Put not your faith in labels: naming in the dismal science – guest post by Lorenzo

By skepticlawyer

[SL: A frequent criticism of economics is that the ‘dismal science’ is now too big for its boots: it makes claims in rhetorical language that would do credit to a theologian or philosopher, and often appears to step far outside its remit. This criticism is particularly acute when some large rhetorical claim turns out to be empirical bunk, allowing people who are hostile to free commerce and markets under law to stand back, point and giggle. That’s unfortunate, because markets under law really are great engines of prosperity, and to write off humanity’s greatest wealth creator because some economist thinks he’s chanelling Plato does great harm.

In this piece, regular commenter Lorenzo (his bloggy home is here) offers some more modest labelling and definitional suggestions for some common economic terms, but be warned — there’s something to offend everyone, from Keynesian to neo-classical to Austrian school. Enjoy.

Lorenzo’s piece is over the fold.]

Any time there is a serious economic downturn, mainstream economics drops in popular and intellectual esteem, even though mainstream economics generally does not pretend to have abolished the business cycle and it also explains why reliable, systematic prediction of future economic conditions is impossible.

However, serious economic downturns are almost invariably the result of bad policy, and economists and economics will be berated for failing to give successful advice. (Indeed, one view is that serious downturns can be manifestations of market predictions of bad policy.)

This loss of esteem is generally unfair about microeconomics. In the words of former head of the Department of Prime Minister and Cabinet, Dr Michael Keating, microeconomics is successful at “producing robust predictions of general tendency”. It is rather less unfair about macroeconomics, which has failed to achieve even a common analytical language.

Of course, some folk can be correct in predicting some particular event or trend, but it will generally not be continually the same folk. Outlier predictors are, of course, a statistical possibility—consider having a large number of people predicting heads or tails: some will continue to get it right, though fewer and fewer as more throws are made, but that is a result of the fact that a particular sequence will occur and, with enough varied predictors, some people will pick that sequence. It is not that they have some special insight into “heads or tails”.

That said, economics also creates rods for its own back, and it does so by poor naming of major ideas. Typically, such names misleadingly over-claim and either provoke hostile responses from the unsympathetic or encourage poor thinking or both.

Information and expectations

Consider ‘rational expectations‘: it should really be labelled consistent expectations since the fundamental notion is that th expectations of agents in the model of the economy should be consistent with the model. That is, you should not base any economic model on the mere presumption that the modeller has significantly and persistently better insight into the operation of the economy than the (other) agents in the economy. This is a principle of analytical humility but, unless one can provide reasons why the modeller would have—in a systematic and continuing way—better information than people for whom a great deal is at stake, it is also a sensible analytical principle.

The principle is a formal expression of the reality that people react to information about the economy, which includes (implicit or explicit) models of the economy. But labelling the principle ‘rational expectations’ is misleading and invites misreading: it puts a very high value on the “quality” of expectations rather than their common cross-agent limitations. Yes, the notion is that agents are rational in their use of information but rationality is a general economic principle: the principle involved here is specifically about analytical consistency in application of information.

Then there is ‘the efficient market hypothesis (EMH)’: which should be labelled the informed market hypothesis, since the notion is that prices will reflect information available to agents. The problem with terming it the efficient market hypothesis is that it then looks like a principle of market perfection, which it is not. (There is a strong version and a weak version: I am talking here of the weak version.) The weak version does imply that open markets will be the best way of pricing assets, but that does not entail that markets are perfect: merely there is no systematically better mechanism for pricing assets. It does not even imply that information is transferred instantaneously.

Nor does EMH imply that asset price bubbles are impossible: on the contrary, it is precisely because we cannot predict new information that we cannot predict turning points, so asset price bubbles become possible. If we could reliably and systematically predict turning points, prices would not rise to a level for people to be caught by them when the bubble bursts, while expectations of capital gain both motivate agents and are part of the information feeding into prices. Asset bubbles are clear enough in hindsight, when we have the information about how they ended: this is specific information not available to the participants in the bubble. This is why there are always people denying that any bubble exists, and if income on said assets rises to “catch up with” the expected capital gains, they will be correct.

If EMH was labelled the ‘informed market hypothesis’ it would be less misleadingly named and less of an affront to people not enamoured of markets. (And yes, EMH is about the efficiency implications of information use but, again, efficiency—or its lack—is a general feature of economic mechanisms; EMH is specifically about markets and information.)

Putting consistent expectations and informed markets together—the alert reader will have noticed that they both enjoin the analyst to take information flows seriously and not presume one is a privileged observer—suggests that considerable scepticism about regulation is appropriate. This particularly applies to discretionary regulation, where the approval of officials is required, as there is no reason to think regulators will be systematically better informed than economic agents in general. (Noting, of course, that regulation is based on some implicit or explicit model of behaviour.) Indeed, there is good reason to think that discretionary regulation will make markets more chaotic, rather than less, by narrowing the use of information and generating perverse incentives: an expectation that has considerable empirical support (pdf), particularly in the experience of command economies.

There is a large debate about central banking in particular around the discretionary/rule/open markets possibilities (central bankers should have discretion; they should operate according to some policy rule; they should be abolished). Hence Swedish economist Lars Svensson’s suggestion to target the forecast; so policy action and market information work together.

Note: I am using “layperson friendly” characterisations of both “rational expectations” and EMH: for much more sophisticated discussion of both and critiques thereof, see Stephen Williamson’s review essay (pdf) on John Quiggin’s Zombie Economics.


Another case of poor labelling is the Austrian economics concept of “malinvestment“. What is or is not a good investment significantly depends on larger economic conditions. What is a great idea in New York may be a really dumb one in Port-au-Prince. The notion of malinvestment is that unwarranted monetary expansion misleads people about the future path of economic activity. As conditions change, investments based on such unwarranted expectations are “exposed” and need to be liquidated to free resources to go to more valuable uses.

But the label implies (in compete contradiction of Austrian value subjectivism) that being a malinvestment is an intrinsic quality of an investment. If so, the level of economic activity becomes irrelevant to the level of malinvestment. So, you can happily advocate any amount of restrictive “adjustment” because the level of “bad investments” wasting resources is set.

Conversely, if you understand that what is or is not a good investment significantly depends on economic conditions, then driving down income expectations does not “release” resources, it increases (potentially considerably) what becomes a non-returning investment and what level of burden they are. (After all, the original idea is that investments are created based on misleading expectations about future economic activity.) This process can be conveyed graphically:

… the debt-to-equity ratio for U.S. small businesses soared above 100% in 2008, where it has persisted to the present. That level is significant in that it indicates that external lenders (banks) currently have a greater financial interest in the small businesses to which they’ve lent money than do the actual owners of the small businesses. Consequently, lending institutions are carrying over half the financial risk associated with the operation of U.S. small businesses.

Barry Eichengreen makes the point well in his essay on the problems of a gold standard:

Society, in its wisdom, has concluded that inflicting intense pain upon innocent bystanders through a long period of high unemployment is not the best way of discouraging irrational exuberance in financial markets. Nor is precipitating a depression the most expeditious way of cleansing bank and corporate balance sheets. Better is to stabilize the level of economic activity and encourage the strong expansion of the economy. This enables banks and firms to grow out from under their bad debts. In this way, the mistaken investments of the past eventually become inconsequential.

Restrictive adjustment insisting on prior liquidation of “malinvestments” is a “cure” which is, in fact, more of the disease (by increasing the level and burden of non-returning investments). Thus does poor analytical terminology lead to bad policy thinking.

As an historical aside, the Austrian business cycle story does not make much sense for the 1920s boom and 1930s bust, as David Glasner explains nicely. Yes, the central banks, especially the Fed, got it wrong but it was their restrictive monetary policies that did the real damage, though Ben Bernanke’s words to Milton Friedman in his 2002 speech:

Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

now ring very hollow.

What is money for?

The mislabelling which does the most damage to general economic thinking is using ‘real’ prices and ‘real’ wages when what is meant is prices and wages in terms of goods and services. This terminology does analytical damage by attempting to abstract away from money while preserving the fundamental attributes (and so reasons to use, and effects of) money.

In actual economies, there are only two sorts of prices: money prices and barter prices (i.e. prices in terms of goods and services). Money can come in various forms: commodity money (gold, silver, rum, cowrie shells, cigarettes, tins of mackerel), commodity standard money (commodity money with paper notes added and/or paper notes backed by some commodity or commodities: as in, most famously, the gold standard) and fiat money (paper/plastic notes with the commodity standard taken away: now extended to include electronic entries).

Whatever its form, we use money because it massively reduces transaction costs. Prices and obligations can be dealt with by a single medium of account across all transactions. We have a single unit of account to record prices and obligations in and a single medium of account to make offers and set and pay obligations. This hugely reduces search and information costs. So much so, that people continue to use money even in times of ludicrous hyperinflation.

The cognitive burden in trying to price things in terms of goods and services is large: far too much so in a complex economy with a wide variety of goods and services (a result of the interaction between there being very little production-for-self and expanding technological capacities). While, even in hyperinflation, the search costs involved in finding useful chains of barter are too high for it to become a general mechanism.

So, we use money for good reasons: it serves extremely useful functions. Using the concept of ‘real’ prices abstracts away from “actual” money while continuing to invoke its functions. This is not analytically helpful, for we then make money what it is not—immediately, transparently “neutral” about prices in terms of goods and services. Cognitive simplification means precisely that and is a genuine economic function. It takes time to register shifts in the barter price(s) of money (what it buys in terms of goods, services and assets). Which means that shifts in spending have effects on output, until people adjust for any general change in what money buys (in terms of goods, services and assets).

Such abstracting away also takes from money what it is—a contractual constraint. Contracts are set in money terms: it is what our obligations are typically set in. So, of course wages will be “sticky” downwards because people will resist being paid less of what their existing obligations are set in. (They will also resist any unilateral changing of contracts by the other party, since this undermines the very notion of a contract and their own “standing” as a contracting party.)

In other words, money matters in the economy and it matters for good reasons. By using ‘real’ prices and ‘real’ wages we create statistical artefacts that encourage us to incorrectly discount the actual economic functions of money, creating a misleading “shadow” of still-using-the-functions-of-money “real” prices and wages between the economic realities of (money) spending and (goods and services) output. Basic economic functions of money are turned into “money illusion” (rather than cognitive simplification, information lags and contractual constraints), creating misleading expectations about economic behaviour.

By instead using the term ‘barter prices’ (prices in terms of goods and services) we keep the actual functions of money analytically “front and centre” rather than ontologically discounting money prices by implying they are not as “real” as our misleadingly labelled statistical construct. By abandoning the language of “real” prices, our language conforms to the economic reality that there is not “nominal” and “real” spending, there is (money) spending and (goods and services) output.

Looking at things in this way, we can more clearly see that inflation is a (positive and continuing) gap between spending and output. Goods and services inflation is (positive and continuing) gap between spending (on goods and services) and output (of goods and services) while asset price inflation is the (positive and continuing) gap between spending on, and the level of, assets. Conversely, deflation is a (negative and continuing) gap between spending and goods and services output/level of assets. Inflation and deflation are neither “tack-ons” to the “real” economy nor “ring-fenced” “money illusion” phenomena: they are consequences of basic economic phenomena and influence behaviour—primarily, through their effects on use of money and thus the form and level of transactions. So expectations about money and spending matter.

Abandoning the notion of “real prices” would also allow us to see price indices more clearly for what they are: measures of shifts in the scarcity of money in circulation compared to “stuff” (goods, services and assets). Price indices are inevitably “works in progress” (though technology can dramatically improve them). If we have some notion of “real prices” which somehow have to be discovered by having the “right” basket and making the “right” adjustments this leads to angsting about (ultimately insoluble) problems of shifts in technology (what is the price of a PC in 1930 dollars? Infinite, because there weren’t any, so no amount of money could buy one). If we instead accept that there are only money prices and barter prices, only spending and output, then price indices are still useful as measures of the changing scarcity of money in circulation compared to stuff. While trying to estimate changes in standards of living over time would be more clearly about indices of consumption, about measuring consumed output, which can lead to some striking results (pdf):

These experiments provide evidence that an hour’s work today will buy about 350,000 times as much illumination as could be bought in early Babylonia.

(I recommend Nordhaus’s paper: he has a very droll sense of humour.)

We can also see more clearly that measuring changes in the scarcity of money compared to stuff and measuring changes in consumed output are not, in fact, the same function. Hence the latter is better measured in a continuing constraint, such as time (even though that changes too in that we are no longer sun-up-to-sun-down societies), or a continuing requirement, such as energy.

If we can measure output, and spending, even roughly, then we can get estimates of things we want to know without being diverted by the chimera of “real” prices, for there is no Platonic “shadow land” of “real” prices to be discovered in between spending and output which is nevertheless (in true Platonic style) somehow more “real” that what we actually observe: there are just prices in terms of money and (barter) prices in terms of goods and services.

Barter wages

Thus, the barter value of a wage (‘barter wage’ for short) is what a given wage can purchase in terms of the goods and services. If the barter price(s) of money falls, then barter wages fall. If the barter price(s) of money rises, then barter wages rise. But a wage is also a cost, so then the good-and-services cost of labour rises.

So it is perfectly possible to tell the “real wages” story but in a way which uses the same language for money and wages without playing the silly and misleading game of “abstracting from” money while continuing to invoke the functions that money performs. Similarly, we can talk of spending GDP (money spent on productive transactions) and output GDP (GDP deflated by the changes in the barter price[s] of money) without then misleading language of “nominal” and “real”, as if money is some epiphenomenon diverting us from some Platonic “real” economy that is more “real” that all that using-money-things people do.

Using this language also discourages the irritating (and false) usage that interest rates are “the price of money”. Interest rates are the price of credit (or, if you like, the opportunity cost of holding money across more than one time period: the opportunity cost of money within a single time period is its barter prices[s]—what you can get for it in goods and services). Interest rates cannot be the “price of money” since they include expectations of changes in the future barter prices(s) of money. (And if you are wondering when money becomes capital, it does when anything produced by people becomes capital: when it is used for productive purposes over more than one time period.)

Terms matter

It is all very well to say what specific terms “really” mean, but terms are not transparently neutral between us and the world. The terms themselves have connotations and implications that matter, as they encourage or discourage patterns of thinking. Coined poorly, they can also get in the way of communicating with, let alone persuading, others. Labelling, like money, matters, and economics (whether mainstream or Austrian) does itself no favours with its mis-labellings.


  1. derrida derider
    Posted September 12, 2011 at 12:30 pm | Permalink

    Much to agree with here, but also much to disagree with (for a start, your description of the implications of the EMH is much closer to the semi-strong form than the weak form (and you don’t even mention that there are 3 – weak, semi-strong and strong – forms, not two).

    I’ll pick up on one bit only:

    “Putting consistent expectations and informed markets together … suggests that considerable scepticism about regulation is appropriate. This particularly applies to discretionary regulation, where the approval of officials is required, as there is no reason to think regulators will be systematically better informed [my emphasis] than economic agents in general

    They mayn’t be better informed, but they clearly face different incentives. Or do you, for example, think that potential monopolists are to be trusted as the best judge of whether taking over a company reduces competition or not?

    Regulators may on average be no better at picking a bubble than others (though history gives me some doubts even of that). True, they tend to get caught up in the same animal spirits as the market particpants, and anyway pricking bubbles gets you called a prick – better to let “greedy banks” or whatever take the blame for the inevitable bust.

    But that in no way makes a general case against regulation, or even against trying to manage the macroeconomy. The Lucas critique is about knowledge, but knowledge is one thing and incentives another.

    BTW, Stephen Williamson’s review essay is quite dreadful – it will actively mislead those without background in these issues.

  2. Posted September 12, 2011 at 12:43 pm | Permalink

    Interesting post. I do think there’s more problems than labelling issues with the theories you describe.

    This is a principle of analytical humility but, unless one can provide reasons why the modeller would have—in a systematic and continuing way—better information than people for whom a great deal is at stake, it is also a sensible analytical principle.

    Given bulk of economic activity isn’t undertaken by people with ‘a great deal at stake’, or by those with the economic modelling power of governments or large financial institutions, I think it’s naive to assume that economic actors will behave consistent with a sufficiently detailed economic model. I also think it’s naive to assume that even sophisticated investors will always behave in a way consistent with economic modelling independent of subjective assessment and social, political or psychological influences.

    Putting consistent expectations and informed markets together—the alert reader will have noticed that they both enjoin the analyst to take information flows seriously and not presume one is a privileged observer—suggests that considerable scepticism about regulation is appropriate

    I agree that information flows are important, however one also has to consider the impact of informational imbalance and incentives when considering the need for regulation. Consider the prisoners dilemma: a third party with as much information as the two prisoners could regulate their decisions in a way that was beneficial to everyone, without relying on the individual agents to trust each other.

  3. David Chester
    Posted September 12, 2011 at 3:24 pm | Permalink

    The language of macroeconomics is not dismal but I would agree it is VERY confused. So what is there to be done about it? Surely we cannot have good government until we understand each other properly and how are we supposed to do that when we mean different things by the same words. Australia of all places (where they say it for real about what it is all about) should be the first place to overcome this problem of the definition of the expressions used in macroeconomics. May I suggest that the government commission an august body whose job it is to prepare some working definitions which are to be used for teaching and debating purposes and that at last the confusion can be stopped. Any politician or media writer using the wrong expression should face the prospect of a fine!

  4. kvd
    Posted September 12, 2011 at 4:36 pm | Permalink

    Well Lorenzo, this is one of those posts where I think the introduction said all that really was needed to be said. I think proponents of various economic theories, including present students, should be satisfied with their role as a valuable, respected sub-branch of history studies – but no, that seems to be not enough.

    I think they are akin to tv weather forecasters: very solid in describing what just happened; much less so about tomorrow. This cannot be passed off as a misunderstanding of terminology (although some sort of consistency would be nice, I agree), more it is a case of “my guess is as good as yours, but my guess should be regarded as more authoritative because I understand what happened sometime last century”. Economists are probably very nice people, and deserve an occasional good meal or two, but please forgive my less than awe when one or other offshoot pokes its head (or tail) up, claiming “I predicted that”.

    And if you’re interested in some tulip bulbs, well I happen to have some stock I’m remaindering 😉

  5. Rafe
    Posted September 12, 2011 at 4:49 pm | Permalink

    Good work Lorenzo, you picked up the post of the day at online opinion, although SL got the compliment!


  6. Posted September 12, 2011 at 5:02 pm | Permalink

    It’s still pretty dismal at its most reductionist DC – easier to predict the behaviour of 100 people than 1 it’s true, but only more accurate ON AVERAGE. We all like to think we’re individuals (insert Life of Brian scene here…).

  7. Posted September 12, 2011 at 5:05 pm | Permalink

    Can’t seem to find the link, Rafe (although that could be just me being technically useless), but yes, Lorenzo’s been writing some rippers for us lately.

  8. Rafe
    Posted September 12, 2011 at 8:21 pm | Permalink

    He drives me mad with his massive lists of great links. I get a weekly email from online opinion with a list of their latest things, plus the link to their pick of the day, so the link does not appear on their page, just the email. Pity!

  9. Posted September 12, 2011 at 10:49 pm | Permalink

    Lorenzo has just returned from a job in the country, and has sent me an update to this post — it’s been added under the heading ‘barter wages’. He’s been driving for six hours, so he’ll be around to respond to your comments tomorrow morning (Australian time).

  10. David
    Posted September 13, 2011 at 5:58 am | Permalink

    Some time ago I studied economics. The faculty insisted that the professor submit an exam paper, even though we were only assesed on our year’s work. He therefore gave them last year’s paper. The faculty objected. “The students will know the answers” they said. “Oh no” was the reply. “This is economics, same questions, different answers”.

  11. kvd
    Posted September 13, 2011 at 4:28 pm | Permalink

    There is another class of books for which great durability, during rough usage, was desired. These were volumes of accounts, registers, and law records – from today’s Book of Days

    So, the accountants and lawyers get a mention, but nothing about economists – zombie or otherwise 😉 Sorry. Couldn’t resist.

  12. RipleyP
    Posted September 14, 2011 at 7:14 am | Permalink

    Interesting stuff. One bit jumped out at me,

    “economics will be berated for failing to give successful advice”

    This is an issue in any field where there can be different interpretations of data and very different etrapolations made from the data.

    Of course add to that the fact that policy makers don’t always understand the advice or act on said advice.

    I feel for those in the economics arena as I don’t understand a tenth of it and they are expected to communicate a complex subject into simple yes/no good/bad statements.

  13. kvd
    Posted September 14, 2011 at 1:34 pm | Permalink

    Lorenzo, the thing which gets me more than the nomenclature is the reaction to things economic. Events are seemingly reacted to in real-time, when even that fellow on the Clapham bus was probably considering his options (or retirement package) a year or two back.

    What I mean is one day soon we will wake up to find Greece has been declared in default, and it can’t even take its marbles home ‘cause they’re mostly in the Brit Museum. And our papers will report this fact, and prognosticate, and the stock market will dip – banks especially – and all the while I’m thinking “this was obvious yonks ago, and if our banks (including especially our RB) aren’t operating on scenarios ‘gamed’ months/years ahead, decided months/years ago, then their MD’s are not worth three fifths of five eighths of what they accept in emoluments”.

    Economics is not a ‘science’ leading to universal truths as such – dismal or otherwise; more a considered observation and analysis of past events, and sensible commentary and analysis is the result. But right now, where are the articles from the luminaries simply stating “this will happen shortly; this is what we have been doing for the past x-period in preparation, and this is what is now needed to be done”? I do agree with RipleyP’s comment that it is the economists who may be berated, but that is only to be expected of a ‘science’ with so many disparate (even directly opposed) viewpoints, all the while claiming to “know”.

    Nothing in the above should be taken as criticism of your essay, which is quite clear, and very understandable. It’s just a basic fact that markets exist without economists, and not the other way round. And SL nearly got that right.

  14. Posted September 14, 2011 at 4:00 pm | Permalink

    There’s an underlying theme in the nomenclature and it seems to me anyway characterized by ‘purity’. A need for a pristine, hydroponic model train-set idea of economic activity. The notion of replacing the phrase ‘real money’ with barter money’ moves away from this because it, to take one example, embosses the uncertainty of such estimates. One person can can get more in exchange for the same good than another.

    One problem cited in the evaluation of the GFC and its causes was the reliance on computer generated models that made assumptions of perfection. Down on the street those making such assumptions are not taken seriously whereas those who assume what Murphy did are. There’s a kind of Utopian formalism in economic discourse that’s odds with the messiness of real-world trade. This seems something that economists are unaware of.

  15. Posted September 14, 2011 at 6:13 pm | Permalink

    Economics is too polluted by ideology and political affiliation. Economists who clearly side with one branch of politics and so engage in advocacy are seriously over-estimating their ability to retain objectivity. A strong intellectual domain should be able to exist independent of politics but in these days most of the general public only hear about economists being left wing or right wing or libertarian. Economists need stop engaging in public debate and start engaging in a serious revolution of their domain. Perhaps I’m asking too much but is it possible to have an economic discourse without invoking politics? Or have I just spent too much time at the Cat, which I no longer do the above being one major reason why. I no longer trust economists because I too often see them engaging in advocacy yet in many other intellectual domains such blatant side taking is often frowned upon. I’m not even sure economists are serious about their discipline. Consider the modern concept of money: a quantifier that is a variable, can be created and destroyed, bought and sold. WTF?

  16. Patrick
    Posted September 14, 2011 at 10:54 pm | Permalink

    No John H your comments appear entirely applicable to Paul Krugman, for example.

  17. Posted September 15, 2011 at 10:49 am | Permalink

    Economists who clearly side with one branch of politics and so engage in advocacy are seriously over-estimating their ability to retain objectivity.

    I don’t think you can retain objectivity when, whatever paradigm you deploy. you’re dealing with human individuals and civilizations. You’re a monkey too and you have your catalog of values which govern what you look at and how you interpret that.

    But I think you’re basically right. There are alliances all over the place and it distorts the information. Gettin’ a bit much here. We don’t want to end up like America.

  18. Posted September 15, 2011 at 11:46 am | Permalink


    Perhaps I’m asking too much but is it possible to have an economic discourse without invoking politics?

    I think the problem is that most economic theories start from a set of assumptions that have clear political implications. Part of the problem is that the economy is so complex its difficult to understand it without making a huge amount of assumptions, and any empirical evidence is so detached from fundamental assumptions that it’s difficult to distinguish between valid and invalid assumptions.

    Personally, I think any economic theory that isn’t at least partially based on psychology is bound to fail at some point.

  19. kvd
    Posted September 15, 2011 at 1:12 pm | Permalink

    most economic theories start from a set of assumptions

    I think that’s fair desipis. Whereas most sciences seem to start from some sort of observation of physical phenomena, then build towards a theory fitting those ‘facts’, while always willing to be dispassionately critiqued, debated; even disproved or displaced.

  20. kvd
    Posted September 15, 2011 at 2:54 pm | Permalink

    I love this stuff. From the Telegraph (UK) “Debt Crisis: Live”:

    19.01 The Dutch parliament unanimously backed a motion raised by the anti-immigration Freedom Party leader Geert Wilders demanding the country’s cabinet spell out exactly what a Greek default would cost. Cabinet would also have to explain what other sovereign defaults would cost, as well as restoration of national currencies across the eurozone.

    18.15 You may remember talk from EC energy commissioner Guenther Oettinger over recent days, raising “unconventional ideas” to keep the eurozone in line, such as lowering flags of countries with high deficits outside EU buildings to half-mast.

    17.41 Swazi King Mswati III wants the IMF and the World Bank to rescue his economy, as they bailed-out Greece and Portugal.
    But demonstrating labour unions in the country have pointed the finger at Mswati for bankrupting the nation, pointing out that his 13 wives each have their own palace.

    17.35 World Bank President Robert Zoellick has criticised the US, Europe, Japan and China for being guilty of poor financial policy.

    Farce overlaid with insanity seems to have replaced the ever reliable fear, uncertainty and doubt principle. But do note that Zoellick did not point his finger at Mswati v3. So, is this significant?

  21. Posted September 15, 2011 at 11:29 pm | Permalink

    I don’t think you can retain objectivity when, whatever paradigm you deploy. you’re dealing with human individuals and civilizations. You’re a monkey too and you have your catalog of values which govern what you look at and how you interpret that.

    But that is precisely why you must consciously undertake strategies to address those failings. The legal system is a good example where rigorous procedures are in place to try and prevent excesses. It isn’t perfect but at least the legal profession recognises the problems. Economists too often don’t. The obvious fact that humanity has made so much progress in understanding so many things clearly indicates that all is not lost, that we are doomed to some hopeless relativism or cognitive bias that forever forbades us arriving at useful ideas.

    A keen interest of mine is neuroimmunology. It is very complex, dazzlingly so but in spite of that great progress continues to be made. Even in the last decade various “established truths” have been overthrown. We are rapidly approaching a time when problems like age associated cognitive impairment and some dementias can be held at bay. It is said the brain is the most complex known thing. I have my doubts about that but the important point is we are probing ever deeper into that complexity. So if the collective efforts of scientists can crack that doozy of problem what the hell is wrong with economists?

    Economists are still arguing about the causes of the Great Depression, it is as if they can’t settle the arguments, they just go on and on. Perhaps it is time for economists to stop throwing rocks at one another and look to how other intellectual disciplines achieve progress.

    Personally, I think any economic theory that isn’t at least partially based on psychology is bound to fail at some point.

    Hayek essentially made the same point when he wrote that economists must be more than economists, they must probe into anthropology. He’s right but his acolytes never took that on board, possibly because they’re too busy bashing their protagonists. For the most part that habit is just venting, not thinking, certainly not analysis. Why waste the energy on so much venting? When I read scientific papers I don’t find the authors attacking people holding different views. They will challenge those views, typically with a footnote laden text. Can economists do that?

    Patrick, your statement illustrates my point. Krugman is only one example but there are plenty on both sides of the political divide.

  22. RipleyP
    Posted September 16, 2011 at 7:54 am | Permalink

    The bias question is very important and well raised. I think there is always going to be an issue of bias in any field where there are assumptions and interpretations.

    When we get a hairy matter around the law firm there will be a bit of a debate between the lawyers as to what things mean, what’s going on and the interpretation of the law.

    Some partners are very much in the Liberal Party camp and I am in a very religious region while I am more inclined towards socialist views and am an out atheist. The arguments presented by the differing factions within the firm appear to be coloured by our base viewpoints and assumptions.

    The solution luckily is appears to be in the fact that we recognize these biases and try to apply logic. I think the economists are doing something similar and although there appears to be a bias I have the hope they are trying to address it and rely on the strongest argument. The challenge is the sheer magnitude of the problem they are trying to analyze.

    When I think of economic I am often reminded of the Foundation and Empire stories by Asimov. A series of calculations designed to plot and predict human history 1000 years into the future was science fiction. I think we might be asking for something similar from the economists.

  23. Posted September 18, 2011 at 12:31 pm | Permalink

    Lots of comments! [email protected] I am willing to be corrected on the details of EMH. One of my reasons for venting about naming is that I have found bad naming regularly gets in the way of understanding what the underlying thesis actually is.

    Also, I tried to make a distinction between discretionary powers and mere rules. The latter can be argued over, the former are more or less invariably noxious. But the problem for the former is both one of knowledge and of incentives, not least because incentives affect what knowledge is sought/available.

  24. Posted September 18, 2011 at 12:35 pm | Permalink

    [email protected] I am willing to believe agents act on a more informed basis than any given model :). It is certainly not an argument for thinking the modeller will do better!

    On the prisoner’s dilemma, real world situations are rarely that simple. But my real beef in the post was with discretionary regulation, than rules per se.

  25. Posted September 18, 2011 at 12:47 pm | Permalink

    [email protected] I believe the French have tried something vaguely like that: not an encouraging example 😉

    [email protected] There is a difference between saying “x will not work well” or even “doing x will tend to lead to y” and “some specific z will happen”. The “reading the entrails” stuff panders to the human wish to know the future but is a misuse of the discipline.

    [email protected] An oldie but a goodie. It is, however, a macroeconomic, not a microeconomic joke.

    [email protected] A nice argument, ta. Yes, the modern fascination for computer models is vastly irritating. All a computer model can do is tell you the consequences of your premises (including the inputed data). Useful, only as long as you understand that is what it is doing.

    [email protected], [email protected]6, [email protected], [email protected], [email protected], [email protected] The lack of a common analytical language in macroeconomics makes that problem much worse. Of course, one reason for the lack is the heavy ideological baggage. David Glasner, on his excellent blog, has ripped into the WSJ editorial page for the patent inconsistency of their commentators.

  26. Posted September 18, 2011 at 12:51 pm | Permalink

    [email protected] There is more progress in understanding the cause(s) of the Great Depression than you might think. I particularly commend this recent paper (pdf). Apart from being historically revealing, it blames the French and knocks down the gold bugs–a triple win!

  27. Posted September 18, 2011 at 12:53 pm | Permalink

    [email protected] Economics suffers from the ideological significance of its subject matter. (To see how that can matter in any discipline, I refer you to contemporary climate science.)

  28. kvd
    Posted September 18, 2011 at 1:08 pm | Permalink

    David Glasner, on his excellent blog, has ripped into the WSJ editorial page for the patent inconsistency of his commentators.

    That should be … “their commentators”.

    Well, only if you insist Lorenzo. I thought it a good observation as it was, as it were 😉

  29. Posted September 18, 2011 at 5:25 pm | Permalink

    I’ve fixed that glitch, Lorenzo. Some fascinating comments on this thread, yes.

  30. Posted September 19, 2011 at 6:05 am | Permalink

    SL The paper I linked to @26 has acknowledgements of useful comments from your favourite economic historian (Peter Temin) and my favourite economist (Scott Sumner).

  31. Posted September 19, 2011 at 8:11 am | Permalink

    [email protected] I was not trying to argue against any managing of the macroeconomy. One has to have some structure for money, for example. While sympathetic to critiques of central banking, I go with the “Market Monetarists” (pdf) on such matters.

    As for bubbles, I would look to more specific reasons first–the question of why are there bubbles in some markets rather than others is always a good one–and the quality of prudential regulation, rather than monetary policy.

  32. Posted September 19, 2011 at 12:54 pm | Permalink

    [email protected] Also, monopoly is not a good justificatory example for regulation. Very little regulatory activity is about monopoly as such, regulation is far more likely to create monopolies or quasi-monopolies than markets, and regulation has a strong general tendency to protect incumbents.

  33. Adrien
    Posted September 19, 2011 at 5:15 pm | Permalink

    Economics suffers from the ideological significance of its subject matter. (To see how that can matter in any discipline, I refer you to contemporary climate science.)

    Well put.

  34. Posted September 19, 2011 at 9:17 pm | Permalink

    [email protected] Ta. And I think I even managed to make a neutral climate science comment! 🙂

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