Endogeneity is one of the advantages of economics above naive heuristics

Sometimes you hear a comment that helps you see that something may be unclear, when economists may not have thought it was previous:

(ENPOG here stands for endogenous potential output gap)

The statement in that tweet made little real sense to me [Note, I could build an explanation – say that the endogenous credit cycles he’s saying have some impact on measures of potential output, so that you get a non-inflationary cycle. Of course, this doesn’t say too much – unless you are willing to take it as far as Borio. But remember with all this we are talking mainstream economics again …].  In the same way that I found it weird how people went on and on about endogenous money/credit as a way of seemingly winning a myriad of entirely different arguments!

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Quote(s) of the day: Keuzenkamp on controls and data mining

As I indicated here I am reading Probability, Econometrics, and Truth.  A nice outline of things, I’m enjoying it at present (I was 20% of the way through when I wrote this post over five weeks ago).

Two quotes I’d like to note down here: Read more

Economics vs physics

An interesting post by the Economic Logician that bears on our recent discussion:

Physicists believe that social sciences can only be described as true sciences if on can figure out some laws that always apply, without exceptions, and if there some invariant constants that would be good, too. Social scientists do not believe this is the right approach, foremost as one has to deal with individuals and societies that make choices.

James Wayne realizes that Physics lacks one ingredient that is essential in social sciences: choice.

Economics and science – careful with the prediction call

I see that Rosenberg has created a bit of an uproar in the economics community with his claims around economics (although the articles focus is macroeconomics) not being a science.

Unlike other economists I think this is a good thing in terms of forcing economists to defend against the claim – however, like other economists I don’t quite agree with his sole focus on predictive success and the way he frames elements of economists’ arguments.  To me the suggestion that economists are instrumentalists (the Friedman essay) misses the point on what economists actually do – fitting the Friedman essay into a consistent lens of understanding for what economics is and what economists do is a hard, but fun, thing to attempt do with friends over beer 🙂

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Math, reading, and purpose

Noah Smith recently smashed math in economics (specifically macroeconomics) stating:

Math can also be used as obscurantism; if every paper in a field starts with a dense thicket of formal statements and functional equations, it will be difficult for even very smart outsiders to come in and evaluate what the people in a field are doing with their time. Again, I doubt all but the most cynical macroeconomists would be intentionally obscurantist; they would just be subtly rewarded for doing things that ended up having an obscurantist result.

Paul Krugman then neatly defends maths, stating the following:

mathematical models are useful in economics: used properly, they help you think clearly, in a way that unaided words can’t.


What is true is that all too many economists have lost sight of this purpose; they treat their models as The Truth, and/or judge each others’ work by how hard the math is.

This all reminds me of one of my favourite quotes Read more

Coherence of economic models

From the Pagan report on modelling at the Bank of England:

Models and forecasts are important inputs into any decision-making process …[The] model used in the monetary policy process needs to incorporate the views of the MPC about the way the economy functions, ie to be theoretically coherent, and also be able to replicate historical data on the UK economy, ie to be empirically coherent. It is hard to achieve both of these simultaneously and some trade-off needs to be made when selecting the model.

Apparently it’s not possible for economic models to simultaneously match the data and reflect the way economists view the world. If that were true then it would indicate that economic theory is wrong. Perhaps not categorically wrong, but certainly a long way from reflecting the way the world actually works. It would mean that the modelling simplifications were the wrong ones and discarded important information and mechanisms.

What I think Pagan is trying to get at is that there are two classes of economic models at the moment. Read more