Wednesday, June 30, 2010

Economics would be hard...if it worked.














Wow. Kartik Athreya, researcher at the Richmond Fed, set off a blogging conflagration the likes of which I haven't seen since George Will lied about global cooling. What Athreya said was this:

In this essay, I argue that neither non-economist bloggers, nor economists who portray economics —especially macroeconomic policy— as a simple enterprise with clear conclusions, are likely to contibute any insight to discussion of economics and, as a result, should be ignored by an open-minded lay public...

In the wake of the recent ļ¬nancial crisis, bloggers seem unable to resist commentating routinely about economic events...Examples include Matt Yglesias, John Stossel, Robert Samuelson, and Robert Reich....I will argue that it is exceedingly unlikely that these authors have anything interesting to say about economic policy.
On the face of it, this seems like a reasonable complaint. Athreya is a PhD economist; these others he named (and many other "economics bloggers" like Megan McArdle and Will Wilkinson) have no advanced economics degree. He's saying "Listen to the experts, ignore the laymen."

Is that such a crazy statement? If an epidemiologist told us not to listen to bloggers who denied AIDS was caused by HIV, or if an evolutionary biologist told us to ignore bloggers' arguments against human evolution, or if a geologist told us to ignore writers who advocated for a "young Earth," or if climatologists told us to ignore George Will's or Steven Levitt's armchair theorizing about climate change, part of their argument would certainly be that the bloggers in question simply didn't have the technical expertise to make an important contribution. And we would buy that argument. But when Athreya tries to use this line in reference to economics, he receives an epic smackdown!

Brad Delong:
[S]omeone who has taken a year of Ph.D. coursework in a decent economics department (and passed their Ph.D. qualifying exams) is unlikely to be able to say anything coherent about our current macroeconomic policy dilemmas[.]

Matt Yglesias:
Now in the natural sciences [you would] try to conduct some experiments...Economists, however, can’t run controlled experiments on macroeconomic phenemona. That’s a big part of what makes these questions so hard. But that’s also why it’s foolish to view them as akin to questions in the natural sciences where laymen have nothing to contribute. If economic policy questions were easier, you’d just “ask an economist” what to do about sky-high unemployment. But...there’s no consensus and relatively little prospect for forging a consensus [on economic issues] through standard scientific methods.

Will Wilkinson:

[Athreya's] argument for why [economics] is so hard –economics is full of phenomena ”pathologically riddled by dynamic considerations and feedback effects”– sounds to my ear like an argument for the unreliability of pathologically oversimplified economic models, and for the proposition that economists will more often than not fail to converge on a consensus position on which the rest of us can rely.


Mike Konczal:
I’m actually going to take the critique one step further and be critical of economics. Never, and I mean never, during the financial crisis, where we’d leave work on Friday and wonder whether or not the world would collapse during that weekend or what kind of market we’d walk into on Monday, did I think “man I wish there were more academic economists around.” Academic economists had very little language with which to describe the crisis. Most of our narratives come straight from journalism or sociology. There are no “toxic assets” in economics, that evocative description comes to us from business world and journalism. Same with the culture and pitfalls of high mathematical finance, math predicated on the efficient markets hypothesis...

I think [Athreya] took down the essay, but he mentioned how bloggers who haven’t taken the first year of Economics PhD coursework, and passed the prelim exam, shouldn’t be writing...My very first economics class ever was auditing a graduate macroeconomics class where we went through the Lucas/Stokey “Recursive Methods in Economic Dynamics” and Ljungqvist and Sargent “Recursive Macroeconomic Theory.” I still remember asking my classmates “no seriously, this isn’t what macroeconomics is, is it?” It was like they were training to be electrical engineers, but could do no actual engineering. I still am terrified of what macro graduate students are cooking.

John Chandley:
[T]hose economists who were in charge got it mostly wrong, probably because of their particular PhD training in economics.

The grownups in charge back then claimed they knew what they were doing, even though they couldn’t see an $8 trillion housing bubble, didn’t think it was a problem, didn’t think the Federal Reserve or anyone else should do anything about it, didn’t want states enforcing laws against lending fraud, didn’t think the shadow banking system and its fraudulent CDO/CDS trading were a systemic threat that required intervention, didn’t realize major banks/investment banks had become too big to fail/reform/control, and believed deep in their souls despite all evidence to the contrary that financial markets were self correcting . . . and then watched helplessly as the financial system collapsed and took the economy and millions of people, their homes, their jobs, their savings down with it.

Economics can seem hard to non-economists, but it doesn’t take a PhD economist to recognize the last 30 years of ruling economic advisers and their apologists should never be trusted again.

Richard Green:
[I]n the end, we should be respecting evidence more than clever theoretical edifices. And yes, Kartik, while I am not an expert in macro, I did have to slog through lots of OLG models and rational expectation models and real business cycle stuff in graduate school, and pass prelim questions on them, so I have at least some idea of what it is that I find intellectually unsatisfying. [George] Akerlof's view, expressed before we had the financial meltdown, that we really need to start over with modern macro, has, I think, largely been vindicated.

And finally, Matt Yglesias again with the epic smackdown:
To oversimplify a bit for the sake of polemic, a lot of economics work seems to put more emphasis on “doing work that superficially resembles physics and therefore counts as science-like” rather than on doing work that actually resembles scientific endeavor in the sense of leading to useful predictions or technologies or what have you. You get the sense that some practitioners of economics would pick up The Origin of Species and dismiss it as too narrative to count as real science. This guy’s just arguing from a bunch of anecdotes!

The consensus response to Kartik Athreya is: Macroeconomics sucks so hard right now that anyone with half a brain has useful things to add to the discourse. And the sad thing, and the amazing thing, is that this response is completely correct.

Macroeconomics started out in the 30s with Keynesianism, which was mostly (but not completely) wrong science, but at least it was science. The discipline was then gutted by Robert Lucas, Edward Prescott, and their followers in the 70s, who asserted a number of ridiculous things (I will not launch into a list and explanation of these ridiculous things, but you can read me ranting about them here, here, here, and here); these ridiculous things were heavily promoted by businessmen and Republican politicians eager to stop government from intervening in the economy, and because of this - and with more than a little help from the Nobel Prize committee - Lucas, Prescott, et al. turned macroeconomics from wrong science into nonscience.

And here we are today. Macroeconomics doesn't work because it was designed not to work. And so bloggers with philosophy degrees often have just as much valuable stuff to say as PhD macroeconomists. Someday, if serious scientifically-minded folks can fix macro, Athreya's admonition to "listen to the experts" will be right. But that day is a long way off. As of now, there are no experts.

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