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December 18, 2017


Luis Enrique

"It thus refutes labour market-clearing real business cycle theories."

I hesitate to say this, because I am sure some lunatics can be found in the halls of economics departments who did take it literally (I'm looking at you Lucas*), but what sort of lunatic would seriously propose that labour markets clear and recessions happen because people respond to negative productivity shocks by choosing to work less?

If that element of RBC is defensible, it is as an easy way of filling in that side of a model whose real interest lies elsewhere, and should be consumed in the full knowledge that it in no way describes how people lose their jobs in recessions.

* top of my list of bad economics is Lucas' calculations of the welfare cost of recessions by taking that model literally

Luis Enrique

p.s. I seem to be the only person who was not impressed with UE's piece. As you intimate, every econometrics student is told to graph their data (and make heavy use of Stata's tabulate commands to look at average etc. by sub-sets) and yes descriptive statistics are probably undervalued but his example where a table is more informative than a regression has what half a dozen countries two data dimensions? Plenty of papers start by laying out some descriptive statistics. RDD is there to try to solve problems around causal inference, not merely to show that something changes around a discontinuity. Just another instance of confirmation bias from UE.


Well, RDD is there to solve causal inference about a particular outcome...by looking at how it changes around a discontinuity. My point is that if there's no reason to doubt the story being told from descriptive statistics then you can use something like RDD as a robustness check in an appendix, but any precision it offers is spurious - highly local, resting on unchallenged assumptions, and full of statistical noise. Ultimately there are far more important questions that should be filling the pages of 'top' economics journals.

I'd also dispute your far-reaching statement about econometrics, as I've both taught and been taught it and the story you're telling is not familiar.

Howard Wall

The part about voluntary employment is simply incorrect. The notion of voluntary employment is that people choose to be unemployed because a favorable-enough employment opportunity is unavailable to them. That is, conditional on their options, they choose to be unemployed. There is nothing about them being "happy" to be unemployed.

derrida derider

Perhaps then, Howard, it is more precise to say RBC assumes both the employed and unemployed face no cost or risk in changing jobs. There are no signalling effects, for example, of an employer offering a scandalously low wage or an employee being willing to accept it. RBC folk don' need no stinking asymmetric information.

But of course much of modern labour economics is about trying to quantify exactly these sort of effects, and studied ignorance of that is where Lucas' ridiculous estimates of the minimal welfare effects of a recession come from.

BTW "modern" New Keynesian models get their downward wage inflexibility feature from nowhere (they simply sprinkle some Calvo fairy dust on those RBC models) and so fail to incorporate the (often large) monopsony power of employers properly. That is why they still tend to find that a percentage point rise in inflation is more painful than a percentage point rise in the unemployment rate; something any man on the Clapham omnibus could tell them is reality-defying.

Now tell me again which class gains from maximising the measured welfare cost of inflation and minimising the welfare cost of unemployment?

Luis Enrique

UE that's gibberish. Finding evidence of causal effects is a perfectly sensible thing for top economics journals to concern themselves with, there are lot of things out there that people think they know but really lack evidence for.

You cannot infer the magnitude of an effect by inspecting descriptive statistics. Causal inference is warranted by the assumption that in the vicinity of the discontinuity "all else is equal" so of course the estimate is local, in that sense. That assumption is not unchallenged, it is exactly the sort of thing economists would challenge if they thought it was wrong. I don't know what "full of statistical noise" means, if data has 'noise' in that effects everything including whatever you learn by looking at descriptive statistics but extracting sensible estimates from noisy data is kind of what statistics is about. And finally "highly spurious". This is your MO isn't it. As good an estimate of, say, the causal impacts of the Head Start program for poor kids, as you are likely to get, and for you it's "highly spurious". Utter bollocks.
If you really didn't get taught to graph and tabulate your data when you were being taught econometrics then you had a shit teacher. And I pity your students.


"All these, however, run into the Big Fact – that fund managers do not beat the market. This is not inevitable: they could in theory out-perform at the expense of retail or overseas investors. So why don’t they?"

They do, and they have. In the UK at least. Over the last 10 years, the IA UK All Companies Sector Average is up 89.33% (after charges, to yesterday's price point). The FTSE AllShare is up 86.34%. (Both are total return, i.e. dividends reinvested)

So it's not quite as Big a Fact as it seems.


«should be consumed in the full knowledge that it in no way describes how people lose their jobs in recessions.»

Oh please this is an endless and pointless discussion -- the RBC people and Lucas, in the terms in which they put it, make an entirely correct claim that essentially all unemployment is voluntary:

* if the so-called "involuntary" unemployed were willing to work for £1 per month I am pretty much sure that they would all find jobs;

* if they were willing to pay say £400 a month to their employer, I am pretty sure that the market would supply jobs to those willing to pay to work them.

The debate about "involuntary unemployment" is poisoned by the stupid intellectual dishonesty of those who argue as if the unemployed wanted work instead of wages, and the facile intellectual dishonesty of those who correctly point out that if the unemployed really wanted work instead of wages, they could always buy it.


«The debate about "involuntary unemployment"»

As previously mentioned IIRC, I regularly have the same argument with the "Sandwichman", who keeps repeating that it is a fallacy to claim that the "lump of labour is a fallacy", because:

* the "lump of labour" is obviously a fallacy, in that the amount of labour demanded is pretty much without limit if pay is low enough or negative;

* the "lump of wages" is not a fallacy, it is much harder to increase the total amount of wages paid to workers than the total amount of hours worked, never mind the total number of "jobs".


LOL OK Luis, I won't derail Chris' thread any more. I'll let people judge your post for themselves.


A theory of the connection between inequality rising and productivity growth being poor is easy to invent. One could argue that inequality is a measure of monopoly power and political influence of the wealthy. More monopoly and high end income/ wealth equates to less competition and innovation. Also to politically driven crony capitalism where the ruling faction bribes their base with sweetheart arrangements which disadvantage other businesses and consumers/workers. The deliberate promotion of low pay makes demand overdependent on workers borrowing thus making the financial system overleveraged. The policy of making property into a speculative asset diverts capital away from employments which increase marketable output in favour of increasing the price of land so owners can make a capital gain.Using private firms to do state functions is featherbedding inefficiency.

Plenty of ideas to explore.

Pablo Mira

On and on I find myself puzzled by the EMH claim that "not beating the market" must be interpreted as informational efficiency. Isn't that an absurd idea? We can't beat the roulette either, but nobody claims for casino efficiency. Why that simple fact woun't account for anomalies AND and difficulties to beat the market?


«We can't beat the roulette either, but nobody claims for casino efficiency.»

That seems to me a good point, a better than most; after all there is also ample literature that stock prices in the short term are noise. After all there is a well-known book on the EMH with a title like "A Random Walk Down Wall Street".

The problem with your point and many others is that there is not just one EMH, but many, with definitions from rather weak to rather strong, depending on how cleverly it is worded, and while some of the weak EMH definitions are well supported by some evidence, this is often turned into claims that there is evidential support for the narrower definitions too.

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