tag:blogger.com,1999:blog-1740670447258719504.post3692755454381879441..comments2024-03-27T03:00:27.024-04:00Comments on Facts & other stubborn things: Two truly excellent modeling posts by Paul KrugmanEvanhttp://www.blogger.com/profile/12259004160963531720noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-1740670447258719504.post-29791188076730283052012-07-17T12:27:48.525-04:002012-07-17T12:27:48.525-04:00Ricardian equivalence has been disproved by a simp...Ricardian equivalence has been disproved by a simple example, see<br />http://www.economics-ejournal.org/economics/discussionpapers/2012-13Ekkehart Schlichthttps://www.blogger.com/profile/03956592476069086149noreply@blogger.comtag:blogger.com,1999:blog-1740670447258719504.post-1570473587880932462012-07-16T00:53:09.498-04:002012-07-16T00:53:09.498-04:00Daniel,
My point is that rationality and foresight...Daniel,<br />My point is that rationality and foresight are highly suspect (not possible) in everyday human life, so then laying them as axioms/assumptions in the heart of the theory will likely lead to the theory not reflecting reality.<br />I do not have neither real life academic career nor web notoriety (so I might as well be nobody), but sure, if you prefer it this way.Roman P.https://www.blogger.com/profile/17384153967221979673noreply@blogger.comtag:blogger.com,1999:blog-1740670447258719504.post-7856696972556613012012-07-15T16:56:11.832-04:002012-07-15T16:56:11.832-04:00I agree it seems peculiar to start with a highly u...I agree it seems peculiar to start with a highly unrealistic set of axioms.<br /><br />I don't think we behave like homogenous globules of desire, nor do I think we can predict the future (we talk about that a lot on here actually).<br /><br />I'm not sure what your point is.<br /><br />Stop commenting anonymously, please.Daniel Kuehnhttp://www.factsandotherstubbornthings.blogspot.comnoreply@blogger.comtag:blogger.com,1999:blog-1740670447258719504.post-65691899305811960632012-07-15T16:21:35.333-04:002012-07-15T16:21:35.333-04:00Daniel,
It seems peculiar to start with a highly u...Daniel,<br />It seems peculiar to start with a highly unrealistic set of axioms. You think that people are rational enough, but really, how rational? We certainly don't behave as 'homogeneous globules of desire'. Nor could we predict the future for it is uncertain.<br />And it's not like you could not choose other axiomatics.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-1740670447258719504.post-74512705722129740862012-07-14T08:16:28.162-04:002012-07-14T08:16:28.162-04:00Additivity is a mathematical property.
http://en....Additivity is a mathematical property.<br /><br />http://en.wikipedia.org/wiki/Additive_function<br /><br />http://www.economics.ox.ac.uk/members/sujoy.mukerji/nine.pdf<br /><br />http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1546726<br /><br />Since Dr. Michael Emmett Brady has been making the argument that George Boole and J.M. Keynes are the founders of non-additive probabilities, this renders Subjective Expected Utility as a special case of a more general theory of decision-making. I'm sure that the Boole-Keynes approach to probability would have implications on Ricardian equivalence, but I'd need to consult Dr. Brady again.Blue Aurorahttps://www.blogger.com/profile/02044362251868221897noreply@blogger.comtag:blogger.com,1999:blog-1740670447258719504.post-33730155769279695662012-07-14T06:56:24.022-04:002012-07-14T06:56:24.022-04:00I'm not understanding the last point. I think ...I'm not understanding the last point. I think it's pretty reasonable to say that preferences aren't stable, aren't linear, and aren't additive (I guess... I'm not particularly clued into the implications of that last one), but Ricardian equivalence isn't really about preferences, it's about intertemporal expectations associated with fiscal decisions.<br /><br />And to clarify I don't think people strictly practice Ricardian equivalence for a lot of the reasons that unlearningecon listed above. But I do think people are rational enough that rational expectations, utility maximization, and Ricardian equivalence are excellent "gadgets" (as Krugman puts it) to start with. If we toss out rational expectations I'm not sure what I'd replace it with. Seems to make more sense to start with rational expectations and then start loosening assumptions.Daniel Kuehnhttp://www.factsandotherstubbornthings.blogspot.comnoreply@blogger.comtag:blogger.com,1999:blog-1740670447258719504.post-9273722229452251672012-07-14T03:06:16.729-04:002012-07-14T03:06:16.729-04:00Daniel Kuehn: Economists may not be physicists, an...Daniel Kuehn: Economists may not be physicists, and our models may not be perfect. I would agree with you and Krugman that Sir John Hicks's IS/LM model still is a good pedagogical tool, but why not have more dynamic methods in the study of economics?<br /><br />You know well enough that agent-based modelling is now popular in economics research. Of course, I doubt that a computer program's model would perfectly capture the macroeconomic level.<br /><br />As for Ricardian equivalence...doesn't the work of Daniel Ellsberg technically show that people's preferences and decision-making processes demonstrate non-linearity and non-additivity? They may be "rational", but their preferences certainly aren't stable.Blue Aurorahttps://www.blogger.com/profile/02044362251868221897noreply@blogger.comtag:blogger.com,1999:blog-1740670447258719504.post-19827221291427079342012-07-14T01:34:07.657-04:002012-07-14T01:34:07.657-04:00"If for the next ten years the government ran..."If for the next ten years the government ran surpluses, I would probably expect my future tax bill to go down. Wouldn't you?"<br /><br />No. That is not an important datum for my expectation of future taxes. My expectation would depend, among other things, upon <b>why</b> the gov't ran surpluses. The important cognitive point is, once I take those reasons into account, it would be irrational of me also to take the fact that the gov't ran surpluses into account. It does not work the other way around. Knowing only about gov't surpluses (or deficits) does not give me enough information to predict future taxes.<br /><br />My reaction in '09, upon hearing the Ricardian equivalence argument against gov't stimulus during our depression, was two-fold. First, how could anyone over the age of 30 believe such a thing? Second, why isn't it an argument for giving money to poor people?Minnoreply@blogger.comtag:blogger.com,1999:blog-1740670447258719504.post-50548337246583000062012-07-13T16:06:22.426-04:002012-07-13T16:06:22.426-04:00Two thoughts -
First, as Krugman often points out,...Two thoughts -<br />First, as Krugman often points out, Ricardian equivalence (I assume this is what you mean by RE, and not rational expectations) does not mean everything it's claimed to mean about spending decisions. RE with permanent income hypothesis (another lefty favorite!) does not imply that deficit spending is going to be canceled out by spending reductions elsewhere, even in the case of <i>full</i> Ricardian equivalence.<br /><br />Second - how realistic is Ricardian equivalence? It's tough to say with changes on the margin around a reasonably table debt level (yes we've swung around but we've never borrowed unsustainably for an extended period of time). If for the next ten years the government ran surpluses, I would probably expect my future tax bill to go down. Wouldn't you? If after the recession was over deficits continued to be around ten percent of GDP I would expect my future tax bill to go up. Wouldn't you? Wouldn't <i>everyone</i>? But any given year's deficit is of course not going to do this - it's a matter of persistent behavior. In the entire postwar period we have stably practiced functional finance. I fully expect we'll continue to. Deficit changes will be marginal so detecting behavioral responses consistent with Ricardian equivalence will be tough. But yes, I think as an approximation we respond to things rationally. We have our irrational blindspots, and since this is an intertemporal question it's important to note that I think we do engage in hyperbolic discounting to an extent. But aside from those wrinkles, I think it's reasonable to say we behave rationally.<br /><br />Let me ask you this - you and I both think we depart from rationality to some extent. Do you think we depart so radically that rational expectations modeling techniques like Ricardian equivalence are even a bad starting point (presumably you think so). If that's the case, where would you start?Daniel Kuehnhttp://www.factsandotherstubbornthings.blogspot.comnoreply@blogger.comtag:blogger.com,1999:blog-1740670447258719504.post-48177445658139855262012-07-13T15:52:11.654-04:002012-07-13T15:52:11.654-04:00Should a model really take into account RE? Really...Should a model really take into account RE? Really? I mean, ask your average person if they structure their spending plans around the actions of the government and central bank. Ask them if they know anything about monetary and fiscal policy.Unlearningeconhttps://www.blogger.com/profile/13687413107325575532noreply@blogger.com