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Old 11th August 2018, 03:28 AM   #1
GnaGnaMan
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Skepticism in Economics

There is no shortage of public criticism of economics. There is even fundamental criticism about the nature of capitalism and such. What is conspicuously absent is any kind of disciplined skepticism.

Here is an exception that proves the rule:
http://faculty.chicagobooth.edu/luig...ts_capture.pdf

In medicine the influence of funding on results is well established. Economic incentives shape the content and results of research. This is not necessarily bad as long as the economic incentive is to produce better treatments. At the same time national health systems and insurance companies have an incentive to push for more efficency.

In economics I see that there is an incentive to produce good microeconomics which has practical use within companies. But as for macroeconomics, I only see an incentive to produce arguments and not facts for the highest bidder.
In Europe, powerful unions and more independent governments may provide some push-back. (Can anyone imagine an American Picketty?)

I wonder how much of the rise of the rich can be explained by systematic bias in economics.

What are your thoughts?
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Old 11th August 2018, 05:29 AM   #2
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Exceptions don't actually prove rules.

It sounds like your argument is that capitalism may not actually work, but is being perpetuated by the rich who commission flawed economic theories.

Besides finding an example of not-that, what have you done to investigate this possibility?
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Old 11th August 2018, 05:35 AM   #3
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Originally Posted by theprestige View Post
It sounds like your argument is that capitalism may not actually work, but is being perpetuated by the rich who commission flawed economic theories.
I don't know why you'd think that.
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Old 11th August 2018, 07:10 PM   #4
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Unfortunately that paper focuses on regulatory capture and largely ignores other influences which may have a more insidious effect. In the US one particular rich person is successfully indoctrinating economists with his flawed economic theories:-

Koch Uncovered:
Quote:
In 1974, chair of the Institute for Humane Studies and billionaire businessman Charles Koch said universities “encourage extreme hostility to American business,” and businesses must “[support] only those programs, departments or schools that contribute in some way to our individual companies or to the general welfare of our free enterprise system.

According to Koch’s public tax records, the energy tycoon has donated approximately $95.5 million to Mason since 2005 through the Charles Koch Foundation, his charity organization... Fourth Estate’s investigative team has found that these donations do not come without strings attached.

“At George Mason University, academic research predominantly underwritten by Koch has resulted in professors lobbying on topics related to Koch’s financial interests, including energy issues and state *level politics,”...

One of the lobbyist professors listed in “Koch Brothers’ Higher-Ed Investments Advance Political Goals,” a Center for Public Integrity Article cited by the Unkoch My Campus report, is economics professor Walter Williams. Williams was selected by the 60 Plus Association, a nonprofit funded in part by Koch, to be a member of its “truth squad,” and lobby against Social Security and Medicare expansions....

Some examples of this talent cultivation within IHS can be found in Mayer’s “Dark Money.” Mayer alleges that Charles Koch ordered for “ideology tests” to be done on students at the end of each week to gauge students’ political leanings after seminars at the institute.
And it gets worse:-

Millions of Students Are Quietly Being Taught the Koch Brothers’ Whitewashed Version of Black History
Quote:
Cash-strapped social studies teachers across America have discovered an exciting new resource that provides lesson plans, study materials and even seminars geared toward elementary, middle and high school students.

The lessons are extremely detailed and come with suggestions for activities, multimedia and additional reading. More importantly, unlike many educational tools, most of these materials are provided free of cost. There’s only one catch: It’s right-wing brainwashing

Almost every lesson plan stresses the conservative idea of the limited role of government...
'The rich' certainly are doing their best to perpetuate a systematic bias in economics. And it was going well too, until someone threw a spanner in the works

Quote:
Koch Brothers Very Angry About “Rigged System” That Favors Giant Corporations Over Ordinary People

Donald Trump’s tariffs suddenly have them sounding like a pair of born-again socialists.

In an op-ed in The Washington Post, Charles very earnestly argues that tariffs are bad because, he explains in a passage that prompted me to audibly gasp, they perpetuate a "rigged system" in which moneyed interests use their influence to promote policies that are not in the public interest...

Ignore the fact that the Kochs spent some $250 million in the 2016 election cycle on candidates and causes who will make their business ventures more profitable. Or that their network has announced plans to blow $400 million on the 2018 midterms, including $20 million toward arguing that Paul Ryan's donor-appeasing tax-reform bill is a good thing for voters who are not handsomely compensated corporate board members. Or that the brothers already wrote a $494,000 check to Paul Ryan after the House passed the bill last year.
Not all rich people promote flawed economic theories for their own benefit, but those that do can have much greater influence than unbiased economists.

Quote:
Can anyone imagine an American Picketty?
We do have economists who know what they are talking about, but no one listens to them. We are all either brainwashed with 'free market' ideology or reacting against it (sometimes both at the same time).

Quote:
There is no shortage of public criticism of economics. There is even fundamental criticism about the nature of capitalism and such. What is conspicuously absent is any kind of disciplined skepticism.
Disciplined skepticism is conspicuously absent in most fields. But economics suffers particularly because:-

1. It affects us personally and immediately, therefore,

2. We all have a vested interest in its upkeep so,

3. Everybody thinks they know how to make it better, even though they have no clue, and

4. Even economists aren't sure how it works, because

5. It's largely based on the 'random' behavior of individuals, and

6. Performing experiments on a running economy has ethical and practical problems.

Quote:
In economics I see that there is an incentive to produce good microeconomics which has practical use within companies. But as for macroeconomics, I only see an incentive to produce arguments and not facts
There is an incentive to produce good macroeconomics too, but it's hard. People generally prefer simple easy solutions, even when they are wrong. And unlike easier fields like quantum physics, you can't just trot out a mathematical formula and prove it with a nice simple lab experiment.
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Old 11th August 2018, 07:48 PM   #5
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Originally Posted by GnaGnaMan View Post
There is no shortage of public criticism of economics. There is even fundamental criticism about the nature of capitalism and such. What is conspicuously absent is any kind of disciplined skepticism.
You know what they say about economists: If you were to place them all in a straight line they would all be pointing in different directions.
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Old 11th August 2018, 08:24 PM   #6
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Originally Posted by GnaGnaMan View Post
I wonder how much of the rise of the rich can be explained by systematic bias in economics.

What are your thoughts?

Are you saying that our economies are not driven by scientific understanding of how money should best be used or are you saying that the discipline of the study of economics lacks scientific rigor?

Because those are two very different things.
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Old 12th August 2018, 01:50 AM   #7
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Originally Posted by Loss Leader View Post
Are you saying that our economies are not driven by scientific understanding of how money should best be used or are you saying that the discipline of the study of economics lacks scientific rigor?

Because those are two very different things.
They may be different but both are still true.

Macro Economics (like law) is such an inexact science that any two experts are likely to have diametrically opposing views on the same issue.

The ruling classes will of course buy which ever economic opinion most suits their agenda.
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Old 12th August 2018, 05:37 AM   #8
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Originally Posted by Loss Leader View Post
Are you saying that our economies are not driven by scientific understanding of how money should best be used or are you saying that the discipline of the study of economics lacks scientific rigor?

Because those are two very different things.
Neither. I am saying that there are probably systematic biases at work within the field of economics and that this distorts policy prescriptions.
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Old 12th August 2018, 05:45 AM   #9
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Originally Posted by Roger Ramjets View Post
Unfortunately that paper focuses on regulatory capture and largely ignores other influences which may have a more insidious effect. In the US one particular rich person is successfully indoctrinating economists with his flawed economic theories:-
It makes a comparison to regulatory capture. It is not about regulatory capture.
It discusses various channels in which rich persons might influence the discipline.
Basically, based on what you quoted, you'd want to read it. The evidence is presented in the second half.
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Old 12th August 2018, 08:55 AM   #10
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Originally Posted by psionl0 View Post
They may be different but both are still true.

Macro Economics (like law) is such an inexact science that any two experts are likely to have diametrically opposing views on the same issue.

The ruling classes will of course buy which ever economic opinion most suits their agenda.
There's a case to be made that macroeconomics is not even a science. As an academic field it fills Lakato's criteria for being a degenerative field; i.e., there is no proper role for falsification in the dominant (neoclassica)l theoretical framework.
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Old 13th August 2018, 12:52 AM   #11
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Originally Posted by GnaGnaMan View Post
It makes a comparison to regulatory capture. It is not about regulatory capture.
It discusses various channels in which rich persons might influence the discipline.
Basically, based on what you quoted, you'd want to read it. The evidence is presented in the second half.
I did read the whole thing. It identifies various ways that economists may be subject to regulatory capture, and argues that they are less susceptible due to fewer financial incentives and a more philanthropic attitude. As evidence it offers the fact that economists tend to stick with particular theories rather than change them to suit their employers.

However what it fails to consider is that economists are influenced by their training, and when that comes in the form of support and material supplied by rich patrons promoting an ideology they are effectively 'brainwashed' into becoming believers. That is why many economists don't change their economic theories despite evidence against them - they are closer to being religious zealots than scientists.

Everybody gets upset when creationists try to get their claptrap into the classroom, but few realize that Charles Koch is breeding an army of economists to push his dogmatic economic theories. And now he is targeting school children. As I said it's insidious, and if not checked the eventual result could be devastating.
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Old 13th August 2018, 01:02 AM   #12
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Originally Posted by psionl0 View Post
You know what they say about economists: If you were to place them all in a straight line they would all be pointing in different directions.
You know what they say about people who spout disparaging platitudes without a shred of evidence...
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Old 13th August 2018, 09:21 AM   #13
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Originally Posted by Roger Ramjets View Post
I did read the whole thing. It identifies various ways that economists may be subject to regulatory capture, and argues that they are less susceptible due to fewer financial incentives and a more philanthropic attitude. As evidence it offers the fact that economists tend to stick with particular theories rather than change them to suit their employers.

However what it fails to consider is that economists are influenced by their training, and when that comes in the form of support and material supplied by rich patrons promoting an ideology they are effectively 'brainwashed' into becoming believers. That is why many economists don't change their economic theories despite evidence against them - they are closer to being religious zealots than scientists.
I agree that it is quite incomplete and curiously shy of frank criticism.

Quote:
Everybody gets upset when creationists try to get their claptrap into the classroom, but few realize that Charles Koch is breeding an army of economists to push his dogmatic economic theories. And now he is targeting school children. As I said it's insidious, and if not checked the eventual result could be devastating.
I'm not american, so that is simply something I don't know about.
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Old 13th August 2018, 10:08 AM   #14
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See comments by Prof Mishkin and Dean Hubbard of Columbia U's B-School, starting at minute 1:27 (Inside Job, free online access, easy to FF) if you want to experience the kind of people I once paid to brainwash me at the same institution. Yes, be skeptical of economists and finance professors.

As I recall, momentarily, there was press to the effect that the Capital Asset Pricing Model, essentially the invisible hand of financial markets back when I was taught, was shown to be falsified by the 2008 financial crisis. I'm sure some googling would find that. At any rate, the point being that the difference between dogma and reality was laid bare at that time. Greenspan even had his libertairan bell rung, stating that even if there had been irrational exuberance, he never thought "people" (read: enlightened libertarian übermensch) would act as they had. Then, there are the expressions "perfect markets" and "market distortion," the latter used with prices do not result from "pure" supply and demand factors and the actions of rational utilitarians. To not repeat comments I've made before about such matters, suffice it to say these are terms used in economic descriptions that have been turned into magical prescriptions, not because people are stupid, but because they are too clever by half. These and other terms have become accepted parts of the common lexicon, often used in politics when speaking of policy. As used, it is willful misdirection.

In short, there may be all kinds of economists and finance professors, but there most certainly are many who play fast and loose with social science. Model-gazers and charlatans.
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Old 14th August 2018, 12:37 AM   #15
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Originally Posted by Hlafordlaes View Post
As I recall, momentarily, there was press to the effect that the Capital Asset Pricing Model, essentially the invisible hand of financial markets back when I was taught, was shown to be falsified by the 2008 financial crisis.
Seriously? How could CAPM possibly have been proven wrong? It is not some sort of forward prediction model; it is supposed to give us Re at any particular point in time. About the only way I could imaging CAPM being falsified is if lots of negative beta stocks also went down in alignment with the market, which can be checked and I know without checking, is not what happened.
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Old 14th August 2018, 02:34 AM   #16
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Originally Posted by Brainster View Post
Seriously? How could CAPM possibly have been proven wrong? It is not some sort of forward prediction model; it is supposed to give us Re at any particular point in time. About the only way I could imaging CAPM being falsified is if lots of negative beta stocks also went down in alignment with the market, which can be checked and I know without checking, is not what happened.
It's possible to look at the empirical implications of the assumptions in the model, making it possible to evaluate the validity of the model.

For example, Fama and French 2004 (pdf) thus conclude:
Originally Posted by Fama & French
The version of the CAPM developed by Sharpe (1964) and Lintner (1965) has never been an empirical success. In the early empirical work, the Black (1972) version of the model, which can accommodate a flatter tradeoff of average return for market beta, has some success. But in the late 1970s, research begins to uncover variables like size, various price ratios and momentum that add to the explanation of average returns provided by beta. The problems are serious enough to invalidate most applications of the CAPM.
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Old 15th August 2018, 11:41 PM   #17
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Originally Posted by lupus_in_fabula View Post
It's possible to look at the empirical implications of the assumptions in the model, making it possible to evaluate the validity of the model.

For example, Fama and French 2004 (pdf) thus conclude:
I tutor students in basic finance; I'll happily admit that paper is well above my level of incompetence. When I think of CAPM, it's just the basic equation: Re=Rf+B(MRP). I just found the concept that one single event could somehow invalidate the formula to be unlikely--they are called black swans for a reason. I will say that the CAPM formula I used above is definitely in the top five reasons I get asked for help, 14 years after that paper.
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Old Yesterday, 02:46 AM   #18
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Originally Posted by Brainster View Post
I tutor students in basic finance; I'll happily admit that paper is well above my level of incompetence. When I think of CAPM, it's just the basic equation: Re=Rf+B(MRP). I just found the concept that one single event could somehow invalidate the formula to be unlikely--they are called black swans for a reason. I will say that the CAPM formula I used above is definitely in the top five reasons I get asked for help, 14 years after that paper.
Well, all the "umpf" in the formula is located in beta. Everything else is set by homogenous assumption. Thus, empirically, we should expect beta to have a linear relationship with Re. That relationship is often falsified by empirical tests (e.g., figure 2 in the Fama & French paper).

Now, in more general terms, simply looking at the assumptions underlying the model, we find them to be highly unrealistic. So, just to mention one example: the model assumes everyone can borrow at the risk free rate without limit at any time (defaults are ruled out by assumption). Fast forward to any real episode where markets take a tumble and we'll see that there are actors who find themselves unable borrow even though they previously could – especially at the risk free rate.

This is, of course, what Sharpe (as in the Sharpe-Lintner version of CAPM) also acknowledged when he said the whole theory is in shambles if we reject the assumption of limitless borrowing at the risk free rate.
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