October 8, 2013

Remarks on Chen and Pearl on causality in econometrics textbooks

Bryant Chen and Judea Pearl have published a interesting piece in which they critically examine the discussions (or lack thereof) of causal interpretations of regression models in six econometrics textbooks. In this post, I provide brief assessments of the discussion of causality in nine additional econometrics texts of various levels and vintages, and close with a few remarks about causality in textbooks from the perspective of someone who does, and teaches, applied econometrics. Like Chen and Pearl, I find some of these textbooks provide weak or misleading discussion of causality, but I also find one very good and one excellent discussion in relatively recent texts. I argue that the discussion of causality in econometrics textbooks appears to be improving over time, and that the oral tradition in economics is not well-reflected in econometrics textbooks.

The Chen and Pearl paper has been around for a while in working paper form and recently came out in the Real World Economics Review, also available here from the authors with much clearer typesetting.

The additional textbooks I discuss below are: Amemiya (1985), Kmenta (1986), Davidson and MacKinnon (1993), Gujarati (1999), Hayashi (2000), Wooldridge (2002), Davidson and MacKinnon (2004), Deilman (2005), and Cameron and Trivedi (2005).

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December 6, 2012

Steve Keen still butchering basic microeconomics

In 2002, I wrote a small piece noting that Steve Keen’s novel criticism of economics in his book Debunking Economics is simply wrong (Debunking Debunking Economics). Part of that novel criticism is Keen’s claim that the standard analysis of the competitive model is mathematically wrong, and if one does the math correctly, one finds that the competitive equilibrium and the collusive outcome are the same. Which is an extraordinary claim! Everyone has been just doing the math wrong for well over a century, and if we were to do the math correctly we’d find that all industry structures actually behave as if the industry were monopolized, under textbook assumptions. Again, it’s important to emphasize this isn’t an appeal to some more complex model, or to empirical evidence, or criticism of some unrealistic assumption in the standard model: Keen’s claim is that this theoretical result follows from textbook assumptions if one merely does the math correctly.

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November 5, 2012

More bizarre anti-economics from the Globe and Mail

Brian Milner is a “a senior economics writer and global markets columnist” at Canada’s largest and arguably most highly respected newspaper, the Globe and Mail. Milner doesn’t understand what economists mean by the word “efficient,” doesn’t understand the elements of the efficient markets hypothesis (EMH), and, worst, uncritically repeats nonsense from David Orrell, whose awful anti-scientific screed I reviewed here. Why oh why, as Brad DeLong likes to say, can’t we have a better press corps?
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October 31, 2012

The intuition of robust standard errors

Commonly econometricians conduct inference based on covariance matrix estimates which are consistent in the presence of arbitrary forms of heteroskedasticity; the associated standard errors are referred to as “robust” (also, confusingly, White, or Huber-White, or Eicker-Huber-White) standard errors. These are easily requested in Stata with the “robust” option, as in the ubiquitous

reg y x, robust.

Everyone knows that the usual OLS standard errors are generally “wrong,” that robust standard errors are “usually” bigger than OLS standard errors, and it often “doesn’t matter much” whether one uses robust standard errors.  It is whispered that there may be mysterious circumstances in which robust standard errors are smaller than OLS standard errors. Textbook discussions typically present the nasty matrix expressions for the robust covariance matrix estimate, but do not discuss in detail when robust standard errors matter or in what circumstances robust standard errors will be smaller than OLS standard errors. This post attempts a simple explanation of robust standard errors and circumstances in which they will tend to be much bigger or smaller than OLS standard errors.

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October 26, 2012

Debunking Debunking Economics

A short article I wrote in 2002 regarding the novel arguments in Steve Keen’s Debunking Economics has been hard to track down for a while, so I’m making it available here.

Click here to download a copy (debunk.pdf).

Unfortunately, the link to Keen’s paper on the first page is broken. I attempted to get the paper from Keen’s site, but it’s now behind a paywall! I think the paper was called “A 75th Anniversary Gift for Sraffa,” but I failed to locate a copy.

October 25, 2012

Behavioral hazard in health insurance

Suppose your health insurance becomes more generous, decreasing the proportion of the cost of care for which you are responsible. At the same time, your premium goes up to cover the extra costs faced by your insurer. In standard theory you are better off because you face less financial uncertainty, but you will also tend to consume too much health care because the price you pay is lower than the cost of your treatment. Standard theory suggests that insurance should be designed to optimally trade-off these benefits and costs. But standard theory assumes rationality: suppose instead people systematically make errors when choosing how much health care to consume. Does it make a difference to how we think about health insurance?

In a recently released NBER working paper, “Behavioral hazard in health insurance,” Katherine Baicker, Sendhil Mullainathan, and Joshua Schwartzstein consider behavioral biases that lead people to (specifically, and with loss of generality) underutilize health care. How should we think about designing health insurance in the presence of such biases?

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October 7, 2012

What do we know about the effect of income inequality on health?

This post briefly surveys some of the methods and results in the literature on health and income inequality, closing with some remarks on problems with the existing literature and where future research may take us. It is not intended as anything resembling a comprehensive survey; Lynch et al (2004) provides a useful review of the empirical literature up to that time.

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September 25, 2012

The World’s Colonisation and Trade Routes Formation as Imitated by Slime Mould

If you glue corn flakes to a globe and infect it with slime, the slime grows between corn flakes in a pattern that looks kind of like roads.

No, I don’t know either.

Adamatzky, A. (2012) The World’s Colonisation and Trade Routes Formation as Imitated by Slime Mould, arXiv:1209.3958.

The plasmodium of Physarum polycephalum is renowned for spanning sources of nutrients with networks of protoplasmic tubes. The networks transport nutrients and metabolites across the plasmodium’s body. To imitate a hypothetical colonisation of the world and formation of major transportation routes we cut continents from agar plates arranged in Petri dishes or on the surface of a three-dimensional globe, represent positions of selected metropolitan areas with oat flakes and inoculate the plasmodium in one of the metropolitan areas. The plasmodium propagates towards the sources of nutrients, spans them with its network of protoplasmic tubes and even crosses bare substrate between the continents. From the laboratory experiments we derive weighted Physarum graphs, analyse their structure, compare them with the basic proximity graphs and generalised graphs derived from the Silk Road and the Asia Highway networks.

September 22, 2012

Externality [ek-ster-nal-i-tee] [noun]: “We don’t give a shit.”

An alert reader of yesterday’s post regarding David Suzuki’s ongoing confusion over the concept of an “externality” pointed me to an interview with Professor Suzuki in a magazine called Common Ground. Suzuki helpfully clarifies precisely what he thinks “externality” means, so we no longer have to infer from context:

I won’t go into a long critique, but currently nature and nature’s services – cleansing, filtering water, creating the atmosphere, taking carbon out of the air, putting oxygen back in, preventing erosion, pollinating flowering plants – perform dozens of services nature to keep the planet happening. But economists call this an ‘externality.’ What that means is “We don’t give a shit.” It’s not economic. Because they’re so impressed with humans, human productivity and human creativity at the heart of this economic system. Well, you can’t have an economy if you don’t have nature and nature’s services, but economics ignores that. And that’s an unbelievably egregious error.

(emphasis added). I agree someone’s made an “unbelievably egregious error,” and repeated it countless times to countless people.

David Suzuki owes the community of economists, and his audiences, an apology and an unequivocal retraction.

September 21, 2012

David Suzuki still hasn’t figured out what an “externality” is

A reader of this (seemingly defunct, but stay tuned) blog sent me a link to a portion of a movie called Surviving Progress in which Dr. Suzuki gives an even more offensive, ridiculous, and staggeringly ignorant take on economics than those previously discussed on this blog. For the amusement of fellow economists, here’s the video, complete with helpful visuals of a guy in a suit—possibly modeled on Ben Stein’s character in Ferris Bueller—standing in front of a chalkboard with some dull looking stuff that’s not even recognizable as economics. Dr. Suzuki recites his oft-repeated claim that “economics is a form of brain damage” and here adds the allegation that economists “know damn well” that we deliberately deceive people into thinking economics is a science when in fact all we want to do is torch the planet for sweet, sweet cash.

For those interested in what economists actually think about the environment, and what an “externality” actually is, see for example “How do economists really think about the environment?” Or open any Economics 101 textbook.