Locklin on science

In which I have a laugh at economists: whistling at the abyss

Posted in econo-blasphemy, history, philosophy by Scott Locklin on July 31, 2011

I never studied economics. Don’t pretend to understand it. Don’t want to understand it any more than I want to understand Voodoo theology or radical feminism: it seems to me a pernicious form of anti-knowledge. Some of it makes a little bit of sense (maybe voodoo theology does too: dunno), but looking at it like a visitor from another planet (MFM Osborne or Joe McCauley are reasonable approximations, being from planet Physics), it doesn’t look much different from schools of medieval medicine, punctuated by occasional linear regression models. There aren’t generally falsifiable models, and when there are, people seem awfully reluctant to test them. Economic schools seem to grow up around charismatic prophet types, and the arguments for their validity seemed to be along the lines of “Rabbi X said Y, and lo, he was correct.” I think everyone on the internet has seen the Hayek vs Keynes rap, which is about as good an introduction as one could hope for to this sort of thing. I think the intellectual content of a posing rap battle is about as much as one can hope for in this sort of argument as well; ultimately, it’s just a dong wagging contest.

Hayek’s views on economics are, I think (and someone please correct me if this is a misapprehension) closer to the conventional thinking in the 1920s. Keynes views seem to be something approaching the conventional wisdom in the 21st century. Austrian views are “conservative” and Keynes is “liberal” (in the American sense anyhow). This is a broad generalization; most modern Keynesians have some Austrian ideas, and vice-versa, but ultimately, the debate between these guys boils down conflict between these two ideas:

  1. Expansion of debt is inevitably followed by economic recession (Austrian Business Cycle Theory).
  2. Economic recession is ameliorated by deficit spending (Keynesian idea).

The historical battleground they fight their idea on is the Great Depression and WW-2; the events which formed the modern world. The modern Keynesian view is that “Austrian” ideas made the great depression worse. The government, according to them, should have engaged in lots of deficit spending, and that would have magically made things all better. After all, things only got better after WW-2, when we engaged in lots of deficit spending, right? I’m certain the Keynesians have all manner of regression models with which to “prove” this idea, but ultimately, they’re only using one set of data points, and only a couple of variables. This school of thought seems to have won the modern day; we’re at WW-2 levels of deficit spending now. Of course, we’re not spending the money on the same things at all. It’s not clear to me how the Austrians account for the financial success of the United States (and Japan and Germany and the Soviet Union) in the post WW-2 era, but it seems likely to be an equally specious shaggy dog story.

I don’t know if any school of thought argues that the war itself had something to do with things, but I’m going to argue exactly that; call it the Heraclitus school of economics. Seems like an obvious thing to me. I can’t “prove” it using regression models, or by being a college professor or whatever nebulous vril economists use to “prove” their points, but it seems as ultimately convincing as anything else. My toy model does something few economic ideas since Pareto has done: it takes into account the fact that we’re talking about large groups of actual human beings, rather than utility optimizing economic robots.

To reiterate: in Krugmanistan, the prevailing idea seems to be that printing a lot more money will magically make things all better, because dropping lots of bombs on Germany and Japan seemed to be good for the American economy in WW-2. To a Keynesian economist, it was the magic of the printing press. Not the fact that the US developed new technologies, invested in vast new industrial infrastructure, mobilized its entire population, brainwashed its civilians into working double shifts for small amounts of money (and buying lots of government debt), brainwashed its military aged men into fighting a war in distant countries, displaced vast segments of the population to work in factories; hell, we even put women to work in factories. All those other countries did the same thing. Car makers and other manufacturers built giant ships, aircraft which couldn’t have been built before, new kinds of vehicles, tanks, atomic bombs, jets; radio makers made huge strides in electronics, computers and other electronic techologies: and all these companies retained the ability to produce these new technologies after the war was over. Entirely new forms of economic output were possible after the war which weren’t possible before. To name five obvious ones: Airlines, Computers, Atomic power, Highway travel, Rocketry. These new technologies and manufacturing capabilities became new industries which provided people with jobs and further economic output creating things which were figments of people’s imaginations a decade previous. The United States (and all those other countries) made a hail Mary investment in their infrastructure, and transformed their people into fanatical worker bees. The amateur businessman could look at this as an investment in the country; an investment in the employees and the infrastructure. By accident, it was a reasonably intelligent investment for future growth. And after that, the economy did a lot better. Economists want you to believe it had something to do with printing money or business cycles.

I don’t buy the arguments of economists. I think the reason things changed for the better after WW-2 is people were transformed into something they weren’t before, and the national infrastructure was transformed into something a lot more capable than it was before. I do think availability of money is important (duh), and deflation is generally worse than inflation, but if you asked me why WW-2 was followed by a period of prosperity in the US, the above is my reason: nothing to do the magical printing of money or lack therof. Single factor regression models rarely work on systems more complicated than a couple of diodes: why should I be impressed by spurious regression on ancient data?

Another thing economists don’t seem to notice much: the nature of the population. Taking only one variable: mean age seems important to me. Old people don’t work or innovate as much as young people. Old people also have more money than young people, and they do things like invest this money in hopes of making rent on it. Basically, finance is the loaning of old people money to young people, so young people can do useful things with the money, like start businesses. Populations in all industrialized countries are getting older. This means there is a surplus of old people money seeking young people to invest in. This is why interest rates are low, despite all the printing of money going on everywhere. If there were more young people, we’d be in a completely different pickle. This single fact pretty much makes rubbish of any statistical model based on historical data: we’ve reached a fundamental change point which is unprecedented in economic history. There are no historical regimes in which there were lots of old people money chasing young people to invest in. The idea of fitting an economic model to something in the 1930s and expect it to be relevant today …. I might as well trade a model based on 1930s IBM stock prices.

Me? I’m not an economist, or a prophet. I work for a living. I don’t have any answers, and I don’t have any bright ideas as to how to fix the mess we’re in. I’m pretty sure nobody else does either; certainly no politicians alive today are saying anything remotely sensible -it’s all magical thinking, and genuflections before long dead sacred idols. Since I’m of a scientific bent, I wouldn’t mind running some experiments. It seems to me the country is large enough this sort of thing is possible. Hopefully we don’t have one forced on us.

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  1. Martin said, on July 31, 2011 at 9:48 pm

    Considering you’ve seen the Keynes-Hayek rap battle, this quote by Keynes shouldn’t come as a surprise to you:

    “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.”

    This post is a beautiful illustration of this observation made by Keynes.

    You repeat the ideas of living and dead economists and profess to be blissfully unaware of it.

    One point though: for someone who’s unaware of what economists do and say, you do often say “Economists this, Economists that”.

    • Scott Locklin said, on July 31, 2011 at 9:52 pm

      Yes, I remember this quote; a good one. Hayek has some juicy ones as well.

  2. scott said, on July 31, 2011 at 9:50 pm

    The Austrian school is less about not believing in Keynesian models and more about not believing in economic models in general. In Hayek’s nobel speech he speaks of how little we know about what goes on in a market system. http://nobelprize.org/nobel_prizes/economics/laureates/1974/hayek-lecture.html

    On your other points about what caused the growth after WWII. Economists have noted all of them, lots of times.

    My favourite economists talk about trial and error a lot. Vernon Smith, Tim Harford, Elinor Ostrom.

    Robert Higgs has nice explanations of what happened after WWII.

    • Scott Locklin said, on July 31, 2011 at 9:54 pm

      Perhaps I’m an Austrian after all, in that case. One thing I do know: the rap battle is going on in Congress now, and it seems tremendously silly to me.

      BTW, I’d be very interested in pointers (preferably with links, though book references are good too, so long as they’re specific enough) to economists who come equipped with enough common sense to notice that “different people sitting in different kinds of machinery produce different kinds of economies.” The only people I’ve ever read who said such manifestly obvious things worked in finance. Stole the “old people” thing directly from Spengler at Asia Times.

      • scott said, on July 31, 2011 at 11:00 pm

        Yeah, its revolting. Oh well at least it is just a TV show… wait, no.

      • Martin said, on August 1, 2011 at 9:05 am

        For microeconomics/price theory, try David D. Friedman’s text “Intermediate Price Theory”, it’s free online (http://www.daviddfriedman.com/). Or try Deirdre McCloskey’s Price theory and its applications, also free on her website (http://www.deirdremccloskey.com/). The first has a physics background like yourself and is teaching law and economics without a background in either and the second is an economist from the “good chicago school” with very strong neoclassical foundations now writing on the relationship between ideas and our prosperity.

        In case you’re planning to dive straight into Austrian Economics, I’d suggest you first read this: http://econfaculty.gmu.edu/bcaplan/whyaust.htm, it is an essay by someone who started out as an “Austrian Economist” did a phd in econ and wrote about the differences between the two. Conclusion in short: there is no ‘austrian’ economics, there’s only good and bad economics, the difference between the neoclassical school (mainstream) and austrian econ are overstated.

        That being said this is a short primer on the school: http://www.adamsmith.org/publications/economy/austrian-economics-%11-a-primer/

        I’d suggest though you not do that, as most people who self-describe themselves as Austrian economists on the internet are cultists and on almost every topic you will see them repeating and referring to the words of Rothbard and Mises, mostly Rothbard as that is the easier read. “it’s all magical thinking, and genuflections before long dead sacred idols.”, this is a pretty apt description of most “Austrians” encountered on the internet.

        There is one additional point that I’d like to address though:

        1.To reiterate: in Krugmanistan, the prevailing idea seems to be that printing a lot more money will magically make things all better.

        The printing money is a stereotype. The problem in a crisis (in short) is, that people want to hold something safe as a hedge against uncertainty. Cash and high quality safe assets will generally do the trick. There however have to be a sufficient number of those to satisfy that demand. Supply has to respond, otherwise there will be an excess demand and this will result in an excess supply of goods. As inventory piles up and nobody is buying, people will have to be laid off. This process is self-enforcing. The ‘simple’ solution to this is to have supply respond and satisfy that demand, so that there remains enough income to buy that excess supply of goods.

        It this doesn’t happen, there is a drop in nominal income (NGDP), declining inflation/deflation and this will have real effects (impact on RGDP).

        In terms of an equation that is probably familiar to you:

        MV = Py, this means stabilizing MV. Modern day Austrians, Monetarists and Keynesians all agree on that point, the question is how to do that. Do we use monetary or fiscal policy? Keynes wrote about this in – I believe in his treatise on money and the tract on monetary reform – and the reason to use fiscal policy, is that monetary policy is (politically) constrained. It’s a last ditch effort. Hayek mentioned this in his “Prices and Production”, however did not elaborate on this point – keeping MV constant – further and regretted this later on. Monetarists, ever since Friedman and Schwartz study have known that the depression was caused by a federal reserve keeping money to tight.

        Economists do not argue that the printing press made things magically better, it made the better things possible. If this event had not taken place, in 1945 there would have been different or the same industries, but nobody is denying that those industries represented real wealth due to investment.

        I hope this clears it a bit up?

        • Scott Locklin said, on August 1, 2011 at 9:29 am

          Hey Martin: thanks for the detailed reply. I wasn’t really looking for a full education in economics. I mean, I used to live with a feminist voodoo priestess; there’s only so much I can take! I was more looking for fellows who talk about the effects of actual human populations in actual capital infrastructure, rather than treating the lot as elementary particles, and calling infrastructure something other than what it actually is.

          I don’t think Monetarists really *know* that the depression was caused by keeping money too tight. That’s the kind of thinking I’m railing against here. I think they have agreed among themselves that this is the case, but I don’t think they *know* anything. I do agree with economists that deflation in a currency is a very bad thing, and in fact, I give them a lot of credit for making the wacky system we have work for almost my entire lifetime. But as a financial dork, I also think volatility is bad. One of the things which was completely obvious from reading the primary sources: FDR failed to revive the economy in large part because he was doing a lot of bonkers things which were freaking investors out. Wrote about it a year and a half ago here: http://scottlocklin.wordpress.com/2010/02/11/to-learn-about-the-future-study-the-past/

          • Martin said, on August 1, 2011 at 12:10 pm

            “I was more looking for fellows who talk about the effects of actual human populations in actual capital infrastructure, rather than treating the lot as elementary particles, and calling infrastructure something other than what it actually is.”

            The way I understand it, is that you want to read stuff that is best categorized as a mix of economic history and theory? If this is the case, I think this might interest you then: http://www.nytimes.com/2011/02/13/books/review/Silver-t.html?_r=1 (Triumph of the City by Edward Glaeser) and I think that Deirdre McCloskey might be of interest to you too then. What those writers do, that work in that field, is apply economic theory to facts of history and try to give an interesting narrative why the thinks you mentioned came to be and what they caused. I also believe that some economists in the ‘Austrian’ tradition have written some interesting books on those topics, the “Invisible Hook” by Leeson comes to mind: http://www.amazon.com/Invisible-Hook-Hidden-Economics-Pirates/dp/0691137471. I haven’t read that one, but it had good reviews.

            “I think they have agreed among themselves that this is the case, but I don’t think they *know* anything.”

            This is what I meant with “know” as well. They do have a very persuasive account of how they know this, through the work of Friedman and Schwartz.

            “Wrote about it a year and a half ago here: http://scottlocklin.wordpress.com/2010/02/11/to-learn-about-the-future-study-the-past/

            It’s a good piece: the similarities are certainly there. Not too sure about the FDR claim. I won’t defend him 100%, but I do think that expansionary policy did work. It’s not just that the economy seemed to recover, but also when it ended in ’37, the economy fell back.

            “But as a financial dork, I also think volatility is bad”

            The question though is: how bad?

            Keynesians argue that the drop investment causing the depression, is due to a sudden reversal of confidence. The question then is how bad is the additional uncertainty in undoing the effects (drop in demand) of the first bit of uncertainty? It cannot have been self-defeating, as the economy expanded. The only criticism I have therefore is that he could have done better, but the question then is what were the available alternatives?

            • Scott Locklin said, on August 1, 2011 at 8:36 pm

              Thanks Martin: that’s something I can sink my teeth into. I’m not so interested in the theory (all the schools are evidently mixed up in my head), as in falsifiable theories. Ideally, the geniuses who make up the common wisdom should put all their data in a spreadsheet so people can check their work. Don’t think that will ever happen. Theoretically nobody else does this either, but almost nobody else expects us to trust them and run national policy on their findings either.

              I mention the volatility thing in part from my own experiences, and in part from reading the old 1930s London Times Imperial Trade Supplement. The frusty old dudes thought it was all volatility. One of the weird takeaways I got from reading the primary sources: Hoover was already doing everything they give FDR credit for in “solving” the Depression, and government spending was very high even in the 1920s.

            • wolfwalker said, on August 3, 2011 at 10:10 pm

              Martin: “Not too sure about the FDR claim. I won’t defend him 100%, but I do think that expansionary policy did work. It’s not just that the economy seemed to recover, but also when it ended in ’37, the economy fell back.”

              Did work? Did you mean to type “didn’t work?” because that’s what it looks like to me. As I understand it, a basic tenet of Keynes’s theory was that in bad times, the government could jump-start the economy with a short burst of focused spending, and if the government ran a deficit during that period it didn’t matter. After the economy was running on its own again, the government spending would be drawn down, and revenue would be redirected to paying off the accumulated debt.

              But in 1933-37, that didn’t work. Oh, Roosevelt’s programs boosted employment all right, in accordance with the first half of the Keynesian program, but the second half failed completely. The jobs, the economic activity didn’t last. When the government throttled back on spending, the economy plunged right back into depression. It took a much greater burst of spending, directed toward different kinds of jobs and backed by the gargantuan country-wide war effort, to end the Depression. Why does anyone still think that Keynesianism worked during the Depression?

              • herdofcaribou said, on August 30, 2011 at 5:38 pm

                Wait what you just said shows Keynesian prescriptions did work.

                Government spends some: Employment goes up some.

                Government stops spending: Employment goes down.

                Government spends a lot (war): Employment goes up a lot, leading to a great economic boom period for the US.

                Yeah of course there are other factors then just the spending, but WW2 gave the political cover to have enough government spending to get the US out of the depression. Before that the political cover wasn’t there. So same principle different magnitude.

  3. Rod Carvalho said, on July 31, 2011 at 9:55 pm

    Economists simply don’t know what science means. I am quite disgusted with all of this rubbish. I am more and more of the opinion that Keynes is a scientific charlatan, and his followers not even that.

    – Oskar Morgenstern (1942)

    • Scott Locklin said, on July 31, 2011 at 10:58 pm

      Von Neumann collaborators FTW.

  4. John Mount said, on July 31, 2011 at 10:09 pm

    Most macroeconomic theory comes down to attempts to fold your laundry by rapidly varying the setting on your thermostat. Both are parts of your house, but beyond that the relation is weak.

    • Scott Locklin said, on July 31, 2011 at 11:15 pm

      God help us all when they discover Bayesian statistics.

      I was googling around on Samuelson at one point, and was amused to note how impressed people were with his thermodynamic ideas. It was amusing, as my grad school roomie Texas Joe and I came up with a similar idea when we were drunk and trying to think of ways to rape the stock markets. We came to our senses when the beer wore off. Economists; not so much.
      Three other fun facts about Samuelson: he didn’t believe in Kelly betting, he thought the Soviet Union had a more efficient economy than the West because of all its economic planning, and would ultimately bury us, and he was a radical proponent of Ricardo’s law (though he admittedly had a near death conversion), which is why everything is made in China now.
      Why does anyone listen to this dead asshole? Bueller? Anybody?

      • wburzyns said, on August 1, 2011 at 9:07 am

        “(…) he was a radical proponent of Ricardo’s law (though he admittedly had a near death conversion)”

        That’s funny because “Stanislaw Ulam once challenged Samuelson to name one theory in all of the social sciences which is both true and nontrivial. Several years later, Samuelson responded with David Ricardo’s theory of comparative advantage: That it is logically true need not be argued before a mathematician; that is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.”
        (https://secure.wikimedia.org/wikipedia/en/wiki/Paul_Samuelson#Miscellaneous)

        So it looks like Ulam’s question is still unanswered :)

        • Scott Locklin said, on August 1, 2011 at 9:31 am

          In fact, that’s how I first heard of Ricardo’s law. Ulam is one of those under appreciated guys: I used to use his, Fermi and Pasta’s model to calibrate my nonlinear thingamajiggies.

  5. Rod Carvalho said, on August 1, 2011 at 1:01 am

    To be fair, there are some fields in Economics that are very interesting and non-voodoo: Game Theory, Mechanism Design, Auction Theory, Voting Theory, Market Design, Social Choice, etc. Of course, all of these fall under the Mathematical Economics category, and one could argue that they’re more Math than Economics…

    • Scott Locklin said, on August 1, 2011 at 1:11 am

      Of course; those are wonderful fields. Even plain old microecon has some interesting and useful things to talk about. Those people aren’t telling anybody how to run their economies either. It’s these great, big, ideological, power-grabbing bozos I have issues with.

      • matthew pearce said, on August 1, 2011 at 8:09 pm

        Reading this post while procrastinating from a text on Stated Choice Methods, I was going to put a word in for micro. I see Rod’s already there.

        On macro: please put the boot in. One thing to say about it is that it is in large part a demand led exercise. There is a demand for talking heads, witch doctors and other peddlars of mischief.

  6. John said, on August 1, 2011 at 2:34 am

    “Old people don’t work or innovate as much as young people.”

    Whoa, if that isn’t a stereotype foisted on us by the US media ! You might want to look at recent acquisitions and startups and take a look at the ages of some of these people involved; a lot of them are over 60 and beyond. I used to believe your assertion but when I was in my early 30′s I ran into too many entrepreneurs, scientists and engineers who were in their late 60′s who ran rings around my age group.

    • Scott Locklin said, on August 1, 2011 at 2:40 am

      I won’t argue with you about innovative 60 year olds starting businesses; Ray Kroc was almost 60 when he made his big move. However, statistically speaking: more 60 year olds are retired and not doing anything than 30 year olds. As such, aging populations change the nature of the economy in a deep way. People talk about this in some broad accounting terms, like, “how are we gonna pay for it?” But they don’t talk about the fact that the elementary particles which make up economies are different in this situation.

      • John Flanagan said, on August 1, 2011 at 6:21 pm

        From a certain perspective America (or anywhere else really) could solve its aging population problem merely by slaughtering the old people instead of waiting for them to keel over on their own. Quite apart from changing the calculus of old people money versus new people money, it would also free up the gargantuan resources tied up in fogey maintenance and warehousing.

        Keeping useless people alive is a luxury, not a need. It is a luxury that the modern mindset sees as essential and necessary out of compassion and humanity. But nevertheless it is still a luxury, and someday it may become one that people choose to stop paying for.

        • Scott Locklin said, on August 2, 2011 at 12:53 am

          The movie they made of this in the 60s was hilarious: http://en.wikipedia.org/wiki/Wild_in_the_Streets

          • John Flanagan said, on August 2, 2011 at 9:11 pm

            Hey, if we’re gonna go completely over the top on this, there’s no human problem that killing ABSOLUTELY EVERY HUMAN wouldn’t solve. If every human being simultaneously keeled over dead, I’m quite sure that the world would recover, and non-human life would go on. Even the subsequent meltdown and loss-of-containment of every operating nuclear reactor would only be a mess for what, a million years at most? That’s an eyeblink on evolutionary timescales. The earth abides.

            It only gets nasty if you chicken out and merely kill ALMOST everybody. You’d only have to miss maybe a couple thousand in a few concentrated, isolated pockets, and whaddya know, in barely a couple thousand years we could be right back where we started, only with a significantly more trashed planet.

            Haha, I suppose that’s a metaphor for cancer, in a sense. We’ve already metastasized, the odds of relapse are pretty high even if Earth does manage to put us into remission.

        • Petro. said, on August 2, 2011 at 1:50 pm

          I know some of those old people.

          You wouldn’t stand a fucking chance. They may not be as light on their feet as they once were, but they understand they get one shot, so they don’t miss.

          Don’t fuck with old guys, they have no ego, they won’t beat you down–they’ll just kill you and go back to boche.

          • Scott Locklin said, on August 3, 2011 at 2:34 am

            I won’t disagree with you here, but I know John pretty well (you might remember him from nightclub days): he was just making a little economic joke.

            • John Flanagan said, on August 3, 2011 at 4:38 am

              Furthermore, if things ever get so dire that people really did start considering foregoing the luxury of fogey warehousing, bravery comes in a lot of forms. How many grandparents would willingly go without food in order to feed their grandchildren? That kind of thing happened all the time under severe rationing regimes during WWII, for instance.

  7. Chris-certified economist said, on August 1, 2011 at 5:39 am

    The problem is that they don’t teach Keynes,Hayek or Marx at Uni they only teach Neoclassical economic theory.If you have the balls look it up it’s like staring into the face of madness……
    For example the main assumptions :

    1.People have rational preferences among outcomes that can be identified and associated with a value.
    2.Individuals maximize utility and firms maximize profits.
    3.People act independently on the basis of full and relevant information

    • Scott Locklin said, on August 1, 2011 at 5:58 am

      I always figured that was a sort of collision between Keynes and some other guys who came later. I picked some of this stuff up from reading the funny papers (mostly econophysics guys like McCauley complaining about economics), and at one point, I checked out the CFA bible: it was a lot like an H.P. Lovecraft novel.

      “Ultimate horror often paralyses memory in a merciful way.” -HPL

      • Chris-certified economist said, on August 1, 2011 at 6:19 am

        Hmm so neoclassical economists are the apostles of Cthulhu? Now it makes sense…

  8. [...] Where economic growth comes from and why interest rates are so low.  (Locklin on Science) [...]

  9. deniz said, on August 1, 2011 at 6:33 pm

    Some of your comments about economics are on the money. There is a reason why it’s called the dismal science. But it’s kind of silly to claim that you don’t read economists then ascribe all sorts of ideas to them (like all economists that think people are utility maximizing robots working in static environments). Do you really think that no one has thought about issues like investment in infrastructure and demographics and their impact on economic growth? Of course things like mean age matter greatly, so do things like culture, history, politics, protection of property rights, the legal system, geography, social dynamics and a thousand other things. Of course, what works in one environment may not work in another, but do you really think that no one has thought about these issues before?

    Also, you seem to be confusing fiscal policy with monetary policy, and long-term growth with short term cyclical fluctuations. Having good infrastructure will explain why you are able to produce more, but won’t explain why suddenly you go from 3% unemployment to 20% with the same infrastructure in place. Things like “printing money” are meant to smooth out short-term fluctuations, it won’t explain why US had 50 yrs of prosperity after ww2. Long term growth depends on demographics, legal/political system in place, innovation, etc.

    • Scott Locklin said, on August 1, 2011 at 11:20 pm

      I’m sure I am confusing a lot of things together: I fully admit I’m as ignorant of economics as I am of radical feminism and voodoo theology. I plan on maintaining my stygian ignorance until someone points me to something worth looking at.

      Maybe people have thought these things through, but they certainly aren’t telling anybody about the results, and they are making policy prescriptions which have consequences for *everybody* while insisting that they (whoever “they” are) are some kind of authorities who know all the answers. I really don’t think they know anything which gives them this authority. The most famous economists seem to make predictions which are strongly anti-correlated with reality and what actually happens. One of the things I do for a living is make forecasts using fancy-pants statistics: I know what is involved in making a forecast, and when my forecasts should not be trusted. I don’t think economists know the difference. If they do, they’re not telling us this. I want error bars on my goddamned economic pronunciamentos if they expect me to buy or sell based on ‘em. Otherwise, I might as well use the Magic 8-ball.

      http://web.ics.purdue.edu/~ssanty/cgi-bin/eightball.cgi

      • deniz said, on August 3, 2011 at 2:02 pm

        Same is true in any social science where human behavior is studied. Take your field, quant finance (or worse econophysics) fo instance. >90% of the output is no better than ‘voodoo theology’. You have clowns like Sornette who thinks that somehow ideas from geophysics can be applied to the behavior of stock market, whose forecasts are worse than monkeys throwing darts on a board. Unfortunately serious economists (who make up the majority) who give nuanced arguments to complex issues do not get attention. It is people who tell simple stories that appeal to conventional wisdom that people will listen to. Economic relationships are complex and hard to study (http://market-ticker.denninger.net/uploads/2010/Jun/33655771-Economics-is-Hard.pdf) and people do not like hard complex things. And I do find it annoying (like the person in the link) that people who understand the subject at only a superficial level dismiss it outright. Take the issue of mean age. There number of papers on the subject. There are at least a dozen papers that study its impact on the stock market. It’s a complex problem, plagued with endogeneity issues. Just to give you an example, as countries get rich both birth rates go down and life expectancy increases. If a poor country with a lower mean age like Turkey grows faster, it’s not clear because it has more room to grow via input substitutions (e.g. using technology that’s already out there) . An economist will think about these issues and try to understand and disentangle different effects. He’ll try to model these relationships and come up with intelligent ways to empirically test them.

        • Scott Locklin said, on August 3, 2011 at 7:11 pm

          Well, the nice thing about quant finance is, the models can be tested out of sample: there’s plenty of data. The models also work better. Compare even some crappy model like Black-Scholes to, for example, the forecasts of Paul Samuelson: kind of hard not to notice that, even though B-S is BS, it works a lot better than macro. I also don’t see guys like Sornette (whose forecasts, last time I checked, were pretty good) being invoked in policy debates which effect everyone on Earth, wheras somehow gasbags like Krugman are regularly invoked in these matters.

          I’m hoping to be educated here: if there’s some *good* economics paper on what mean population age does to an economy (for example), link me. If it’s just speculative blather (like what Martin linked above): I don’t care. I can do my own speculative blathering, and as far as I can tell: mine is just as good. Anyone can weave words together and wave regression models around.

          I know economics is hard. The point is, if economists don’t know enough to make accurate forecasts, or at least be honest when they can’t make accurate forecasts, they need to recuse themselves from policy decisions. Their power is undeserved, and the respect they’ve got in our society is unearned. I have nothing against boffins whiling away their hours studying hard problems: it’s when they’re trying to ruin my life I get annoyed at what they don’t know.

          • deniz said, on August 4, 2011 at 4:40 pm

            Most economics is not about forecasting but understanding complex relationships (see here: http://www.cato-unbound.org/2011/07/15/john-h-cochrane/in-defense-of-the-hedgehogs/). I have not read anything by Sornette in a long time. Last time I read him, he was making the following predictions: http://www.safehaven.com/author/37/didier-sornette.
            But I am surprised that you’d find econophysics appealing. Here is a field where they literally treat investors as particles :)

            “Compare even some crappy model like Black-Scholes to, for example, the forecasts of Paul Samuelson”
            Sorry but, it is statements like this that I find annoying. Scholes and Merton did their grad work in econ departments, BS was published in a mainstream economics journal with the help of Paul Samuelson (and Miller). Instead of focusing on some forecast Samuelson made, if you read about Samuelson or history of quant finance, you’ll find that Samuelson was behind every important idea in this field, anything from option pricing to portfolio allocation to risk management. You may want to look at his papers on warrant pricing from the early 60’s. He wrote papers on using brownian motion to model stock prices in the early 50’s. He was the one who discovered and published Bachelier’s work in the US. He is a giant in this field. And he had accomplished more by age 25 than Sornette could hope to accomplish if he cloned himself and lived to be 900 years old.
            I think you’d have more respect for economists if you read some of their more technical work. Even Krugman who has stopped being an economist and became a political hack, did very interesting and important work in understanding patterns of specialization and trade. If you are interested in history I think good place to start is history of economic thought Although somewhat old, a good book I’d recommend is “new ideas from dead economists”

            • Scott Locklin said, on August 4, 2011 at 6:37 pm

              Sornette’s insight is that people are not, in fact, elementary particles in a gas the way economists say they are: they’re more like grains in a weak lattice. People’s social networks are hugely important in their decision making, and herding is not only possible, it’s inevitable. He not only publishes hard predictions (aka X will happen by Y date); he encrypts them so there is no possibility of cheating; something no economist has had the stones to do: http://www.technologyreview.com/blog/arxiv/25269/ -I haven’t followed lately either, but his ideas are not to be so casually dismissed. They’re original, and very different from how economists think about things. He may very well be wrong: that’s why he makes testable predictions.
              Samuelson was certainly a giant in his field: but that’s sort of like saying Mussolini was a really great politician. I can’t think of anyone else more to blame for the loss of America’s manufacturing base, so even if he came up with the unified field theory, he’ll always be “the sack of shit who ruined my country’s economy.”

              • deniz said, on August 4, 2011 at 9:37 pm

                lol, I guess we each have our biases. You should do a post on Sornette, and the unique approach he takes to analyzing markets. I haven’t paid attention to that literature in ages, and who knows maybe I’ll change my mind ;)

                • Scott Locklin said, on August 4, 2011 at 9:44 pm

                  Did one about a year ago: http://scottlocklin.wordpress.com/2010/02/02/music-molecules-and-misanthropy-econophysics-part-1/

                  Had one brewing on his log periodic model (which is a consequence of thinking about economies as made up of dynamic social networks), but I got bogged down trying to get Tabu search working in R, and LaTeX working in WordPress. Maybe this will inspire me to revisit it. And maybe I’ll end up agreeing with you: it certainly looks like overfitting. I think there is a Bayesian/online learning kind of model you can fit to his log-periodic function which would work better than Tabu search, but if it works, I’m not telling anybody about it for the obvious reasons.

  10. Michael said, on August 1, 2011 at 6:39 pm

    Yeah… it’s clear you’ve never understood economics, because (i) your representation of the field is, simply, hopelessly wrong, and (ii) all of those factors you mention have been taken into account by economists.

    At a basic level, you missed – from Krugman – the whole debate about Obama’s initial stimulas, which was (i) it needs to focus on “investment” projects (infrastructure, mainly, but anything that has a great-than-zero ROI; dropping bombs has a zero ROI), and (ii) it needs to be big enough to forestall a contraction in the economy.

    The economic policy followed by the current administration is more neoclassical than Keynesian or New Keynesian. Austrian economics does not exist outside of the internet, pretty much.

    • Scott Locklin said, on August 1, 2011 at 10:40 pm

      I have never heard Krugman or Obama talking about actual investment projects they’d like to spend the dough on. Thus far, the money seems to have gone to banks, to pay people not to work and … am I missing anything? The Obama dollars did fill a few potholes on one street in my town, but that’s something which they could have done a decade ago if we weren’t paying for crap like “peace and justice committees” instead of filling potholes. I’ve heard some yammering about “Green” things, but those seem to be more along the lines of, “geez, I wish we had some magic pixie dust to make oil disappear,” and as such don’t have a great ROI. Krugman does talk an awful lot about printing money though. I don’t think I need to quote examples here.

      I won’t dispute you that I don’t know what I’m talking about when it comes to economics, but I don’t think economists do either, and you have presented no evidence to the contrary. Evidence would include unambiguous data which forecasts something out of sample.

  11. Tschafer said, on August 1, 2011 at 10:12 pm

    Left unanswered in all of these rebuttals; if economics is so much an exact science, why isn’t the economy recovering, and why can’t economists even seem to agree as regards whats wrong? Hell, economists can’t even agree on what caused the Great Depression, anf they’ve had over seventy years to work on that one.

    Scott L’s criticisms are a lot more on the money that a lot of you are willing to admit.

    • Scott Locklin said, on August 1, 2011 at 11:27 pm

      To be fair to the economists who have been managing things since 1982 or so, they did a decent job of keeping “inflation” down, despite all the cheap money floating around. The thing they didn’t mention: they really didn’t keep inflation down. It was simply exported into places where it doesn’t count to economists. One place inflation was exported was in housing prices, which made everyone who owned a house happy for a while. It made people shopping for houses miserable, and negatively influenced family formation, but they’re not a majority, so who cares, right? Another place it was exported: higher education prices. Made for lots of jobs among University administrators, administering all that newly minted cash into their pockets, and also created a lot of new professors in useless topics. Consigned a generation of young Americans into debt slavery for a worthless piece of paper, but they don’t vote, nor realize how useless their education is, even if they do. Another place it was exported: health care costs. I’m not sure how that happened, but it’s pretty obvious that the Medical Oligarchy made bank on all that cheap money. Cheap money definitely inflated the stock market: that much was obvious. Finally, I’m pretty sure some of the inflation was exported to other countries with less clever economists, like China. Pretty clever, but I’m not sure it happened on purpose. If it did, I’m not sure people would have voted for that if given the option to do so.

    • Matt said, on August 3, 2011 at 4:42 pm

      If you’re dying of emphysema, don’t blame medicine…blame yourself for being dismissing as incompetent, irrelevant, or outdated all of the doctors who told you to quit smoking while listening instead to the one who was not only happily lighting your cigarettes for you, but who now advises that since you can’t drag effectively off a regular cigarette anymore, you switch to unfiltered cigarettes.

      Makes about as much sense as blaming “economics” for the state of the economy.

      The folks with their hands on the tiller of the macroeconomy have consistently preferred flattering lies to uncomfortable truth, so flatterers were showered with attention and money and power. With such a large and remunerative market for lies, is anyone really surprised that there are a lot of liars hanging around?

      If there were that much money and power to be had by claiming the Earth was flat, geography would have the same credibility problem that economics does now.

      • Scott Locklin said, on August 3, 2011 at 7:15 pm

        This is one rebuttal I can certainly agree with. Many sciences end up corrupt when there is money and power on the line.
        The way I see it, professionals need to police their own ranks: something there is very little of in our modern age of brown nosing careerists. I’ve pretty much appointed myself as chief inquisitioner until someone else starts doing it.

  12. kkrv said, on August 2, 2011 at 2:13 am

    Harry Dent has done a lot of work and investing on the lines of your age hypothesis. In short, economies boom when there are lots of 40 year old men, being at their peak earning and spending years. He thinks we’re pretty much doomed by the current demographics.

  13. Jeff said, on August 2, 2011 at 3:41 am

    When you think of economics and what I has and hasn’t done, it’s easy to make the mistake of comparing it to other fields, e.g. Finance, accounting, etc. Economics is much
    more difficult because you can’t set up experiments and the data is very limited. Another isue with economics is that most of the the things we hear about are manufactured at the government level which automatically loses he innovation one might gainin the private sector. Another issue is not being able to fully associate economic policy and outcome because you can’t separate the effects from th central bank and from government. For example you could argue that the credit crisis stemmed from lack of government policies that were needed to monitor banks or separate credit agencies from the firms whom they monitored. My biggest peeve with economics has been the failure to properly measure success in the economy– GDP and inflation are all that we use, but is that what society really cares about? I don’t think so. We need “happiness” measures+. I know there has been some french research on how to do this.

    • Chris-certified economist said, on August 2, 2011 at 7:49 am

      Those limitations are true but what do they have to do with teaching ridiculous bullshit like neoclassical economics? When you find yourself digging a hole the first thing to do is to stop digging. Stop teaching neoclassical econ at uni level ,teach economic history and history of economic analysis.

    • Scott Locklin said, on August 2, 2011 at 7:55 am

      I won’t disagree with you here, however, them pesky economists are *making trouble.* They’re like witch doctors, except the government listens to them. Astronomers can’t do experiments and have limited data, but they do better than economists. It’s also no big deal when they’re wrong.

      I don’t know about hedonic indeces; a lot of it seems like happy squishy talk, though I generally agree with the idea that GDP doesn’t measure anything worth measuring. All things considered, I’d rather live in Italy, with German laws and bureacrats.

      Another thing economists ruin people’s lives with: somehow economists think economies exist in a vacuum, independent of culture and legal system. This was the theory behind the apocalypse our own wunderkind Larry Summers, and the disgusting grub he kept out of jail, Andrei Shleifer, visited upon Russia’s economy, while lining their pockets with the loot. I’m pretty sure they killed more Russians than Marxist economics did in the previous 20 years. This theory of people as interchangeable economic particles is obviously not true. Tatars don’t turn into Englishmen when you give them free markets.

  14. Jeff said, on August 2, 2011 at 3:44 am

    BTW. Long term economic grown is driven by population size and technology/education.

    • Scott Locklin said, on August 2, 2011 at 5:38 am

      It is only trivially true of population; and only if the population is of working age. Education: complete bullshit. Technology: yes, now go find me some interesting new technology likely to make our economy grow. There is no time limit, until you die, in which case, “time’s up!”

    • wolfwalker said, on August 4, 2011 at 1:08 am

      I disagree. Long term economic growth (if there is such a thing) is driven by the same things that can drive short-term economic growth:

      1) New markets for existing products and services
      2) New products and services for existing markets

  15. oss117 said, on August 18, 2011 at 1:36 pm

    So is Greece in worse than Germany because of *sensored* local culture?

  16. Krugman vs. Krugman | adsnarks said, on September 7, 2011 at 9:14 pm

    [...] is the science of explaining why what you predicted yesterday did not happen today. I agree with Locklin that fundamentally Economics cannot be a science, even a social science, because it fails to [...]

  17. Sarah said, on September 8, 2011 at 7:32 am

    I agree in general, but disagree in particular. Adam Smith, the father of economics, argued that our unplanned social order is far more complex and functional than anything we could reason out for ourselves, and many economists today still harbour and promote this type of theory. In other words, there are other economic schools of thought out there that align with your own (or at least do not totally contradict). Categorizing always produces reduction in true complexity, n’est ce pas? Enjoyed your post!

  18. isomorphismes said, on August 7, 2013 at 1:06 am

    Just to be specific you are talking about MACROeconomics. A couple simple insights from econ per se include:

    • opportunity cost: there are ALWAYS tradeoffs. Even if you learned both physics and economics at twice the speed of a normal person, by spending the time learning those two you didn’t learn something else. (eg, clojure)
    • crowding out: closely related, if you invest through the NSF then the tax money has to come from somewhere so something else went down (whatever whoever paid the tax would have done with it)
    • again, tradeoffs: there are ALWAYS tradeoffs. Even if you found a way to double the energy production efficiency you would still have to decide whether to simply lower the cost, or provide more of it (more likely a mixture of both)
    • incentives: if you make something easier that’s pulling out hte boundary condition. you should expect more of it (unless it wasn’t up at the boundary to begin with). Conversely if you make something harder you should expect less of it.

    Of course it gets much more complicated and veers into voodoo but those are a few worthwhile takeaways. Take them as far or not very far as you want, the danger or rewards are waiting for you.

  19. isomorphismes said, on August 7, 2013 at 1:26 am

    Also GDP = consumption(GDP − tax) + investment(interest rate) + government spending(tax) with

    ∂consumption/∂[arg]>0
    ∂investment/∂[arg]<0
    ρ(government spending,tax)>0

    is a good chunk of macro right there, it’s built up from accounting identities so not yet bringing in the Keynes/Hayek voodoo.


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