Over at Econlog Arnold Kling takes to task virtually all mainstream Macroeconomists for there “description” of the current economic crisis. This combined with my reading last night on reductionism in economics (I think it was Robert Frank Kevin Hoover – although I have now forgotten as it was an essay in a larger book) currently has me on the back foot – even though I’m a strong methodological (and even an ontological) individualist there are obviously issues with the current application of reductionism in economics.
However, let met put down some of the key bits from the Kling.
First the criticism of current descriptions:
many economists breathlessly cited high short-term interest rates in interbank lending markets as an indicator of credit markets “freezing up.” However, as some Minneapolis Fed economists point out, the volume of lending does not indicate such a freeze
Very key point. The reason I have focused on rates instead of volumes of credit as been a result of timing – the rate is out right now, the volume numbers appear later. Given what I think has happened to the supply or demand of credit I felt that the change in the interest rate would give me an indication of what has happened to volumes – however, if the data is released and this isn’t the case we DO have to re-evaluate things.
Where are the stories of businesses canceling projects because of lack of funding?
One thing I would add is that there is a greater incentive to put cancellations in the paper during a recession, as it feeds on the public urge for “information”. As a result, even if the stories came out – i’d rather look at what happens to consents and work put in place.
Where in the textbooks is “liquidity preference” a demand for Treasury securities? Where in the textbooks does it say that injecting capital into banks is a policy tool?
One thing I would point out here is that liquidity is an factor economists have studied – especially following the collapse of Japan. However, given the lack of a integrated “general theory” of macroeconomics it is hard to look at these subsets of monetary theory in perspective with the rest of the economy. Hell, is our view of labour markets and goods markets even very well integrated nowadays?
But the economics profession for the past thirty years instead focused on producing stochastic calculus porn to satisfy young men’s urge for mathematical masturbation
That quote is gold. That is definitely going to be a quote of the day at some point 😉
Personally I think he is partly right and partly wrong with this statement. The focus on mathematical models is a useful thing – as it allows us to clarify what we are describing and in what ways it works.
However, I think his main point stems from the scarcity of knowledge – there is only so many economists who can only work on so many things. As a discipline he feels we have focused “too much” on abstract mathematics and too little on “important policy issues” – so we haven’t balanced the trade-off in a way that is consistent with the social good, given economists private incentives.
This could very much be true. However, I always think that if we don’t have a clear understanding of why (which comes from the maths) then our policy conclusions will be weaker. Furthermore, I’m not even convinced that economists should make policy conclusions, we should just be describing reality.
This brings me to where I think he is right – our models of the current crisis are NOT good enough, and as a result, we can’t even do the descriptive role very well.
Economists ought to admit that we do not know much about what is going on today
Economists never know what is going on today – the best we can do is frame issues in order to try and understand them. The difficulty is that this involves conjectures – we have to guess what has happened to some variables, which involves models of there own and value judgments. We are far better at explaining what has happened – once the data is actually available.
Now, as Arnold Kling said, we don’t have the models, so we can’t conjecture what is happening clearly. This is worse than not knowing what is going on – we don’t even have the capacity to form a good partial view.
I’m not sure if I fully agree with the pessimism show here – but he raises a lot of very good points. Something for economists to chew on no doubt.