Thursday, January 10, 2013

Why do people think economists are charlatans?


A couple posts back, I talked about the AEA panel called "What do economists think about major public policy issues?". Actually, I only talked about one of the two papers that was presented there; the other was by Luigi Zingales, and was entitled "Comparing Beliefs of Economists and the Public." Unfortunately, I can't find this paper anywhere online, which is a shame, because it was actually the more interesting of the two. Here is a download link to the working paper.

Zingales either performed a survey or reviewed a survey (I can't remember which) that compared economists' and non-economists' positions on policy issues. The paper found quite a bit of disagreement, but here's the really interesting part: When normal people were told the position of the economists, they changed their positions in the opposite direction. In other words, saying that "economists believe X" made people less likely to say they believed X!

Update: Ryan Avent of The Economist has a great summary of the findings here, complete with a fun chart, which I will now steal:


What on Earth??...

Now, maybe this was just an expression of good old American anti-intellectualism, like Insane Clown Posse's views on magnetism, or the Republican party's denial of evolution. But Bob Hall, who was a discussant on the paper (and who I've heard referred to as "the greatest working macroeconomist") had a different interpretation. "The average American," Hall memorably declared, "thinks of economists as masters of an alien religion, with teachings no more relevant than Buddhism." Non-economists, he said, see economists not as empirical scientists, but as deductivist Aristotelian philosophers, sitting around and thinking of how economies ought to work while totally ignoring the evidence of how they really do work.

I have to say, I have encountered that view a lot. On occasion, I have even espoused it myself (with respect to certain pockets of the econ world, mind you, not nearly the entire profession). I think it is certainly true that economics doesn't have the multi-century empirical tradition possessed by physics, biology, and chemistry. For a long time, econ was a literary enterprise, advanced by philosophical treatises rather than laboratory experiments. Some of that culture still lingers, though I think it's been changing.

But what do non-economists know about that? They don't go to econ conferences or read econ papers. Most of all, they just see what we write in the press. Now, there's a school of thought that econ's big shame is macroeconomics - that people see us disagreeing about whether to ease monetary policy or tighten, whether to spend on stimulus or tighten our belts with austerity, and think "Man, these economist guys just don't know anything." I do think there's a bit of that going on. But I think that there's another issue that has done far more to hurt economists' standing with the public. An issue on which economists, for once, have extreme consensus rather than disagreement. And on which that consensus is nearly the opposite of what almost every non-economist believes to be the nature of the world.

Trade, of course.

"Free trade" is the one issue on which economists - at least, American economists - famously agree. And yet, substantial majorities of Americans think that free trade has hurt them. In the Zingales paper, trade was the issue where there was the greatest divergence between economists and the public. How can the common people disagree so sharply with the overwhelming expert consensus? Are the common people simply a bunch of flat-earthers who refuse to look at the evidence? Or do they have a point?

The free trade consensus is certainly one issue where economists' convictions tend to spring from Aristotelian deduction rather than careful consideration of empirical evidence. The logic of free trade - If trade was bad for people, why would they choose to trade? - is simple and compelling. And the Econ 101 explanation of the gains from trade - the Ricardian theory of Comparative Advantage - is counterintuitive, clever, and simple to master.

But there has always been another idea of trade out there. We usually call it "mercantilism." This is basically the idea of state-directed, export-oriented industrial policy. Dani Rodrik, a Harvard economist, explains:
[T]hink of mercantilism as a different way to organize the relationship between the state and the economy – a vision that holds no less relevance today than it did in the eighteenth century... 
Mercantilism...offers a corporatist vision in which the state and private business are allies and cooperate in pursuit of common objectives, such as domestic economic growth or national power... 
Mercantilists...emphasize the productive side of the economy. For them, a sound economy requires a sound production structure. And consumption needs to be underpinned by high employment at adequate wages... 
Mercantilists...view trade as a means of supporting domestic production and employment, and prefer to spur exports rather than imports.
Most American economists believe mercantilism to be a debunked idea, a false doctrine refuted since the time of Adam Smith. In fact, the collective memory of this "great victory" may be one thing that makes the free trade consensus so precious to Smith's successors in the Anglo-Saxon world. But remember, Adam Smith (though possessed of an excellent last name) lived in the time of literary economics, when empirical evidence was not much of a check on logical argumentation.

What does the empirical evidence tell us about mercantilism today? Well, it's difficult to say, but it is worth noting that all the countries that have become rich in recent decades have employed extremely mercantilist policies. Dani Rodrik again:
[I]n a nutshell, [this] is the story of the last six decades: a succession of Asian countries managed to grow by leaps and bounds by applying different variants of mercantilism. Governments in rich countries for the most part looked the other way while Japan, South Korea, Taiwan, and China protected their home markets, appropriated “intellectual property,” subsidized their producers, and managed their currencies.
This is probably why economists in those countries are much more sympathetic to mercantilism than their counterparts in the Anglosphere. (Update: Of course, it's worth noting that the U.S., Britain, Germany, etc. were also extremely mercantilist during their periods of rapid economic development.) To the south, Latin Americans are fairly annoyed that the "Washington Consensus" of free trade and low government intervention didn't reap the same results enjoyed by the East Asian mercantilists. Rodrik has written some papers arguing that industrial policy, while generally not such a good idea for rich economies, is far more effective as a development strategy. Finally, there is a lot of evidence that the most common thing that pushes countries out of long economic slumps is an increase in exports, usually preceded by a depreciation of the currency.

So Americans look at developing countries like China powering ahead with mercantilist models. Then they see themselves losing jobs to Chinese competition. They see their country in a long slump, while countries with export booms manage to bounce back quickly. And here come all these economists, with their simple little theories of how free trade is always good?

Charlatans! Deductivists! Masters of alien religion!

Which doesn't mean the common people are right. Maybe Rodrik's research is wrong. Even if it's right, maybe industrial policy and mercantilism lose their luster once you near the technological frontier. Maybe export booms can only be engineered by small open economies or developing countries, not by a big rich nation like the U.S. In general, when the common people go up against the experts, it's the experts who come out on top (see Nate Silver, evolution, climate change, etc. etc.).

I'm really not sure. But here's the thing - I suspect that a lot of economists would also not be so sure, if they actually took the question to the data and tried to get a comprehensive picture of the real-world effects of trade. It would be a difficult task, and the answers would not be clear. But it would, in my opinion, be a better approach than simply repeating the nostrums of Econ 101 and Ricardo.

I tend to side with the experts, but I definitely have some sympathy for the intuition of the common people. As I recall from the panel, Luigi Zingales felt similarly.

159 comments:

  1. I would think that you could explain the majority of the answer simply by referring to ou good friend Homo Economicus...

    ReplyDelete
    Replies
    1. Anonymous12:58 PM

      Why are economists always talking about homos? What do tehy have against teh gays?

      -Ibod Catooga

      Delete
  2. This comment has been removed by the author.

    ReplyDelete
    Replies
    1. Actually, onions are delicious.

      Delete
    2. When they are sauteed, not raw.

      Delete
    3. Raw red onions are pretty great in a salad.

      Delete
  3. Anonymous1:22 AM

    Even most economists who favor free trade recognize that it's hurt the working class in rich countries, don't they? They just support it anyway. Economists often favor these kind of "Step 1, enact efficiency improving policy that will hurt everyone below the 95th percentile, Step 2 compensate the losers" ideas, and voters, sensibly noting that the losers (i.e. them) never get compensated, have perhaps less sensibly concluded that economists are just shills for the rich.

    ReplyDelete
    Replies
    1. Yup- a good economist should avoid "people are stupid" (and polite variants thereof) as an explanation. So saying "people oppose trade policies because they're stupid" is bad economics. A far better explanation of people's opposition to trade policies is that trade causes structural adjustments, some people gain, some people lose, and the people who lose aren't happy.

      Delete
    2. here is a recent example of a high status economist (Acemoglu) putting out a paper in which trade lowers real wages for the unskilled in rich countries.

      http://www.nber.org/papers/w18595

      [btw, I wish when people argued about how macroeconomists think, they paid more attention to people like Bob Hall and less to people like Cochrane and Fama]

      Delete
    3. Yes! My intuition would also say that trade increases inequality. And doing the simpleminded thing of plotting Imports as % of GDP versus the Gini coefficient (in the US) certainly seems to back this up:

      http://research.stlouisfed.org/fred2/graph/?graph_id=102823&category_id=0#

      Delete
    4. Zelrak4:30 PM

      I think the justification they use, rather than "screw the poor", is that overall everyone is better off -- it isn't a zero sum game. So even if working class people in the US are less well off at first, people overall in the world are better off, since more trade produces more economic opportunities. Eventually such overall growth will even come back and help those who were initially disadvantaged.

      Now whether that is what actually happens is another question.

      Delete
    5. > Now whether that is what actually happens is another question.

      No, it isn't. To nearly everybody, it is *the* question, the only important question about trade. The rest is just preliminary background.

      Delete
    6. Anonymous12:20 AM

      Eventually free trade probably will make everyone - or most everyone - better off, though given the how long it will take Third World wages to catch up with the First World, most of the people who are right now only "intially" disadvantaged will be dead by the time that happens. And even after wages converge it's plausible that the increased pressure on commodity prices might be enough to leave the First World working class worse off than they would otherwise have been. There really is a large class of losers here.

      Delete
    7. Nathanael9:28 PM

      Free trade is a "race to the bottom" in terms of POLLUTION, and as such I'm fairly sure it will make everyone WORSE off, by creating larger and larger tracts of poisoned land and water needing remediation.

      We found this out when the environmental "side chapter" to NAFTA was never passed.

      Delete
    8. Anonymous7:42 AM

      The textbook free trade model is simplistic. Comparative advantage is not the typical situation. Unrestrained trade is labor rate arbitrager. Add in the fact that foreign governments are happy to run permanent trade surpluses to keep their citizens employed and you end up with lost US jobs and the hollowing out of the middle class.

      Is it any wonder that people have so little respect for economists?

      Delete
  4. BOOM: http://www.princeton.edu/~reddings/pubpapers/emptrade_palgrave10web.pdf

    I'm nice. Gang sign. <>

    ReplyDelete
  5. I think that far too many members of the profession are more interested in the interior decorations of their ivory towers and, swaddled by funding from hedge fund managers and their ilk, spend all their time on arcane spells with which to transmute VARS into gold. They never even look out the windows. Try and find a recent study of the long term economic impacts of major projects like the Hoover Dam on the web. When I wrote this piece, 'Dam the Economists' at http://somewhatlogically.com/?p=523, all I could find was a couple of puerile rants such as this one from the Von Mises Institute, http://mises.org/daily/4584 and the best overall article was a 1933 Fortune article, but that just gives the impact to that date. ( if anybody knows of any serious recent academic studies, please let me know)

    I think that Frances Woolley at Worthwhile Canadian Opinion sets a great example of general accessibility and humanizing economics with her web posts, such as The Macroeconomics of Middle Earth at http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/12/the-macroeco.html#more and more serious pieces such as The Shopping Cart Puzzle, or Intermediate Micro takes on Behavioural Economics at http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/12/three-solutions-to-the-shopping-cart-puzzle.html

    There is obviously a very necessary place for highly abstract serious research, but unless the economics profession builds a bridge of understanding to the public, which definitely means evaluating their ideas against real world results, the public will see economists, as Bob Hall is quoted in Noah's post, "sitting around and thinking of how economies ought to work while totally ignoring the evidence of how they really do work."

    ReplyDelete
  6. You forgot to note the most famous protectionist growth miracle: the United States. The republican party was built on rejecting ricardian doctrine and challenging free trade-slavery policies on the grounds of environmental destruction and hurting domestic industry

    ReplyDelete
  7. Anonymous3:56 AM

    Ricardo predicated his arguments about gains from trade via comparative advantage with the qualifiers that it was based little or no money *and* labor flows across national borders. Otherwise gains from trade would/could also be made by trading within national borders. The verbatim quotes are easy enough to find in his works at econlib.org. The condition of strongly frictional money flows hasn't held for decades.

    Interestingly when I put this to a free trader economist back in 2004 he replied that it sounded like left wing diatribe. I said no, its David Ricardo actually. He ceased discussions.

    ReplyDelete
    Replies
    1. You know, some hold that James Mill (who edited and reorganized Principles) had more to do with the Comparative Advantage chapter than did Ricardo.

      What you say is true. Ricardo makes the explicit assumption that capital cannot cross borders, and says explicitly that this is necessary for his argument to hold. I'll also throw out that Adam Smith considers the possibility of competing with a foreign mercantilist country, and comes out agnostic about whether retaliatory protectionism is OK.

      Delete
  8. Jonathan Spieler4:19 AM

    I think that common people not only got the notion that economists embrace free trade and markets in general in an often oversimplifying way, but that economists are themselves part of a special market: Their opionions - not in the papers, but in the press - seem more often than not just bought and sold. Think of the so-called think-tanks. They are not searching for any kind of truth, they are mining arguments on the political agenda they need to sell to remain financed. How to trust a (possible) prostitute?

    ReplyDelete
  9. Anonymous5:38 AM

    The way economists imagine trade works and the way it actually works are different. Economists imagine that increased trade benefits everyone because the net productivity of the system increases.

    The way it has worked in practice is that wealthy and very greedy special interests in the US are positioned to reap enormous benefits from trade that they are not sharing more broadly with society. Those who suffer dislocation must simply 'suck it up'. Part of the increase in wealth due to trade was supposed to go to the dislocated. It hasn't and it doesn't because the wealthy elites that control the system have taken the portion of the trade money that was supposed to go to the dislocated.

    Trade is unpopular because the rules allow the wealth to be unfairly distributed. Economists value growth. The public values fairness. If economists want the best growth policies, the implementation must be fair in order to gain public support.

    -jonny bakho

    ReplyDelete
  10. fresno dan5:43 AM

    Well, I used to drink the cool aid. I believed in the EMH (efficient market hypothesis)- it seemed logical, intuitive, elegant as far as theories go. Than the truth beat my ass, and blow torched off my skin with REALITY.

    So take just one aspect of the great recession - the housing bubble.
    The lack of understanding that first, second, everything after, and last, is due to FRAUD seems to excape most economists. As well as the logical inconsistencies with the "market."

    So, a listing of problems:
    First many economists claim that can't recognise bubbles (don't bubble poke a GIGANTIC hole in "homoeconomicus)?
    Second, a business that rates bonds, e.g., MBS (for SAFETY) generates bond ratings by the firms issuing the bonds...LOL - how does one reconcile that with the rational man view of economics that a person of average intelligence should see how compromized those rating are - yet they happened and were used to justify buying MBS bonds?
    Third, the LOGICAL outcome of the EMH is that practically everybody had an incentive to lie and cheat - home builders, bond rating agencies, banks, mortgage servicers, realtors, home sellers, Fannie, Freddie, some home buyers trying to get on the gravy train, campaign contribution grasping politicians. (the market is suppose to be self correcting - but the only ones who got "corrected" were the poor schnooks who bought houses during the boom - somehow, every bank got a bailout - this is a profit and "loss" system)
    Fourth - regulatory capture. Why do the "nationally recognized statistical raing organizations" exist? Why does the market allow them to CONTINUE to exist??? What is the point of keeping the imprinteur of the SEC on firms that have empirically and objectivally demonstrated that a)they don't know what they are doing, and b) they are corrupt as well?

    The market fails to work, because unlike sports which are transparent and take place right before your eyes, in economics back room deals are the norm, with firms colluding and buying off regulatory agencies and politicians. This thorough and obvious corruption is simply not acknowledged by economists.



    ReplyDelete
    Replies
    1. Anonymous9:15 PM

      where did synthetic CDO's go? they are still around ,yes market prices have adjusted,but the point is they are still just syn thetic securities,not tied to any real asset. Commodities like oil and gold are traded, artificial prices set,when in fact they are just securities traded on the price of these items, regulation? markets? where?

      Delete
  11. Have you considered the possibility that both may be right? It really depends on the questions you ask. And this is where the public does not trust economists, and I think for good reason. Economists look at aggregate growth. People look at what it does for themselves. It is becoming ever more clear that the free trade economics prescribed by western economists (and politicians) tend to lead to larger inequality. When you ask questions about aggregate growth, this will be good. However, for the greater majority of people this is almost certainly (in hindsight) bad. And if you look at it this way, economists really have to ask themselves whether they are asking the right question. I would say no, and many agree with me, and that's the problem.

    ReplyDelete
    Replies
    1. Nathanael9:26 PM

      Lately, "aggregate growth" has meant "more money and power for 15,000 very rich people" (perhaps combined with "more pollution" and "fewer natural resources left in the ground")

      Who wants that? All of those have negative societal value. Aggregate growth as defined by typical economists is therefore BAD. It should become obvious why people distrust economists.

      Delete
  12. Yeah, forget the evidence. Must be something to do with size, wealth, lollipops. /sarc

    Seriously though, this is just one of the typical 'real life' problems economics has swept under the carpet. There are consequences of changing the rules of the game midway through multi-decade lives of fixed capital. Free trade also exposes you to the policy agenda of your trading partners - it's only really free trade if the other country has identical policies/regulation/rules of the game. In which case they are essentially the same country (or have some unifying political force). Otherwise, its a battleground played out on the political front.

    In any case, your mate Steve Keen is a sceptic of the 'watertight' arguments in favour of free trade
    http://www.debtdeflation.com/blogs/2011/09/30/1000000-economists-can-be-wrong-the-free-trade-fallacies/
    And I add my 2c worth
    http://www.macrobusiness.com.au/2011/11/keen-questions-economics-of-free-trade/

    ReplyDelete
  13. There are two great lies

    1) The check is in the mail

    2) Free trade is good

    And, Nate Silver was right only because of the good sense of a majority of Americans

    ReplyDelete
  14. Anonymous7:05 AM

    Are you familiar with Bad Samaritans/Kicking Away the Ladder? Ha-Joon Chang advances the position that free trade is a good strategy at the top but bad for catchup development, like you conjecture. He takes examples from the 19th century too.

    They're popular books, but a more thorough exposition of what you've outlined here.

    ReplyDelete
  15. Me: "My hobby is proving economists wrong."
    A Professor: "Must be a short proof."

    In the story, you need to take account of the presence among those who distrust economists of very educated members of other fields who have looked into economics.

    As for trade, the Leontief paradox shows that comparative advantage does not explain patterns in trade. An alternative Keynesian theory exists - I can cite both Joan Robinson and Harry Johnson. Ian Steedman and his colleagues, building on the Cambridge Capital Controversy in the 1970s, showed long ago that the Heckscher-Ohlin-Samuelson theory cannot justify free trade; free trade does not even necessarily make the country better off as a whole.

    (Potential) Pareto improvements is not a value-free criterion for making policy judgements. And economists refuse to explicitly state whose interests they are basing their recommendations on. You can see Gunnar Myrdal's The Political Element in the Development of Economic Theory (or whatever) for these points.

    You probably do not know much about what I am talking about above. The culture of economics is anti-intellectual and anti-scholarly (that is, pro-stupidity). It is not just that some economists lie about the facts, about their logic, and about what their colleagues believe (see Glen Hubbard on Countrywide, Frederic Mihkin's star turn in Inside Job, Andrei Shleifer's adventures in Russia). It is that these are leaders of the discipline, the outward face in prominent textbooks. And the consequences for lying are very minimal.

    ReplyDelete
    Replies
    1. Anonymous3:27 PM

      Being "very educated" is distinct from being very educated about economics.

      Delete
    2. Nathanael9:23 PM

      Joan Robinson's work is very much worth reading. It's not a coincidence that she isn't considered "mainstream" in the anti-intellectual, pro-stupidity econmics profession.

      Delete
  16. As a non-economist, I'd like to emphasize three perceptions that make me distrust most economists in the news.

    First, there is the perception of defeasibility of economic arguments. Pretty much every argument relevant to people's political positions is argued in both directions. Laypeople have essentially no way of testing which argument is right, but they know that only a fraction of the arguments can be right and the rest are wrong or lies. More sophisticated laypeople can recognize which positions are funded by government, the rich, and academia; but then they exercise their prejudices towards those sources.

    Second, to take your example of free trade, there is the perception of concentrated harms dominating the perception of minute but diffuse benefits. For at least two generations we've seen high-paid and/or union jobs being offshored by free trade: in clothing, manufacturing, steel, electronics, paper, automobiles and a host of other industries. That's direct, concentrated harm to US employees. The benefit we ought to expect in return is lower prices to everybody: but not so much lower in the stores that we notice. And not so much lower that we couldn't have gotten equal decreases by improvements in productivity if we had made investments at home.

    Third, the fact that economists are in the news for anything politically relevant makes me suspicious that somebody is trying to sell me something misleading. One side or the other or both. Any minor familiarity with history bears out this viewpoint. Any minor familiarity with the corrupt think-tank propaganda that is pushed into the news bears out this viewpoint. Corporate funded economics denialism is very poorly fought in the public perception.

    ReplyDelete
  17. Are you being fair to Econ 101? Krugman & Obstfeld's undergrad text - Trade 101 - has a chapter on trade policy in developing policies, a section on the East Asian miracle and another called Controversies in Trade Policy, where many of the arguments you make here can be found.

    ReplyDelete
    Replies
    1. Nathanael9:22 PM

      Krugman is not the typical Econ 101, unfortunately. Schools are still teaching out of the reprehensible Mankiw textbooks.

      Delete
  18. There are really two ways to be "against" free trade, that are not exactly mutually exclusive but definitely in tension. One is the kind of mercantilism that dominates today among non-economist elites and emphasizes boosting exports (let's double exports in 5 years!). This mercantilism has actually not been bad for actual outcomes from the point of view of free trade orthodoxy. The whole GATT/WTO process is based on the idea that countries gain from exporting, and it has led to large reductions in trade barriers. After all, if countries want to get rich by exporting more, the only way they can all do that is if they all import more too. This kind of mercantilism is not actually anti-trade; it thinks trade is great, but is just mistaken about where the benefits of trade come from.

    There used to be another kind of development strategy that emphasizes import substitution. This really is anti-trade. If everything followed this strategy, the logical outcome is high trade barriers and autarky. But nobody espouses this today.

    ReplyDelete
    Replies
    1. As Dani Rodrik has argued, Latin America saw higher growth rates under import substitution than it did under the Washington Consensus. So maybe you shouldn't be quite so quick to dismiss import substitution.

      P.S. to Noah: Could you maybe get some less brutal captchas?

      Delete
  19. Free Trade is certainly one of the two big reasons why economists are mistrusted. The other one (and a much more confounding one) is the difficulty for non-economists to make the jump from individual to aggregates (The Fallacy of Composition)

    ReplyDelete
  20. here are some recent papers working with Aristotelian trade theory (i.e. comparative advantage). Are they guilty of what's charged here?

    http://econpapers.repec.org/article/ouprestud/v_3a79_3ay_3a2012_3ai_3a2_3ap_3a581-608.htm

    http://www.aeaweb.org/articles.php?doi=10.1257/jep.26.2.65

    (although of course Robert V has already told us that comparative advantage cannot explain trade, and that all economists are morons)

    ReplyDelete
  21. Phil Koop9:00 AM

    I think you are on the right track here, but have overlooked something important by focusing on Asian low-income success stories: Deutschland. Germany is the paragon of national economic governance that most appeals to main street, and it is mercantilist. Yes, I know Germany is a member of the world's largest free-trade area; she is mercantilist all the same.

    ReplyDelete
  22. Anonymous9:30 AM

    "Wise governments realized they should assist their national companies in competing with foreign rivals for the hands of the global markets, and make sure there were plenty of high-tech, high value-added jobs for their workers; indeed, some wise men called for active industrial policy and strategic trading, so that our country would win this race at the expense of all the others.

    As I said, is now conventional wisdom, accepted everywhere from the Wall Street Journal to The Nation; I bought it for quite a while myself. Krugman shows it's all hogwash, from start to finish, and not nearly so good a fairy tale as those in the Brothers Grimm. Trade, as a fraction of the world's economies, is barely back at the level it attained in the late 1800s and early 1900s, before the Great War and the collapse of the first free trade regime: yet it was precisely in such circumstances that the original economic theory of international trade was formulated, and with special reference to Great Britain, always the most trade-dependent country, at that. (Foreign trade amounts, now, to something like 10% of America's gross domestic product, but it was about 40% of Victorian Britain's.) Moreover, trade is overwhelmingly between the rich countries --- the average wage rate in America's trading partners, adjusted for purchasing power, is about 90% of the US wage rate. Whatever happened to US manufacturing jobs, they were certainly not competed away by low-wage labor in Germany, Switzerland and Japan. (The most likely explanation --- Krugman goes through some of the math --- is that productivity in manufacturing continues to grow much faster than productivity in services, while demand for manufactured goods does not, so relatively fewer manufacturing workers are needed to supply that demand, and the surplus go into services; this accounts for why the same pattern is observed in the main US trading partners, as well. Krugman notes that the US labor movement having basically collapsed has something to do with this, too.) East Asian countries oriented towards exports have achieved massive rates of growth: but Krugman shows this can be accounted for by mobilization of resources (invest in infrastructure, train your labor force, get people out of subsistence farming and into cities and factories, etc.), with a very small residual, if any, to be explained by other factors (implying, among other things, that those growth rates cannot continue indefinitely, or be matched by countries which are already highly developed). It's impossible for a country to receive net foreign investment and run a trade surplus at the same time. It is simply not true that nations are in competition: companies are, but what is good for General Motors is not necessarily good for America, and the standard accounts of mutual gains from trade are demonstrably correct, or at least very nearly so."

    http://masi.cscs.lsa.umich.edu/~crshalizi/reviews/pop-internationalism/

    ReplyDelete
    Replies
    1. Following your link, I found you referenced a piece from 1996. The world has changed. As of 2009, imports were 14.0% of the US GDP and exports were 11.2%. I got those numbers here:

      http://www.oecd-ilibrary.org/sites/factbook-2011-en/04/01/01/index.html?contentType=&itemId=/content/chapter/factbook-2011-33-en&containerItemId=/content/serial/18147364&accessItemIds=&mimeType=text/h

      Delete
  23. Also this. (For the benefit of anybody living at the bottom of a well who is unfamiliar with this series, you need to hover over the red button at bottom left.)

    ReplyDelete
  24. Anonymous10:08 AM

    Noah:

    First, love the reference to ICP, Michigan's awful rap export. Perhaps you can go to a panel discussion regarding magnets at The Gathering in Southern, IL next summer, and do some education. I heard it is like the AEA Conference, except with more Faygo pop...;)

    Second, I think distribution in this whole debate is so important, both sides fail to see this is the crux issue. Trade may be a net win for the importing country, like the US. But the gains are highly concenrated, while the losses are spread out. In China, by contrast, the gains are more evenly spread.

    I think econ too leaves out a cultural component. Very few people in the US think Chinese peasents and savers as losers, although they are under its Mercantilist regime. No one thinks about this-they just see big new cities and people buying applicances for the first time.

    In contrast, in the US, people place a low cultural marginal value on lower-middle class people buying more cheap crap at Big Lots and getting tattos. They might be real gains, but are viewed as trivially as to more pressing issues such as unaffordable health insurance, over-priced education, and familial chaos. These feelings go above and beyond simply the measure, dollars and sense of economic transactions.

    It is similar to views on saving and spending. Some view saving as a virture onto itself, while in some cases it is not smart or futile to save for something. There is a moralistic and cultural component to evaluating economic gains that I don't think are easily modeled...

    ReplyDelete
    Replies
    1. I think part of the problem is that people don't realize how much easier it is for a poor country to play "catch up" and grow really, really fast. It's been so long since the US was not at the "technological frontier".

      They might be real gains, but are viewed as trivially as to more pressing issues such as unaffordable health insurance, over-priced education, and familial chaos. These feelings go above and beyond simply the measure, dollars and sense of economic transactions.

      There are arguments from some economists (such as Dean Baker) saying that we could probably get some reductions in the cost of services if we increased trade there. There's some of that already (people go abroad to hospitals in Mexico and elsewhere for cheap surgery), but it could be more.

      Education and housing, though . . . are much trickier.

      Delete
  25. Anonymous10:24 AM

    Most non-economists have never taken introductory econ (or any college course, for that matter) and are unaware of the free trade literature as well. But recall that for a majority of economists, satisfying the Kaldor-Hicks efficiency criteria is good enough. In principle, the trade winners could compensate the losers. And now you are back at the common perception of "ivory tower" dwellers thinking of how economies ought to work while totally ignoring the evidence of how they really do work.

    ReplyDelete
  26. free trade is good
    yes, but you teach us models that are so simple, they are not believable
    I lost my job to chinese competitors, got a new job at half the salry, by boss got rich, and I get cheap, poorly made clothes at walmart - how am i better off (not to mention the pscyhcological damage)

    I pay minimal attention to the paper; I see one nobel prize winners calling each other idiots; what am i supposed to think ?

    I see economists saying we need cuts in social security, while my grandmother is eating dogfood, and M Romney is doing a multimillion dollar teardown, but can't afford more taxes

    economist are to lazy to make blog post without jargon like "nominal" (hint: use adjusted or not adjusted for inflation), and they expect me to not feel that they are superior and condescending

    they routinely produce scattergrams that are poorly made, violating basic laws of how to make a good graph (see not tufte buy N Robbins)

    they routinely write blog posts about empirical stuff, with many citations to theory papers, and no discussion whatsoever of empirical studies

    they branch out, like chaos theory guys, claiming that they understand all
    they routinely apply econ to problems that are not econ,like rise in healthcare costs, which is almose entirely a technical issue

    they admit that they were like, way way wrong about macro demand shock effects in 1998, or 2003, but hey, trust us now

    they were to stupid to see the housing boom - I should trust these guys ????

    they engage in endless infantile debates over things like the legality of platinum coinism (by DEFINITION, the legality will be what 5 or more members of SCOTUS say)
    I mean, I could snow forever, but you get the drift

    ReplyDelete
  27. Mark H10:52 AM

    Think about diminishing marginal utility. If one person loses everything because of structural shifts due to trade, how many cheap iPhones would it take to make up for it?

    This, I think, has a lot to do with how most people think about trade (although maybe not in those words). I don't care that I can get cheap steel from China if my grandfather loses his retirement because of it.

    ReplyDelete
    Replies
    1. Nathanael9:20 PM

      Indeed.

      Economists routinely act as if mean income is a proxy for societal welfare, even though several well-established empirical facts tell us that it isn't. This is just jackassery and benefits the 0.1%, but nobody else.

      Delete
  28. "Correlation versus causation" is a big issue with looking at industrial policy in East Asia and the rest of the poor countries in the twentieth century. Korea, Japan, Taiwan, and China all have several examples of successful state-subsidized businesses, but they also have tons of those that didn't work out, like the Aluminum Smelting Industry in Korea and aircraft business in Japan (and now possibly the solar panel industry in China, since the sector will implode the instant subsidies are curtailed).

    Moreover, while the overall economy might be mercantilistic and hostile to imports, select sectors can be more exposed (since they have to actually compete). You also often find that the "industrial policy" in question is much less than meets the eye - a big part of China's private sector growth has happened despite its bank-dominated financial sector, not because of it (for example).

    Personally, I'd put more stock on the "appropriated technology" bandwagon, combined with "going into new market segments and new ways of doing stuff". The Korean steel industry used new technologies that were slower to catch on in the US, the Japanese auto industry made and produced cars to meet a niche that US auto-makers weren't fully addressing (and they introduced new business organization methods as well), and so forth. That goes back to the wave of 19th century industrializations as well - Germany became a leader in heavy machinery manufacturing in part because Great Britain was so dominant in producing textiles.

    ReplyDelete
  29. As for "Economics as a science", I think the bigger issue is that Economics is slower to clear out the "crap", in the form of badly supported theories. There has been some of that - most economists support trade, oppose rent control, and the like - but it's much slower and less decisive than in Physics, and you often find people still clinging to old theories because it supports their pet political ideology.

    ReplyDelete
  30. My explanation is much simpler.

    People don't like economists becayse we are party poopers, we keep pointing out that simplistic, free-lunch answers to complicated problems are nor real solutions and may in fact be worse than the problems they are trying to address. Here are some examples:
    - No, you can't eliminate povery by raising the minimum wage.
    - No, you can't address the shortage of "affortable" housing through rent controls.
    - No, you can't, under most circumstances, raise tax revenue by actually reducing tax rates.

    If you dare suggest the first two it must be because economists are right-wing market-loving ideologues.
    If you dare suggest the third it must be because economists, like other ivory-tower occupants, are liberals who like big government.

    Well, I suppose this is the nature of our job!

    ReplyDelete
    Replies
    1. mmmm...
      1. Straw man alarm - I don't think anybody thinks that.
      2. Old news really - hardly anybody even remembers rent control - and of those that do, hardly anybody think it helps with a shortage.
      3. Well some economists DID argue for that idea - in fact one economist gave his name to that idea.

      Have you better examples?

      Delete
    2. "I don't think anybody thinks that."
      You clearly haven't met many of my students

      "hardly anybody even remembers rent control"
      You clearly don't live in NYC

      "in fact one economist gave his name to that idea"
      Wow, one whole economist! And he did only as a theoretical possibility. Should I list names of biologists who believe in intelligent design?

      Delete
    3. Anonymous1:31 PM

      "People don't like economists becayse we are party poopers, we keep pointing out that simplistic, free-lunch answers to complicated problems are nor real solutions"

      Right. The maggotry are too stupid and greedy.

      I love guys like you, because by your very conduct you answer the question of why economists are broadly disdained -- and you don't even have a clue about how you do that. (Are you Delong, writing under an alias?)

      The answer's evident in lots of comments in this thread, and dozens more like it:

      Your "science" has been unable to predict globally significant events. Economic "scientists" can't seem to agree on even the most basic things.

      Your "profession" polices itself not at all. Tenured economists shill for, lie for, monied interests all the time. (This alone accounts for most of the reputation that you've earned.) Name ONE who's suffered for it. ONE.

      And confronted with these realities, guys like you come back with smug replies about how it's all pearls before swine. Golly, what's not to like?!?!?

      So **please** keep up the schtick. With more like you, we can look forward to the day when economists are finally tossed in the attic with phrenologists, where they belong.

      Delete
    4. Nathanael9:18 PM

      CA: on #3, it's referring to Laffer, and he managed to get the support of the entire Reagan administration. Not a small thing.

      Delete
    5. Nathanael,
      Yes I know. Laffer is one economist. Reagan, an actor, found it convenient. Of course, back then tax rates were much higher. George Bush on the other hand called it voodoo economics. In any case, it is not a proposition that any serious economist I know of thinks is valid at current tax rates.

      Delete
    6. Anonymous3:43 PM

      the problem in a nutshell
      you assert as true something that other people find incorrect.
      I mean, it is not as if a lot of astronomers are arguing about the hubble constant...(well, actually, untill the 90s, there was a big argument, Ho was 70 or 35 Km s-1 parsec-1)

      but, they settled it thu this stuff called data...

      Delete
  31. Regarding trade, four points:

    1) No serious economist would say that "free-trade is good" for everyone. What they would say is that free-trade is welfare-improving. However, how these gains are divided is a different issue.

    2) Trade with China is not free. China engages in mercantilist policies, and many models predict that sometimes, when that happens, retaliation is welfare-improving.

    3) There are theories that point out that international trade can reduce welfare if other conditions (e.g. secure property rights) are not in place first. See for example this one by Garfinkel, Skaperdas, and Syropoulos (2008):
    http://ideas.repec.org/a/eee/inecon/v76y2008i2p296-308.html
    Of course, the policy implication is not that a closed economy is better, but rather that a country should strengthen it property rights and the rule of law first.

    4) Economists do not base their ideas on free trade solely on some Aristotelian deduction. There is evidence in favor of trade, perhaps the most cited being the paper by Frankel and Romer (1999): http://ideas.repec.org/a/aea/aecrev/v89y1999i3p379-399.html
    Other paper, including one of my own, shows that the impact varies from region to region, and economists are trying to figure out why (see point 3).

    In conclusion, there is a lot of research going on, but unfortunately most people are unaware of it. They want a simple "good or bad" answer. Reality is much more complex than that. Even when the answer is "it is bad", it may have to do not with free-trade per se but with other issues that need to be fixed first.

    ReplyDelete
    Replies
    1. Anonymous12:09 PM

      Virtually none of the free-trade supporting (or indeed trade supporting) papers about trade between nations takes any account of increased energy exploitation in the countries. That wouldn't be a problem, except that there's substantial evidence that energy exploitation is a much bigger factor in wealth increase than trade...

      Delete
    2. Well, if you think that you should write a careful, well-thought-out paper.

      Delete
    3. I'm not sure I buy it, either. The "energy intensity" of GDP growth has gotten better over time, meaning that there is less energy consumed for a particular positive change in GDP.

      Delete
    4. Brett,
      I think you may be confusing technological progress with gains from trade. You are far from unique in that of course, I see it all the time from "free market" exponents who just point to technology and assign it to the free market. Maybe. Maybe not.

      Delete
    5. Anonymous8:31 AM

      " No serious economist would say that "free-trade is good" for everyone. What they would say is that free-trade is welfare-improving. However, how these gains are divided is a different issue."

      Unless you equate welfare with aggregate income these questions are not logically separable. I personally think that it takes a rather large net gain in aggregate income to make up for one person becoming unemployed or even suffering a serious income reduction. And I find evasions based on interpersonal comparison of utility considerations to be fatuous.

      Since most people think along the same lines as I do they tend to see simple-minded free trade arguments as shilling for those who gain. Which is one reason economists are in low repute.

      Delete
    6. Welfare improving in economics lis when those who gain from a policy would support it even if they had to compensate those who lose for their loss. But a welfare gain is not simply an increase in income. When I have access to French wine or Swiss cheese my welfare improves even though my income does not rise. The theory of trade that emerges from a taste for variety is what won Krugman the Nobel Prize for.

      Now, you claim that if people were forced to buy Wisconsing cheddar, Californian wine, and American-made cars welfare would improve, because the gain for those employed in these industries would exceed the loss to consumers. I fail to see why. My family would experience a significant decrease in welfare if I couldn't have bought my Mazda 5 (mini) minivan and were forced to buy a more expensive, larger, lower MPG Grand Caravan, or if instead of buying Greek Feta I was forced to buy Feta made in Wisconsin. The loss to millions of consumers like me would be quite substantial, greater than those who would be employed making goods inferior relative to consumer preferences instead of things that consumers actually want to buy.

      Delete
  32. As I mentioned in a post a few days ago, I think micro is even more damaging to economists' standing than macro. The public can see macroeconomists debating with each other, which might be taken as a sign that the field is sorting things out. On micro matters there is virtual unanimity around doctrines that are vastly at odds with what noneconomists think, including very well educated noneconomists.

    Trade is a great case in point. Many of the issues brought up in the comments are valid, but the 800 lb gorilla is still missing: nearly all economists simply *assume* that trade balances at the margin. That is, if you liberalize trade the assumption is that any increase in imports will be exactly offset by a corresponding increase in exports and vice versa. This makes it possible for economists to say that there can't be any aggregate employment effects, and the only questions pertain to efficiency and distribution. The rest of the population worries about jobs (losing them if they live in deficit countries, holding on to or expanding them if they are in surplus countries), and, yes, the economists' assumption of balanced trade sounds like it comes from another planet.

    Incredibly, after two centuries of economic modeling of trade, we still don't have an acceptable model in which trade balances and capital flows are both endogenous -- with at least the theoretical possibility that liberalization can lead, for some countries, to bigger trade deficits and greater borrowing. So when economists weigh in on trade policy what we usually get is a failure to communicate.

    ReplyDelete
    Replies
    1. Peter, actually you are not correct. Everything else being equal, trade should be more beneficial if imports are NOT balanced by exports. Think about it. Your are a baker that trades bread in exchange for meat from the butcher. One day the butcher decides to sell you meat but does not ask for bread in return. So instead of making bread you take the meat and spend time cleaning the house, tending your garden, etc. Are you worse off or better off?

      If foreigners sell us goods, get paid in paper dollars, and stick them in a suitcase and never use them to buy back American products we are better off, not worse off! Rather than making exports to pay for our imports, we can instead make additional goods for domestic consumption!

      Delete
    2. CA: The baker borrows from the butcher to put meat on the table. Not a problem....until it is.

      As for the US, yes, we print the world's foremost reserve currency; this is our "exorbitant privilege". It certainly has supported consumption. But even in the absence of an xrate effect, it is identically an accumulation of domestic debt -- household, business and government. Or maybe you don't think this has been a matter of concern.

      Delete
    3. Peter,

      I never said that the imbalance is not a matter of concern. It is, which is why one needs to ask additional questions like why are foreigners doing this, what kind of debt are they buying (currency, sovereign bonds, what), what are the risks from a sudden change in behavior, etc. But this is a very different problem than the demand story you told earlier.

      Delete
    4. Actually not. In your parable you associate the idleness of the baker with "cleaning the house, tending the garden, etc." Most people would see this lack of demand for bread as resulting in "unemployment" and a less than happy state, even if consumption were (temporarily) maintained with debt accumulation. Remember, the point at issue is the disconnect between economists and the general public. That's what I'm trying to get at.

      Delete
    5. Peter, you are right, but this is a temporary phenomenon, no different than the effect from the introduction of a new technology.

      But economists do recognize this, and the vast majority supports policies that help ease the transition. Examples include unemployment insurance, retraining programs and subsidies to go back to school, etc. In fact, because of the overwhelming support for such policies among economists both McCain and Obama endorsed them, verbally at least, in the previous elections. Is it possible that people do not know this? Maybe, but I always mention it in my class. What I find is that my position pisses off both right-wing students who don't like government intervention, left-wing students who don't like trade, and populists of the Lou Dobbs kind. I am convinced that the least popular your opinion is on both political sides the more likely it is to be correct.

      Delete
    6. Why is this a temporary phenomenon? Why is it about readjustment friction rather than a potentially long-lasting reduction in domestic aggregate demand?

      Delete
    7. Peter Dorman is correct. Microeconomics cannot overcome the crucial problem that Bentham's "hedonic calculus" -- the basis of utility theory and marginalism -- is a badly mistaken model of human behavior, rejected by psychology almost as soon as it became an academic discipline. From what is bent or twisted, no straight thing shall come.

      Delete
    8. CA, doesn't your simple example violate transversality?

      Delete
    9. CA: The baker borrows from the butcher to put meat on the table. Not a problem....until it is.


      In a country that couldn't just print the universal reserve currency and spend it, this would be self-correcting. You can't buy the foreign goods unless you can accumulate enough foreign reserves to do it, and lending money to importers is only a short-term solution because it has to be paid back. Even in the US's case, it only works because the Chinese and Japanese take rock-bottom returns for political reasons.

      I think a lot of Mercantilistic arguments acknowledge that just "export to win!" isn't viable, so they instead tend to focus on what's exported. "Export manufactured goods/technology and import natural resources and food? Win!"

      Delete
    10. Peter, several reasons. First, as you pointed out, eventually foreigners should collect on the debt by exchanging the U.S. financial assets they hold for goods and services. Second, by spending less on imports people have more income to spend on other goods not subject to internatinal trade, therefore raising demand for jobs in those sectors. So long as some consumer wants remain unfulfilled, freed-up resources from some sectors should find employment making other things that people want. In the long run the problem is a mismatch between skills demanded and supplied rather than an AD issue.

      Examples: The U.S. was running bigger trade deficits before the recession when unemployment was actually lower. Some of the biggest deficits were in the late 1990s, when the U.S. labor market had its best performance in decades. The problem is that different people experienced the labor market differently. If you looked at job advertismenets in late 1990s of mid 2000s you would find that at the same time that we had unemployed manufacturing and clerical workers we also had unfilled vacancies for medical doctors and nurses, software engineers, college professors, and so. So much that many of these positions were filled by immigrants from India (just visit Silicon Valley), China, and so on. So what is the appropriate policy? To bring these low-skilled sweatshop-type jobs back from India, Bangladesh, China, and so on, eventually becoming the China of the future, or to invest in an educational system that will train Americans to do the high-skill jobs of the future? There has been plenty of recent research on this issue. Here is a nice report by Autor (MIT) for the Center for American Progress:
      http://economics.mit.edu/files/5554

      Delete
    11. Noah, well, it depends. U.S. dollars are the medium of exchange for international transactions (trade outside the U.S.). IF this does not change, and provided that the volume of transactions continues to rise as world GDP expands, then so will the demand for U.S. dollars. So in theory the U.S. can finance a trade deficit forever, and pay for it by supplying the international medium of exchange.

      Delete
    12. CA, I think you just invented the open-economy version of MMT...

      Delete
    13. First, let me say we’ve come some distance from the butcher and baker story. I suppose this represents intellectual progress, but bear in mind that it is exactly this kind of parable that the public hears from microeconomists, one where unemployment is “leisure”, if indeed it is permitted (in theory) to exist at all.

      Now on to the explanation why trade balances will necessarily be restored in a short amount of time. First, “foreigners should collect on the debt by exchanging the U.S. financial assets they hold for goods and services.” (a) Not necessarily, at least not within the space of a few years. In fact, the record is the opposite, and not only for reserve currency-generating countries like the US. Deficit countries stay in deficit year after year; the same with surplus countries. Most countries are in one camp or the other and stay that way over long historical periods. (b) The process by which the lending stops is typically painful, not benign. We haven’t seen that in the US (yet), but forex crises are well known, and feared, outside our borders.

      Second, we are told that internal appreciation will take place in surplus countries due to expenditure-switching. Yes, this could happen, but it doesn’t have to. Again, the experience with chronic surplus and deficit regimes tells us that this is rather less likely than more.

      But the real point is that the mechanisms CA is advertising are simply possibilities, nothing more. They fall far (far, far, far) short of the automatic adjustments that would justify models in which trade always balances at the margin. Next time someone worries about the loss of jobs in the US (or anywhere else) due to trade, try arguing that, well, we should just sit tight until automatic expenditure switching in our trading partners causes their costs to rise and brings about rebalancing. Or perhaps it is easier to trot out a model that shows gains from trade liberalization *right now*.....based on the assumption that the balance never changes.

      BTW, I draw no immediate conclusions for policy. At this point all I ask is for an economics that avoids making absurd, counterfactual assumptions. Trade rebalancing can be the output of a model – no problem there – but it should not be baked in from the outset. Then we can talk about policies: how to regulate trade so that we (an international we) get the most benefit from it while minimizing the hazards. No doubt there are valid disagreements about what policies to adopt. But economics should be a force for enlightenment, not obfuscation.

      Delete
    14. Noah, I wish I could take credit but I didn't come up with this. See also Brett's comment. This theory has been circulating, especially among Keynesians. It is a simple money-demand story. :)

      Peter, we were making progress, but I am afraid after reading your accusation that we are drifting back to the obscure. I am not sure what counterfactual, absurd assumptions economists are making, but balaced trade is certainly not one of them. Plus, I stand behind my baker-butcher example.

      1) Just like the baker re-allocated his time to home production (and not leisure as you claim) so workers displaced by international trade can engage in other productive activities. People like to eat out, fix their homes, go to the movies, attend college, play video games, spend more time with their doctors during visits, and so on. These are not things they buy from China. People who are displaced could instead offer more of these services. This is what I was talking about, no one is referring to unemployment as leisure. If they are not, and instead remain unemployed, we must ask why and address the reasons. Is it because they do not have the skills? Is it because they refuse to work for less? What is it? This is what economists are saying all along.

      2) Another thing we are saying is that this is not an international trade issue per se. It is the same when Wallmart displaces the mom and pop shop or computers displace typewriter repairmen. As with international trade, most economists argue that forcing people to shop from mom and pop when they wouldn't on their own, for example by keeping Wallmart out of town, reduces welfare, as does forcing people to continue to use typewriters. It makes more sense to help ease the transition for those who are displaced.

      3) Your position that trade imbalances reduce aggregate demand is just not supported by data. Go to the NIPA tables and look at net exports relative to GDP (I believe this is table 1.1.10). You will see that trade deficits expand (number gets more negative) during expansions (when AD is high) not during recessions!

      4) The problem from sudden reverses of financial flows is well known to economists. See for example this Calvo paper written in 1998: http://www.ucema.edu.ar/pdf/calvo.pdf

      What I see is that people think economics is the few things they learned in principles and/or couple of intermediate classes, or what they read in newspaper op-eds. The truth is that this is a tiny subset. Most people do not know enough economics to trully understand the issues untill they have at least a Masters degree, and even this is a necessary but not sufficient condition. I wish it were that easy, I wish I didn't have to spend endless hours over pages struggling to keep my eyes open. And yet, after all this, I am still awed by the extent of the literature that I am ignorant about!

      Delete
    15. CA, there's a limit to what can be accomplished in back-and-forth comments, and maybe we are staring at it. For the record, I've written a bit of trade theory, taught it, and I think I know the contours reasonably well. I have to say that I am a bit offended by your assumption (if I understand correctly) that I must be part of the crowd that "think economics is the few things they learned in principles and/or couple of intermediate classes, or what they read in newspaper op-eds."

      Meanwhile, if you want to read some economic literature on the constraints on growth attributable to the open sector, I recommend the many articles that assess "Thirlwall's Law". It's preferable to drawing conclusions from the uncontrolled negative correlation between NX and AD (which is surely part of the story, but with a different interpretation than the one you give).

      Delete
    16. CA, I might believe in a supply curve that's flat everywhere at a moment in time. I can't believe in one that's flat forever. All trade deficits must eventually be paid back or defaulted upon in the long run... ;-)

      Delete
    17. Peter, let me make clear, especially because I do not want to end a good discussion on a sour note, that I did not have you in mind when I wrote my comment. It was a remark about the general public. In fact, by pointing out Thirlwall's law you are strengthening my argument that economists do think about trade in more complex ways. The problem is that we don't have time to talk about them as part of an undergraduate curriculum, so we cover the basics like explain why people bother to trade with each other in the first place. In fact, a recession can precisely be viewed as a break-down in trade.

      Having said that, I am not sure how Thirlwall's law is relevant for explaining the U.S. experience (as opposed to, say, Latin America's). Is there any evidence in U.S. time series that shows a positive relationship between the trafe deficit and AD?

      Noah, yes, they are paid, but the question is with what, with goods or with other financial instruments? :)
      Actually, I wish foreigners tried to collect right now, that could help with the AD Peter is so concerned about.

      Delete
    18. Anonymous8:39 AM

      "But economists do recognize this, and the vast majority supports policies that help ease the transition. Examples include unemployment insurance, retraining programs and subsidies to go back to school, etc. In fact, because of the overwhelming support for such policies among economists both McCain and Obama endorsed them, verbally at least, in the previous elections. Is it possible that people do not know this?"

      Perhaps they do not know this. But if they did they wouldn't care, because they know perfectly well that it is not going to happen.

      Delete
  33. Here's a paradox. If economists are right, then average public opinion about economists is irrational. But economic models assume people are rational, therefore economists are wrong. But that would make public opinion correct, and therefore rational...


    ReplyDelete
    Replies
    1. Nope, SW answered this on his blog. The view is consistent with costly information acquisition.

      Delete
    2. This is a circular, unfalsifiable concept of rationality, then. If we can preserve "perfect rationality" with some handwaving about "costly information acquisition", what evidence could we not preserve it from?

      Delete
    3. Nope, there is a name, it is called bounded rationality, and it is used in models. See here:
      http://en.wikipedia.org/wiki/Bounded_rationality

      Delete
    4. CA, I didn't mean that to be a serious critique. I was just trying to make a nerdy joke. But I do think it's a good idea for economists to ponder why they are held in such low esteem with the public, so I was glad to see Noah's post on the topic.

      But out of curiosity, which blogger are you referring to as SW?

      Delete
    5. For a joke, it was a good question though! :)
      I was referring to Steven Williamson. Someone asked a similar question in his blog about how one can explain the divergence of opinion among economists if they are all rational.

      Delete
  34. Nothing has hurt economists more than the belief that what was presented in Inside Job is the rule rather than the exception. These guys looked like hired guns. Mishkin looked like a liar, Hubbard shady (correctly as Taibi recently noted from court docs) and the head of the Harvard dept looked like he didn't understand how incentives to economists might work just like those from drug companies that all believe pervert research. Is this picture accurate? Probably not. But there is a reason economists get paid so much and part of that has to do with their role as leading parts of the intellectual priesthood. The public senses this, correctly in my view and this does not lead greater credibility for economists. A lot like used car salesmen and for the same reason more or less.

    ReplyDelete
    Replies
    1. Anonymous1:38 PM

      Those guys were ALL from prestigious institutions. Presumably they represent the summit of their "profession", unless Harvard & Columbia are giving away department chairs by lottery. And hell, "Inside Job" didn't even get to Larry Summers or zombie Milty Friedman.

      Are the Harvard & Columbia econ departments going to inflict the slightest censure or inconvenience on those clowns? Are they going to lose their memberships in the professional associations?

      Delete
  35. Let's see: Western economists designed Russia's transition to a market economy; supported open trade with China; supported repeal of Glass Steagall and liberalization of banking rules; generally support repeal of income taxes on corporations and the rich and imposition of consumption taxes; generally failed to identify the housing bubble; and provide intellectual cover for a Wall Street that is looting the country.

    And you seriously don't understand why the profession has a credibility problem?

    ReplyDelete
    Replies
    1. "Western economists designed Russia's transition to a market economy"
      Reference please?

      "supported repeal of Glass Steagall"
      Again, research showing that this was bad please?

      "and liberalization of banking rules"
      Again, reference please? Economists did argue against some bad rules, like the ones prohibiting interstate banking, but in favor of others like capital requirements.

      I mean, where do you guys get all that stuff!

      Delete
    2. fledermaus1:55 PM

      1000x this. Above one economist says people don't like them because they tell people that there is no free lunch. Yet after lecturing all of us on how creative destruction from free trade is a good thing, these shills didn't say boo about a $700 billion wall street bailout. Suddenly creative destruction will destroy the world when it affects their friends.

      Delete
  36. Alright, I'll bite. I hope you don't delete my comment.

    I actually hate economists. Really, truly, deeply. I love Krugman, I hate your profession. I think its influence has been dire and devastating. One of the most (of many) hateful elements is the utterly obtuse and careless nature of your attention. As I happen to have grown up in one of those abandoned devastated (formerly) industrial Rustbelt regions I know whereof I speak. It sickens me in my gut my heart and my whole body and mind to contemplate the horror ( there is no other word ) of what your pernicious theories have accomplished, which is after all the destruction of great swathes of America. Regions that were full of inventive, hard working, and productive citizens have been laid waste. Your profession is largely to blame. Of course no one in your profession would even bother to take a look.

    Oh, the exceptions prove the rule. Another economist I love: Stiglitz. Where did he grow up? Gary, Indiana. No wonder he can't have his head up his you know what like the rest of you guys. He can't excise from his brain the actual conditions of his stricken home town.

    You (economists generally) have no business making policy prescriptions for America as you are without care or concern for the actual citizens of THIS country - if they are working class. (Dean Baker is an exception, I also love Dean Baker.)

    I recently felt that hollow sense of victory (which is the true sign of defeat) when I read about this study - which has the imprimatur of the Fed, no less.

    http://www.washingtonpost.com/blogs/wonkblog/wp/2013/01/06/study-freer-trade-with-china-cut-manufacturing-employment-by-almost-a-third/?wprss=rss_ezra-klein

    Let me extract the title, which speaks for itself: "Freer Trade With China Cut Manufacturing Employment By Almost A Third."

    Wow. Are you satisfied yet? What else in America do you want to destroy?

    I'm speechless with fury. I just want you to know that.

    ReplyDelete
    Replies
    1. Maybe we should blame economists for this, http://en.wikipedia.org/wiki/Luddite
      the Internet revolution, and anything else that has displaced a particular group of workers in the history of mankind. Hmmm...

      Delete
    2. Economists love their simple little first order models more than they love people and never seem to notice that they live in a second order world.

      Delete
    3. Mark H1:49 PM

      Paul Krugman is a celebrated trade theorist who laid the theoretical foundation for gains from trade associated with a preference for variety. As far as I know, he was the first to put this theory into a model. It was for his work on trade that he received the Noble prize.

      Just thought you should know.

      Delete
    4. Anonymous1:58 PM

      Hi Minka,

      Economists often seem a little detached from the world but bear in mind its hard to tell the implications of recommended policy and even further, policy is enacted by politicians, not economists.

      As to your example most economists tend to want to maximize welfare of an entire economy, not just one subset. In the short run there are pains on an individual level but on the long run we as a soceity prospers from free trade and our labor force adjusts.

      Look at anything you buy, be it your cell phone/computer/food etc. Most of this wouldnt be available to you for a price you can afford if it wasnt for freer trade.

      yes some economists are ideologues, but really the vast majority of the profession simply studies how we organize ourselves and looks to improve on any system we have in place, and that is not such a loathsome goal.

      Delete
    5. Absalon, you are full of it. At least we are not responsible for nuclear bombs (physicists/chemists), bloodletting (medical doctors), and anthrax spores (biologists). I wonder who loves people the least!

      Delete
    6. Regions that were full of inventive, hard working, and productive citizens have been laid waste. Your profession is largely to blame. Of course no one in your profession would even bother to take a look.

      High labor costs, automation, and complacency devastated the Midwest manufacturing complex, not economists.

      Oh, the exceptions prove the rule. Another economist I love: Stiglitz. Where did he grow up? Gary, Indiana. No wonder he can't have his head up his you know what like the rest of you guys. He can't excise from his brain the actual conditions of his stricken home town.

      Funny how you love Stiglitz, even though he's in favor of uneven trade barriers that would allow Developing Countries like China to become even more potent industrial powers.

      You (economists generally) have no business making policy prescriptions for America as you are without care or concern for the actual citizens of THIS country - if they are working class. (Dean Baker is an exception, I also love Dean Baker.)

      Baker supports freer trade, in both services and manufacturing. He just (rightly) goes after the Chinese for active currency manipulation.

      Delete
    7. Those who are taking me to task clearly didn't read the referenced study. Your points are NOT well taken.

      Delete
    8. At least we are not responsible for nuclear bombs (physicists/chemists), bloodletting (medical doctors), and anthrax spores (biologists). I wonder who loves people the least!

      Those groups of people also have also improved the lives of nearly all people in the western world in tangible ways.

      Economists have not.

      Plus, if they have to account for anthrax, nukes, and bloodletting, you get Marxism and the "Laffer curve".

      Delete
    9. "Economists have not."

      You may want to read this: http://www.hup.harvard.edu/catalog.php?isbn=9780674036185

      Oh, and I would take a Laffer curve over a nuclear bomb any time!

      Delete
    10. Anonymous11:12 AM

      You continue to amuse, CA. I looked up your link. I won't be buying "Better Living Through Economics" any time soon. But the blurb for the thing is telling.

      Consider the small-beer scale of these economic "accomplishments": CA really truly wants to rank airline deregulation and easier 401k signups with, say, vaccination and electricity?!?! I guess Keynes is **still** right, economists **still** "set themselves too easy a task".

      With at least some of listed "accomplishments", it's a very open question whether they actually improved quality of life for most people at all. To my mind the best example is the claim that "economists built the foundation for eliminating the military draft in favor of an all-volunteer army in 1973". (Actually, I suspect the thought of eliminating conscription occurred to non-economists a century or two earlier, but I digress.) Look at American foreign policy since then -- one can make a very good case that it's become **more** reckless and detached from democratic oversight because there's no draft. Nixon didn't end the draft because some dweeb economist gave him the right cost-benefit numbers. He did it to block the wind in the antiwar movement's sails. I'm guessing that economists also hailed the "efficiencies" offered by outfits like Blackwater/Xe/Academi.

      Again, keep it up CA, you make the case against yourself so elegantly.....

      Delete
    11. Thanks but I wouldn't credit myself for your amusement, which is mostly the result of building strawmen. Read the comment I was responding to, it talks about economics having produced no benefits. That is, no benefits period, not relative to electricy or vaccination. Surely even you can tell the difference.

      P.S. So you are in favor of mandatory military service as a means of influencing foreign policy? You support forcing people to serve, like in Korea and Vietnam? Come on now, don't be shy!

      Delete
    12. Anonymous11:15 PM

      "Read the comment I was responding to, it talks about economics having produced no benefits. That is, no benefits period, not relative to electricy or vaccination."

      Yeah, I got that, genius. I guess you didn't quite comprehend what I was saying, that the accomplishments cited in your link are small beer at best, very debatable at worst. Downright paltry compared to the contributions of real scientists -- whose accomplishments YOU strove to minimize with your silly "doctors: bloodletting!, biologists: anthrax!" remark. Christ, it's only a fewe comments up -- you wanna take a moment to review what YOU wrote, ace?

      "P.S. So you are in favor of mandatory military service as a means of influencing foreign policy? You support forcing people to serve, like in Korea and Vietnam? Come on now, don't be shy!"

      Awesome. Now you've gotta go for the cheap -- and very wide of the mark -- shots.

      Yeah, AS I SAID, I think that conscription would make American foreign policy a lot less adventure-prone and military-centric. The thinking goes like this, genius: If Americans thought that they or people they cared about might be affected by military adventures, they might behave like citizens, take an interest, agitate for more negotiations and fewer aircraft carrier sailings.

      See, it's about modifying the **incentives** that Americans live with. Aren't you economists supposed to be dimly familiar with that concept?

      Thank you for again providing a lab-grade specimen of the profound obtuseness that pervades your "profession".

      Delete
    13. Nathanael9:00 PM

      Airline deregulation has proven itself to be a disaster. Turns out airlines don't work as a private industry, and do work as a public utility. And I know the guy who invented airline deregulation. Seemed like a good idea at the time... wasn't.

      Delete
    14. Nathanael9:17 PM

      CA: if you actually do a longitudinal study, and try to spot increases in the median standard of living, you'll find that economics has had...
      ...no benefits.

      Close to all the identifiable quality-of-life benefits in empirical studies come from sanitation. Most of the rest are from electricity. There's a little from medicine and from refrigeration. Nothing else even *registers*; any potential benefits are too small to measure.

      So, has economics helped promote sanitation or electricity? Answer: maybe Marxist economics, since the Soviets and Chinese went on big programs of sanitation and electricity installation. Maybe whatever sort of economics (Keynesian) called for rural electrification and created the Tennessee Valley Authority.

      But not "mainstream" economics as she is practiced in the US.

      Delete
  37. CA - you remind me of my economics professors - the common thread was an overwhelming arrogance. I see that arrogance when I visit deLong's, Cochrane's or Cowen's blogs.

    ReplyDelete
    Replies
    1. You are the one attacking ad hominen people you have never met and you are accusing me of arrogance? This is sad!

      Delete
    2. What is sad is the fact that you seem to feel a need to lurk on Noah's blog and post in response to everything that comes up in the comments. I said that certain people I had actually dealt with were generally arrogant. I said that Cowen's, deLong's and Cochrane's blog writings demonstrate arrogance. They could be Mother Teresa in person - that does not change the tone they choose to use in their writing.

      Delete
    3. Well, arrogance is one, economists not caring about people is another...the list goes on. But you are correct about me responding to every comment (even though I at least try to write something constructive once in a while). It is called procrastination, and it is indeed sad (even though Noah lists it as one of the goals of his blog). Therefore I am taking a break!

      Delete
  38. "For a long time, econ was a literary enterprise, advanced by philosophical treatises rather than laboratory experiments. Some of that culture still lingers, though I think it's been changing."

    This does not quite capture the history. Within economics, there have been numerous attempts to take a more empirical, non-ethical turn. View James Steuart's tome, published several years before Smith. The German Historical School, the American School, the English Historical School, and the Institutionalist School (not to mention a few others) offered many contributions along these lines, explicitly rejecting abstraction and illusory mathematical precision. The mainstream has shut these schools out, to the point that relatively few students know that they existed.

    On trade, what really boggles my mind is that J.M. Keynes -- revered as the Great Economist of the 20th century -- was himself a dissenter at the time he published his treatise.

    ReplyDelete
  39. Hey Noah have you played around with Minsky yet? Be interested in hearing your thoughts.

    ReplyDelete
  40. Summarising a few of the comments here:-

    Economists claim to study the allocation of resources.

    After presenting Ricardian trade, professors and textbooks invariably claim that the allocation of the resulting goods is a political problem, not an economic one.

    Students conclude that economists are liars.

    ReplyDelete
    Replies
    1. Nathanael8:57 PM

      Astoundingly true. I remember thinking that in Econ 101. The only trustworthy economics professors at my college were the "heterodox" ones -- the Marxist, the one obsessed with experimental game theory -- while the "mainstream" ones were fundamentally intellectually dishonest.

      Delete
  41. Anonymous6:06 PM

    Do you not love your readership, Noah? Yesterday you do an epic takedown of a Megan McArdle piece from the Daily Beast, which leads to a one-one one brawl with the author herself in the comment section, and the whole thing generates as sum total of 35 comments, said brawl included.

    Today you run an esoteric critique of economists' basis for believing that free trade is beneficial, and you're up to 87 geek-heavy comments in no time.

    Who reads this stuff?

    ReplyDelete
    Replies
    1. I know, right? :)

      Delete
    2. Health care is a settled issue in which it looks like overall American welfare will increase. (Somehow, Obamacare is on track.)

      Many, many folks have lost jobs and livelihoods, or experienced decreased wages, because of free trade. There is no remedy in sight.

      Delete
    3. Nathanael8:56 PM

      People are optimistic about healthcare partly because *every* country in the world is establishing single-payer. Mexico will have it done in a few years. Even in the backwards, benighted US, Vermont is ready to go in 2017 and California has a large movement going.

      Free trade, unfortunately, has shown only a few signs of beginning to die -- the South American countries have rejected it (to their immense benefit) but nobody else has had the guts to.

      Delete
  42. I think the public mistrusts and constantly bashes economists for the same reason it gossips about Brittany Spears.

    ReplyDelete
  43. ^and the president, and big corporations, their boss at work, and anyone else who sits at the top of a perceived hierarchy

    ReplyDelete
  44. Very interesting post.

    A few thoughts:

    "For a long time, econ was a literary enterprise, advanced by philosophical treatises rather than laboratory experiments. Some of that culture still lingers, though I think it's been changing."

    I'm not sure whether this is entirely change for the better, or even if it's entirely change. As a non-economists, it sometimes seems like even the attempts at "experiments" are sometimes more accurately understood attempts to support prior assumptions with numbers and fancy math.

    But that's not fair. Adding math and data should only help. But the philosophy and the narrative are still important if you ever want to talk to non-economists.

    As for mercantilism, I'm not sure whether the relatively more statist practices of developing economies says much for the rest of us, except that state direction may be able to help boost catch-up growth. To me, the key isn't so much the mercantilist protection of domestic markets, but the partnership in export markets, which may or may not be mercantilist.

    But that's just my intuition talking.

    ReplyDelete
    Replies
    1. Nathanael8:54 PM

      Experimental economics is what firmly threw out the idea of "homo economicus" and proved it utterly, utterly wrong -- experimental economics is what showed the economics world that *people care about fairness*.

      Of course, the rest of the economics world didn't listen to the results of those experiments.

      Delete
  45. Corey Mutter9:12 PM

    My own personal journey through econ crankery may be illustrative: I spent years convinced that free trade was going to immiserate us all.

    Not that autarky would have been better, resisting the economic forces for freer trade would be like resisting the tides.

    I assumed it would lead to, at best, the whole world having the same standard of living (1/4 of the US, per 2008 GDP per capita numbers). At worst, standards of living would go down to something really low like India's (1/24 US in those numbers IIRC). (It's not like competition drives prices to an average after all; people buy the lowest-cost item). I saw no counteracting force that wasn't orders-of-magnitude smaller. Surely the gains from trade couldn't quadruple (or 24-uple) the world economy to make up for the difference!

    What I thought economists were missing: the distributional consequences. I assumed they'd say there was no problem as long as the world economy was bigger than before; never mind everyone in developed countries was worse off.

    This was salient for me as a programmer. I spent 10 years or so expending no effort, as I was positive the last programming job was going to go to India any day now, to be followed by all "knowledge work", leaving us Americans to fight over a handful of lawn-mowing and fast-food jobs. The jobs would come back eventually, when our standard of living matched India's, at about the level of Brazil.

    I took to following econ blogs (this, Krugman, & DeLong mostly) to try to figure out where I was wrong. One of DeLong's midterm questions was the first chink in my armor: calculate when China's GDP per capita and the US's meet, with real numbers and real long-run growth projections. (Answer: 82 years, at about 3x today's level). So that told me growth could indeed close the gap.

    Now I have a rudimentary understanding of Krugman's work, agglomeration externalities and the like - this also helps me understand why Wake County NC could have a better standard of living than Mercer County WV, despite there being zero trade barriers between the two.

    I was concerned for a bit as to what might happen when/if labor ceased to be scarce but material goods and/or energy was still scarce. But you and Krugman are on the case there, and I know that Krugman cares about distributional issues.

    So far (a couple years since my enlightenment) I've yet come up with another method to convince myself that the future must suck. Hopefully I won't succeed :-)

    ReplyDelete
    Replies
    1. Nathanael8:53 PM

      Corey: what you actually missed was an ancient piece of *empirically based* economic lore: professional clustering, the thing which causes all the shoe factories to locate in the same place, and to make it whichever place got there first. So, for computer programming to move requires fighting against that trend, which is a very slow process.

      As for why the future must suck, global warming, 'nuff said.

      Delete
  46. Nor is trade the only issue with a large disconnect between economists' and public opinion. There is price gouging , or elimination of the corporate income tax. Underlying all of these to some extent is the value that most people place on fairness in exchanges. Economists are aware of this, through the outcomes of the ultimatum game if nothing else, but it isn't in the standard models or assumptions, so they keep taking positions on issues like the ones mentioned that strike ordinary people as outrageous.
    Paul Krugman described one of the errors in economics as 'mistaking beauty for truth'; but even once the truths started intruding, you kept choosing beauty. Nobody found any elegant way to incorporate the findings about actual, messy, not always 'rational', human behavior into the simplified, abstracted models, so you chose to keep them simple, elegant, abstract, and erroneous. Yet you still imagine that they apply to the real world. And the rest of us wonder what planet you're from.

    ReplyDelete
    Replies
    1. Nathanael8:50 PM

      Indeed. Economists' failures to adopt models based on the actual results of experimental economics... is pathetic, really.

      Fairness is people's #1 priority in trading (for people who aren't psychopaths) and economists have built entire fairy castles by imagining that it isn't.

      Delete
  47. Anonymous1:09 AM

    When economists actually start being exposed to the ills of free markets then maybe the 'common people' will trust their 'betters' more. I congratulate you on your ability to translate your failure as a physicists and your cowardice at joining a profession that might actually benefit the common man into a job-for-life that exploits people too stupid to understand how spending 9,000 dollars per semester to hear you ramble on is a waste of money but not everyone gets to join the guild the way you or Cohrane did.

    ReplyDelete
    Replies
    1. Anonymous1:34 AM

      You mean, like allowing foreign economists to come and take "our" jobs at American universities, or allowing American students to study abroad instead? I think we are already exposed to that, old chap.

      Delete
  48. This post suggests to me that economists have been thinking about all these issues many here believe they ignore

    http://afinetheorem.wordpress.com/2013/01/11/gains-from-trade-without-lump-sum-compensation-a-dixit-v-norman-1986/

    ReplyDelete
    Replies
    1. Luis,
      I read the paper - are you making a joke here? This brief paper (largely ignored by the profession I think), makes things worse not better.

      Delete
    2. reason,

      do you mean it's another paper that says free trade would be good if we did this thing ( taxing the goods that become cheaper as a result of trade) which we won't in fact do.

      if so, yes it is. I merely cited it as an example of economists thinking through these kinds of issues. I think it's still valuable - I'd rather know about how taxes can ameliorate the distributional impact of trade than not know. And as AFT says "Later work expanded this idea into a more general model; in particular, with limits on factor mobility, we don’t get a Pareto improvement, so direct payments to immobile factors (such as job market assistance to fired workers) may still be necessary". i.e. free trade is all very well but you need to compensate the losers.

      Delete
  49. Anonymous10:38 AM

    Call me crude, but haven't we seen quite a few wars started by mercantilism? Wasn't imperialism a pretty direct extension of mercantilism?
    Maybe my history teachers were simpletons, but that's what I remember them telling me. I am not saying that there isn't a middle ground, but that empirical evidence shouldn't be completely ignored either.

    Since we cannot all be exporters, a policy which tries to focus on export is definitely going to cause problems (and it did as well).

    It's true that USA, Germany, etc... were mercantilistic. They also sent battleships to open ports and force other people to accept imports. It doesn't sound like a great idea to encourage that kind of behaviour.

    I think it's also difficult to argue that free trade has not improved the life of countless millions in developing countries. Surely that must count for something as well...

    ReplyDelete
  50. re. update

    so if economists are a bunch of lunatics ideologically opposed to stimulus, the general public are even more so.

    Can be blame economists for that, having learnt that people don't believe what economists tell them?

    (personally I am disappointed in how few economists think the benefits of stimulus outweigh the costs - how are these people weighing the welfare lost by unemployment?)

    ReplyDelete
  51. This is what I see.

    Economists don't agree on monetary theory, the efficacy of fiscal policy, whether the ZIRB makes any difference, liquidity preference, whether austerity is expansionary, whether NGDP targeting makes sense, what causes inflation, Say's law, Ricardian equivalence, EMH, rational expectations, crowding in/out, and what causes interest rates to rise.

    Then, as someone mentioned, there's unemployment as leisure.

    Add to this the slavish adherence of some economists to DSGE, with its almost total inability to explain anything in the real world. Modeling vs reality, as was pointed out is beauty at odds with truth.

    Theory vs reality aside, the worst of it is that politics and economics are joined at the hip. At least one Econ Dept is a wholly-owned subsidiary of the Koch Brothers, and partisanship and tribalism overshadow everything else.

    We don't trust economists/economics for the same reason that congress is less popular than cockroaches.

    http://www.publicpolicypolling.com/main/2013/01/congress-somewhere-below-cockroaches-traffic-jams-and-nickleback-in-americans-esteem.html

    JzB

    ReplyDelete
    Replies
    1. Jzb,

      Largely agree with your views here and in general. I have to just briefly comment on the Koch brothers reference, which presumably refers to George Mason. As a first year PhD student there, the core classes were very similar to mainstream programs (taught by professors from Harvard, UCSD, UCLA) only with less math and a bit more theory. For example, our macro course focused on the Mundell-Fleming IS-LM model. Now, I'm not a big fan of that model, but I doubt that model was chosen by the Kochs.

      I recognize that the most outspoken policy proponents from the program lean a certain direction, but there is more diversity both among the students and faculty than I think many recognize.

      Delete
  52. Getting to this late enough that all I can do is ditto many of the thoughts above.

    "Free trade" is the one issue on which economists - at least, American economists - famously agree. And yet, substantial majorities of Americans think that free trade has hurt them.

    I'm astonished (and a little saddened) Noah thinks this is a contradiction. Why is free trade good? Because it is Kaldor-Hicks superior. Why is it Kaldor-Hicks superior? Because although it does make many millions of Americans worse off, it makes enough other Americans sufficiently better off that they could compensate the losers of the deal. Have the losers been so compensated? No, quite the contrary; the free-trade era has seen if anything cuts to the safety net, at the same time income and wealth inequalities have grown.

    Anyway, the best line from Avent's piece is this:

    To control for this difference, Ms Sapienza and Mr Zingales focus on the subset of the public—namely, “Democrats [with] high trust in markets”—that looks most similar to economists.

    That is, many of the people disbelieving in economic thought are the same people disbelieving in evolution, global warming, and the president's birth certificate. Might just be there's a larger story than "people just don't like economists"....

    ReplyDelete
    Replies
    1. Nathanael8:44 PM

      "Why is free trade good? Because it is Kaldor-Hicks superior. Why is it Kaldor-Hicks superior? Because although it does make many millions of Americans worse off, it makes enough other Americans sufficiently better off that they could compensate the losers of the deal. Have the losers been so compensated? No,"

      The logical conclusion is that free trade is only good for socialist countries which forcibly redistribute the wealth.

      Yet you won't find many economists (apart from the Marxists) suggesting this.

      Delete
  53. Anonymous7:30 PM

    Wouldn't it be a smart idea to assume that if most people think economists are charlatans that then there's a good chance most economists might be charlatans (not that charlatanism implies ill will on the part of the charlatan necessarily)? And it's not like we're asking people about rocket science, this is about spotting bullshit and charlatans - something that people are pretty good at.

    ReplyDelete
    Replies
    1. Not necessarily. A huge number of people think biologists are charlatans for advancing the theory of evolution, and that climatologists are charlatans for warning about global warming. But in fact these suspicions were promulgated by people who are themselves charlatans...

      Delete
  54. Having recently taken first-year Micro, I was once again reminded of the simplicity behind the benefits of free trade. However, as a student of history, it’s hard to argue with the apparent success of mercantilist policies across developing countries during the past couple centuries. Trade may be an issue where theory, while correct, simply does not match up well with historical experience. If economists hope to be taken more seriously on these issues, then regardless of the outcome, the time has come to truly study the empirical data (http://bubblesandbusts.blogspot.com/2013/01/bubbling-up11013.html).

    ReplyDelete
  55. This thread seems like it might be a good place to toss in questions I've have in mind for a while:

    1) How does the free-trade/mercantilist (or whatever) distinction hold up in a world in which comparative advantage is endogenous.

    2) An in which there are increasing returns to scale?

    3) What do people think of Gomory and Baumol?

    Since these are rather large topics I don't expect answers, but would be grateful for pointers.

    And an observation: back in the early 90s Congress passed restrictions on foreign doctors explicitly aimed at increasing the incomes of American doctors. Economists explaining how this would be welfare reducing because it would make medical care more expensive for the rest of us were conspicuous by their absence. It was hard to avoid the conclusion that free trade is for chumps.

    ReplyDelete
  56. Anonymous9:21 AM

    Why do my attempts to comment using my OpenID end up at the anonymous screen?

    ReplyDelete
  57. As a trained scientist (and I'm positive this is generalizable; I'd feel the same way if I were a car mechanic), I think the easiest way to judge whether a source is trustworthy is to see whether it gets the things I am knowledgable about correct. And, in that case, economics as a discipline fails consistently.

    Scientists have spent the past thirty-odd years attempting to sound the alarm about any number of impending catastrophes. Our modern society consumes absurd amounts of natural resources (e.g. oil, phosphorous, helium). Our supplies of all of these are limited -- in some cases (most notably, helium), the resources are absolutely non-renewable and irreplaceable, while some of the other resources (e.g. oil) could be substituted for but only with great difficulty. (*) Professional economists generally dismiss such concerns. We will never run out of oil, the argument goes, because as the price goes up, we will mine sites that are currently not worthwhile. Fair enough, but they (almost always) continue on to stipulate that this will be fine -- technology will save us, because we will find another source of energy to sustain us at our current standard of living.

    This is the part where they step into a field which I am familiar with, and so this is why I can't respect the field of economics as a discipline. Those technological innovations they're relying on (the solar cells and the biofuels and the like) are nowhere close to becoming a general substitute for the resources we're rapidly depleting. What's worse, those innovations are much farther from being useful than they would be had the same economists not been fine with cuts to government R&D over the past thirty years. Economic models make it pretty clear that resources will never be unavailable, yes. But they say nothing about whether or not we're guaranteed to find a substitute.

    When I and others point this out, economists will usually justify their claims with a general belief in human ingenuity -- we haven't been failed yet, they'll claim. Apart from the fact that they've not bothered to consult with the researchers who are supposed to develop substitutes (almost all of whom will tell you that we're nowhere near there yet), the other problem is that history says nothing about future developments. Yes, the standard of living in Western society has not declined overtly yet (though the current recession says otherwise) -- but the same might be said by investors in the second-to-last generation of a Ponzi scheme, for just as good reasons.

    Until economists start consulting experts they're relying on for innovation before they make optimistic claims about the future of energy, I feel justified in ignoring them. And until they include a section in Econ 101 about how the free market doesn't guarantee a persistent standard-of-living, I will continue to feel that their discipline actively harms society.

    (*) Or, as a geochemist I met once said, the US *had* massive amounts of clean coal. It's called anthracite, and it was found all over Pennsylvania. We've mined most of it. We burnt it. It's gone.

    ReplyDelete
    Replies
    1. Nathanael8:42 PM

      Technically, the helium is renewed continuously by radioactive decay. Unfortunately the supply from the uranium/radium mines is at a *very slow level*, and we're using it far FAR faster than the renewable rate.

      Just to be clear.


      ----
      Now, on your other point:

      "What's worse, those innovations are much farther from being useful than they would be had the same economists not been fine with cuts to government R&D over the past thirty years. "

      Yep. And there are other policies which have been promoted by economists which have harmed renewable energy development. Lots of 'em!

      Free trade is one. Had we instituted oil import tarriffs, I think we would have seen a lot more private investment in renewable energy.

      Destruction of SEC-type regulation is another one. I currently am working with some people who have a fantastic new quantum battery design, vetted by quantum physicists, which has 100x the energy density of existing batteries.

      What's the problem? *Crooked businessmen*. Since the crooked businessmen never go to jail, it's become extraordinarily difficult to find an investor who isn't a crook trying to cheat us -- the honest people all left the market. This has delayed commercialization for at least a decade so far.

      In other words, lack of government enforcement of the SEC-type laws has severely damaged the venture capital market, due to pervasive untrustworthiness. This is really severe.

      Another economist-promoted idea which has harmed renewable energy development: the idea that income inequality is in any way OK or natural. Right now there are millions of poor people who would love to put solar panels on their house. They can't afford to. Demand is stifled by the impoverishment policies pursued for the last 40 years.

      I could go on and on.

      Delete
    2. You are a trained scientists, you mean, like the members of the club of Rome? Maybe you have heard about this bet between one of them and an economist?

      http://en.wikipedia.org/wiki/Simon%E2%80%93Ehrlich_wager

      And, by the way, the first person to make a gloomy prediction about growth was Thomas Malthus, an economist! But Malthus was proven wrong by the explosion of innovation right before the industrial evolution.

      Delete
  58. Anonymous7:04 PM

    I might also be worth saying that economists think free trade is the most 'efficient' outcome. But people care about more things that allocative efficiency. Tariffs are so low in the west that further lowering them would see little gains in efficiency and large trade-offs in terms of equality. The marginalist revolution, alas, removed any consideration of the ethical ends to which economics could be put.

    ReplyDelete
  59. Nathanael8:35 PM

    Good analysis, Noah.

    Mercantilism works, under most circumstances. (Krugman is actually smart enough to recognize this.) Free trade benefits nobody except the 0.1%, under most circumstances.

    (Yes, there are other circumstances. They aren't common.)

    Therefore, the economists promoting free trade have quite blatantly and obviously been promoting the "public bad", promoting unnecessary pain and suffering. We WATCHED this happen under Clinton, with NAFTA, which was an unmitigated disaster.

    It's become clear to most people that most economists are just bought-and-paid-for hacks who promote the interests of the 0.1%.

    Now, I personally know economists who do the opposite -- a friend of mine who died recently worked in the field of, basically, figuring out how to prevent government regulators from getting snowed by the propaganda of the 0.1%. But they aren't *representative* of the field.

    ReplyDelete
    Replies
    1. "Mercantilism works, under most circumstances. (Krugman is actually smart enough to recognize this.)"

      Can you provide some sources to both claims (regarding mercantilism and Krugman's position)?

      Delete
  60. Nathanael9:56 PM

    It's really interesting to read the comments: the overall conclusion is: people believe economists are charlatans because...

    ...most of the the time, most economists ARE charlatans. Particularly the famous ones with fancy credentials.

    ReplyDelete
  61. Agree w/ Nathanael. For starters, you have the obvious charlatans like Fama, Cochrane, Mulligan, Hassett, etc - people who will use accounting identities to argue against ARRA and then turn around and make the exact opposite argument about the fiscal cliff.

    Then you have the people who are so dedicated to their theories that they can't see the evidence to the contrary. This isn't unique to economics; scientists in all disciplines have a tendency to hang on to their ideas for too long. But people who are wrong about, say, the relative benefits of flashing yellow left turn arrows versus solid green circles for permissive left turns at traffic lights, have a much smaller impact on people's lives than economists.

    In the case of free trade, it has become apparent that these policies have made many people in the US worse off, even if the condition of humanity as a whole has been improved. But I don't think I've heard many economists admit that, save Paul Krugman. Ditto for declaring mercantilism dead, despite the obvious success of Taiwan, Hong Kong, Japan, South Korea, and China.

    ReplyDelete
    Replies
    1. "But I don't think I've heard many economists admit that"

      Can you provide reference? This admission is standard in pretty much every principles textbooks, including ones written by the big shots that Nathanael characterizes as charlatans. What do you have in mind?

      Delete
  62. Michael Harris7:36 PM

    I thought someone would have made this point by now, but I guess everyone's been preoccupied with angry finger-pointing and fist-shaking.

    I just wanted to point out that I think Aristotle was the empiricist and taxonomer, and Plato was the abstract conceptual deductivist.

    ReplyDelete
    Replies
    1. Anonymous8:18 PM

      Yes, Aristotle was more empirically minded than Plato, but it was Aristotle's lasting influence, via the scholastics and others, which had, so to speak, to be overcome in order for modern science to really blossom. And in particular his notions of 'cause', which were objects of deductive reasoning. So, both his long-held academic authority and his (still) insufficient regard for or grasp of experiment make him a good analogue here. (In other words, the implied contrast is with modern science, not Plato.)

      Delete