TVHE

A famous quote from Keynes:

When the facts change, I change my mind. What do you do, sir?

This is what John Key really needs to say about the “revelation” that he wouldn’t increase GST in 2008.

John Key now knows that increasing GST and reducing income tax is seen as a way to improve economic efficiency – so he is willing to do it.  When he said they wouldn’t do it, it was because the facts he was labouring under were different.

Criticising him on the basis of a speech in 2008, before the impact of the great financial crisis was clear, is petty – shame on the politicians, and other members of society, indulging themselves in this.

Excellent quote (ht Economist’s View):

Popper’s critique of historicism, then, can be rephrased as a compelling critique of the model of the natural sciences as a meta-theory for the social and historical sciences. History and society are not law-governed systems for which we might eventually hope to find exact and comprehensive theories. Instead, they are the heterogeneous, plastic, and contingent compound of actions, structures, causal mechanisms, and conjunctures that elude systematization and prediction. And this conclusion brings us back to the centrality of agent-centered explanations of historical outcomes.

Agreed with this 100%.  Fundamentally, the usefulness associated with the study of economics comes from its framing and discussion of tendencies – not from the precise value of its predictions.

An understanding of individual actions and incentives allows us to describe what has happen and inform policy – but it does not give us a crystal ball with which to see the future, or figure out exactly what will maximise social happiness.

That is why we economists never seem to agree with each other.  But when we do agree, it is probably a good idea to listen, as there must be a rare combination of compelling factors driving such an unlikely event

Note:  To clarify what I think the quote says that I’m agreeing with.  I believe it says that we can’t come up with some holistic model of society that will spit out nice predictions – we can only try to understand society through the behaviour of individuals given observed actions.  This sounds like methodological individualism to me …

As we’ve said before, the first port of call for economists is trying to frame an issue as objectively as possible.  However, in a practical sense many economists can’t help jumping in and adding some conclusions along the way.

Now, I’m no philosopher so I find it handy to keep some rules of thumb in mind when trying to figure out what value judgments seem “reasonable” to me.

the frailty of life matters more when you are on the wrong side of it

(Unattributed as I can’t remember)

This quote makes me think of two important issues when I use value judgments to reach a conclusion:

1. Value is subjective and built on experience, so how something makes a person feel and how it came to make feel that way does matter.
2. My own values are subjective and built on experience, so I need to correct for my personal bias when I initially look at an issue.

This is something that some other analysts need to think about, especially when they make comments like:

Being drunk in a public place should be made illegal and fines should be given to those caught

From David Chaplin’s blog on the Herald site:

If New Zealanders have a love affair with property investments, it’s one where government and regulators have acted as pimp.

That is awesome – and very true.

From mouse on the rates blog comes this awesome quote:

It looks like Infometrics have been Smoking some “Green Shoots”.

Given I work at Infometrics, this quote is going to make its way onto my wall.  Bloody brilliant

From here:

Macroeconomics failed in this crisis because it has for ages under-rated the importance of the stuff we (might) learn in industrial organization classes

Industrial economics is effectively applied microeconomics in the field of the economy (as compared to some of the more social fields that some microeconomists have moved into). I have always believed that current macroeconomics is simply an application of applied micro from 20 years earlier. Given the amount of progress made in industrial economics over the past 20-30 years I agree with this quote, and can see why an ignorance of these lessons has lead us to some observable errors.

Furthermore, I agree with this quote as it paints the future of macro in “methodological individualistic” terms – specifically we want to understand the behaviour of the individuals in a system in order to understand, and then predict, how the system will work.

I fear that macro will move back to the Friedmanesque interpretation of economic models – where all that matters is current predictive power, not the underlying “truth” of the assumptions driving the model. Why do I fear this? Well, when something goes wrong and the model stops forecasting well (which it will), if we don’t understand the assumptions we don’t know where to look for the failure.

However, I have to admit that trying to apply these lessons to an aggregate framework (which we need for macro) is a lot harder than it sounds. A factor that may make my dreams more of a pie in the sky fantasy than an actual realistic prescription for the direction of the discipline.

Update: Anti-Dismal has a related post on criticisms of macroeconomics and DSGE models. I agree with him on this point “much of the criticism aimed at DSGE models seems to result from a failure to understand the use of the DSGE model”. However, when looking at macro we have to ask – did macroeconomists maybe exaggerate the scope of their own models to get attention? If so I think maybe we deserve a little criticism to put us back in line. However, don’t throw the baby (DSGE modeling) out with the bathwater.

I also discussed criticisms of macro here in March.

The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery.

— Winston Churchill.

So, really, it’s all about value judgments.

I heard the following gem round the water cooler at work:

Beer makes economics happen

I felt that given it is a Friday, and given that there is a lot of economics going on, this quote was felt especially poignant.

Personally I think Jagermeister is a better economic stimulant – but I understand that I’m in the minority.

This was a quality quote (ht Economist’s View):

Paradoxically, then, the current disarray within the profession is perhaps a better reflection of the profession’s true value added than its previous misleading consensus. Economics can at best clarify the choices for policymakers; it cannot make those choices for them.

I have to admit – I agree with Dani Rodrik a more during a credit crisis than I do outside of one (although, it is a small sample ).

Note the last statement in the quote – we cannot make choices for policymakers. Why? Because it involves making value judgments we are ill equipped to make. I was concerned that economists had forgotten about this – but it turns out I was just looking at the wrong economists!

However, given his own argument – why did he term contemporary macro a failure? Is it because he thinks that the use of a scarce resource (time) in a role that isn’t offering the best social return is bad? I think we need someone to frame a potential incentive issue for macroeconomists here (wink wink Rauparaha )

A quote that currently hold resonance with me:

I disapprove of what you say, but I will defend to the death your right to say it.

This quote is often misattributed to Voltaire – in fact, before I fact checked it today I thought it was a quote from Voltaire.

This quote helps me find peace in the face of different value judgments that I don’t agree with or don’t understand.