Economics has problems. Because of Samuelson, it got a half-century case of physics envy. Then people read Schumpeter and McCloskey, and realized economics can’t predict a whit. Economics became useful (ex post) stories, a bit like archaeology or geology.
Then came The End of History (1989) and The Great Recession (2008), and weirdos still talk of evolving economics, but into what they can’t explain. Like Marx redux, they blame ‘capitalism’ or neoliberals, though they can’t go whole hog back to old-style apparatchik economics. Some think that the missing link is a co-equal infant science called psychology.
What to do? At one point, one way out was to study ‘institutions.’ But this seemed like hard work — too much scholarly pain for little gain. But gains there were if you read Coase or Ostrom, or (if you want Keynes to shudder) Hayek.
Perhaps that’s just the way it is. Economists are more like chickens with no heads but imaginarily pecking away at crumbs of intellectual progress. Some toil away at saving the world from falling over a cliff, much like Salinger’s Catcher in the Rye. That’s at least humanitarian if mostly unheralded.
Keynes did say that economists should be more like dentists. Dentists are good guys who help people prevent cavities and enable them to smile. The economist can then go home after a day’s work knowing the economy will still do its wayward thing but not die.
Here’s a link to a discussion on statistics. If you did some thinking, many things you don’t see have a powerful story. Bastiat is famous for the cases of the unseen.
Hat tip to Don Boudreaux.
This piece by Sebastian Mallaby is fundamentally flawed. It doesn’t matter if the Chinese government sold US bonds. They are US-dollar-denominated, and the Fed can of course print US dollars. This makes the US different from everyone else who issues debt in a foreign currency.
The dire consequences of Egypt’s Suez canal debacle do not apply, unless, which is unlikely, the dollar ceases to be accepted as an international currency. For now, the euro, yen, or even renminbi are way behind the dollar in acceptance.
I had thought that Hayek’s use of the markets concept helped to explain why Keynesian economics would ultimately fail. Each market participant would contribute his iota of information to determine prices, which would then reflect collective wisdom. Any tinkering by a “smart policy maker” would be undone, and thus this ended up as the kernel of the Lucas Critique.
But it seems Lucas became the foundation of later work, called RBC and then DSGE models, that came to be touted as “the best there is.” This is of course vainglorious and premature self-congratulation, what with the advent of the 2008 global financial crisis.
The explanation is perhaps that Lucas never really read Hayek. Very few mainstream economists did or do. But here’s an explanation by Paul de Grauwe. In short, de Grauwe considers DSGE/Lucas as “top down” models built on the short-circuitry of rational expectations (“If it doesn’t succeed, it must not have been rational; so it could not have happened”). But models running on Hayek’s ideas are “bottom up” models of incomplete information, which provide an alternative explanation of unemployment even as markets try to do their thing. It is better than Keynes because Keynes simply assumed wage and price rigidities (a failure of some kind of markets) and injected “animal spirits” to explain the Depression.
Bottom line: Lucas was a detour into not-quite-useful rationality. That is why macroeconomics is back to the drawing boards. Kind of like the Wise Guys having to stock up on home-made pasta and mattresses, waiting for a solution to their “territory” problems.
Here’s investment advice based on what the BSP is supposedly doing with its foreign exchange reserves and gold: Sell US dollars, and buy real estate, gold, stocks. In effect, Mangun says that we should think of what’s out there as an emerging inflationary bubble.
Continue reading “If the dollar is weak, will the peso strengthen?”
As the global economy appears to come out of recession, it is natural to worry. Is it a temporary uptick? Will we have another 2008-type meltdown in the financial markets? If not that, what? For the moment, the economics profession has no answers. None. And that makes the ideas of Nassim Taleb “interesting.”
The Taleb critique
Taleb has sparked a firefight of sorts in the killing fields of academia. In his book, The Black Swan, Taleb gives mainstream economics a very bad grade for its empiricals. Taleb claims that economics cannot predict because (a) either what it attempts to predict is unpredictable; or (b) it predicts using a wrong probability model. While I have no quarrel with Taleb, it does not follow that economics is no longer “useful.” Some parts of the discipline should survive.
Continue reading “Economic recovery, false rally, and the Taleb critique”
Here’s a pessimistic answer to the question. But see my earlier post.
An economist, now seen as a “prophet of boom,” is quite optimistic. He thinks the economic model used by the IMF and World Bank staff is “erroneous.” Economists at the two institutions see a bleak outlook for OFW remittances in 2009, while Villegas predicts the opposite. Of course it is already August, and more than half the year is done, and so far the first half has not been bad. The real test is the next six months to a year.
I’m coming to the view that the economy is not that bad because it was never that good. Before, I was tempted into thinking it was not that good because it was never that bad.
Of late, the US economy (and perhaps the rest of the world as well) appears to be getting earlier on the road to recovery than most pundits have been saying. Possibly it is an effect of human psychology. We seem to get too pessimistic about the most recent crash, just as we get too optimistic just before a bubble bursts.
The above is just an educated guess, not a strong prediction.