Excerpts from my latest Atlantic column:
Imagine you are the Royal Physician in England some time during the 14th century. The prince is sick, and you've been summoned to help. You call in two experts for advice. The first says: "Use leeches to suck out the evil humors." The second says "No, you must bleed him to get the evil humors out." Just to make sure, you summon a third expert all the way from Austria, who says “No, the disease is God’s punishment for the prince’s sins, you should let it run its course.” After the Austrian expert is duly led off to the dungeons and beheaded, you’re still left with the question of whether to treat the prince with leeches or bleeding. They start to argue, insulting each other in nasty epistles. "Leech guy is secretly working for the French!" alleges Bleeding Guy. "Bleeding Guy just wants the prince to die because the prince wanted higher taxes on the nobles!" Leech Guy fires back.
What's the right move? Well, in an ideal world, you would go and get 999 patients who have illnesses similar to the prince's and give them all a variety of household substances, such as bread mold. Then you would take careful note of who died and use statistical analysis to figure out which household substances cured disease. Thus, you would discover penicillin and invent modern medicine.
Sadly, this is not what you do, because a) if you proposed it, you would be led off to the dungeons and beheaded right next to the Austrian guy, b) it's the 14th century and you have no concept of the scientific method, and c) you don't really have the right tools for that experiment, anyway. Instead, it's bleeding or leeches. So you take your best guess and you pray you're right.
The economic situation we find ourselves in today is a little bit like the example above...
If economists ever do succeed in developing formal models that work better, then we'll be able to go to them with questions (like "Should the Fed print more money?") and simply trust their expert advice. But until that day, all economists can really give us is intuition, suggestions, and ideas...
No matter how much we might wish they were, economists are not go-to experts who know just how the world works or how to fine tune it...But they do have a lot of interesting things to say. They might help you clarify or re-evaluate your own beliefs about how the economy functions. They can also help you spot the flaws in each other's arguments.
And in the end, you're the Royal Physician. You may not know everything, but the prince is dying, and you pick from among the "experts" you've got.You can read the whole thing here. Unfortunately, the part about the Austrian guy was edited for length. :(
Regular blog readers will recognize material from some of my past blog posts, such as:
"What can you do with a DSGE model?"
"The swamps of DSGE despair"
"A world without macroeconomists?"
"A satisfactory philosophy of ignorance"
The advantages of simple rules when you are not a scientist http://www.bis.org/review/r121127c.pdf
ReplyDeleteAnd you look at past history and experience. Interpretation may be difficult but it is what models must be based on.
ReplyDeleteWhy give an article a title that gives the million people who (incorrectly) think they're snarky and clever the opportunity to just comment "no"?
ReplyDeletebecause
DeleteHaha sorry, couldn't resist...
DeleteGood question. A wise man once explained to me that if a header poses a yes/no question where the answer is obviously "no", then you can safely skip the article. ;)
DeleteWise men rarely think anything of substance is "obviously" no.
DeleteWise men rarely think anything of substance is "obviously" no.
DeleteSince answer to the question posed is obviously "No" it follows from your proposition that wise men would generally not think the question to be one of substance.
Noah focuses on the reliability of economists as a question of competence. Lack of intellectual integrity and ideologically motivated thinking seem to be other substantial problems with the credibility of economists.
Well, it seems ludicrous to think the answer to such a far-reaching and nebulous question is "obviously" no, but other than that, you have an important point, I guess.
DeleteFollow-ups: Whom do you trust completely? Whom do you distrust completely? Why? And do you yet have any idea how foolish you are going to sound when you start answering these questions?
I think your analogy with doctors is perfectly fit. You forgot, however, the one thing that doctors should do in situation of such ignorance: nothing. Do no harm is an important principle and should be applied to economics. Stick to what you know.
ReplyDeleteAlso, try to see what difference the arguments make in the real world. There once was a wise guy that taught us how the multiplier doesn't matter (http://noahpinionblog.blogspot.com.br/2013/01/why-multiplier-doesnt-matter.html).
Lastly, weigh the risks with the potential benefits. I have never seen an argument for why adopting NGDP targeting could seriously hurt the economy. On the other hand, I've seen many very plausible arguments for how it could help it.
The situation is not complete ignorance, it's chose the best option given the current level of understanding. Should the Royal Physician really say, well, shoot we dont know anything so I recommend we do nothing. If so, how then does one learn what they should do? Also, how exactly would you weigh the risks with the potential benefits if you do always nothing?
DeleteThe other thing that is missing is that doctors, what with not washing hands between patients and passing horrible infections around, could easily do a lot of harm, because they didn't know what they didn't know...
DeleteThose meddling editors...
ReplyDeleteI'm must say Noah that was a fine piece of writing, this article. Very good. And although I'm still on Steve Keen side in this "strange" debate ;) ;) :), this op-ed express perfectly what I feel about economics.
ReplyDeleteI think that after 200 - 300 years we will know much more, about the economy...
It's such a pity that this "Austrian doctor" stuff got trashed :(
(Why don't you post it here (?))
Through my little model of effective demand based on labor share, I can see the failings of economists. For example, the quote you have from Greg Mankiw in the article about business cycles makes me want to go visit him and show him how to calculate the effective demand limit. And just this past weekend, there was a discussion over the AS-AD model where it lacks many important features. By chance this weekend, I posted about the AS-ED model (Aggregate supply - Effective demand)... A model which has an important thing the AS-AD model lacks, a mechanism to describe the NAIRU.
ReplyDeleteThe model for effective demand also offers an explanation of why monetary policy is ineffective; An explanation nobody seems to mention. The business cycle has fallen to a "lower" range of utilization rates of labor and capital. A lower "steady state" if you will, closer to what one sees in Latin American. Would it be embarrassing to admit that we have fallen? No... The simple truth is that lower labor share is forcing upon the advanced economies, from Japan to EU, the economic dynamics of developing countries and economists haven't caught on yet. Wait till they realize the natural rate of unemployment has risen by at least 2% reflecting that fall in the range of the business cycle.
Story... There was a tall truck that tried to pass under a low bridge. It didn't make it and got stuck. Then the experts debated different solutions... cutting the top of the truck off, cutting part of the bridge, pulling the truck out with great force... Then a little boy stepped up and said, "Why don't you just let the air out of the tires?"
I am that little boy saying, "Why don't you just let the air out of your economic expectations?"
The advanced economies cannot be as strong as they once were due to lower labor share. Economists say the US is still in a recession, only because they compare the now to the past. Well, economists are living in the past. The past is gone. There is a new lower reality for the US economy. Once you let the air out of your macro-expectations, you will see the economy is moving normally in this new reality. You will see that the truck can just drive out from beneath the bridge, even though damaged and in need of repair.
.. And the answer from an expert was:
Delete"you are a derp: do not you see that the truck has problems at the top and definitely not at the bottom?"
BIS has just published a study showing that financial crises can be predicted with ~70% accuracy simply by looking at a threshold of total credit growth in excess of gdp growth over successive years.
ReplyDeletehttps://www.bis.org/publ/qtrpdf/r_qt1306f.pdf
No models , just observation and rational deduction.
So yes , we should trust certain types of economists , like those who warned us in advance about the credit bubble , discussed in your prior post.
However , we should certainly distrust all those economists who continue to trivialize those predictions , even in the face of accumulating reams of evidence that can only make you wonder how any economist , anywhere , could have failed to see the growing debt bubble and the risks it posed , many of whom seem quite eager to ramp up the credit engine once again.
don't give Steve Keen's secret away. Otherwise Noah may have to stop complaining about his lack of a mathematical model and be forced to start looking at alien concepts like "credit" or "private debt".
Deletedon't give Steve Keen's secret away. Otherwise Noah may have to stop complaining about his lack of a mathematical model and be forced to start looking at alien concepts like "credit" or "private debt".
DeleteAnd by "looking at", you mean "repeating the words, without having any idea of how they work", right? ;-)
You do realize that Steve Keen's argument, and the Post Keynesians in general, is that neoclassicals have the way banks function wrong, and that the Loanable Funds theory is empirically false. It's not like Keen or Minsky were the first to come up with Endogenous Money (hey look it up, you might learn an important thing about Post Keynesians!). Joseph Schumpeter and Irving Fischer, for example, both wrote about how bank credit is endogenous.
DeleteYou might want to actually understand someone else's arguments before you write a hit piece against them.
Goose and gander, Kain. Goose and gander.
DeleteTo bad Noah is one of those smart idiots! Last time I checked, mathematics is based on logic. Also, as he mentioned, a lot of what is talked about by all sides concerning macroeconomics is complete BS. I my humble opinion, microeconomics is the only true field of economics and a lot of what is studied is very much based first on logic and then is confirmed (though in reality, because micro is based primarily on the various incentive stuctures humans face in 'markets', anything can happen).
ReplyDelete????
DeleteWhat is your point exactly? I have no idea what you are trying to say in this rant.
Did Noah even mention mathematics? I did a quick scan and you are the first to mention it. And what on earth do you mean by a "true" field of research?
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Delete"Unfortunately, the part about the Austrian guy was edited for length."
ReplyDeleteThat seems fair, since the Austrian guy was edited for height. . . .
Isn't writing for a popular non-econ audience fun?
ReplyDeleteShould we trust economists?
ReplyDeleteUmm. Isn't this a derpy question? I mean, which economists?
"Should we watch baseball players?"
Has the author ever read any books by the austrian school?
ReplyDeleteYes.
DeleteAs always, Noah only presents an outdated, caricature version of the Austrian school. Modern Austrians such as Larry White, George Selgin, and Mario Rizzo have much more nuanced views on monetary policy, which certainly don't boil down to "let the depression run its course."
ReplyDeletehttp://www.freebanking.org/2013/06/04/monetary-policy-is-there-a-prudent-second-best/
Would it be so bad to accurately describe the views of Austrians who occupy relatively prominent positions in academia (GMU, NYU, UGA) rather than focus solely on those of Joe Salerno (Pace University)?
I just wonder if there IS such a thing as the Austrian school. Whenever, you try to tie it down, it suddenly becomes very slippery. John Quiggin tried, but the result was only civil war.
Deletehttp://johnquiggin.com/2009/05/03/austrian-business-cycle-theory/
Simply put, there are two wings today: Auburn (mises.org) and GMU (coordinationproblem.org, freebanking.org). GMU is more reasonable, imo (most of Auburn is against fractional reserve banking, which is silly).
DeleteHistorically, there have been other branches (Lachmann), but I think it's best to focus on the work of living Austrians rather than those who have passed.
To clarify, what I mean is that there economists who claim to belong to the Austrian school, but I think that maybe it is just a convenient label for anti-governmental cranks who reject some part or other of the neo-classical framework. Maybe they really have nothing more in common.
DeleteActually, I see much more overlap than disagreement among Austrian economists and the mainstream Freshwater/Saltwater schools.
DeleteFor example, the mainstream says that competitive equilibria generally lead to Pareto efficient resource allocation. http://en.wikipedia.org/wiki/Fundamental_theorems_of_welfare_economics
Austrians believe the same thing. If the subjective theory of value (also accepted by the mainstream) is true, then all voluntary exchanges are mutually beneficial, and we should leave most resource allocation to the free market.
The difference is that Austrians take the subjective theory of value to its logical ends, while the mainstream does not. For example, Austrians ask: why must govt have a near monopoly on the provision of schooling? Why can't health care operate as a regular business w/o so much needless govt interference? Why do we need a central bank with a monopoly on base money? (And why do mainstream economists assume the necessity of a central bank? I thought such apriorism was the type of thing you scolded Austrians over).
It may very well be the case there are "market failures" in these areas, and govt is the only capable steward. But these questions are still worth pursuing, and Austrians seem to be the only ones who are asking them.
"maybe it is just a convenient label for anti-governmental cranks"
Certainly, most Austrians oppose central planning for economic reasons, but that hardly makes them "anti-govt" (excepting Rothbard, who was an anarchist). Most Austrians believe in limiting, not abolishing, govt authority.
"Maybe they really have nothing more in common."
Nearly all Austrians are strongly influenced by a core set of concepts: Mengerian subjectivism, Hayek's work on distributed knowledge and the functions of prices, Mises' action axiom, and Kirznerian entrepreneurship. Other ideas, such as capital heterogeneity, the non-neutrality of money, and the time preference theory of interest influence most of them to various degrees.
None of this is dogma, of course, but simply a description of the views held by most Austrians.
And Noah criticized Austrians for "[believing] that we only need logic to understand how the economy works"
DeleteThat charge cuts both ways--the mainstream is just as reliant on pure logic for its explanations of "how the economy works." Show me a modern, real world Giffen good. Did the Diamond-Dybvig model emerge from rigorous empirical analysis? How do we know that monetary policy is ineffective at the zero lower bound?
Kettle, meet pot.
http://blogs.wsj.com/informedreader/2007/07/16/economists-hunt-for-a-giffen-good-might-have-ended/
DeleteYes, I've seen that study before. Forgive my snideness, but the main lesson seems to be that if you define a concept tortuously enough and jigger the conditions just so, you can kinda-sorta see behavior that matches a textbook definition but yields no useful policy implications.
DeleteAll this to explain the result that raising the effective incomes of poor peasants might cause them to choose to add a bit more protein to their diet? Perhaps I'm missing something, but I remain unimpressed.
You are missing the point totally. A giffen good is not a good where the substitution effect works abnormally, but a good where the income effect is more powerful than the substitution effect.
DeleteBut why did you bring it up, it is a completely unimportant side issue!
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ReplyDeleteIsn't the real problem the lack of a common definition of what "good" and "bad" mean in economics. If people make any sort of judgements at all, and ultimately people giving advice are filtering the information they give based on value judgements, then a sense of "good" and "bad" matters. If you read the completely loony Casey Mulligan, this is consistantly the problem. His solution to a lack of jobs is cut unemployment benefits. This would be perfectly rational if your ONLY value was to make markets clear faster, and you didn't actually care about people's lives.
ReplyDeleteEconomics isn't hard science, that much is obvious. It has a scientific component, but it also is heavily involved with human desire and so it can't help but grapple with normative questions. And that isn't science, it's politics. Or culture, or religion or whatever you want to call it.
DeleteBut, "should we trust economists?" Well that depends, and one of the first questions we should ask of an economist is, "who's interests do you have at heart?"
I found the column in The Atlantic to be more "sterile" in voice than we find in regular blog posts. I double checked the author because I wouldn't have guessed it was NS. Perhaps it was the editing. #complainingaboutfreeicecream
ReplyDeleteIs the girl in the picture checking out a certified used car thanks to Akerlof's Market for Lemons showing car dealers how to get more money from resale and thus more from first sales? Economists don't know everything but they know somethings. Reagan's trust, then verify, is good for buying a car or checking spreadsheets.
Well, you could call in the village midwife/herbalist, who has a better track record than any licensed doctor available at the time. But that would demean the prince's status....
ReplyDeleteActually, two learned doctors versed in Galen's Theory of Humours would likely arrive at the same diagnosis, treat appropriately, make regretful noises when it didn't work and then do it again. One such doctor very nearly did for the whole French royal family (a famously tough lot) in the C17.
Tell me again why the President has a Council of Economic Advisors? And why we pay economists when village healers have better records?
Noah: "The economic situation we find ourselves in today is a little bit like the example above...
ReplyDeleteIf economists ever do succeed in developing formal models that work better, then we'll be able to go to them with questions (like "Should the Fed print more money?") and simply trust their expert advice. But until that day, all economists can really give us is intuition, suggestions, and ideas... "
Jesus H. Christ, Noah - perhaps a third way is to look at the people who've been right, like Krugman. In addition, you behead (actually, hang, draw and quarter, or break on the wheel) people who get caught lying, like - oh, seemingly everybody at Harvard, and anybody at Chicago who's egotistical enough not to keep their heads down.
Why do you persist in this stupidity?
Barry, there are more things in heaven and earth than are dreamt of in your philosophy.
DeleteThe point at which indignation begins to cut against ones position arrives quicker than expected.
DeleteNoah, I apologize for being harsh, but a Shakespeare quote is both not an answer and not a justification. We actually have histories to rely on. If one doctor's potions were strongly associated with recovery, and another with death, the choice is obvious, even given the absence of theory and controlled trials.
DeleteNoah - I just read this, and it bears an uncarry resemblence to what you are saying. Were you influenced?
ReplyDeletehttp://davidbrin.blogspot.de/2013/05/consensus-science-and-more-science.html
I had not read that, but David Brin is one of my favorite authors, and I used to be on his mailing list as a teenager long before blogs were invented...so I'd say there's a fair chance I was, yeah... ;-)
DeleteLove the analogy, but I think it's a litle harsh on Keynesianism. In my view, Democrats & Republicans both know it works, they just use it for different reasons. Democrats always want the economy to go faster, because their core constituents always need more money. Republicans think it should only be used when there is a Republican President, to prove to everyone that they know how to run the economy.
ReplyDeleteOT, but fits better here than most places: Noah had a good post recently (?) about why economics has limited predictive value. My take is that it is almost as complicated as Ecology or Neurology (sheer number of connected nodes), but that unlike either of those, economic agents (people) are constantly trying to game the system they are working in - which changes the "rules" of the system.
To be fair, ecology has the same problem, but evolution runs slow, relative to human experience.
-elkern
Personally, i started to trust US economists much less than other academics after reading this excuse for the overconsumption bubble:
ReplyDeletehttp://scholar.google.de/scholar?hl=de&q=Hausmann+Sturzenegger+dark+matter&btnG=&lr=
First off, I generally enjoy reading your posts, Noah, just for the record, but I found this one sharper, clearer and darn it, just more entertaining than usual. It took me a couple re-reads before I worked out why. I think maybe you should use that photo a lot more in future. There's just something about an auto mechanic pointing at an engine that makes everything around it better.
ReplyDelete