The Dismal Science
Mark Thoma reports in the Fiscal Times that last week's gathering of Nobel Laureates in Lindau revealed no consensus whatsoever among economists about the cause of the financial crisis:
Surprisingly, the financial crisis did not receive much attention at the conference. Many of the sessions on macroeconomics and finance didn’t mention it at all, and when it was finally discussed, the reasons cited for the financial meltdown were all over the map.
It was the banks, the Fed, too much regulation, too little regulation, Fannie and Freddie, moral hazard from too-big-to-fail banks, bad and intentionally misleading accounting, irrational exuberance, faulty models, and the ratings agencies. In addition, factors I view as important contributors to the crisis, such as the conditions that allowed troublesome runs on the shadow banking system after regulators let Lehman fail, were hardly mentioned.
Macroeconomic models have not fared well in recent years – the models didn’t predict the financial crisis and gave little guidance to policymakers, and I was anxious to hear the laureates discuss what macroeconomists need to do to fix them. So I found the lack of consensus on what caused the crisis distressing. If the very best economists in the profession cannot come to anything close to agreement about why the crisis happened almost four years after the recession began, how can we possibly address the problems?
Well, there's that, first. If you read the whole thing, you'll see that he's arguing, whether or not he intends to, that economics isn't a science.
But whatever it is, it's dismal for sure these days. Read the abstracts of the papers that were presented. Go through them yourself, it will take about 20 minutes. Do you see a single interesting idea? A single new one? Do you even see a well-written sentence?
Are these guys just too old to come up with anything new?
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Mar '11
Re: The Dismal Science
It wasn't any one thing, it was all of them. Too-big-to-fail banks issuing loans to bad risks underwritten in a hand-waving "full faith and credit" way by a government that was arguably already too-big-to-succeed and based on property values increasing forever and ever, amen.
Nuts. It is a wonder that it held together as long as it did.
Oct '10
Re: The Dismal Science
Most (all?) economists are too full of themselves to allow for The Law of Unintended Consequences.
Nov '10
Re: The Dismal Science
I think both the abstract and title of the Mirrlees lecture---Poverty, Inequality, and Food---are excellent. They're clear, elegant, and jargon-free. They set out the hugely important questions he's considered, the approach he's used to tackle them, and the implications of his conclusion. I also give him bonus points for his using an Oxford comma. To put it in economists' terms, I'd pay money for a seat at that show.
Re: The Dismal Science
When you consider the kinds of ideas Mirrlees used to have, it is hard not to view "clear and jargon-free, with bonus points for use of an Oxford comma" a very low standard.
Aug '11
Re: The Dismal Science
Understanding the financial crisis is a study of history, not economics, and the lesson is clearly, when the government intervenes in basic economic transactions, like the extension of credit for a home purchase, expect a bubble to grow beneath your feet. As the earth rose beneath us, we all felt a little bit taller, until the bubble burst and now we're climbing out of this big ugly sinkhole.
Economists trade in insight and the buyers are the ones who caused the bubble. When asked to explained the sinkhole, they all hrrumph, like the Gov's council in "Blazing Saddles."
Jul '10
Re: The Dismal Science
"Are these guys just too old to come up with anything new?"
These guys are just too partisan to come up with reality.
Oct '10
Re: The Dismal Science
Perhaps someone can explain how economists predict the actions of politicians in a world where institutions like the IMF, World Bank, and scores of large sovereign governments are now manipulated for personal political kingdom building. Given that the game has no rules where personal ethics are dissolved, how, exactly, does one build a model to predict outcomes?
Feb '11
Re: The Dismal Science
Fancy what a game of chess would be if all the chessman had passions and intellects, more or less small and cunning; if you were not only uncertain about your adversary's men, but a little uncertain also about your own . . . You would be especially likely to be beaten if you depneded arrogantly on your mathematical imagination, and regarded your passionate pieces with contempt. Yet this imaginary chess is easy compared with a game man has to play against his fellow-men with other fellow-men for instruments.
--George Eliot, in Felix Holt, the Radical (1866)
I think many economists, as well as many if not most political leaders, fail to understand the above point. Also, very few economists seem to have ever run a business or worked in one in other than an advisory capacity...in conversations with economists, I find they often have rather stilted and schematic views of how things in businesses actually work.
Edited on Sep 1, 2011 at 7:35amRe: The Dismal Science
About a year ago I got a paper from my mentor that had a list of explanations for the financial crisis. (Appendix A from here.) I put it on the overhead projector in my undergraduate money and banking class. We then found ten more explanations. Somewhere I hear Harry Truman wishing for one-armed economists...
There may be several of those explanations that work in part, and interact with the others. We keep looking for 'the' smoking gun rather than a team of snipers.
The macro models are not built to explain this kind of a recession, because this is not a classic business-cycle recession. We can only forecast something for which we have a history to look back onto. That history "trains" models, in a way. No macro model has been trained to predict what happened here, so you have to rely on something less formal, more historical and anecdotal.
Re: The Dismal Science
King, you know the "all odd numbers are prime" joke, I assume ... at this point, it's a bit like saying "the models weren't built to explain the number 9." I agree with you--we don't have a model for this. (A point that really should get a lot more attention.) What I wonder is whether we can rely on something less formal, more historical, or anecdotal.
Edited on Sep 1, 2011 at 8:49amSep '10
Re: The Dismal Science
I view Reinhardt and Rogoff's book as really history with lots of economic data and some opinion. Its a wonderful book and yet many who oppose pro growth policies and seek to justify the President's actions with counterfactual arguments use that book as referance to say that we are just in for slow growth because that is what always happens after a credit bubble bursts. We are quite able to allow psychiatrists to prescribe SSRIs and other medicines that are shown to be effective even though we have, to say the least, a less than perfect understanding of how the brain works. I think it is simply intuitively obvious that lower marginal tax rates and less regulatory interfearance will produce more growth.
Re: The Dismal Science
Claire, half the problem we have is that we still go to the models even when we know they don't work. "When all you have is a hammer..." Aubrey is correct to bring up Reinhart and Rogoff but you end up with people rather depressed because the answers are "recession lasts a long time" and "trying to DO SOMETHING usually makes matters worse." If you want this science to be even more dismal, you write a book like Tyler Cowen's, which in one sentence is "the good times don't roll any more."
Of course there are some things you might do. This morning Krugman is blogging that Iceland has gotten better and out of its IMF program
I agree though, as he admits, Iceland isn't out of the woods yet. But the US couldn't do two of the three things Iceland did, and it's already doing the third. So what to learn from it? I don't know.
Apr '11
Re: The Dismal Science
It's a strange conclusion to reach. If a scientific model fails to predict, or if it predicts poorly, we don't throw out the topic entirely and say it's not scientific. Rather, we should conclude that the models we had were wrong.
At least that's my layman's understanding.
Oct '10
Re: The Dismal Science
Is it actually news that economics isn't a science? I suppose in a world in which we have "climate science," "psychology," "sociology," etc. as sciences, it could be news.
I know of one, and only one, attempt to make economics an actual science: Axiomatic Economics. It's a valiant attempt, but unfortunately, Mr. Aguilar has bought into the incomplete mainstream definition of probability based on the Kolmogorov axioms and Measure Theory. This leads him to posit a flawed, and unnecessary, three-valued logic, which Jaynes put to rest in Probability Theory: The Logic of Science. (Yes, I know I'm a broken record.) If Mr. Aguilar revisited his work in terms of probability-as-logic, perhaps working from New Axioms for Rigorous Bayesian Probability, he might yet reach his goal.
But the problem isn't really a technical one. Technically, economics could be a science. Unfortunately, there's a large array of incentives stacked against it ever becoming one.
Jul '10
Re: The Dismal Science
Debt repudiation is a fine approach as long as one never intends to borrow or do business with their creditors again. Or people that know their creditors.
Currency depreciation only works against those foolish enough to keep savings in that currency. Can't imagine why the price of gold is through the roof.
Somehow, responsible governance never seems to be on the list of alternatives.
Jun '10
Re: The Dismal Science
I disagree, and said as much on one of your member comments, Douglas. The Canada Mortgage and Housing Corporation (CMHC), has been providing mortgage guarantees for over half a century and, guess what, no bubbles. I'm not going to rewrite here what I wrote there, so consult one of your previous threads for the details on how this was done.
Jun '11
Re: The Dismal Science
Models fail because at some point, data fails.
Collected data can only get one so far. An excessive reliance on past performance and behaviour blinds one to the Chance or Calamity inherent in being human.
A man wearing a dark green suit shows up at 9:00 each morning in front of the drug store. He pauses for a moment and walks on. He has been doing this every day for 20 years.
Is it safe to assume that he will show up on the first day of the 21st year based upon available data?
A lot of black box stock market models assume that it is a safe assumption. They use massive amounts of leverage to capitalize on the predictability of this very reliable green suited man. For 20 years, it's a wonderful bet - go long the green suited man.......until one day, he gets hit by a bus 2 blocks away at 8:45.
That's how the crisis starts.
Oct '10
Re: The Dismal Science
The paper on health economics looked interesting, and the one on bounded rationality is at least new. I didn't find the others particularly original, though.
Oct '10
Re: The Dismal Science
King Banaian:
Of course there are some things you might do. This morning Krugman is blogging that Iceland has gotten better and out of its IMF program
I agree though, as he admits, Iceland isn't out of the woods yet. But the US couldn't do two of the three things Iceland did, and it's already doing the third. So what to learn from it? I don't know. · Sep 1 at 9:29am
Surely Krugman isn't implying the gold standard is economic orthodoxy? That's absurd. Iceland got away with that strategy because it's a small, insignificant country that can afford to do such things. How that applies to the U.S. is beyond me.