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Famous economists' famous errors
Bob T., a loyal MR reader, asks the following:
10 (or more) most famous mistakes in economics. Viner on costs and Feldstein on Social Security come to mind. Malthus? Not talking about old vs. new economics, but simple analytical errors and bad predictions.
That's a good start. What else might be listed? Just to circumvent various hobby horses in the comments section, let's avoid Marx and Marxists, Keynes, and the last twenty years.
1. Kenneth Arrow confusing risk subdivision and risk multiplication, in arguing that government should use a riskless rate of discount.
2. The Cambridge, Mass. economists having to admit, finally, that capital reswitching could be quite a general phenomenon (though is it, really?)
3. Ricardo's prediction that most of national output would end up going to the landlords.
4. Paul Samuelson praising the economic performance of Soviet central planning in his Principles text.
5. 93 percent of all proclamations made about the demand for money in macroeconomics.
6. The more exaggerated claims about the Laffer Curve.
7. Various claims that the Fed should have let the money supply fall during the Great Depression.
8. Jevons's claim that England (or was it the world?) would soon run out of coal.
9. Welfare analysis done in overlapping generations models (the standard welfare theorems do not generally hold in such models).
And dare I offer up a controversial pick:?
10. Those who think that the difference between "capital" and "ideas" in a Solow growth model is actually well-defined.
What else can you think of?
Posted by Tyler Cowen on January 2, 2009 at 07:06 AM in Economics | Permalink
Comments
The belief, common to most macroeconomists 30 years ago, that the national debt is not a burden on future taxpayers "because we owe it to ourselves", and at the same time believing that bond-financed tax cuts increased net wealth and so would increase consumption demand.
Posted by: Nick Rowe at Jan 2, 2009 8:16:01 AM
1) I hate to pick on Paul Samuelson again, but he predicted that the government would have to deal with a return of the Depression after World War II.
2) Irving Fisher's remark about stocks reaching "a permanently high plateau".
3) Nassim Nicholas Taleb would surely argue for the Black-Scholes formula.
4) Paul Ehrlich's bet about the future price of certain commodities.
Posted by: at Jan 2, 2009 8:42:34 AM
Mises saying that middle-of-the-road policy would lead to socialism. Some will say that 2008 makes him look better, but not much better, I think.
Keynes wrote something about a future of agricultural shortages, I think in Economic Consequences of the Peace.
Posted by: Daniel Klein at Jan 2, 2009 8:46:59 AM
Not seeing how number 3, Ricardo's prediction that most of national output would end up going to the landlords, is a mistake. If we understand that the landlord, the owner, the rent collector, in the modern world, is the political class, then it is obvious that they take a far larger share of national output than anyone else - and their share is clearly growing.
Posted by: Randy at Jan 2, 2009 9:26:31 AM
The second comment adds Paul Ehrlich's bet on the future price of commodities, but he was not an economist.
In fact, it was the economist Julian Simon that pointed out the folly and subsequently won the bet.
Posted by: Justin Ross at Jan 2, 2009 9:36:17 AM
And what would you say is your biggest actual mistake?
Posted by: David at Jan 2, 2009 9:39:31 AM
Dow 36000 is the one who stand out in my mind.
Posted by: Mads Keller at Jan 2, 2009 9:43:20 AM
"If we understand that the landlord, the owner, the rent collector, in the modern world, is the political class, then it is obvious that they take a far larger share of national output"
Yes and if wishes were horses than beggars would ride.
Posted by: assman at Jan 2, 2009 10:07:07 AM
But one would argue Modigliani-Miller theorem deserves some mention in the list given the current evidence.
Posted by: arun eamani at Jan 2, 2009 10:08:59 AM
The current canard (Krugman?) that since very restriced laissez faire led to our current economic predicament, the only way out is via John Maynard.
Posted by: BK at Jan 2, 2009 10:10:53 AM
How about Starve the Beast? I'd also argue against Friedman's 1953 'The Methodology of Positive Economics' but I suspect I'm in a very small minority on that one.
Posted by: Mike Moffatt at Jan 2, 2009 10:21:26 AM
Cool question. I would like to quibble about two of Tyler's picks:
6. The more exaggerated claims about the Laffer Curve.
Tyler didn't accuse Laffer himself of this, but I want to clarify that--having worked for him and gone back through his old papers many times--Arthur Laffer never said, "Anytime you cut tax rates, you necessarily bring in more tax revenue." It's true that some of his followers, and especially Republican politicians, have claimed as much over the years, but Laffer himself was always pretty careful merely to argue that the "static" projections of revenue losses/gaines (from tax cuts/hikes) were too pessimistic/optimistic.
7. Various claims that the Fed should have let the money supply fall during the Great Depression.
How do we know that this advice was bad? There was a lot of ridiculous stuff that Hoover and FDR did, any number of which could have been expected to wreck the economy. E.g. besides Smoot-Hawley, Hoover also jacked up taxes like crazy (in 1932 I believe) and urged businesses right after the Crash to keep up wages and investment spending.
So it's true that the money supply contracted at the same time real output plummeted, but how do we know it is cause and effect?
Posted by: Bob Murphy at Jan 2, 2009 10:37:25 AM
Anything that Abba P. Lerner wrote, including the letter
"w," as in "we owe it..."
The long list of efficient markets theorists, which includes Samuelson.
Anyone who ever used calculus to try to theorize (and that's the horrible word for it) about economics.
Whoever founded econometrics.
Posted by: Bill Stepp at Jan 2, 2009 10:58:23 AM
Clearly, you're missing one of the most famous and consequential mistakes:
the belief in a stable and exploitable inflation-unemployment trade-off (aka the Phillips curve) - e.g. Samuelson-Solow AER 1960.
Posted by: hg3 at Jan 2, 2009 11:07:31 AM
That a consumption tax would lead to more productivity than an income tax. Taxing people on the front end introduces more risk and uncertainty.
Posted by: aaron at Jan 2, 2009 11:14:49 AM
I would put more than just the detailed point of #10 down for Solow's model: the whole thing was one big disaster of a mistake. Along with it, what about the Phillips curve? What about 99% of all macroeconomic models of the 20th century?
And what about Lange et al?
And, aside from just Samuelson, couldn't you name another dozen or more economists who believed that the Soviet Union was outpacing the West, and that socialism was far superior to capitalism? Those predictions being tightly linked to the above two mistakes I mentioned, of course, aggregation and static modeling.
Posted by: liberty at Jan 2, 2009 11:15:54 AM
Often, it's just too soon to tell.
Posted by: dearieme at Jan 2, 2009 11:21:14 AM
The crazy idea that "dollar-cost averaging" or "buy low, sell high" is a better strategy than "buy high, sell low" or any other.
Posted by: jimbino at Jan 2, 2009 11:23:49 AM
perhaps not in the top 20, but on the Solow growth model:
XX) Everybody who uses Solow's model for *anything* without reading and understanding Robert Ayres' papers on it. Really, economists should try and understand useful work and energy, even though most will dogmatically resist even the idea.
as for Laffer, why even include him? The Laffer curve error, if attributed should probably be attributed to Keynes, no? There was nothing new about the Laffer curve, afaik, only the way it was politically misused. The blame on that should fall on the politicians - not that Mr Laffer himself escapes without major brain bloopers:
http://www.youtube.com/watch?v=-MqIQ5IQPxM#
http://www.youtube.com/watch?v=LfascZSTU4o
In general I think we should post this as numero uno:
1) Building a theory with total disregard to reality and when proven wrong by fact from the real economy proceeding to claim that economy is 'wrong' and actors are 'irrational'
That is the cardinal sin.
Posted by: Antti K at Jan 2, 2009 11:46:17 AM
hg3 nailed it, The Phillips Curve is an easy, far and away, nothing comes close, #1 champion in this category. The error, a true classic: confusing correlation with causation.
Posted by: Noah Yetter at Jan 2, 2009 11:48:37 AM
"Building a theory with total disregard to reality..."
Hey, maybe I'm not the only one who sees Friedman (1953) as a mistake!
Posted by: Mike Moffatt at Jan 2, 2009 11:54:37 AM
The sample selection bias in Baumol's "Productivity Growth, Convergence and Welfare..." (AER, 1986). Its a good example of how smart people can make mistakes that seem obvious in retrospect, after another smart person (Brad DeLong) points them out.
Posted by: Bill C at Jan 2, 2009 12:25:03 PM
Mistakes in economics is a dull subject.
The truly electrifying inquiry would be to name 10… well… 5… OK just 3 incidents when economics made indisputably correct (in a rigorous scientific sense – since economics dare to call itself a science) prediction/forecast on a more or less significant scale.
Posted by: Ozornik at Jan 2, 2009 12:26:12 PM
Oops. Not sure if consumption is the right word. I was thinking of a fossil fuel tax. You don't want to tax the inputs. That's bad news.
Posted by: aaron at Jan 2, 2009 12:26:59 PM
Noah Yetter beat me to the punch with the Phillips Curve, but I'll nominate the Gordon growth model for its assumption of a constant (and permanent) rate of dividend per share growth.
On a closely associated note, any assumption linking GDP growth to the growth of stock prices.
Also, for first place, any economic theory predicated on stochastic assumptions where interdependencies among the underlying data are evident.
Posted by: Ironman at Jan 2, 2009 12:27:05 PM
