I'm a big fan of Krugman but I find his defense somewhat question begging-that somehow the failures are the failures of economists but the economic theory they believe in is wholly innocent.
"It is deeply unfair to blame textbook economics either for the crisis or for the poor response to the crisis. The mania for financial deregulation, for example, didn’t come out of standard economic analysis — in fact, it flew in the face of the canonical model of banking crises, Diamond-Dybvig, which suggested both a crucial role of government guarantees to prevent self-fulfilling panics and the need for regulation to control the moral hazard such guarantees would create. It’s true that few economists tracked the rise of shadow banking that bypassed the traditional safeguards — but that was a problem of vigilance, not bad theory."
http://krugman.blogs.nytimes.com/2013/11/27/the-trouble-with-economics-is-economists/?_r=0
The trouble is which textbook does he have in mind? If it's Paul Samuelson's The Foundation of Economics maybe there's something to it. Still, I find it lacking as an explanation: if a theory is as sound as he believes it is then why do all practitioners of it get it so wrong? Why is it so easy to misunderstand this theory? In fact Krugman himself has at times admitted that even the IS-LM, 'old Keynesian' neoclassical synthesis was something of a tenuous consensus. Then as a 'kind of, sort of New Keynesian' he offers a 'sort of kind of, sort of' defense of EMT:
"Efficient markets theory arguably deserves more blame for the failure of too many economists to recognize the housing bubble, but textbook economics always presented EMT as a baseline, not a revealed truth."
Why does EMT also get so misconstrued? Krugman himself always admits that he never saw anything to worry about in terms of a housing bubble-is this not thanks to EMT? Speaking of EMT, I wrote a few posts about this debate and Simon Wren-Lewis' defense of it a few weeks ago. One trouble with EMT is that mainstream guys like WL always say it's being misused by why is it so conducive to being misused? I think the problem is that it's not so easy to clearly demarcate the difference between legitimate and illegitimate uses of EMT.
http://diaryofarepublicanhater.blogspot.com/2013/11/simon-wren-lewis-makes-case-for.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29
Wren-Lewis while another kinda, sorta NKer sounds rather like Sumner when he's forced to defend mainstream macro as a whole. He wonders if heterodox guys can even hold a conversation with mainstream economists.
http://mainlymacro.blogspot.co.uk/2012/07/can-heterodox-economists-constructively.html
Here is his defense of mainstream-ie, Neoclassical-econ:
"Mainstream (orthodox) economics is having a hard time in the pages of the Guardian. First Aditya Chakrabortty writes “How do elites remain in charge? If the tale of the economists is any guide, by clearing out the opposition and then blocking their ears to reality. The result is the one we're all paying for.” Then Seumas Milne adds “Any other profession that had proved so spectacularly wrong and caused such devastation would surely be in disgrace.” In this post I want to say why such attacks are wide of the mark, but also say something about how these attacks gain traction, and why they suggest changing the way the subject is taught."
"It is deeply unfair to blame textbook economics either for the crisis or for the poor response to the crisis. The mania for financial deregulation, for example, didn’t come out of standard economic analysis — in fact, it flew in the face of the canonical model of banking crises, Diamond-Dybvig, which suggested both a crucial role of government guarantees to prevent self-fulfilling panics and the need for regulation to control the moral hazard such guarantees would create. It’s true that few economists tracked the rise of shadow banking that bypassed the traditional safeguards — but that was a problem of vigilance, not bad theory."
http://krugman.blogs.nytimes.com/2013/11/27/the-trouble-with-economics-is-economists/?_r=0
The trouble is which textbook does he have in mind? If it's Paul Samuelson's The Foundation of Economics maybe there's something to it. Still, I find it lacking as an explanation: if a theory is as sound as he believes it is then why do all practitioners of it get it so wrong? Why is it so easy to misunderstand this theory? In fact Krugman himself has at times admitted that even the IS-LM, 'old Keynesian' neoclassical synthesis was something of a tenuous consensus. Then as a 'kind of, sort of New Keynesian' he offers a 'sort of kind of, sort of' defense of EMT:
"Efficient markets theory arguably deserves more blame for the failure of too many economists to recognize the housing bubble, but textbook economics always presented EMT as a baseline, not a revealed truth."
Why does EMT also get so misconstrued? Krugman himself always admits that he never saw anything to worry about in terms of a housing bubble-is this not thanks to EMT? Speaking of EMT, I wrote a few posts about this debate and Simon Wren-Lewis' defense of it a few weeks ago. One trouble with EMT is that mainstream guys like WL always say it's being misused by why is it so conducive to being misused? I think the problem is that it's not so easy to clearly demarcate the difference between legitimate and illegitimate uses of EMT.
http://diaryofarepublicanhater.blogspot.com/2013/11/simon-wren-lewis-makes-case-for.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29
Wren-Lewis while another kinda, sorta NKer sounds rather like Sumner when he's forced to defend mainstream macro as a whole. He wonders if heterodox guys can even hold a conversation with mainstream economists.
http://mainlymacro.blogspot.co.uk/2012/07/can-heterodox-economists-constructively.html
Here is his defense of mainstream-ie, Neoclassical-econ:
"Mainstream (orthodox) economics is having a hard time in the pages of the Guardian. First Aditya Chakrabortty writes “How do elites remain in charge? If the tale of the economists is any guide, by clearing out the opposition and then blocking their ears to reality. The result is the one we're all paying for.” Then Seumas Milne adds “Any other profession that had proved so spectacularly wrong and caused such devastation would surely be in disgrace.” In this post I want to say why such attacks are wide of the mark, but also say something about how these attacks gain traction, and why they suggest changing the way the subject is taught."
"One frequent accusation, very evident in Milne’s piece, and often repeated by heterodox economists, is that mainstream economics and neoliberal ideas are inextricably linked. Of course economics is used to support neoliberalism. Yet I find mainstream economics full of ideas and analysis that permits a wide ranging and deep critique of these same positions. The idea that the two live and die together is just silly."
Why is it silly? I mean it could be wrong but there's nothing that he said in this quote that makes it obviously wrong-only when you say something obviously wrong is what you say 'silly.' First of all, one would have to unpack what W.L. even means by 'neoliberal'-which already makes the answer non-obvious and so not silly. I do know that NC has been used to justify many bad ideas; here is an example of Noah Smith using it to export NL to Japan:
W.L. also claims that orthodox econ makes it crystal clear that austerity is a bad idea in the middle of a deep recession.
"The absurdity of linking mainstream economics to all our current problems is also obvious if you think about austerity. As I never tire of saying, the proposition that austerity was a crazy thing to try in this recession is prominent in the pages of undergraduate and graduate textbooks. It is what mainstream economics, as practiced in central banks, tells us. Now I agree that it is a great shame that some influential economists sometimes seem to ignore or have forgotten what is in these textbooks, or put their own textbooks aside to provide support for particular political parties. However it remains the case that the most effective critic of austerity is using totally orthodox economics."
One thing that makes me think that WL overstates the case is how strident he sounds hear-almost like Scott Sumner or something. The snide jibes at 'silly' and 'absurdity' suggest this is less a reasoned intellectual argument than just defensive name calling. He also complains about those who criticize the NCers for not predicting the crisis.
"Nearly all complaints about that mainstream start off with the economics profession’s failure to foresee the financial crisis. Again it’s important to make some fairly basic points. First economics is not just (or even mainly) about trying to forecast the future. The percentage of the profession that made this mistake is tiny. Another one of my favourite lines back from when I did forecasting is that macro forecasts are only slightly better than guesswork. We know that, both from past evidence and the models themselves. It is a difficult message to get across, because a very visible part of economics - making decisions about interest rates - necessarily involves forecasts, and the media loves simplistic messages, but institutions like central banks do their best to emphasise the uncertainty involved."
He's right that econ is not just about predicting the future. However, one can't help but think that the reason the mainstream-and Krugman admits he's on this list-did so poorly is because they believed in EMH and this said that there couldn't be a bubble. At the end of the day Krugman and W.L. don't sound so different than Greenspan on this belief that bubbles don't happen or don't matter.
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