Tag Archives: economists

Through the economist’s looking glass

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I’ve had people requesting me to post more economics-type stuff for a while now and I think it’s time to get to work on it.  I’ve had trouble thinking of exactly what would fall under that category as I would define it, but I keep getting more requests, implying I have a definition.  The easiest way out of this is to start by taking a look at what we don’t want.

We’ll start with this piece where Brad DeLong contemplates whether or not he and his peers “understand what was going on.”

Here is the most interesting part of [Larry] Summers’ long answer: “There is a lot in [Walter] Bagehot that is about the crisis we just went through. There is more in [Hyman] Minsky, and perhaps more still in [Charles] Kindleberger.” That may sound obscure to a non-economist, but it was a devastating indictment….Asked to name where to turn to understand what was going on in 2008, Summers cited three dead men, a book written 33 years ago, and another written the century before last.

The first problem is asking that question of one of the people most responsible for the present mess and a number of others over the past few decades. Putting that aside for a moment, DeLong gave a strange introduction to one of the three:

Minsky (1919-1996) is best approached not through his collected essays, entitled Can “It” Happen Again?, but rather through the use Kindleberger (1910-2003) made of his work in his 1978 book Manias, Panics, and Crashes: A History of Financial Crises.

Having read some of Minsky’s work, this caught my attention.  I get the sense that he doesn’t want the “non-economist” to get the wrong impression.  He goes out of his way to avoid mentioning Minsky’s other works and steers us around the one he will name.  Here’s a clue as to why he keeps his distance from Minsky’s Stabilizing an Unstable Economy (don’t worry too much about the technical terms):

The Walrasian input to the neoclassical synthesis starts with a discussion of an abstract exchange (barter) economy: the analogue may be a village fair. Results are obtained by analyzing a model that does not allow for capital-intensive production, capital assets as we know them, and capitalist finance. Using an artificial construction of trading relations, the theory demonstrates that a decentralized market economy achieves a coherent result.

Standard economic theory then goes on to show that the property of coherence also carries through for an economy that produces, but only under heroic assumptions about the nature of capital and time….The theory is set up in such a way that any deviation from the labor supply-labor demand equality will be removed by market interactions; that is, the theory holds that full employment is achieved by means of the internal operations of the economy. The theory does not explain, however, how any initial deviation is brought about: unemployment as the result of economic processes is unexplained.

The neoclassical synthesis (mainly the work of Paul Samuelson) has been the foundation of standard economic theory for over fifty years.  It has been modified in various ways, but has retained this same theoretical core.  The degree to which it has remained unchanged is striking, as we can see by looking at what Brad DeLong is teaching his students:

We neoclassical economists really do believe that markets are extraordinarily flexible, powerful, and adaptive social institutions. We believe that they recover from shocks. We believe that if something goes wrong with the market system and it finds itself out of equilibrium with substantial excess demands or excess supplies, that it will right itself and crawl its way back to supply-demand equilibrium quickly.

It might not fix itself as quickly as we would wish. We might well want to have the helping hand of the government pushing it back to equilibrium. But the idea is that a period of high unemployment with lots of people who want jobs and could do jobs and do not have jobs not fixing itself–that a period of fifteen months after the downturn ends with no sign of any return toward equilibrium in the labor market–that is very distressing for us neoclassical economists.

No wonder he advised looking elsewhere to “understand” what is wrong with standard economic theory. But I shouldn’t single DeLong out, Paul Krugman has also vigorously (if dishonestly) defended the same thing.  Shifting from the media and classrooms to policy advisers, Christina Romer was ahead of the game in obsessing about balanced budgets for their own sake as she celebrated the “great moderation” (an equilibrium concept) right before the crisis hit. Returning to Larry Summers, he was once quoted as saying, “Spread the truth–the laws of economics are like the laws of engineering. One set of laws works everywhere.”  He has spent plenty of time in positions of power engineering his surroundings to fit this view. I could go on (and probably will in the future) but it should be clear that this will not do.

There are many alternatives, but some work is inevitably involved if we’re going to get rid of this destructive ideology.  L. Randall Wray (one of Minsky’s PhD students) is going to be giving free online classes on his university department’s blog starting soon.  You could do worse than following those and David Harvey’s lectures on Marx’s Capital (also free online).  The former will cover a number of issues that are currently coming up in the media like government deficits and the financial system and the latter will help you sit back and appreciate a much broader perspective than the term “economics” tends to imply.  That should get anyone off to a good start without even having to buy a textbook.  Where to go from there should come to you pretty naturally.

 

The economics crisis

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Dean Baker:

In a country with almost 15 million people out of work, it is amazing that any economists still have jobs. This one is their fault first and foremost. Economists are supposed to know about the economy and provide advice on how to avoid disasters before they happen and help us recover from the bad things happen in spite of good advice.

The economics profession has not done well on this simple scorecard. Remarkably, rather than improve their game, economists are now busy dampening down expectations so that the public will not hold them responsible for the state of the economy.

….

Having failed to prevent disaster, economists are now anxious to tell us that there is nothing that they can do to remedy the situation. The story they are pushing is that unemployment is structural, not cyclical – a refrain now echoed by op-ed columnists. This means that people are not unemployed because of a lack of demand in the economy, but rather they are unemployed because there is a mismatch between the available jobs and the skills and location of the available workers.

….
In short, there really is no evidence for a problem of structural unemployment. The problem is that because of bad policy, we don’t have enough demand in the economy. If there is any mismatch of jobs and skills, it is between economists’ positions and the people who fill them.

First off, don’t defer your judgment to someone because they’re “an economist” and sound like they know something.  That said, Dean Baker is an economist who has managed to publish a number of books, help draft legislation, and appear on the almighty television on a pretty regular basis despite his tendency to veer from the party line.  In the article quoted above, he links a study done by the Federal Reserve that concluded that economists could not have been expected predict the current financial crisis, citing him as one of the people who did predict it:

One of the first prominent housing pessimists was Dean Baker of the Center for Economic and Policy Research in Washington, who in 2002 wrote that:

“In the absence of any other credible theory, the only plausible explanation for the sudden surge in home prices is the existence of a housing bubble. This means that a major factor driving housing sales is the expectation that housing prices will be higher in the future. While this process can sustain rising prices for a period of time, it must eventually come to an end. (Baker 2002, p. 116).

However Dean Baker and the others that made surprisingly accurate predictions were actually wrong because:

The “Fundamental Theorem of Asset Pricing” implies that the evolution of asset prices is, to a first approximation, unpredictable.

That’s pretty offensive, but it gets even better in a footnote:

[E]conomists both inside and outside academia may have been reticent to make any sort of predictions, for fear of damaging their reputations if they were wrong.

However if they neglected to do so and there was a massive financial crisis, their reputations are just great and they shouldn’t shy away from making policy recommendations that will affect the livelihood of millions.  I’m not sure if it’s outright contempt for people, extreme insularity or both, but this is pretty clearly a problem.   They’ve divided themselves into camps on how to view the unemployment problem, which pushes policy predictions into the future so they can avoid a little embarrassment despite the predictable consequences on the most vulnerable.  It’s very telling that both camps have a point and bad policy could come out of either view though it’s absolutely certain for the ones that believe that the only solution to a “structural problem” is just sort of creating unpeople who are just going to have to use the income they don’t have to buy some bootstraps.