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What went wrong in the economics profession?
I've been putting off this topic but reactions to Krugman's essay don't seem to go away. Mark Thoma links to everyone. Here is a Krugman post,criticizing Chicago School economists. Via Greg Mankiw, David Levine offers the latest broadside. Here is Alexander Rosenberg criticizing John Cochrane.
I would have preferred it if this debate had focused on what real business cycle theory -- whatever its limitations -- has to offer. For instance if you are postulating a "jobless recovery," most likely you are invoking ideas from real business cycle theory. RBC theory has been a major contribution, even if it doesn't explain the core of the recent financial crisis or even if it has some very limited one-person models. If you think seriously about the persistence of business cycles over time, or the spread of business cycles from one sector to another, probably you are invoking ideas from real business cycle theory. For all its prominence, Keynesian economics tends to portray states of affairs and it often has difficulty presenting a business cycle per se, such as the time paths of variables across the entire range of the cycle. RBC theorists have formalized what a cyclical explanation, in the full sense of that term, has to look like and so they have done a big service to Keynesian ideas also.
At this point the debate is more a topic of sociology than substance. The substantive issues will be better worked through in other forums; this forum has been spoiled. The remaining lesson -- and perhaps the major lesson -- is that the Jacksonian mode of discourse does not very well suit a discussion of macroeconomic theory.
In the comments I would say stick to the issues and don't bother criticizing any of the participants in the debate.
Posted by Tyler Cowen on September 21, 2009 at 07:26 AM in Economics | Permalink
Comments
>>I would have preferred it if this debate had focused on what real business cycle theory -- whatever its limitations -- has to offer.>>
There's also the issue of what Keynesianism and its descendants has to offer.
It is too bad that this is often a food fight rather than a serious discussion.
Posted by: fusion at Sep 21, 2009 8:41:53 AM
There are few times I have ever experienced an intellectual "head exploding" moment, but Krugman's article was certainly one of these moments, not necessarily for what he said but that he has the gall - as Paul Krugman, the man who has arguably been at the forefront of the charge to twist economics for the purposes of political hackery - to have said it, or even to believe he has ground on which to stand while saying it given his role in leading discourse astray. Economists who so eagerly and fully dive into full-blown partisan fiction at the expense intellectual honesty and credibility should be held accountable, even moreso when their real-world accomplishments (however far into the past they may have come) demonstrate that they should know better. This goes for any school and any side of the aisle (or quadrant of the graph). The debate itself is certainly valid, but economists who so willfully mislead the public on such a large scale should be taken to task, not pretending to ringlead the "Golly, how did we get here and how do we fix it" debate with their badly sullied credibility.
Posted by: BKarn at Sep 21, 2009 9:39:26 AM
"the Jacksonian mode of discourse does not very well suit a discussion of macroeconomic theory"
Keynes pretty much set the standard for this with his all pejorative and no substance attacks on Hayek in the 1930s, didn't he?
Krugman is merely aping his hero Keynes.
Posted by: Greg Ransom at Sep 21, 2009 10:05:54 AM
And note well, Keynes' all pejorative no substance attacks -- were journal "articles". Of course, Keynes was the editor of his own journal ... sort of like the blog of his day.
Posted by: Greg Ransom at Sep 21, 2009 10:07:57 AM
The debate is indeed disappointing. Most of the posts lack substance. Rosenberg and the latest Krugman in particular offer nothing new, except when Krugman makes the important point that Keynes' work has been banished from many (most?) top doctoral programs. But this is precisely what Cochrane says, although to the latter it was clearly a good thing. Rosenberg's post is a well written but meaningless mish-mash. He attacks one straw man after another (Agents' beliefs are sometimes wrong! Data include measurement errors! People are not rational-expectations automatons!) and draws the wrong conclusion from the stagflation episode.
I hope someone redirects the discussion towards a more constructive platform.
Posted by: Jack at Sep 21, 2009 10:15:08 AM
@TC: Sorry, I just saw your request not to criticize specific actors in this discussion.
A different starting point could be what I was told in grad school (before the crisis hit): Keynesian models are ad hoc and rest on unreasonable assumptions without any solid connection to micro models (i.e. the core of economic theory), and yet they work pretty well. RBC models are carefully developed from a precise set of micro assumptions and are therefore internally consistent, but they work poorly in practice. Why? What can we learn from this?
Posted by: Jack at Sep 21, 2009 10:19:48 AM
What's the Jacksonian mode of discourse?
Posted by: David R. Henderson at Sep 21, 2009 10:49:08 AM
Falkenstein has a very poignant attack on macroeconomics with a more outside perspective:
http://falkenblog.blogspot.com/2009/09/macroeconomist-says-macroeconomics.html
I especially liked this bit:
"They simply did not have enough business cycles to distinguish between very different theories, and it was too easy to fix models after every new decade's surprise.
"For example, the main data is post World War 2 US data, and there have been about 10 recessions."
Posted by: kalevala at Sep 21, 2009 11:11:20 AM
David,
I was wondering myself and come to the conclusion that it refers to a rough and tumble debate. For example, read the history of the election of 1828.
Posted by: Yancey Ward at Sep 21, 2009 11:13:11 AM
Need we be so negative?
Let's look at the up side of this. The macro profession has been shameless and beyond embarrassment, producing work that is sterile in all sorts of ways -- and from the perspective of the grand tradition of the marginalist revolution (Menger, Bohm-Bawerk, Hayek) it is NOT good micro, is NOT well grounded in micro and LEAVES OUT the central components of a production economy (see Roger Garrison, http://www.auburn.edu/~garriro/ ). And this includes RBC constructs as well as the textbook "Keynesian" stuff.
Exactly what we need is to bring in other psychological factors besides guild dominated and Fed subsidized ego and self interest within the profession. We need public shaming. We need public embarrassment. We need public exposure. These macro guys effect every member of my family, every person on my block, every member of my community, and every citizen of this country. They need to be held publicly accountable.
Posted by: Greg Ransom at Sep 21, 2009 11:19:43 AM
What's most galling is the positive conclusions critics of macro often tend to draw from their purely negative arguments. Macro doesn't tell us much about business cycles or the economy as a whole, therefore my preferred policy choice are justified. Obviously a horrible, unlicensed inference. This should result in mass worry and agnosticism, not as evidence for the efficacy of the stimulus or the need for government intervention.
Posted by: Urstoff at Sep 21, 2009 12:41:45 PM
"At this point the debate is more a topic of sociology than substance."
Perhaps because credentialed professionals are so at odds over what counts as substance, the only options for any participant are:
- invective: declare a large group of credentialed pros to be total frauds
- retreat: pursue complexity and indirection in order to avoid taking sides (your choice AFAICT)
- put an unrelated analytical frame around the participants ("sociology") to make sense of it
In general I find the sociology much the most persuasive, in part because I have seen how powerfully it accounts for the shaping of intellectual work product in other fields.
Krugman himself notes the tension inherent in deciding to de-legitimize a part of one's own intellectual history. On the one hand, if you pretend it doesn't exist and it turns out to be relevant, you're potentially caught with your pants down (as he charges the "freshwater economists" have been caught after excommunicating Keynesianism). On the other hand, if you don't draw a bright line over which to put ideas that are both wrong and dangerous, you haven't as a practical matter defined them as wrong (per his "opinions on the shape of the earth differ" trope). The human mind is not a logic machine, and some of our knottiest recent problems, like the bubbles overseen by the one time Rand acolyte Mr. Greenspan, come from those who would like to pretend it is.
Posted by: Sam Penrose at Sep 21, 2009 1:15:42 PM
The fact that you cannot determine who are the real quacks pretty much proves that you are all quacks.
Posted by: josh at Sep 21, 2009 1:28:20 PM
I have come to feel that the debate depends upon scale and perspective. Schiller's long-run indexes are actually evidence for EMH--when viewed from the perspective of decades and even centuries. But we, and the economy--"live" from year to year. Choices are made, institutions undermined or established, norms eroded or diffused, in response to a series of short run shocks. This, in turn, determines the slope of the long-run equilibrium path, for better or worse. We definitely need mid-level theories, business cycle theories for example, to help manage the lives that we actually live and seek to manage through economic and political markets.
Posted by: R S at Sep 21, 2009 1:39:11 PM
Kalevala, thanks for the pointer to Falkenstein. I also like his comment on Minsky:
"He was a maverick, but perhaps a bit too much."
Posted by: Paul Johnson at Sep 21, 2009 1:58:02 PM
What went wrong in economics? To my eyes, not much:
We had theories from Friedman, Bernanke, and yes, Keynes to understand and to react to events as they unfolded.
We had official and unofficial monitors of liquidity, money, asset prices, income.
We had histories of financial crisis past.
We experienced seventy years without a major financial crisis (in an age of enormous financialization).
We had orthodox models suggesting too much liquidity (i.e. the Taylor rule) and orthodox valuation models suggesting a bubble (i.e. Shiller).
We were well-prepared for crisis and we knew what hit us. And so I would say economics, both Keynesian and Chicago-school, was a rousing success.
A better question would be to ask what went wrong in the economy.
Posted by: Reed at Sep 21, 2009 2:04:32 PM
Who did better than the economists?
Politicians? Regulators? Pffft.
Posted by: Andrew at Sep 21, 2009 2:40:20 PM
I think economists have specific failures. For example, economists seem unaware or tolerant of accounting problems. We have nominal debts and no speed bankruptcy plans. Economists still stick by inflation and the lender of last resort. We still don't see enough debt for equity swaps and mortgage workouts. It seems there is a great need for a refresher of simple arithmetic.
Another failing. They didn't walk over to the business school, find the guy who said it was okay to roll over debt nightly, and kick his ass. That guy is not a participant in the debate, so he's fair game.
Posted by: Andrew at Sep 21, 2009 2:53:51 PM
Question: If macroeconomics cannot come up with a predictive model, what use is macroeconomics? Some macroeconomic pundits were predicting that the economy was unstable and ripe for a recession, and that it could have dire consequences for banks and thereby the economy as a whole. If they weren't even the majority, then isn't macroeconomics as useless as astrology?
Maybe it is time macroeconomics justified its existence. You're on the spot now. Prove that you are more useful to society than sociology or women's studies.
Posted by: Benny Lava at Sep 21, 2009 3:32:51 PM
Some macro models clearly predicted that the conditions for a major crisis were building up, even before the money market break in summer 2007. The best I know of these is set out in Godley and Lavoie's 'Monetary Economics' It is stock-flow constrained, and takes in the accounting concepts. (It has begun to be used in undergraduate teaching, I understand.)
Most macro economists ignored these storm signals. They were steering to the inadequate charts of our mainstream theories; theories we had developed to increase our understanding, not to design concrete policies to cope with events.
The applied economists working for the US and UK Treasuries, the IMF, and the central banks appear to have picked up more of the storm warnings. By October 2007 they were signalling hard that banks needed massive amounts of extra capital. But when the market drive to recapitalise stalled, the authorites took no action. It seems political will failed.
Why did political will fail? Partly because most politicians hope trouble will go away before they have to take uncomfortable action, no doubt. But partly also because we had let our mainstream economic theories condition the mind-set of political (and business) decision makers without warning them that these theories were only sketchily tested against reality.
We are not villains, any more than the Second Officer of the Titanic was; but the trouble did happen on his and our watches.
Posted by: Diversity at Sep 21, 2009 4:31:18 PM
If you have ever sat in a graduate class in macroeconomics you will understand why this is the case. They teach models that do not fit the data reasonably well.Instead of realizing that the model does not present a good way of thinking about the world, they proceed to tweak it and add some "frictions" in order to match one or two variables of interest to the data. This is the state of most(not all) macroeconomics.
It appears that nobody (including me) has the boldness/intelligence to change the status quo. Most professors are happy having their tenured jobs and publishing papers they hardly believe in.
Posted by: Dave at Sep 21, 2009 6:38:29 PM
This is an interesting take on where economist's went wrong, from the finance side.
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=323
Be interested to know what people thought of the claim about Arrow/Debreu.
Posted by: michael webster at Sep 21, 2009 8:55:35 PM
Sam Penrose and BKarn
You were asked not to personalize the debate. You went straight at Krugman.
Do you?
- not read?
- don't think this was a valid constraint? In which case, why didn't you raise that?
- think it was a valid constraint for other people, but in some Randian sense, you are above mere mortals?
Or are you merely stupid?
Posted by: valuethinker at Sep 22, 2009 5:07:24 AM
valuethinker,
"You were asked not to personalize the debate." [...] "Or are you merely stupid?"
And you point it out this way because?
Posted by: MrObvious at Sep 22, 2009 6:09:44 PM
I think the financial markets are not run by the government and the private firms which run them found it very convenient to rig them for some of their bigger players, so they could bring in more business and take a bigger rake and make themselves and all their business friends rich.
They succeeded.
Even if we regulate and punish they will have succeeded the same way George W. Bush succeeded in being a two-term preznit with all the power he wanted during that time. It was immoral thievery and criminal activity, but they got what they wanted.
What does America have to say in response? How do we prevent it happening again? What's the punishment?
Obviously we can't trust the markets to NOT suck in every penny (including social security and anything they can get from the gov't.) and steal a large chunk of it. Obviously we can't trust the SEC to do their job (one can only wonder how much money it took to make them look the other way).
America, at least some large segment of it, is quite immoral and self-serving and it's killing us. As one who sees gov't as needing to be secular I am not one to tell people to 'get religion', but we do need to instill more civility and civic morality in everyone.
There are far too many people with huge financial resources who are destroying us and many of them see this all as a big game they are winning. It's tragic and even the Greeks don't have enough tears for this.
Posted by: tripods at Sep 23, 2009 3:57:49 AM
There seems to be a misunderstanding about the logic of saying that a generally accepted prediction about some future bad news will bring the bad news forward, so that the claim about timing will be wrong. The alternative is that a generally accepted prediction about future bad news will lead to remedial measures. Neither of these is a claim that macroeconomics is unable to make predictions. The claims is that, to the extent the prediction is credible to a large number of people, or to enough people that matter, the prediction will be overturned by responses to the prediction. That is not a weakness in macroeconomics. That is a recognition of reality.
The problem we have experienced is that forecasts of disaster this time were not accepted by enough people, or by people with enough power. That's why we had the problem. In cases in which risks are identified and can be treated, they don't manifest. That doesn't mean the prediction is wrong, but rather that it was useful.
I don't claim to know the frequency of useful predictions, but at least we ought to get our logic right.
Posted by: kharris at Sep 23, 2009 9:39:14 AM
It would be nice to be able to talk about what the different schools of thought had to offer. They don't seem mutually exclusive to me. To a layman, its sort-of clear that this recession has a mixture of real and nominal causes. Its extremely hard to explain what's happened over the last year in real business cycle terms. But the original recession - the one we were in before Lehman folded - looked very real.
But its really hard to have that conversation because the main representatives of both neo-Keynesian and RBC theories are letting their political biases get in the way. RBCT doesn't prove that recessions have no nominal component - it shows that even if you assume away any possible nominal component you can still have recessions. Thats genuinely really interesting and important, but it in no way justifies the shrill accusations of bad faith the Chicago crowd start pouring out whenever anyone uses neo-Keynesian ideas. They may consider Keynes to be unfashionable, but they haven't actually proven him wrong. Its their political prejudices, not their economics, that makes them dislike current fed and treasury policy and they should fess up to that and talk politics with the rest of us or shut the hell up.
And Krugman is, if anything, worse. While Cochrane and Lucas may just have a inflated idea of the significance of their own work, Krugman pretends not to understand the implications of his. He's one of the people who showed that on normal neo-keynesian assumptions monetary policy can still be effective when nominal rates hit zero, and yet in his public pronouncements he pretends there is no alternative to the use of fiscal stimulus. That's his politics, not his economic expertise, talking. He derides the use of mathematical models, and yet if anything the neo-Keynesianism of which he's a major representative is Keynesianim that's come to terms with the neo-classical obsession with fancy maths.
Posted by: Simon K at Sep 23, 2009 1:19:41 PM
I firmly believe that the monetary and fiscal policies that the world is embarking on have created liquidity induced securities speculation (all over again) and have engendered inefficient resource allocation. You can't erase trillions in bad loans and poor capital investment decisions just by throwing around some "stimulus" funds and lowering interest rates to 0%.
READ - The Resurgence of Keynesian Economics and Interventionism
Posted by: BeyondTheMargin.net at Sep 27, 2009 2:08:37 PM
