Read this book: Ann Pettifor, Just Money February 24, 2014Posted by Larry in economics, money.
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After you finish reading this short book, devoted to explicating the nature and function of money in modern societies, you will be able to see not only just that almost everything that Osborne and Balls say about this aspect of the economy is wrong, but why it is is wrong. The intended audience of this book is that group of people who don’t quite understand what money is or how it works, which unfortunately includes both Osborne and Balls, so it is written in as jargon-free and elementary a manner as possible. It is in Chapter 4 where she really drives the knife into the neoclassical acolytes and their financial backers.
In reading this book, you will obtain a greater understanding of what is wrong with the austerity policies of this and other governments and what to do about it. I would recommend reading Just Money before going on to other more complicated, but also reasonably accessible, books like that of Randall Wray’s Modern Money Theory. Just Money and Modern Money Theory, in that order, the latter going beyond the former to cover the entire economic system, will tell you almost everything you need to know in order to understand what is wrong with contemporary economic policies. How they can be so wrong and their justifications so misguided is sometimes difficult to believe.
Also, the subject is not easy, but Ann Pettifor knows that and does her best to explicate what is difficult to explicate. In order to see that most journalists also fail to clearly understand the function of money in our society, even when that is supposedly their specialty, this book is a must read. It is available in pdf format from PRIME or in Kindle format from Amazon.
Saving the Hypothesis August 22, 2013Posted by Larry in economics.
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An Inherent Complication in Assessing Tests of Scientific Hypotheses
The testing of scientific hypotheses is not as straightforward as it often looks and perhaps contributes to the fact that many politicians do not pay as much attention to the character and context of scientific evidence as they should.
Most of us are familiar with the probabilistic character of many scientific hypotheses and the ways in which these can affect the testing scenarios. But what is not as well-known is a strategy for “saving the hypothesis” that is independent of probabilistic considerations. This strategy makes the testing of scientific hypotheses more complicated than Karl Popper and others thought it was.
The methodology described briefly by the reviewer is that developed by Karl Popper, which is that scientists should concentrate on falsifying their theories rather than corroborating them. Many ordinary scientists use Popper’s falsification model as their guide. Effectively, what you do is list the initial conditions, and the lawful regularities, and in the case of the more formalized sciences, you deduce consequences from these, for instance a particular event – a procedure that has been discussed in physics and in other more formalized disciplines. If the event predicted by the theory under test does not occur, that is, is not observed, then Popper concludes that the theory has been decisively falsified. If the event does occur and has been observed, the theory has only been corroborated, that is, the likelihood that it is true has increased. For strictly logical reasons, no theory can ever be conclusively verified, that is, proved to be true, though Popper never explicitly points this out.
There is, however, a kind of get out of jail free card that can be used to “save the hypothesis”. This is known as the Duhem-Quine gambit. When you set up your theory testing scenario, in addition to listing all the initial conditions that apply and the regularities that are involved, there are a number of auxiliary hypotheses that usually go unstated with respect to the testing scenario. In physics, this is because experimental physicists often know what these possible contaminants of the testing process are and attempt to control for them. In less formalized sciences, such influences may be unknown or only informally considered. The Duhem-Quine gambit, when utilized appropriately, is a legitimate procedure, not an attempt to cheat the testing process.
Basically, if the result of the test of a given scientific hypothesis is not observed, for whatever reason, instead of directly falsifying the hypothesis or theory under test, the testers can select one or more of the auxiliary hypotheses as the culprit, such as the nature and operation of the equipment, any presumed biases on the part of the testers, sampling problems, the general environment in which the test takes place, and so forth. Selecting one or more of the auxiliary hypotheses that inevitably accompany any scientific testing situation will enable the scientist to “save the hypothesis”. Of course, one cannot continue to blame failure to obtain a result the theory says should have been observed but wasn’t on the auxiliary hypotheses. Continued failure to observe a result predicted by a theory must eventually lead to that theory (or a portion of it) being considered to be falsified.
Elliman’s point that more scientists should be involved in independent ways in policy decisions not subject to direct ministerial control becomes even more salient in light of the inevitable availability of the Duhem-Quine gambit, a central feature of any scientific testing scenario, which renders assessment of the relevance of scientific evidence for policy purposes even more problematic than it might otherwise be considered to be.
Apostrophe Quiz & probs w/ WordPress August 16, 2013Posted by Larry in economics.
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I had thought I would gloat a little over getting 100% on the Independent’s apostrophe quiz. But most everyone else who took the quiz got most of them right. So, either it wasn’t very hard, which is difficult to judge, or there is a self-selection bias with respect to those taking the quiz. Anyway, here is the link so you can, if you like, also take the quiz. That is, if like me, you are an apostrophe nut.
You can also see how others have done.
By the way, the hyperlink function isn’t working in WordPress, so you will have to copy and paste the above link to to directly to the relevant page. Sorry. I can’t seem to add Media either.
When I published the post, the link did work. But the Media button still didn’t. Hmmm.
Some physicists should stick to their lasts July 22, 2013Posted by Larry in economics.
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Here is one of the reasons I think some physicists should recognize their limitations. Forshaw is one of them. Should you have the time to peruse the article, you will find this:
“The most famous equation in finance was published in 1972 and is named after American economists Fischer Black and Myron Scholes. The Black-Scholes equation provided a means to value “European options”, which is the right to buy or sell an asset at a specified time in the future. Remarkably, it is identical to the equation in physics that determines how pollen grains diffuse through water.”
While Forshaw is right to claim that this is a famous equation, he neglects to mention that it is false in its intended application/interpretation. That it is identical to a physics formula rather undercuts the reasons for giving the authors the Swedish Bank prize. For your convenience, here is their formula.
Now, if the market conformed to two of their assumptions, one being central, that of the Gaussian character of the underlying distribution, all might be well. But market distributions are well known by many to be, and have been shown to be, non-normal by Mandelbrot more than 20 years ago. The Cauchy-Mandelbrot distribution, in fact, has no calculable mean or variance, hence no calculable volatility. Which makes it entirely useless for its intended purpose. Thorp came up independently with a similar set of equations to those of Bachelier, mentioned by Forshaw.
However, Thorp’s were initially developed for Blackjack, a situation more similar to the pollen example than that conceived by BSM. He was banned by every casino in Vegas for his trouble. But that didn’t bother him, as he had adequately tested his theory. Or perhaps I should say in this context, his policy recommendations on how to play Blackjack and win. (His recommendations require the player to compute large ratios in their heads, something most of us can’t do. Using a calculator is banned, as they think you’re counting cards which is a no-no.)
I am presuming Forshaw is thinking of Brownian motion, or something along those lines, which makes pollen distribution in a liquid more or less random and approximate a normal curve. Neither of which is true of the market.
What does this sort of thinking say about the burgeoning field of econophysics? Not much that is positive.
Just to show I am being even-handed, here is an assessment of market behavior by a physicist and a financial economist, Vasquez and Farinelli. Here is the link:
http://arxiv.org/pdf/0908.3043v1.pdf. They argue that there is geometric curvature and, therefore, path dependence in real market data, something anathema to the neoclassical paradigm.
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I have chosen this version for two reasons. One is for its musicality. But the other is that it includes the intro, which many versions don’t. A sign by a Chamber of Commerce is one of the images that are shown (notice that the apostrophe is in the right place). The first skyscraper shown is the Empire State Building and the second is the Chrysler Building.
This version was placed on youtube by musicinhistory.
This song is sung by others, such as Peter Yarrow and Tom Waits, but neither includes the intro.
Osborne, GDP, & Recession April 25, 2013Posted by Larry in economics.
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I am here simply going to repeat something I wrote some time ago on this subject.The media along with certain politicians and economists get all fired up about miniscule alterations in an index that may in itself be inherently flawed.
There may well be no referent for the term GDP (or GNP) that has any real sociopolitical relevance, in the sense in which it is generally used by mainstream politicians and economists. A number of economists and related scientists have wondered over the years whether certain general notions such as GDP, conceived as collections of a number of individual measurements of different factors, actually ends up referring to anything meaningful. Indeed, the factors whose measures that make up, say, GDP can be seen as problematic themselves. A read of Myrdal’s Against the Stream should convince anyone of this who is not already convinced otherwise.
More could be said about this, for example, that the collection of individual measures into collective measures involves more than composition fallacies, but I will have to leave this matter for another time.
Mass psychosis: an additional consideration April 25, 2013Posted by Larry in economics.
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As a number of people are familiar with the concept of psychosis, they invariably think it is caused by some sort of neurological or drug induced condition. When it comes in individuals per se, this is generally true. But when it comes to a large mass of people, possibly an entire social group, this causation link fails as a general explanation. While such explanations can work under particular circumstances, in the case at hand, that of austerity beliefs, it fails because the mechanism is implausible. Indeed, it is not necessary, and indeed otiose, to resort to such individual-centric explanations of such socio-cultural phenomena.
There are other ways of inducing functioning psychotic belief systems, particularly where the social system is organized in such a way that they do not interfere with daily life, indeed, sometimes they may be considered to enhance such life. Inculcating what is effectively a psychotic belief system, that is, one completely detached from reality, can be accomplished by means of social and cultural programming — that is, the programming of social behavior and conceptual (or mental) constructs such as values, beliefs, norms, and the like. (I have dealt with these conceptions in earlier posts, but I did elaborate on them possibly in rough form some time ago in the 1995 issue of the journal, Social Epistemology , in “A Reappraisal of the Concept of ‘Culture’”).
I doubt it can be plausibly argued that beliefs surrounding austerity can be considered in any sense to be life enhancing. If such an argument soundly showing that austerity is indeed life-affirming, contrary to what appears to be the case on the ground, as it were, I would be grateful to know what it is. (I am going to be a stickler and insist that a sound argument is one that is both valid and its premises true.)