November 28, 2008
William Kristol on Economic Theory and Practice
I don't usually read Bill Kristol's column, but once in a while, my eyes get caught by a headline (that's the difference between reading online and "on paper"), and I'll check out what he has to say. The other day, I read his column "Admit we don't know" on the current economic crisis that, while not in my mind "wrong", seemed puzzling to me. Pay attention to the last paragraph (highlighted in bold).
...basically, it seems to me, we're all flying blind. The markets are spiraling down, and our leading experts don't have much of a clue as to what to do.
Given that, one has to welcome the expected appointment to senior positions in the Obama administration of economists like Lawrence Summers, Timothy Geithner, Jason Furman, Peter Orszag, and Goolsbee himself. They're sober and competent people who know we face a real crisis -- and who, importantly, may be more willing than many of their colleagues to adjust their thinking early and often.
Indeed, one hopes they're not too invested in the findings of the economics profession of which they're such distinguished products -- because one suspects many of the conventional answers of that profession aren’t much applicable to the current situation. After all, wasn't it excessive confidence in complex economic models and sophisticated financial instruments on the part of people well educated in modern economics that helped get us into the current mess?
So I hope the best and the brightest who will be joining the new president will at least entertain the possibility that a lot of what they think they know is wrong. I trust they'll remember that successful economic policies in the past have pulled together elements from unlikely sources, and that they're as likely to find wisdom from reading political economists like Friedrich Hayek or Joseph Schumpeter, or Keynes himself, as from poring over the latest academic paper in a peer-refereed economics journal.
My puzzlement is driven by several assertions.
- Are our economic leaders flying blind?
- Were the economists overly enamored of complex economic models?
- Were the economists overly confident in sophisticated financial instruments?
- Is it as likely to find wisdom from Hayek or Schumpeter as in the latest academic paper?
On the first point, I think Kristol is on the most solid ground. So much of what has happened has been unprecedent in terms of institutions, although as Markus Brunnermeier has pointed out, the general outlines are remarkably similar to banking crises of the past. So, here I think reasonable people can certainly disagree whether it's ignorance, or failure to agree between Fed and the Bush Administration and components thereof.
What about complex models? First ask what exactly constitutes a complex model? Is Kristol alluding to models involving algebra? Or calculus? Or lots of equations? I think one could make the argument that the models weren't complex enough to capture important effects (asymmetric information, agency costs, etc.) despite the complexity along other dimensions.
Were economists overly confident in sophisticated financial instruments? Here I think it might be useful to discriminate between economists that work in the financial world, and those that work in academia. From the former group, I always heard a lot about "risk management" and sophisticated statistical models to price derivatives. From the latter, I heard a lot more skepticism, perhaps borne of ignorance. So, Kristol might be right, but I suspect his views are deeply influenced by the sample of economists he talked to.
By the way, I won't say I saw the full enormity of the leveraging problem, but at least I can truthfully say I was suspicious of the free lunch aspects of the net borrowing binge of the past decade. From my August 2005 Council on Foreign Relations report:
Although the likelihood of a "disorderly adjustment," is small,37 the potential consequences are so troubling that the possibility of economic disruption cannot be ignored. In addition to the threat of rising unemployment and declining income, sharp movements in asset prices and interest rates could also threaten the stability of the financial system. In the past, policymakers have been able to contain the threats of systemic crises, such as the crisis of Long Term Capital Management in 1998. That event was at least partly attributable to bets on interest rates movements that did not meet expectations. Markets for making bets are much larger and diverse than they were seven years ago. Some are very new and remain untested. The question is whether they are up to the task of distributing risks when low probability events occur.38 This open question should in itself give some additional weight to the case for action now, to avoid putting the world economy in the position of finding out the answer.
I'm confident it's quite easy to dig up plenty of quotes from other economists who were nervous.
Finally, the assertion that really caught my attention: That the likelihood of finding useful nuggets of economic wisdom in Schumpeter and Hayek is equal to that of finding it in the latest article in peer reviewed journals (I get the feeling he's making a perjorative remark about peer reviewed journals, but I'll let that slide).
Why do I think this is odd? Well, because the statement identifies modern economics as distinct from the great thinkers of the past. But in fact many of the works in the "peer reviewed journals" are not orthogonal to the works of the past, but like many other intellectual endeavors, based upon them. Open up the JPE or the QJE (or better yet, the NBER Working Paper series, and there are plenty allusions to "the greats", and ideas like "creative destruction". That being said, just like there has been plenty of thinking in political science since Machiavelli and The Prince (you'll get the allusion if you've read Dani Rodrik's take on Kristol's economics acumen), there's been a lot of insight developed in economics over the past hundred years. In this respect, the admonition to look backward sound good, but is less profound that it appears at first glance.
Posted by Menzie Chinn at November 28, 2008 05:44 PMdigg this | reddit
Kristol is certainly right about finding wisdom by reading Hayek. What he is wrong about is the notion that we don't know what is going on. If he really understood Hayek he would know that the Austrian school predicted exactly what would happen when governments are permitted to meddle in the markets by bestowing favours on special interests and by being given the power to create purchasing power out of thin air via legal tender laws. The economic picture is actually very clear if one understands Mises, Hayek or Rothbard. Unfortunately, their views are not popular in economic circles because they advocate a system that does not provide many jobs to academics who make a good living by working for governments.
Posted by: Vangel at November 28, 2008 07:20 PM
I'm pleasantly surprised the see Kristol mention Hayek. Austrian business cycle theory does a very good job of explaining/predicting the Japanese bust, the dotcom bust, & our present bust.
Unfortunately, its prescription will be deemed politically incorrect...& that is sure to trump truth.
Posted by: algernon at November 28, 2008 07:38 PM
"Why do I think this is odd? Well, because the statement identifies modern economics as distinct from the great thinkers of the past. But in fact many of the works in the "peer reviewed journals" are not orthogonal to the works of the past, but like many other intellectual endeavors, based upon them. Open up the JPE or the QJE (or better yet, the NBER Working Paper series, and there are plenty allusions to "the greats", and ideas like "creative destruction". That being said, just like there has been plenty of thinking in political science since Machiavelli and The Prince (you'll get the allusion if you've read Dani Rodrik's take on Kristol's economics acumen), there's been a lot of insight developed in economics over the past hundred years. In this respect, the admonition to look backward sound good, but is less profound that it appears at first glance."
I disagree. This would be equivalent to claiming that frequentist statistics was heavily influence by Bayesian thinking. Modern thinkers often throw away large amounts of material and ideas that were popular in the past.
Economic papers may talk about Schumpeter or Hayek, the real truth is that a large amount of macro is in the Keynesian paradigm with some neoclassical and monetarist add-ons.
I consider the Keynesian paradigm to be somewhat of a clumsy hack. The real truth is that we have a very bad understanding of macroeconomics. I regard most of macro as being the equivalent of a cargo cult. We absolutely need to be reading Schumpeter, Hayek, Mises, and many many others. Not because they had good theories but because they were often extremely good critics. Especially Schumpeter. I don't really thinks this will help us with the current crisis but it may help us built a better economics.
Posted by: assman at November 28, 2008 09:29 PM
Menzie is being very kind r.e. William Kristol's ignorance of what's found in peer-reviewed academic economic publications. More of Kristol's lack of familiarity with the research world of academic economics was on display in an op-ed piece published a week earlier on Nov. 17, 2008. Discussing the need for Republicans and conservatives to come to terms with the large-scale defeat last Election Day, Kristol wrote the following piece of silliness: "I suspect that free-marketers ... should depend less on abstract econometric models." Are hardcore econometricians, both theoretical and applied, a roving band of "free-marketers" in the sophomoric Kristol sense? Is it just the theorists? Or only the applied people? I'm anxiously awaiting the arrival of the next Kristol column for enlightenment.
Posted by: Phil Rothman at November 28, 2008 09:46 PM
It was absolutely right of William Kristol (in a passage you don't quote) to urge Charles Schumer and others to read "the political economists" like John Maynard Keynes.
One of the most important lessons of Keynes is not to think of our economic woes in isolation from the rest of the world, or to think that we alone can solve our problems. Keynes teaches us that the US needs, for its own sake, to provide leadership to the international economy, and to encourage coordination of economic policies (such as fiscal and monetary stimulatory measures) between major economies, to develop and strengthen international economic institutions, and as much as possible then to ensure free trade.
It is encouraging that many of those whom President-elect Obama has chosen as his economic team share an understanding of these ideas.
Fortunately there are works about Keynes, such as Donald Moggridge's biography of him and Donald Markwell's study of "Keynes and international relations", to help us consult this great "political economist", as Kristol urges, and in particular to see his emphasis on international economic cooperation.
Posted by: Arthur James at November 28, 2008 10:00 PM
It's a mixed, even foggy, criticism by Kristol who himself is stabbing blindly when he (with all the spectacular economic credentials he brings to the table) condemns the entire profession and yet concedes that Obama's choices are the best on the planet.
I can't bear to read the bloody thing twice...the conclusion once more:
**So I hope the best and the brightest who will be joining the new president [ a vote of confidence in BO's choices from K]will at least entertain the possibility that a lot of what they think they know is wrong.[shrinking that vote of confidence and inflating his authority to dispense confidence ] I trust they'll remember that successful economic policies in the past have pulled together elements from unlikely sources,[K remembers something...] and that they're as likely to find wisdom [K's guide to wisdom? Ut-oh. ]from reading political economists like Friedrich Hayek or Joseph Schumpeter, or Keynes himself, as from poring over the latest academic paper in a peer-refereed economics journal.[as if K visits this literature, a quiet scholar ready to be consulted and share his wisdom ]**
I think he gets paid by the word...otherwise it would read: Hope you guys know what you're doing.
Posted by: calmo at November 28, 2008 10:44 PM
> "Are our economic leaders flying blind?"
Is blind better, worse, or the same as flying with the wrong map?
> "Were the economists overly enamored of complex economic models?"
It depends on the domain.
When I tried to learn economics and started criticizing the idea of "representative agents" (more crudely but along the same line as Kirman, as I later found out), the standard answer I got from either teachers or more advanced economist friends was "What else can you do?". I would think that if you come upon a difficulty or perhaps even impossibility, you say ok, we don't know, we can't go any further. Sometimes the wall wins. But no, like Bush they would say "We stay the course" and stick with our paradigm. To me, the idea of representative agent looks like a lame attempt to impose order. Everything becomes just that much more comfortable if you can aggregate all the chaos into one neat actor who is "well-behaved" and predictable. So in my view, academic economists seem to take too much for granted in the fundamental questions. In that domain, they are less enamored of complexity, perhaps even afraid of it because admission of a mistake there could invalidate all manner of fancy theories and conventions.
But once the big frogs are swallowed (rational representative agents, existence of stable economic "laws",...) economists pull out all manner of stochastic dynamics and optimization and what have you and yes, they do become overly enamored of compelx models. I'm in Europe, not America, so I can only judge from Youtube and such, but what I saw from Palin-type Christian fundamentalists and similar cults reminded me a little bit of that experience. They ask you to take for granted certain things (God exists, blabla) and once you accept that, they pull out all manner of precepts for daily living...
> "Is it as likely to find wisdom from Hayek or Schumpeter as in the latest academic paper?"
This is very self-referential! I read this blog because I think it's excellent commentary on the data as they come in but please at least consider the idea that economists are not the only "experts" on economic matters simply because they call themselves and are seen by the public as "certified economists". Economic systems are also studied by computer scientists, global macro traders, "econophysicists", statisticians, ... some of whom have very nice ideas but would never get published in a journal refereed by "certified economists".
Posted by: Anonymous at November 29, 2008 04:58 AM
What William Kristol writes about economic policy might be more influenced by what he had for breakfast than by anyone Great. I'll admit it's possible that what he read while eating breakfast might contribute a little. For a day. The next day, though, who knows?
If for example he'd been reading Krugman with his toast and eggs on Monday, about the value of having a flair for building small, simple, clarifying models, Kristol would be lambasting the "simplistic" models of economics that embolden us to grand policy follies, and urging us to humbly explore the subject in all of its complexity.
If, on Wednesday, while sipping his orange juice, he read that Fannie Mae pursued a disastrous course in part because it neglected what its financial models were telling it, he'd be saying that we need to pay more attention to those financial modeling people, who carefully crunch the numbers.
If, while sipping his second cup of coffee on Friday morning, he read the beginnings of chapters in Schumpeter's Capitalism, Socialism and Democracy about how capitalism might not survive, and how socialism might actually develop, or perhaps some quote from Hayek about how the lesson of the Great Depression is that we must carefully pick and choose which New Deal programs might be worth keeping, Kristol would be criticizing economics for having Greats who were, in the final analysis, rather limp-wristed, equivocal, and perhaps unworthy champtions of true Free Enterprise
Basically, you give me the first hundred names in the Boston phone book, I'll get you as much economic depth as you'll ever see from Bill Kristol. Or from one of his postprandial burps. He doesn't have to face peer review. Only op-ed deadlines. We should be glad he has no policy input channel with the coming administration, or the present one. We need people who know what their instrument panels are telling them, when they have to fly blind. Bill Kristol? He wouldn't know a pilot's joystick from anything else that might be sticking up between his legs.
Posted by: Michael Turner at November 29, 2008 05:18 AM
A question - what is the greatest achievement of econometric analysis?
Posted by: Rich Berger at November 29, 2008 06:22 AM
One suspects that Kristol wants a very selective reading of Hayek. Just skip over those parts of "The Road to Serfdom" where Hayek argues that in a country as wealthy as ours (and we are far richer now than we were when he wrote this), there is a strong case that the state should be involved in the organization and provision of social insurance guaranteeing a minimum standard for everyone, and that that minimum standard includes insurance against sickness and injury.
Posted by: Michael Cain at November 29, 2008 07:10 AM
Rich Berger: I don't think I can think of a single, but here are some candidates, in no particular order: Trygve Haavelmo form simultaneous equations/identification, James Heckman and Daniel McFadden for sample selection bias and discrete choice, and Robert Engle and Clive Granger for ARCH and cointegration. I'll add in Robert E. Lucas for the econometric policy evaluation critique, which is at the nexus of econometrics and macro.
assman: "I disagree. ... Modern thinkers often throw away large amounts of material and ideas that were popular in the past." Well, I think Galen was pretty smart, but we've dispensed with a lot of his theorizing about anatomy because it was demonstrably wrong.
Anonymous (4:58 AM): I of course agree that people without PhD training in economics can have great insights into the economy's working. But we do need a weighting scheme -- I think about physics, but I don't write about it and then expect people to take it seriously.
By the way, instability of equilibria has been around in economics for a long time.
Posted by: Menzie Chinn at November 29, 2008 08:51 AM
I am in much agreement with Hyun-U Sohn's arguments, although will add a few caveats.
The first is that I think it is useful to distinguish between "complicated" and "complex." What Kristol and most commentators have been calling "complex" is better labeled as "complicted," such as lots of equations with lots of terms all interconnected in ways that are not readily obvious from a quick scanning. "Complex" more frequently means in the economics literature dynamical systems that endogenously generate erratic dynamics of various sorts, with these arising from various nonlinearities. Generally one finds such things more frequently appearing in heterogeneous agent models than in the ratex driven DSGE models that dominate many policmakers' shops, as well as much conventional academic literature.
The second point is that there are some journals that publish well done econophysics papers that manage not to say incorrect or stupid things about economics, as many of them do. I happen to edit one of those (I also write and edit volumes about Complex Economic Dynamics).
As for Bill Kristol commenting on economics, probably the less said the better...
Posted by: Barkley Rosser at November 29, 2008 02:08 PM
Arguing that the Austrian model clearly saw this coming doesn't account for the other doomsaying scenarios of ultimate economic collapse (not correction or contraction, regardless of how sharp, that we see today) that the Austrians (self-styled or otherwise) have been claiming is JUST AROUND THE CORNER ANY DAY NOW for decades. Maybe if, one day, the Austrian adherents get over themselves enough to admit that they're not discounted simply because they're mavericks and rebels they might actually contribute to these topics with something more than vague claims that they saw it coming.
Posted by: MM at November 29, 2008 04:49 PM
Why anyone giveS Bill Kristol any time is beyond me. He is a fraud. I saw him give a lecture years after the Iraq war started and he was still pumping its virtues. He is an educated version of Sahra Palin.
Pump pump pump a set of concepts to protect his cronies. That's it! Why give him the credibility of superior perception? Anyone who blindly supported Palin and Bush (my God, what if those two bred?), is
akin to pond scum,
Posted by: yad Ya at November 29, 2008 08:11 PM
* Are our economic leaders flying blind? Yes, as illustrated by the weekly or daily new bailout plan.
* Were the economists overly enamored of complex economic models? Yes, as illustrated by Greenspan's irrational exuberance about how derivatives diffused risk so magically, and by the fact that very few mainstream economists ridiculed Greenspan at the time.
* Were the economists overly confident in sophisticated financial instruments? See previous response.
* Is it as likely to find wisdom from Hayek or Schumpeter as in the latest academic paper? Much more likely. Hayek and Schumpeter understood economics as the study of human behavior. Modern academics can't see the forest for the trees.
Posted by: W.C. Varones at November 29, 2008 08:17 PM
Kristol is bewildered by the economic crisis so he thinks others should be just as bewildered too. The crisis blindsided the Neocons who were very content indeed with the Bush status quo. They took US economic power for granted, and now that their happy world has disintegrated they really don't have a clue. Hence the addlebrained commentary from Kristol whose knowledge of economics consists mainly of some famous names, little more.
Posted by: Hal at November 30, 2008 12:45 AM
The dangers in the securitization of mortgagees was not anticipated for three reasons:
1) Lack of data on the extent to which banks and Fannie and Freddie did not off-load the risks to others.
2) Lack of understanding of how the example of money "earned" by securitization of mortgages could be adopted to bets on other events.
3) Too much reliance on past events (steadily increasing house prices) predicting future events.
Posted by: WRM at November 30, 2008 06:57 AM
I think there is a good parallel between "Kristol and mainstream economists"
The parallel is the damage done to society by exalted scribblers.
How many innocent lives have been destroyed by Kristol's neocon(war) scribbling? 1,000, 10,000, 100,000 ?
And how many "innocent" lives are being destroyed currently by the economic scribblers of recent memory?
How ironic that 2 of the worst : Paulson the mortgage pump and dump maestro and Bernanke the make sure deflation doesn't happen here by using the Financial Accelerator model genius, are RUNNING the Rescue show.
These Pied Pipers, instead of admitting the error in their ideas and scribbling will attempt to drown the rats(taxpayer) with their hubris ending in the "AMERICAN TRAGEDY".
Posted by: groucho at November 30, 2008 08:24 AM
Let's see, how should I put this: Bill Kristol is a fool.
Okay, now that that is out of the way....
Economics today is more open to the ideas of those who gave us the fundamentals of economics than at any time since WWII. No longer does Nixon's statement, "We are all Keynesians now" hold true. An aside, I do wish to thank Richard Nixon for creating such a clear real world example of the failure of the "New" Keynesian economics.
But that said those in positions of power in our government are clearly linked to the 17th Century mercantilist past. Their policies reject the enlightened economists whose work in the 18th and 19th centuries refuted the failed mercantilist policies so common to government. Economists who began the most robust period of economic growth our world had ever seen.
But the fundamental nature of government is not to allow for the production of goods for the people but to plunder the producers. Those in government always lean toward mercantilism as a means to power and control. So, when Keynes revived the old failed mercantilist theories, those in government quickly embraced them.
The problem that confronted men like Hayek and Schumpeter is that Keynes was so confused and his logic so flawed they never expected anyone to take him seriously.
But people did take him seriously leading us into the Great Depression, then the Great Inflation, and now it appears that we are on the verge of having both at the same time. I am tired of economists who say they simply do not understand what is going on because events do not conform to their theories.
Oh, how I long for a bit of the wisdom of Adam Smith, JB Say, David Ricardo, Hume, Bastiat, Schumpeter, Mises, and Hayek to mention only a few. Oh, how I long for government economic leaders who have answers, for clear descriptions of our current destructive economic mess, and for clear proposals to end the pain.
So to address the very first question, yes, our economic leaders are flying blind because, like our newest Nobel Laureate in Economics, they have abandoned economic fundamentals about production for the good of mankind and embraced a fantasy world of mercantilist consumption stimulation for political expediency.
Menzie, thanks for asking.
Posted by: DickF at November 30, 2008 08:29 AM
Since when has William Kristol had anything insightful to say. Billy Crystal provides better economic and political commentary.
Posted by: Dirk at November 30, 2008 12:11 PM
Kristol's editorial is not well written but I think he is trying to make the following points, which I agree with.
1) When it comes to economic policy, there is a lot we don't know and it can be dangerous to be over confident in models.
2) As for economic policy, it is important to have someone who has an intuitive understanding of the strengths and weaknesses of "the greats" rather than someone who can regurgitate the minutia of the latest journal articles.
Posted by: MikeR at November 30, 2008 01:11 PM
I would draw a distinction (which I doubt that many critics of economics understand) between econometrics and mathematical modelling of the economy. If you want to unravel multiple influences, test hypotheses and quantify mechanisms and predictions, econometrics is essential. By contrast, it is hard to think of any circumstances in which mathematical modelling is really necessary. It drives the choice of abstractions and functional forms more for elegance than realism, and because most people find algebra relatively difficult it slows down presentation and reception of ideas. Mathematical modelling also narrows the range of people contributing to academic journals - the difference between physics and economics is that many non-academics (eg financial analysts and businessmen) are carefully observing and thinking about the economy in a way that would be impossible in physics, and may well have novel ideas about how the economy works. But these ideas would be unlikely to be accepted for publication in academic journals because they would not be presented in the required style. In my opinion, the mathematical modelling approach is hindering the development of economic understanding such that most articles in academic journals contribute little to practical understanding, and too few academic economists (with the honourable exception of most of those who blog) have much interest in economic affairs. Unfortunately, however, the very difficulty of mathematical modelling has made it the test of academic ability and means that those who argue against its use are considered suspect.
Posted by: RebelEconomist at November 30, 2008 01:47 PM
I read that kristol column too and laughed myself silly when I came to this part:
"So I hope the best and the brightest who will be joining the new president will at least entertain the possibility that a lot of what they think they know is wrong."
I you've had your coffee yet you might think back to Bush and the others that Kristol was cheerleading for over the last 8 years. A lot of what they thought they knew was totally, fabulously, wrong. The never entertained that possibility, however, and I doubt they ever will. Mission Accomplished! Doh!
Posted by: vern at November 30, 2008 05:54 PM
RebelEconomist is spot on. Precisely.
An infinitely more insightful non-economist than Kristol is in evidence with the George Will column in the Sunday Washington Post
Indeed, he is better than most economists.
Posted by: algernon at November 30, 2008 08:25 PM
What will people like commenter Hal do when they don't have neocons and Bush around to blame for everything? They might have to learn something about the issues!
On a sadder note, Tanta of Calculated Risk passed away. She foresaw the mortgage collapse while most "economists" were contemplating their navels.
Posted by: W.C. Varones at November 30, 2008 09:30 PM
When will people like commentator Varones realize that many, perhaps most, of the messes we are in, from the stupid war in Iraq to the reckless policies that brought on the financial crisis, were advocated and sold to the public by the Neocons? They exist and they have done massive damage, and that is simple fact. It would be a very good thing if they were to disappear, but I don't expect that to happen.
Posted by: Hal at November 30, 2008 10:20 PM
"When it comes to economic policy, there is a lot we don't know and it can be dangerous to be over confident in models."
I'd like to second that.
"I of course agree that people without PhD training in economics can have great insights into the economy's working. But we do need a weighting scheme -- I think about physics, but I don't write about it and then expect people to take it seriously."
Perhaps there is a difference between physics and economics? One, after all, is a science. Maybe instead of physics we should use philosophy as a base of comparison? So ask: do some people think about philosophy, write about it, and then expect other people to take it seriously? Well yes, happens all the time! What is true is that *professional* (i.e. academic) philosophers don't usually take seriously the writings of non-professional philosophers. I'm not making any claims about fault or rightness, just that this is the case.
Posted by: a at December 1, 2008 04:10 AM
Academic economists regard the Austrian School of Economics about as seriously as academic natural scientists regard Christian Science and Scientology. It pains academics to re-tread basic scientific methodology and theories disproved long ago.
Nevertheless, the true believers are still out there, some writing for the New York Times. Maybe the next columnist they hire will provide a touchstone for those who still believe the world is flat.
Until the mainstream media improves, maybe econbrowser could do a good public service by spelling out the err in Austrian-school thinking?
Posted by: mike at December 1, 2008 04:43 AM
Menzie: surely GMM counts as a significant econometric achievement, no?
Posted by: Robert Bell at December 1, 2008 05:40 AM
What about complex models? First ask what exactly constitutes a complex model?
Multiple regression. Especially multiple nonlinerar regression.
Posted by: Buzzcut at December 1, 2008 06:13 AM
I'll score the "complex models" in favor of Kristol. Complex models do not readily capture phenomena like "massive fraud."
What may give one pause is that the goal of Kristol's writings is to misinstruct and to mislead. Many, like Vangel, are easily misled into imagining that the mortgage crisis is due to government intervention, while the evidence is clear that under the period of highest government intervention, there were essentially zero financial crises and as regulation relaxed, crises increased in intensity and severity.
Sadly, I can't find the phototoon of Kristol as Louis XVI. One should always imagine Kristol in powdered wig and ruffles while reading his columns.
Posted by: Charles at December 1, 2008 07:57 AM
"maybe econbrowser could do a good public service by spelling out the err in Austrian-school thinking?"
What an excellent idea! Surely it isn't merely that Austrians think in sentences rather than mathmatical jargon. If Austrians are so stupid, it should be easy.
Posted by: algernon at December 1, 2008 08:04 AM
I note your references to various Nobel prize winners who won for work in econometrics, but still remain unsatisfied. I think the RebelEconomist's post comes closest to my view. The math is more complicated and more sophisticated, but does it further the understanding of economic phenomena in a fundamental way? Are any of these comparable to the illumination of the importance of the division of labor or the insight of marginal utility? Have policy makers used econometric tools with good results?
I think Kristol put his finger on a key problem with current economists. Hayek and Schumpeter are far more likely to caution policy makers as to what cannot be done, which is not what the can-do crowd likes to hear. We've got an economy to run, don't you know!
Posted by: Rich Berger at December 1, 2008 09:23 AM
Multiple regression is merely "complicated." When it is nonlinear it may become "complex."
Posted by: Barkley Rosser at December 1, 2008 09:30 AM
"Austrian business cycle theory does a very good job of explaining/predicting the Japanese bust, the dotcom bust, & our present bust.
Unfortunately, its prescription will be deemed politically incorrect...& that is sure to trump truth."
I would like to second the view that so-called Austrians have a boy-who-cried-wolf weakness when it comes to claiming to have foreseen our present predicament.
I would also point out that the above-quoted statements about the Austrian school engage in a bit of logical loopiness. That someone expects a disaster will happen which actually does happen doesn't guarantee that same someone will have the right prescription to fix it. If the alignment of Neptune and Alpha Century led to a dire economic prediction that proved correct, would we be wise to look to astronomy to put the economy back on its feet?
Being "deemed politically incorrect" may be a good thing, if the Austrian prescription is wrong. It is possible that the politically correct solution is also the technically correct solution, in which case political correctness promotes truth.
Back to Kristol, I think we are wasting to much neuron time on his economic views. He ain't qualified to have economic views. Full stop. Same with world-is-flat-guy. Absolute waste of ink.
Posted by: kharris at December 1, 2008 09:53 AM
Interesting that all but one of Menzie's list of econometric discoveries are methodological advances (not successful applications), and the other is a critique of the application of econometric methods to policy analysis!
In any case, the "complex models" under question here aren't econometric, they are the asset pricing and risk models that come out of the assumption of efficient markets.
Also, individual examples of economists being "nervous" is not sufficient here, the profession did not sound the alarm and did actively enable a lot of practices that contributed to the crisis.
Posted by: MQ at December 1, 2008 10:04 AM
When we put a handful of economists, all of them Nobel Laureates, in a room and ask them to answer a basic question, they often give multiple, contradictory answers. So economics is not a "real" science. It a social science, inevitably intertwined with politics and public policy.
Sure, you can try to quantify some things, apply some metrics and use statistical modeling, but ultimately a great deal of it is psychology of individuals, and trying to predict individual behavior or confidence is a fool's game. No amount of mathematical modeling is going to change that.
It doesn't mean that people shouldn't study it--they can study it just as they study history, psychology, philosophy, political science and public policy. But it is foolish to believe in the "predictive" power of any model constructed by economists.
Posted by: TedK at December 1, 2008 10:10 AM
No surprise the economics clergy circles the wagons and denies the bankruptcy of their ideas. This is the expected response of any such priesthood.
Only the Austrian economists have a framework for understanding this crisis beforehand. The rest can only come up with ad-hoc theories after the fact. Sadly, it's going to take a lot more economic destruction before the morally bankrupt economics establishment is fully exposed.
Posted by: existential crisis at December 1, 2008 12:09 PM
Multiple regression is merely "complicated." When it is nonlinear it may become "complex."
What percentage of, say, MBAs can follow an economic paper that uses multiple linear regression?
Given the data, how many MBAs could replicate the analysis?
How many could interpret the results?
I've got a "Statistical Analysis with Excel for Dummies" book that I crib from when I do multiple regression. I'm an engineer with a masters degree. I'd say that it is damn complex!
And I have the advantage of using controlled data and Design of Experiments. It's a lot more complex with economic or financial data.
Posted by: Buzzcut at December 1, 2008 12:16 PM
TedK says, "When we put a handful of economists, all of them Nobel Laureates, in a room and ask them to answer a basic question, they often give multiple, contradictory answers. So economics is not a "real" science."
Clearly the man has never attended an APS, FASEB, or ACS meeting.
Posted by: Charles at December 1, 2008 03:26 PM
I have no need to attend meetings of APS, etc. I attend various IEEE conferences and occasionally SIAM and ACM. Anyway, whatever disagreements physicists and other scientists cannot be on the fundamentals. Unless you are talking about pseudo scientists. Economics can never be a real science.
Posted by: TedK at December 2, 2008 09:20 AM
If one is to judge whether some discipline is, or can become, a science, a necessary precursor to judgement is the knowledge of what science is.
Merriam Webster thinks science is a number of things, including:
1: the state of knowing : knowledge as distinguished from ignorance or misunderstanding
2: a department of systematized knowledge as an object of study
I can't see how economics could honestly be excluded from either definition. So, to be generous, I will speculate that TedK lacks familiarity with notions of science, notions of economics, or both.
Posted by: Anonymous at December 2, 2008 09:31 AM
TedK says, " Anyway, whatever disagreements physicists and other scientists cannot be on the fundamentals."
Economists don't disagree over the fundamentals. They disagree over predictions in complex systems. It's like asking a group of physicists how a break on the pool table will go. You'll get plenty of opinions depending on the assumptions taken.
Posted by: Charles at December 2, 2008 09:39 AM
I would also like to note that the tired old argument about whether economics is a science is a dreadful red herring. Plumbing isn't a science, but we certainly don't want to dismiss plumbing. Knitting isn't a science, but has served us well through the centuries.
But that doesn't really convey the magnitude of silliness in the "economics ain't no science" argument. It relies on definitions, on defining economics as outside of science. A narrow definition is required in order to accomplish this. More sophisticated statements of the argument avoid denying economics the status of a "real" science by comparing it to hard sciences. That apparently doesn't carry the appropriate bitter taste for some critics, or they'd all have learned to say it. Economics is a behavioral science, and (pardon the circularity) since human behavior is the subject of economic study, that is a pretty good fit.
We either learn something valuable from the study of economics or we don't. The simple truth is that most who engage in the playground taunting of economists won't actually learn from economics. They are predisposed not to. The rest of us, however, do learn valuable things from the study of economics, so can afford to ignore the silly "ain't no science" mob.
Posted by: kharris at December 2, 2008 09:47 AM
Almost all of what Bill "Liver Lips" Kristol thinks he knows is wrong. This putz wants to attack Iran with nuclear weapons, when our own intelligence service says they do NOT have a nuclear weapons program. Apparently mass murder is O.K. to this criminal.
Posted by: Sam Simple at December 2, 2008 10:40 AM
I am an amateur 'student' of economics who reads here to learn.
I cannot resist posting this time.
It amazes me that you would take Kristol seriously enough to bother posting about his column.
Posted by: canuck at December 2, 2008 03:53 PM
kharris: Don't you think the comments here prove my point?
Comments here, from those with presumably above-average intellect and education, indicate that most just don't understand what science is. And they don't get why Austrian school doesn't qualify.
To spell this out way in a clear and accessible way would take time and skill I don't have. Nor do I have the audience. I have more confidence in the intellect and writing of Menzie and JDH.
So, I'm pleading for free candy: please spell it out for these folks? Yeah, it's taking a big step backwards and downwards, but it would be a huge public service. (And since I'm being rather patronizing at the moment, don't acknowledge this note.)
I think the standard practice of ignoring the Austrians only goes so far. We don't need to pay much attention, but we need to spell out for the masses so they won't be hopelessly misled. It's crazy stuff that seems to have a large internet following.
Krugman did a nice piece in Slate once. Austrians have tried to fire back. Their arguments don't make much sense, though.
Posted by: mike at December 2, 2008 05:34 PM
Anonymous, Charles, kharris,mike
I think this is an old debate and there must be a lot of references. I don't want to waste time, but to me any "real" science has to meet certain criteria such as repeatable experimental verification and falsifiable hypotheses; you can't wiggle out of that by going to some dictionary definition.
I believe that Krugman has admitted this in his writings.
As for learning something of value from economics, that is precisely why non-economists like me try to spend some time on blogs like this. The criticism however is that economists have failed miserably in inspiring any confidence in their models--the recent financial crisis is just the latest to show economists are largely clueless. One just needs to listen to Bernanke and Greenspan to see that.
I am not at all a fan of Kristol. He is a neocon and may well be an idiot. I don't care about Austrians either. But Kristol's view that economists are flying blind is something self-evident in this crisis and is shared by many people across the political spectrum.
Posted by: TedK at December 2, 2008 07:32 PM
canuck: I posted on William Kristol because (i) he has a big bully pulpit, and (ii) his views are representative of a lot of people's views.
Posted by: Menzie Chinn at December 3, 2008 07:13 AM
Not one word on Adam Smith? Get the Government to stop coddling and manipulating the banks. Fear is the now the major factor, the banks are living off of the spread, right now, to correct they're mistakes. Meanwhile people are not able to access even a small modicum of credit to purchase hard assets for themselves or they're small businesses. Let the miracle of the invisible hand have it's way, the longer Governments continue to go where they ought not, the more severe are the consquences "We the People" will have to pay.
Posted by: Steve at December 3, 2008 08:17 AM
I apologize, further down the comments I ran into Adam Smith. This is a wonderful site BTW! Very good analysis by all.
Posted by: Steve at December 3, 2008 08:29 AM
Economists don't know a lot of things. The best ones acknowledge that readily.
But our hosts here, Menzie and JDH, and many other prominent economists at good universities, did see forsee many elements of the current situation, at least as a possibility. Furthermore, there is a lot about macroeconomic fluctuations, including the current one, that economists have understood since J.M.Keynes.
So, it is too dismissive to say economists are flying blind. Much of what economists cannot predict is fundamentally unpredictable, per economic theory and evidence.
Kritsol's column is a small and obvious fig leaf. Current events are textbook illustration Keynesian negative cycles that many "wingnut" conservatives long said didn't exist. Their world view has been crushed more than the stock market. Instead of owning up to this fact, Kristol is throwing sand in the air and saying no one knows what is going on anyway--it's just a bunch of complicated economic theories, he says.
Yes, there is a lot we don't know. But we do know pseudo-intellectual conservatives like Kristol got this very wrong. And Keynes' general theory, perhaps even more than Friedman's subsequent refinement of it, still looks very good.
Krugman's book, just updated and re-released, "The Return of Depression Economics," is good summary of recent history and Keynesian business cycle theory, written in plain English. I recommend it. Krugman's name has been heavily politicized due to his sharp criticism of the Bush administration. If it helps, he wrote this book (most of it anyway) before Bush was in office. It's about business cycle economics, not politics.
Posted by: mike at December 3, 2008 02:06 PM