Monday, February 16, 2015

Macroeconomics: "not remotely scientific"


Excellent post by Noah Smith examining the question of why so many people who aren't trained economists like to weigh in with views on macroeconomics. One reason, he suggests, is that people look at macro and see a modelling approach that doesn't seem terribly plausible, and they also see lots of macroeconomists disagreeing over fundamental points. What they see mostly looks like ideology dressed up to look like something else. As he notes,

There is the perception that macroeconomists don't understand their own subject. The Great Recession convinced a lot of people that macroeconomics hasn't solved any of the problems it was created to solve. Contrast that with physics or bio or chem, which have very obviously given us a lot of the awesome stuff that makes our society rich. In addition, you have very public and acrimonious debates between macroeconomists like Krugman, Cochrane, and Sumner. That convinces a lot of people that there is no consensus within macro, which in turn makes them suspect that macroeconomists haven't gotten any answers out of the Universe. If the experts don't understand anything, why can't the amateurs weigh in?

I am not annoyed by normal people's penchant for butting into macro debates (though the "Austrian" and "heterodox" people do annoy me, since they approach things in a tendentious rather than an inquisitive manner). I think it's natural. Sure, a lot of stupid stuff gets said, but let he who is without sin cast the first stone!

I would agree that this is the main reason. By chance, I came upon this post just as I was reading a speech given two years ago by Manchester economist Diane Coyle. She is by no means a heterodox renegade. In general, she argues that there's lots of value in today's economic theory, though not necessarily in macroeconomics. The problem there, as she see it, is pretty clear:

Macroeconomics – the study of how millions of individual decisions aggregate into economy-wide measures – is essentially ideological. How macroeconomists answer a question like ‘What will be the effect of cutting the budget deficit on growth next year?’ depends on their political views. This is not remotely a scientific area of the discipline.

Tuesday, January 20, 2015

Presuppositions and idealizations...


Lars Syll quotes an interesting passage from Hans Albert on the weird use of theoretical abstraction in economics; "weird" as in very unusual and rather questionable from the perspective of the rest of science. As Albert writes,

Clearly, it is possible to interpret the ‘presuppositions’ of a theoretical system … not as hypotheses, but simply as limitations to the area of application of the system in question. Since a relationship to reality is usually ensured by the language used in economic statements, in this case the impression is generated that a content-laden statement about reality is being made, although the system is fully immunized and thus without content. In my view that is often a source of self-deception in pure economic thought …

A further possibility for immunizing theories consists in simply leaving open the area of application of the constructed model so that it is impossible to refute it with counter examples. This of course is usually done without a complete knowledge of the fatal consequences of such methodological strategies for the usefulness of the theoretical conception in question, but with the view that this is a characteristic of especially highly developed economic procedures: the thinking in models, which, however, among those theoreticians who cultivate neoclassical thought, in essence amounts to a new form of Platonism.

In other words, economists (many of them) start with some assumptions or presuppositions, derive some conclusions, and then feel as if they've made a real and lasting contribution to understanding the world. They've produced an "if... then" statement; established a logical connection. It's often a secondary consideration whether this "if...then" has anything at all to teach us about OUR world. Economics, in this sense, is just a branch of mathematics. Pure mathematics, not applied mathematics.

This is interesting as it resonates quite strongly with the conclusions of the recent work of Itzhak Gilboa and colleagues, who try to understand how economists see economics in relation to the rest of science. Their conclusion is much the same -- that many if not most economists (theorists, at least) see their task as producing "theoretical cases," which cannot possibly be refuted, as they are merely logical connections between antecedent suppositions and logical implications.

I wrote about the article in a recent Bloomberg column, the beginning of which goes below:

When economists say they can "explain" something, beware: Their understanding of the word might be very different from yours.

Several years ago, in the immediate wake of the financial crisis, economist Ricardo Caballero wrote about what he called the “pretense-of-knowledge syndrome” in academia. Economists, he argued, had become “so mesmerized” with the internal logic of their theories that much of the discipline -- even that part concerned directly with policy making -- had spiraled off into fantasy. Even when they studied issues close to the crisis, such as bubbles, panics and fire sales, they relegated them to the periphery of macroeconomics, which at its core valued mathematical elegance over usefulness.

Not much has changed since then. That, at least, is the conclusion of Itzhak Gilboa and a group of economists who recently tried to understand why their profession operates so differently from most sciences. Academic economists, they say, use the term "explanation" in a way that other scientists never would. Instead of developing realistic and testable theories like those in biology or physics, they often aim only to develop "theoretical cases" -- imaginary mathematical worlds with their own rules of cause and effect.

Suppose, for example, that an economist wants to explain a persistent recession following a financial crisis....  

Read more here.
 

Wednesday, December 3, 2014

Yeah for Mark Thoma!

How many economists go out of their way to examine in public what they got wrong in their past views, and what they learned by making such mistakes? I'd say the list is exceedingly short.

So three cheers for Mark Thoma, who does just that in an excellent column in the Financial Times. This is how you inspire trust.

Friday, November 28, 2014

Has big business "captured" the economics profession?


The idea of regulatory capture is a good one, and it’s the principal explanation that academic economists offer for why regulators often — as a rule, in fact — don’t act as firm and wholly independent judges of those they’re meant to regulate. Whether they’re working to make manufacturers meet safety standards, or banks avoid undue risks, regulators rarely act as stern overseers, and often end up softening regulations to appease industry desires. It’s not generally because they’re incompetent or corrupt (although that’s sometimes true). Regulators are human beings, and hold opinions which can be influenced by others. They happen to interact mostly with those they regulate, and so end up getting influenced by the regulated — not surprisingly, in ways that favor those parties.

For example, regulators need information to do their jobs, and cooperation with those they regulate is a good way — probably the best way, and almost certainly the easiest — to get it. They try to get along with those they regulate, and that implies some give and take, some understanding and sympathy. Moreover, as regulators needn’t always remain regulators, prospects for later employment also play a role. A while back, my Bloomberg Views colleague Megan McArdle summarized the natural logic of regulatory capture. It’s not really surprising at all (although it may be surprising that we don’t do more to at least try to avoid it).

Economists are rightly proud of this analysis. It’s an example where thinking carefully about ordinary human behavior, as people do their best to meet their goals and get along with one another, goes a long way to explaining an important phenomenon. However, I suspect that economists may be less happy , possibly even a little alarmed, with the direction in which one of their tribe — Luigi Zingales of the University of Chicago — suggests the analysis ought to be extended.

What about economists themselves? Are they the free authors of their ideas, or are they, like regulators, significantly influenced in their thinking by their interactions with business interests? Zingales suggests the latter — and argues that we should, therefore, consider economists’ views with considerable skepticism. Overall, he concludes, the profession and its publications most likely display a significant pro-business and pro-markets bias, because many economists are captured.

Read the whole thing at Medium.com.

Friday, October 10, 2014

Slow steaming is still dreaming -- a response to Paul Krugman


I've just published a response to Paul Krugman's criticism of my recent Bloomberg article on limits to growth. It's over at Medium.com in the new collection Bull Market. I don't think Krugman's arguments carried a lot of weight, as you'll see. First paragraphs below....

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A few days ago I wrote a column in Bloomberg exploring some ideas about possible physical (and biological/ecological) limits to economic growth. I pointed out that total global energy consumption continues to grow even as we learn to use energy ever more efficiently. And I suggested — based on empirical data from the recent past — that there’s little reason to believe, as many economists quite confidently do, that our energy use will soon “decouple” from economic expansion, enabling us to fly off into a future of unlimited betterment through increasing economic output, even as we come to use less and less energy. I also examined a few reasons why continuing to use ever more energy is a certain path to ever worsening ecological problems; it’s really not a wise option.

Economist and prolific New York Times columnist Paul Krugman was irritated, even exasperated, and fired off an “acerbic rebuttal” (to use Noah Smith’s elegant description). He was aggravated that I, as a physicist, was weighing in on topics he thinks should be left to economists. He also suggested that I was just recycling an old argument originally put forth by other physical scientists, which his fellow economist William Nordhaus had completely demolished long ago. Now Krugman had to rise up to do it again! How tiring!

But Krugman’s actual argument was surprisingly weak, and I think grossly misleading, so here’s an attempt to bring a little more clarity to the discussion. I do think Krugman is a brilliant columnist, and I agree with him on lots of things, maybe even most things. But he very much has the wrong end of the stick on this one.      Read more here.

Thursday, October 2, 2014

Economic numerology


A few days ago, Paul Krugman made reference in one of his columns to some data compiled by the US Energy Information Administration on trends in energy use over the past few decades. The data touch on the question of how much energy different nations use to generate $1 of GDP. Are we getting more or less efficient in our use of energy? The numbers, as Krugman argued, show we’re generally getting more efficient. Below I’ve listed the numbers for US energy usage from the year’s 2001 through 2011, in sequential order, from left to right, separated by commas, the units being BTUs per dollar of GDP:


8,482.307, 8,459.179, 8,274.763, 8,178.463, 7,944.349, 7,688.294, 7,671.837, 7,543.901, 7,414.716, 7,503.361, 7,328.424

So you see, the amount of energy used to generate each bit of GDP is going down. Same is generally true for other nations. Fair enough. I’m not going to question that.

But isn’t there something fishy about these numbers? The energy units are BTUs, and the final entry says we used precisely 7,328.424 BTUs per dollar of GDP in 2011. There are 7 specific digits reported in this number, implying that we know our energy/GDP figure to an accuracy of 1 part in 10 million. It’s incredibly impressive. Think about that “.424" at the end. It’s not “.425" or “.423" but exactly “.424".

Is this at all meaningful? Of course not. It’s ridiculous. Unfortunately, this kind of illusory accuracy infects economics and finance quite widely. It may not be the most important issue in the world — even writing about it makes me feel like a grumpy old man — but we’d all think more clearly if we paid more attention to the numbers. So, what’s wrong here?    Read the rest in the new collection Bull Market at Medium.com

Friday, September 26, 2014

Political polarization -- now WORSE THAN EVER!!!!




I do think the above image captures a truth. But I'm also not convinced that the forces driving politics from the Democratic side are all that much better. Anyway, I have a new thing up at Medium.com on political polarization and how it is worse now than ever, according to voting patterns in congress:

Political polarization and gridlock. It’s worse that ever, or at least it seems that way. In fact, it is worse than it has been for 65 years. That’s the conclusion of a recent study by researchers who looked at the history of political polarization in the US since 1949, as judged by congressional voting records. The study found that cooperation between members of different parties is now lacking more than ever before. Things were actually a lot better back in the Nixon era, even during the most divisive days of the Vietnam War and Watergate, when a President and Vice President were forced to resign, and even in the aftermath of the assassinations of Martin Luther King Jr. and Robert F. Kennedy.

The whole (short) thing is here.