The State of Macroeconomics
You should, of course, read Paul Krugman’s article on the state of macroeconomics and its failures during the recent crisis. That said, if I were going to try to compose a master account of the situation, I would want a bit less of an economist-explaining-economics to describe what went wrong intellectually than I would an economist-doing-economics — or perhaps the better discipline would be sociology — to look in more detail at what’s actually going on in the profession qua profession, in which people’s life and work is embedded in institutions and incentives. Something like what Barry Eichengreen offered in April (via Brad DeLong):
For economists in business schools the answer is straightforward. Business schools see themselves as suppliers of inputs to business. Just as General Motors provides its suppliers with specifications for the cold-rolled sheet it needs for fabricating auto bodies, J. P. Morgan makes clear the kind of financial engineers it requires, and business schools deem to provide. In the wake of the 1987 stock-market crash, Morgan’s chairman, Dennis Weatherstone, started calling for a daily “4:15 Report” summarizing how much his firm would lose if tomorrow turned out to be a bad day. His counterparts at other firms then adopted the practice. Soon after, business schools jumped to supply graduates to write those reports. Value at Risk, as that number and the process for calculating it came to be known, quickly gained a place in the business-school curriculum.
And academics, too:
But what of doctoral programs in economics (like the one in which I teach)? The top PhD-granting departments only rarely send their graduates to positions in banking or business—most go on to other universities. But their faculties do not object to the occasional high-paying consulting gig. They don’t mind serving as the entertainment at beachside and ski-slope retreats hosted by investment banks for their important clients.
Generous speaker’s fees were thus available to those prepared to drink the Kool-Aid. Not everyone indulged. But there was nonetheless a subconscious tendency to embrace the arguments of one’s more “successful” colleagues in a discipline where money, in this case earned through speaking engagements and consultancies, is the common denominator of success. [...]
Sociologists may be more familiar than economists with the psychic costs of nonconformity. But because there is a strong external demand for economists’ services, they may experience even-stronger economic incentives than their colleagues in other disciplines to conform to the industry-held view. They can thus incur even-greater costs—economic and also psychic—from falling out of step.
This seems at least as important to me as the intellectual arguments. We know that Larry Summers is not a believer in the efficient markets hypothesis and, indeed, 25 years ago was capable of being quite scathing and funny about the sort of people who would believe in that sort of thing. But when financiers start cutting you earning multi-million dollar paychecks you’re probably going to know how to be polite.
39 Responses to “The State of Macroeconomics”
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September 6th, 2009 at 1:35 pm
True; which makes things problematic when it comes to thinking in directions that financial corporations might not like.
September 6th, 2009 at 1:41 pm
That is a really long sentence, you know. Especially when you’re a bit baked.
September 6th, 2009 at 1:43 pm
From Krugman’s column: “The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.”
Nah. It was the Money.
Like some of the ancient Greek Sophists, these fuckers will argue that the sun rises in the West if you pay them enough.
That is what the Math is for.
September 6th, 2009 at 1:47 pm
Gillian Tett is good on that sort of thing — her academic background is in anthropology — but she deals more with the folkways of finance mavens than with economists.
September 6th, 2009 at 1:48 pm
It is difficult to get a man to understand something when his job depends on not understanding it.
Upton Sinclair
US novelist & socialist politician (1878 – 1968)
Krugman alludes to this in his article and references Milton Friedman’s big paydays elsewhere. But of course, he is part of the club himself.
September 6th, 2009 at 2:23 pm
The basic point to be made is that those economic theories that protect the interests of entrenched power will always find powerful supporters. The study of economics is intimately entwined with power politics, a point almost completely ingored by free market idealogues, and, at least in this column, igonored by Krugman.
September 6th, 2009 at 2:27 pm
Sure, because wall street demands emh economists that tell them they are ridiculous overpaid and deliver nothing at all for their outsiced fees
.
September 6th, 2009 at 2:27 pm
[...] Matthew Yglesias shows where to look next, with some pointers towards an analysis of the incentives that led so many [...]
September 6th, 2009 at 2:30 pm
re:
This may be closer to what you want.
September 6th, 2009 at 2:44 pm
Micro-economics is accounting.
Macro-economics is politics with charts.
September 6th, 2009 at 2:50 pm
Really? One of Obama’s Czars is pushed out of office for being a truther/communist/backer of a cop-killer and you feel the biggest news is to cover another one of Krugman’s tired columns? Blackout in full force I guess.
September 6th, 2009 at 3:23 pm
This is interesting…but even more interesting would be to describe the core conceptual problems with the discipline, and even attempt to describe how the reality of markets differ from the dominant models. Krugman’s article was still inside baseball–how one faction of economists got the issues wrong. It would be more worthwhile to think, perhaps, in terms of a reboot: what would we need to do in order to have a discipline of economics that could be valuable to society at large?
September 6th, 2009 at 3:49 pm
Mr. Geithner has been cool to proposals to restrict bonuses
Timmeh is on the job at the G20 meeting, protecting the interests of his true constituents.
September 6th, 2009 at 4:37 pm
A corrupt quasi-empirical quasi-science, neither consistent nor complete, making exaggerated claims for its power and offering business indispensable ideological support.
September 6th, 2009 at 5:01 pm
[...] I alluded to Larry Summers’ paper on “ketchup economics” from the mid-eighties earlier today, [...]
September 6th, 2009 at 5:16 pm
Yes, it’s a lot like how Malcolm Gladwell makes millions making speeches to corporations about the findings of social science (as thoroughly misunderstood by Mr. Gladwell) while somebody who actually knows what she or he is talking about, such as Linda Gottfredson or Arthur Jensen, is never ever invited.
September 6th, 2009 at 5:44 pm
A huge thing to keep in mind, though, is that advancement in academic economics and finance, especially at the highest levels is almost completely based on publication in the academic journals, especially the ones that are considered most prestigious. So the gatekeepers at those journals have a gigantic effect on what economists spend time on, and who gets a prestigious Ivy pedigree, high pay, and prizes.
The system has some severe perversions, as evidenced by the fact that Casey Mulligan has tenure at Chicago, and the economics dark ages that Paul Krugman talks about. There’s a gigantic asymmetric information problem in that those predominantly, ultimately paying for the research, the general public, are little capable of understanding the highly mathematical and technical papers to discern which are highly valuable socially, which are of little value, and which make ridiculous (and extremely harmful) conclusions.
In earlier comments on blogs, to deal with this immensely costly asymmetric information problem, I have proposed that we at least discuss a well financed expert government department, with a professional culture cultivated of loyalty to the public good, to at least study and issue regular reports on the extent to which government research funds are being spent by universities in accordance with social NPV (which does, of course, fully take into account small chances of huge gains over the long run. It wouldn’t, or shouldn’t, look at only short term high probability gains).
And we might want such a department to do more than just study and issue reports (although just that might be hugely beneficial), to have some power to rectify situations where academic departments operate predominantly to advance the careers and prestige, and personal likes and hobbies, and extreme libertarian philosophies of those in control, rather than societal NPV.
Such a department would certainly have potential problems and high cost, but the resulting improvements in academic economics and finance, the taking away of power and prestige and the ability to mislead and confuse from people like Casey Mulligan, this increased intelligence and efficiency could result in tens of trillions of dollars in increased wealth over a generation. This is something well worth paying a great price for. Over several decades, increased growth of just a few percentage points means massive increases in wealth, in the tens of trillions, and in science and medicine. The low social investment, inefficiency, and poor growth over the last generation is largely attributable to what’s been coming out of freshwater economic departments.
September 6th, 2009 at 6:19 pm
I should add, though, sadly, you probably couldn’t give the department I discuss any teeth. They could probably only do studies and reports, if that. The probably fatal problem comes in if a Republican administration is elected. Could you imagine if the Bush II administration had control of such a department with strong teeth? They would try to turn our university economics and finance departments into propaganda mills, where hiring depended only on loyalty to the right wing dogma. If this department had the power, they would install Rush Limbaugh as chair of the Harvard Economics department.
With the way the Republicans are today, we could never have a department like the one I discuss with strong, or probably any teeth. Certainly we couldn’t trust the press to be a watch dog for anything like this, with their disgraceful record over the last generation, especially during the Bush II years.
Still, it might nonetheless do a lot of good to have a well funded department, that we try hard to make independent and professional, perhaps with strong legal protections from partisan takeover and biasing, to study the question of the extent to which academic departments are spending money, hiring, and issuing rewards, commensurate with social NPV. This doesn’t appear to be something anyone is studying, from what I’ve seen.
September 6th, 2009 at 6:51 pm
If I might add an example that’s not really partisan, but more about personal rents of department and journal heads. My former finance department chairman at the University of Arizona, once told me that there’s no such thing as normative corporate finance. You can’t get it published.
And this is by and large what I’ve seen. You can publish a study showing just about anything managers are doing, how they wipe their buts wouldn’t surprise me all that much, but it’s very rare to get a paper published on how managers might do things better. All of the technical skills of corporate finance professors can rarely be applied to how managers can do things better; pretty much all you can publish is studies to discern what they’re doing and thinking. It’s almost all positive.
Partly this is an efficient markets myth thing. What managers are doing must be best because the market is perfectly efficient, so there’s nothing finance professors could teach them, even though professors have certain valuable knowledge and technical skills that few managers have. But partly it’s the equilibrium. Positive corporate finance professors rose to gatekeeper positions at the journals and they want to keep their expertise as hot, prestigious, and marketable as possible, so they let that in, and almost no normative corporate finance, in spite of the great loss to societal NPV.
September 6th, 2009 at 7:49 pm
Professor Serlin,
What makes you think that such a department wouldn’t quickly wind up looking like a freshwater place? And suppose you had real diversity of opinion–a brackish department, say. How would they come to any sort of consensus to write reports on the state of things in economics?
September 6th, 2009 at 7:56 pm
I think that Krugman’s piece is welcome. But of course without the math and theory one really has no idea what is going on in the debate. I know some freshy economists. They aren’t bigwigs, but they really are driven by mathematics (and a priori constraints placed on reality). And they don’t know any better; it’s all they learned in grad school. It is similar to many in the humanities saying things like “all the world is a text” because that’s all they learned in grad school. I don’t think that many apparatchiks are driven by money, at least.
And, *pace* Don, these people really believe what they’re selling (as opposed to the sophists).
September 6th, 2009 at 8:08 pm
I was disappointed in the article.
From quick reading a few things are missing or not helpful.
1. The real estate bubble was more than obvious, even to me, an outsider. Krugman clearly knows this, but didn’t write about it. Its hard to imagine that there are people who call themselves economists who don’t believe in bubbles.
2. Neither school, at least as deep as Krugman’s analysis goes, deals with true social value. Real estate is an example. What are the individual and social value of MacMansions?
3. The real estate bubble seems to have been driven, in part, by rational investors. In my community roughly 1 in 3 houses were being enlarged a few years ago. Why? were families enlarging? Was space really needed? I’d argue that people were making rational investments. Putting $100,000 into home improvement increased the value of the house by 2 or $300,000. Plus, they got benefits like rec rooms. It seems clear that bubbles can be driven by rational investors.
4. The ketchup example is not so obvious to me, either.
September 6th, 2009 at 8:43 pm
Lorax,
This is why I put in, “with a professional culture cultivated of loyalty to the public good”.
Objectivity, unbiasedness, and professionalism in civil service is always a challenge. the country made great strides in this over the 100 years before the Republican dominance of the last generation. We learned many valuable techniques, enshrined many legal protections, and importantly greatly improved the culture and morays. Republicans have done a lot of harm since then, but still I think a lot can be done to create a positive department.
We have in the past seen government research departments operating with a great deal of objectivity and professionalism for long periods of time, like the office of management and budget.
In any case, if the department I proposed for discussion only did studies and reports, and those became highly biased, then they could be ignored, but if they uncovered important knowledge, then many would use that positively, like Krugman, Stiglitz, and many more.
September 6th, 2009 at 9:34 pm
Who needs a bank vault to break into when Wall Street, the derivatives market (as just one example) and often-intentionally-blind regulators are available? Eaaasssyy money. Kind of like the eaaasssyy money Bernie Madoff made off with over all those years. Eaaasssyy money, at least for all those at the top of the pyramid-like financial scheme. The phrase “it oughta be a crime” comes to mind.
I don’t recall seeing in Paul Krugman’s article his using anything close to “it oughta be a crime.” Efficient versus inefficient (for whom?). Rational versus irrational. Economic theory and business practices are discussed, but the idea that some criminal-minded folks (ala Madoff) might rig and/or game the financial system solely for their benefit (ala a financial Mafia) is brushed off.
Our nation’s bank vault has been robbed, as have the life savings and payday-to-payday incomes of countless U.S. citizens, from all walks of life, no matter what political party affiliation, leaving little if any federal monies (or even private) for the widows and orphans in our society. And this was all done deliberately.
Which came first, the chicken or the egg? Or in the case of economics, which came first, ravenous greed or the economic “theory” formulated to provide cover for the ravenous, country-destroying, bank-vault-robbing greed? That’s easy. The ravenous greed, the deadliest and most selfish of the seven deadliest sins, came first, with people exhibiting this attitude coming up with economic “theory” and economic “models” to support their addiction, to provide convenient “talking points” in defense of their resultant criminal business practices.
I had hoped that with President Obama being elected president that there would be a new sheriff in town, a majority-elected replacement for the Barney Fife or Inspector Clouseau of presidents we had previously over eight long, long, nation-pillaging years, during which it became abundantly evident that there was no cop on the beat (especially on Wall Street) and the criminal-minded greed-monsters ran amok, raping and pillaging for everything they could lay their hands onto and carry off to their exclusive gated-community mansions.
Hopefully someday, President Obama will don his sheriff’s hat and do what is best for our country, holding accountable all those who have done so much damage to our nation, instead of lamely saying that we should overlook all the crimes committed by officials in the previous Bush/Cheney administration, and look forward instead. Sorry, President Obama. This would be like telling a Mafia kingpin that their past “indiscretions” would be overlooked, but play nice in the future. Yeah, right.
September 6th, 2009 at 11:08 pm
The word “mortgage” only comes up once in Krugman’s enormous article and that one use doesn’t refer to the mortgage meltdown that launched the recession. As Alyssa Katz of Mother Jones’ new book “Our Lot” demonstrates, the government has been increasingly intervening in the mortgage market for decades to get more lending to lower income and minority borrowers:
“How did Fannie Mae and Freddie Mac … turn into the world’s biggest funders of Wall Street-backed subprime mortgages? … It all started with the best of intentions, with … the activists who demanded bank loans for the poor and urban.”
http://vdare.com/sailer/090830_homeownership.htm
September 6th, 2009 at 11:30 pm
Yeah, at the bottom everything is basically always Negroes.
September 7th, 2009 at 12:14 am
Yeah, at the bottom everything is basically always Negroes.
And the top too, have you seen our president?
September 7th, 2009 at 9:40 am
At least Matt is doing something with this post to help the unemployment situation by creating job opportunities for jizz moppers to clean up after yet another “economists don’t know nothing” circle jerk.
September 7th, 2009 at 11:04 am
In his current article, Krugman takes down monetarism. Monetarism is the gift that keeps on giving to statists like Krugman. Monetarism is a government program (slow, steady Fed monetary dilution) that’s bound to fail, and when it does fail, the statists can again celebrate the alleged collapse of laissez faire. Which, of course, has not been tried.
Even liberal Salon.com notes that Krugman has ignored the Austrian School. The Fed and its supporters are in a panic about Ron Paul’s Audit-the-Fed bill (just this week, there is a new scaremonger article by Alan Blinder that fails to mention Austrian theory). Ron Paul’s actions are inspired directly by Austrian theory. Austrian theory is now quite newsworthy. If it were this horrible, misguided theory that will allegedly destroy the American and world economies, I would think that all of the great minds of the Keynesian world could put together a short and precise refutation that would vanquish Ron Paul once and for all. The truth is that the Keynesians like Krugman are scared to death of the Austrian School and will never allow it to be presented fairly to the public because Keynesianism is now and has always been a scam. Austrian theory is like Krytonite to Keynesians. They will avoid and ignore it at all costs.
Let’s not forget that it was Krugman who repeatedly called for Fed monetary dilution to create a housing boom in the early part of this decade:
1. “During phases of weak growth there are always those who say that lower interest rates will not help. They overlook the fact that low interest rates act through several channels. For instance, more housing is built, which expands the building sector. You must ask the opposite question: why in the world shouldn’t you lower interest rates?”
2. “Will the Fed cut interest rates enough? Will long-term rates fall enough to get the consumer, get the housing sector there in time? “
3. “And the job losses would have been much worse if the stock bubble hadn’t been quickly replaced with a housing bubble.”
Thanks to Guardians of the Ancient Faith like Krugman and Yglesias, the ultimate source of the monetary dilution, the boom and bust cycle and price inflation (the Fed) may never be spoken in polite company. Krugman’s main task is keeping the general public from understanding the simple truth while convincing everyone that economics is arcane and incomprehensible to anyone other than “geniuses” like himself and that the fiat money inspired bust was caused by the “free market”.
Krugman’s rants should properly appear in the style and fashion page of the newspaper right next to “What Not to Wear”. They would be called “What Not to Think or Say”.
I guess the only positive thing one can say about the article is that he didn’t mention Marxism, that great end-time death cult (gosh, Vyacheslav, if we whack these 7 million Ukranians, it will result in the magical transformation of society into the final stage of Socialism!)
September 7th, 2009 at 11:19 am
Re: How did Fannie Mae and Freddie Mac … turn into the world’s biggest funders of Wall Street-backed subprime mortgages?
You need to learn something about the secondary mortgage market. A mortgage sold to the GSEs is NOT a “Wall Street backed” mortgage. And a mortgage that has been securitized by Wall Street is not a mortgage that can be sold to the GSEs.
September 7th, 2009 at 11:48 am
[...] couple posts from Matthew Yglesias, here and here. Yglesias: Since I alluded to Larry Summers’ paper on “ketchup economics” from the [...]
September 7th, 2009 at 1:40 pm
I’ve done virtually no reading on economics, but I do know other fields, such as animal behavior.
How can economists possibly feel that markets are perfect? It’s easy to document instances where rational behavior for the individual is disastrous for the group. A good example is vaccination. Vaccination involves risk for the individual that may exceed the risk of getting the particular virus. Indeed, if everyone else is vaccinated, it makes great personal sense not to be inoculated. But the concepts of public health require group practices that are frequently not optimal for the individual.
Another example is signing up for the armed services in wartime. Clearly, this is a dangerous choice for the individual, but individual choices of this sort are may be required for the survival of the nation or the group as a whole.
Society develops mechanisms (morality, laws) to cope with these issues. In animal societies these are dealt with by altruism. But, from what I can tell, “efficient markets” theory says that rational, self-serving individual choice is always perfect.
September 7th, 2009 at 2:52 pm
“How can economists possibly feel that markets are perfect?”
I would say most don’t (but most of the gatekeepers at the journals do/did or have/had an incentive to act that way to make their research more marketable), but how could Edward Prescott feel (or intentionally lie and mislead for his libertarian cause) that the Great Depression was one big extended voluntary vacation from work — and then get awarded the Nobel Prize????????!!!!!!!!!!!!!!
Something is obviously very wrong with those who have taken over the rewarding and gatekeeping positions in economics.
September 7th, 2009 at 7:06 pm
Professor Serlin:
With all due respect, calling someone like Prescott a libertarian is quite a misnomer. Mr. Prescott is a Federal Reserve operative who has written that the claim that monetary policy causes booms and busts is a myth.
The Federal Reserve does indeed cause booms and bust and when it does, this is the result of deliberate government policy, the intentional dilution of the money supply. However, statists invariably wrongly blame the ensuing disaster upon the free market.
I also submit that most of the points made by Prescott in the 2006 paper to which I linked supra are preposterous.
September 7th, 2009 at 8:06 pm
another one of Krugman’s tired columns
That would be “a 7,000 word article”. Thanks, choad, for once more proving that you’re a subliterate turd on training wheels.
Thanks, Bobbis, for preaching your Austrotological creed in copy-and-paste tediousness, and once more showing no whit of understanding of economics, Austrian or otherwise. Zombie Mises will be proud.
And thanks, Sailer, for showing why you can put a professional racist in a suit and tie, and he’ll still make the room look ugly and smell bad.
September 7th, 2009 at 8:34 pm
To pseudonymous in nc:
Brilliant point by point refutation with facts, logic and historical data. Well done as always.
September 7th, 2009 at 11:49 pm
Oh, Bobbis, you can leave your literature on the doorstep, as usual.
When you show more than a passing acquaintance with economics, as opposed to a cultist’s zealotry and paranoia, you might be more than a laughable caricature.
September 8th, 2009 at 10:26 am
This is the best of all possible worlds. Our markets are efficient and our economic decisions are rational. They must be or they wouldn’t have produced this: the best of all possible worlds.
September 9th, 2009 at 10:50 am
Richard H. Serlin,
I enjoyed your posts here. However, I clicked through to your blog page and read your biographical blurb. I would recommend dropping the bit about “tied for highest GMAT score in my MBA class”. Seriously, you had to include that? First, how exactly did you obtain that data about your fellow students? Second, who cares?