The attacks on Keynes and how to be a bad analyst

Brad Delong, combined with an imbedded quote by Krugman, covers off the bone-headed remarks of Niall Ferguson on Keynes in this post.

[Note:  You might wondering why I’m posting when he has apologised – isn’t that a bit uncharitable of me.  Well, he’s said these things in the past so I believe that some element of them remains core to his analysis, and even for off the cuff remarks they indicate a rot that exists among analysts when it comes to looking at models that I want to rant about.]

Now I am not calling Niall Ferguson an idiot for no reason – I accept he is a man of high regard who has, and will, achieve more than I ever will.  Furthermore, as a historian, even as a good analyst, the ideas and philosophies imbedded in someones actions are fair game!  The fact Keynes is gay, was in the Bloomsbury group, and didn’t have kids are all relevant factors for trying to understand Keynes and the subjective assumptions he made when doing analysis!

I have simply lost all respect for Ferguson’s analysis because he has simply played the man and not the ball when doing this.  Any analyst, and especially any real historian, would given this real context in terms of where it actually matters.  Here let me explain.

Truly, the lessons we learnt from Keynes and can apply to our understanding of the economy and the management of currency (which are many) exist independent of our subjective belief about what the “right” rate of time preference is.  The debate about the correct rate of time preference hasn’t been set by any “ancient Keynesian tomb” and should be discussed directly – rather than abusing the notion of a man that can’t defend himself.

If Keynes had said “the discount factor is X” then someone may say “his subjective preferences due to his lifestyle had an impact on that, and I don’t think that is a fair interpretations of how we see things now – and the trade-offs we are willing to make”.

Instead, we see people come out feeling that the government is borrowing too much – and they decide to throw ad hominem attacks on a dead man.  Keynes as a man wasn’t even a supporter of large sustained deficits – he was simply a man trying to work out what the hell was going on during the Great Depression.  Something many modern analysts avoid by directly excluding that time period and just assuming it will never happen again.

Think about it for a second.  Economics involves many models trying to explain and add light to tendencies in the world.  During the largest slump in history and following on from a Great War and the collapse of democracy, would you expect the thinkers of the day to be focused on building and trying to understand models of 100 years in the future – or of trying to understand the extreme business cycle and institutional fluctuations of the day!  The term “the General Theory” may have been inappropriate and grandiose – but his work on business cycles was undeniably useful, especially when combined with the increasing formalisation of the discipline in the following decades.

If bagging someones entire process of thought because they were gay (in truth bisexual) is a legitimate expression of academia nowadays, it’s frankly embarrassing – and suggests that people should perhaps spend a little more time refining their understanding of philosophy before they open their mouth.  If we want to think of the type of standard that people discussing economic concepts should set (and the unfairly high standard I apply to economists I’m listening to), then we should go back to a quote by none other than Keynes, the first quote I popped up on this blog:

… the master-economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher–in some degree.  He must understand symbols and speak in words.  He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought.  He must study the present in the light of the past for the purposes of the future.  No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.

It was this quote that turned me to economics when I was 14, and it was attending classes with lecturers who felt this way about the subject that convinced me to give up on any other career or hobby and study economics.  So I guess I’m undoubtedly a little biased – perhaps that is colouring my defence, and I should be ignored for the man who is implicitly assuming that gay people, and people without children, effectively hate the rest of society ….

We are always repeating old debates

This is a neat history of deposit insurance in the US (via Economist’s View).  It is a clear indication that many of these debates have occurred in the past, and many of the ideas that float around nowadays are simply old ideas being given fresh life.

In 1829, Forman proposed an insurance fund capitalized by mandatory contributions from the state’s banks. Debate in the State Assembly was heated. Critics said failures could overwhelm the fund; they also argued that its very existence would reduce the “public scrutiny and watchfulness” that restrained bankers from reckless lending. This remains the intellectual argument against insurance today. But Forman’s plan was enacted, and subsequently five other states adopted plans.

All did not go smoothly. In the 1840s, during a national depression, 11 banks in New York State failed and the insurance fund — as prophesied — was threatened with insolvency. The state sold bonds to bail it out.

There has been a bit of discussion of these issues here.  The key thing is that we are working off a clear and concise trade-off, and description of reality, that has existed for a long time now.  Even with this knowledge and this clear framework, trying to figure out what is “right” is difficult, and often policy merely goes to where it is “convenient”.  Our biggest mistake would be to ignore the lessons of history, act like this time is truly different, and try to build our knowledge and understanding from scratch.

This is a broader principle for all debate in the social sciences.  Let’s not forget history, and let’s not forget that thinkers in the past were just as good at exciting thought experiments and “intuitive” forms of argument.

Are real Austrian economists neoclassical?

According to this lovely post, the answer is yes (ht Economist’s View).  Choice quote:

Does Davidson know what a neoclassical policy is? Does Boettke? Does anyone? I don’t think so, because neoclassical economics, as such, has no policy agenda. But whatever a neoclassical policy might be, Davidson assures us that Hayek is totally against it.

Now, although the term “neoclassical policy” is a pure nonsense term, I can guess how Davidson, after talking to a bunch of Austrians — I hope not Boetkke or Bruce Caldwell, who is also quoted in Davidson’s piece — picked up on the propensity of modern self-styled Austrians — generally followers of the fanatical Murray Rothbard, as distinguished from the authentic Austrians of Hayek’s generation — to deploy “neoclassical” as a term of abuse, providing sufficient justification for these modern Austrians to dismiss any economic doctrine or policy they don’t like by strategically applying the epithet “neoclassical” to it.

So let me assert flatly that F. A. Hayek was a neoclassical economist through and through. He was also an authentic Austrian economist, schooled in both branches of Austrian theory by way of his association with his primary teacher at the University of Vienna, Friedrich von Weiser, one of the two principal successors of Carl Menger, the founder of the Austrian School, and through his subsequent collaboration with Ludwig von Mises, a leading student of Eugen von Bohm-Bawerk, the other principal successor of Menger.

As well as placing Hayek in the economic mainstream (which most mainstream economists agree with), I love the fact that this post points out that neo-classical economics has no policy agenda.  Pure neo-classical economics provides an objective framework that helps us to describe issues – given this framework we could then apply a varying set of value judgements, which can then in turn justify almost ANY policy agenda.  The advantage of using the neo-classical framework is that we are forced to make our value judgements transparent – so that the trade-offs, and our assumed values, are plain to see!

The confusion about what neo-classical economics is pervades all discussion of economics, so it is nice to see this issue pointed out here 😉

Update:  Krugman has a nice post on the issue here.

Hot cross buns … a lesson on pricing

Over on his blog, Bill Bennett has been discussing hot cross bun inflation over the last couple of hundred years – saying that it has averaged about 1.1%pa.

With the consumption of hot cross buns about to spike, I thought I would copy and paste my comments on hot cross bun pricing over here:

One thing I’d note though is that the increase in the price level more generally only really got kicking off during the last 50 or so years. As a result, if hot cross buns had just been generally following inflation overall, the 1.1%pa figure could be a bit misleading.

Another point when looking at hot cross buns – we need to ask what the price of these buns has done relative to all other goods and services. Over the past 200 and a bit years we have seen the relative price of inputs fall for hot cross buns, but we have also seen incomes rise – and given that hot cross buns are a “normal good” it is ambiguous whether hot cross bun inflation has exceeded inflation in goods and in prices.

A final point, a hot cross bun in 1798 would have tasted and felt different than a current hot cross bun – any changes in the quality of said bun should be taken into account.

These are all points to keep in mind when looking at changes in the price of any good or service.

Jedi vs economist

I have previously stated that economists are like Jedis.  However, I have recently realised the error of my ways – economists are obviously superior to Jedis.

In both disciplines you have a person trying to understand the nature of society and find what they can add.

Economists do the following:

  • They stand back, look for tendancies, and try to come up with an objective framework for discussing the tendancies and trade-offs that exist.
  • They are trained from the age of 18, and are also allowed to interact normally with real people.
  • They recognise that they only have the ability to work out trade-offs, and often only express them in an “ordinal” manner – they avoid passing judgment and are careful about quantifying result due to this.

Jedi do the following:

  • They stand around and meditate waiting for “the force” (voices in their head) to tell them what the trade-offs are.
  • Following the Ruusan reformation they were trained from when they were children, and are allowed no equal interaction with non-Jedi.
  • They think they can determine what is fair and right – and as a result will impose this “truth” on other people.  To fix this they rely on what older Jedi’s have told them – these are the same people who also got trained as children, and a good number of them became Sith and tried to take over the galaxy anyway :/

Seriously, the Jedi are a bunch of spoiled kids who are endowed with awesome power – wouldn’t getting them to run society be the same as just telling well meaning businessmen who grew up in a wealthy family to run society (although the business man is likely to be more balanced – as he actually got the chance to grow up, and is unlikely to still treat society in the way an 8 year old would).  They may make some good choices, and they may do so with the best intentions – but both these groups are equivalent … even if many of the people who would rise up against the business man would welcome in the Jedi with open arms.

Papers on the old new financial crisis

Brad Delong links to a number of interesting papers regarding the US/global financial crisis of 2007-2009.  I recommend the optional ones.

I’m not sure I completely agree that the bailing out of Bear Stearns made matters worse – but it was an interesting perspective.

In any case, its a good idea to try and understand what happened then – in order to figure out whether the debt crisis in Europe will lead to similar global pain.

IMO when Greece does default, who holds the associated liabilities is widely know – as a result, my hope would be that nothing will really happen.  With nothing happening, the rest of the world will just move on.  The risk is that Greek default actually knocks out a big bank (it looks less likely now that it will knock out a sovereign government – although that remains the big fear in Europe).  Fluffing around in Europe has kept credit conditions tight for at least 18 months longer then they would have been, in the absense of European debt issues – it is starting to feel like some people will have to accept some loses before this crisis can end, and some semblance of global confidence can return.