I said more objective – there is no such thing as completely objective, I will agree with that.

But, there is a world of difference between the claim “there is a short-run trade-off between inflation and unemployment” and the quantification, and valuation of, such a claim.

So we can build a model, describe it, estimate things using data we know to be imperfect, and represent it all as clearly as possible. The ordinal conclusions to such studies are often agreed upon by economists of any school.

But then, moving from that point to a point where we can make a policy conclusion, where we can state how large an impact will be, and how we should value it, is a massive step – and it is along these grounds that almost all people will disagree.

Bernanke applied a widely agreed upon model, and used it to explain what he is doing. In this sense he showed a full understanding of economics itself. HOWEVER, it is perfectly reasonable to disagree, because people may have different views on the magnitude of the tradeoffs involved – or the way costs and benefits should be weighted.

As a result, many will disagree – but this does not mean he “doesn’t understand economics” as has been claimed.

I feel that you are taking to stark a difference between objective and subjective here – there is no truly objective things, and the best we can do (and what economists try to do) is to start with the elements that are as close to objective as possible, and make the value judgments required to move from there towards a conclusion transparent.

But surely those data points don’t exist ‘out there’ divorced from all the ‘policy decisions’ and ‘value judgements’ that brought them into existence? You are saying that economists can ignore the history of transactions and interactions that led to those data points: economics belongs to the humanities, it’s not mathematics, so how could that possibly be?

Utilitarianism doesn’t lead to any sort of tyranny – it is only when someone applies value judgments they can get a conclusion.

Going back to the initial point, I was saying that it is weird to say someone isn’t an economist when they are using the economics framework and merely have different value judgments.

Disagreeing with what the Fed is doing is one thing, and can be based on these judgments. But saying that there isn’t an economic model there, and that Bernanke doesn’t understand economics, is taking it a step further – an unjustifiable step further. As Bernanke is using a model with a trade-off that all economists recognise (in an ordinal sense).

“there is no vaccuum, and it has been dangerously naive to believe that there is, or has been.”

When it comes to saying “I recommend policy X” there is no vacuum. BUT, when it comes to laying down the facts and describing the situation that is going to be analysed there is – the economic framework is just there to describe thing, you can apply any value judgments to reach any policy conclusion – but you then have to be ready to use them.

I wouldn’t say treating the initial descriptive stage as relatively objective is dangerous – because by definition you can’t get a policy conclusion from that stage. All it is, is trying to sort out what data, and internal introspection regarding choice, tells us about how and why choices are made.

Which seems to be in the face of the fact that we are, yet, on a long movement toward socialism and Statism in the West. Even your very own Gareth Morgan, disappointingly, has been reaching on every issue lately for the State’s gun at my head. Why?

Ah, the economist’s utilitarianism. Remember?

Utilitarianism leads to a tyranny of the majority leads to statism (as politicians bribe for votes) all of which has to be justified by the common good (namely, a miss-placed altruism, namely socialism or, as bad, mysticism/religion). There is no room in what is always created for an individual to live his life in freedom from others, and most certainly the coercive apparatus of the the State. Your ‘practical’ society snuffs freedom out first.

Economics is not a set of levers operating independently of the transactions between individuals that make up ‘a society’, indeed those transactions are economics, and thus cannot be separated from first, philosophy, and second, politics: there is no vaccuum, and it has been dangerously naive to believe that there is, or has been.

“Then if economists believe they work in this sort of philosophical vacuum, that explains why, as Hayek prescribed, modern life has been one long march to the planned society”

Ahh but if we say that the initial economic model is within this sort of “vacuum” then we are also stating that economists cannot reach a conclusion solely from that model – which implies that there is no reason to expect a movement towards socialism from objective modeling.

What I was saying in the above statements was that the economic method attempts to be as objective as possible, and that is why such disparate economic schools (who reach very different conclusions) can be said to be using the same method – but applying different value judgments.

“laissez faire is the most efficient and properous way to run a (free) society.”

Ahh, but this is just not true. I agree with you that expecting “perfection” is ridiculous – the best type of society that is practical will not be “idealistically perfect”.

However, if we view the formation of groups, and of government, as a social contract we cannot necessarily define what is the best way for society to organise itself. What an economist would say is that we need to use revealed preferences, prices, and any other mechanisms we can find to reveal value – and if we are going to have an institutions do anything it should be premised on the idea that there is something impeding voluntary trade, or that there is external damage from individuals trading. Otherwise leave it be.

“Enjoy the beer, I’ll be soon drowning my depression in a few Friday night ones also.”

The beer was good. I am looking forward to next weekend for sure 😀

Then if economists believe they work in this sort of philosophical vacuum, that explains why, as Hayek prescribed, modern life has been one long march to the planned society (with a few nasty Gulags on the way), whether that was the desired end point or not.

And yes, of course pure free markets have distortions also, but the malinvestments involved are liquidated far more efficiently than in our planned economies, as the last two years has demonstrated. That has been shown as a huge weakness of our Nanny States. Philosophy aside – although that can never be – laissez faire is the most efficient and properous way to run a (free) society.

Enjoy the beer, I’ll be soon drowning my depression in a few Friday night ones also.

Hello, I will be off for some beers soon – so future responses may be a bit delayed 😉

Here I go on this though, it is nice to be commenting again (I have been very much under the screw with things lately).

“But ‘temporarily’ was in some cases over a decade: you’re underestimating, surely, the scale of the central banks distortion of the market.”

But, looking at the inflation statistics we can see that interest rates were consistent – the relative price of housing rose because people, believing it would keep rising, kept buying housing off each other.

“such that could not happen under laissez faire”

Yes it most definitely could happen – I don’t agree with central planning either, but pure free markets also have their distortions. Complete markets, information, property and legal rights, and corrections for external impacts are the set of things we would like in a society to ensure that the allocation is “best” – but even then we would have bubbles, booms, and busts.

“The chief difference between an Austrian and a Keynesian is a philosophic one”

The chief difference of an economist from any school should be a value judgment (or a set there of) – as you say that is philosophical. But they should all agree on a set of guiding principals that they add these judgments to to create policy – a set of facts about how the world works.

With inflation below target over the period of the housing bubble it is hard to make a case that real interest rates were being depressed by the Fed – and so it seems difficult to lay much of the “blame” for a bubble on their shoulders.

I am not defending the governmental actions here – I am solely talking about the monetary policy part.

“Or to slant this another way, if we hold that Bernanke represents the current “synthesis” – and I disagree with that notion absolutely, synthesis in a nonsense notion at the philosophic level”

The philosophical value judgments are the part that is not, and never will be, part of the synthesis though – the synthesis is the set of points and definitions that economists agree upon. As I mentioned earlier in la comment.

But ‘temporarily’ was in some cases over a decade: you’re underestimating, surely, the scale of the central banks distortion of the market. And not only on time frame, but the credit crunch came out of the US, and namely housing/mortgages, and that centred on Fannie Mae and Freddie Mac, by far the biggest single providers of mortgages, and under successive goverment edicts to give credit to those who should have been found wanting in terms of their ability to repay when rates rose, or principal had to be paid. Because central planning is used to control whole societies, even small distortions lead to major unintended consequences, such that could not happen under laissez faire – similar to a cloning v. biodiversity argument fr survival of a species.

On orthodoxy, my main claim is that what Bernanke is doing is consistent with the central view of economists and policy analysts – he understands this view, and he is doing what he is doing.

I think this ‘central view’ adds up to myth making: there simply is not that sort of consensus, especially when you factor in that crucial element you are missing: philosophy. The chief difference between an Austrian and a Keynesian is a philosophic one. Namely, Austrians are philosophical bound to the concept of laissez faire because it is the only economic system that both allows for the stable running of complex societal interactions amongst individuals, that is, a functioning econmy, while allowing those individuals their freedom, whereas Keynesians are drones seemingly bereft of the ability to understand the philosophical impact of their simplification of ‘the human’: that is, their theories end in centrally planned societies, and as shown latterly, the risk of bringing free societies to economic breakdown in its entirety.

Or to slant this another way, if we hold that Bernanke represents the current “synthesis” – and I disagree with that notion absolutely, synthesis in a nonsense notion at the philosophic level – then if this ‘central’ view has it ‘all wrong’, then surely economies do risk the opposite of price stability, but rather, complete breakdown, which, lo, has very nearly happened.

http://macroblog.typepad.com/.a/6a00d8341c834f53ef0133f5388652970b-popup

Between 1998 and 2006 prices were below what a price level target would have indicated – if anything people could claim that interest rates should have been lower. It wasn’t until the housing bubble had already started popping (circa 2005/06) that inflation indicators were telling the Fed to lift rates – which it did.

That same graph indicates that there is little stimulus can do now given that we are on the price line – however, my suspicion is that this line includes the sharp relative price increase in petrol. If we adjusted for that (and adjusted downwards earlier in the piece for record low petrol prices), Fed policy would probably look a bit better in the past – and would look like it needs to be a little more stimulatory now. However, in order to determine that we would really need to look at expectations, not the level – so this is very much just “indicative” I’m not trying to draw definitive conclusions from it.

I remember people talking about the fact the Fed might hit the lower bound through the early parts of last decade. I remember people telling the RBNZ to cut rates in 2006, and then to lift rates more sharply in 2007/08. Its a tough job – and I think the best way to improve things is to improve information, statistics, and communication, not the mandate itself.

No, I’ve always been able to type quickly – I just currently have a greater opportunity to check my email at this moment 😀

I wouldn’t call bubble social insanity per see, it just requires an individual belief that you can sell before others do – and some people would have. In many ways buying a house became a “game” for some people where they believe in other peoples irrationality – so it wasn’t irrational for them to buy the house ex-ante. However, eventually houses were pushed towards their fair value (given the massive oversupply of building over there it was inevitable the movement would be relatively swift).

I think the idea that temporarily low interest rates could lead to the “social insanity” of loading up on debt and buying expensive houses engenders a higher degree of irrationality then the view that people were acting on a belief that some other bugger would pay a higher price – a belief that was being backed by the “evidence” that prices had been rising.

Now I didn’t buy a house, so I’m not saying I agreed with their logic – but that did seem to be the logic many people were working on, and it is internally consistent and rational.

On orthodoxy, my main claim is that what Bernanke is doing is consistent with the central view of economists and policy analysts – he understands this view, and he is doing what he is doing. It is fine to disagree with the central view, but a blanket statement saying he doesn’t understand it seems unfair.

The orthodoxy would be the current “synthesis”. If you add value judgments to the synthesis you can get conclusions similar to those an Austrian or a Keynesian would come up with – and then the question is “are these value judgments fair”.

However, as long as we accept that inflation has been under control (a claim some would dispute, but one I have seen much evidence for) every school would accept the idea that moving towards the inflation target makes sense.

BUT, even if all schools accepted that inflation was below its “stable” level this doesn’t mean every school would agree with printing more money, or QE2, per see. For example, if we believed many of the problems lay on the supply side the Fed might not have to do much to get inflation back to target – but the US economy might still be f’ed. So when trying to decide on the magnitude of what policy is appropriate these differences in description are still essential.