Ryan Grim at the Huffpost has set off a buzz by claiming that the Federal Reserve exercises undo influence over the economics profession. By his count, there are about 1500 economists specializing in monetary theory and policy, and about a third are employed or otherwise lubricated by the Fed at any one time. He cites several sources who have witnessed the corrupting influence of Fed contracts and invitations, as well as outright censorship. Fed staff and veterans dominate the editorial boards of several journals, including the Journal of Monetary Economics. Is this a conspiracy?
I think Grim’s tale relies too much on partial equilibrium analysis. A better model would incorporate all the functional relationships: how journal publication influences hiring at top graduate departments, how the curriculum in these departments molds the next generation of economists, how students self-select in their education and career choices once they know the biases of their professors, how the self-reproducing ideological bent of the profession influences the Fed, the IMF and other policy/research outfits, and how the ideological and practical demands of the finance sector influence and are influenced by academic research. You can’t pull one piece out of this puzzle and say it controls all the others.
Any good DSGE modeler would tell you this.
18 comments:
"I think Grim’s tale relies too much on partial equilibrium analysis. A better model would incorporate all the functional relationships: ...."
And surely there are objective economists out there (with or without Fed affiliations, past, present or future?) prepared to come up with a better model?
Are there any good DSGE modelers?
In all fields I've noted a particular spinelessness to stand up and voice common sense against the sway. It's as if everyone is more acutely aware that the price of honest thought is not getting that all-important position that'll make the difference between a job and a career. Maybe it's always been like that but the opinion leaders just seem so much more dumb than in the past, making for hordes all going the wrong way. Even today I'll meet economists who declare that no-one could ave foreseen this current recession/depression. I stare at them bug-eyed trying to determine whether they're lying or incompetent.
"...Some sort of numbness seemed to prohibit any awareness fo the magnitude and depth of what was happening. People sat in the movies between production shifts, watching with aloofness and even visible indifference as children were 'saturation bombed' in the narrow cellars of European cities. Man had become an object; and in so far as those for whom he wan an object felt about the spectacle at all, they felt powerless, in the grip of larger forces, having no part in these affairs that lay beyond their immediate areas ofdaily demand and gratification. It was a time of somnambulance."
C Wright Mills 'White Collar'
[As quoted on page 150 of Donald White's 'The American Century - the rise and decline of the United States as a world power.'
This has been a very long sleep indeed.
I think this is an accurate for the entire field of economics - not just a faction.
Economists as a whole have been converted from describing what they see, to providing policy options for Washington - who remains the subject.
The models are designed to describe equilibrium, because a steady state economy of the present type (plus some increase in certain resources) is Washington's aim.
Which, perhaps, is to say, when economists model an economy, the economy they are trying to model is Washington's idealized preferences for economic activity, not the economy as it actually exists.
I am not sure to what extent this reflects interests on Wall Street, K Street, or Pennsylvania Avenue - probably some combination - but it definitely does not reflect the potential inherent in the economy for all of us.
Change: "the entire field of economics" to "most and especially the influential economists"
And I am just throwing it out there as the thinking of a noneconomist, not as a truth.
I agree with Peter that the Grim tale is off somewhat. The JME is the leading journal in monetary economics, but most economists are not monetary economists and failure to publish in it in no way inhibits them. It is however a very influential journal in that field, which is clearly closely linked to what the Fed does. It is also true that its editors favor DSGE modeling, and that is what dominates the basements of nearly all major central banks.
BTW, I find it a bit hilarious to read of Paul Krugman whining about not being to a conference on new economic geography because he "invented" NEG. I shall not regurgitate the details, but longtime readers of this blog will realize that I think this label he put on himself is an exaggeration, even if some ignorami on the Nobel Prize committee last fall seemed to fall for his self-publicity.
So where is THIS in all them fancy models?
The financial wizards all using their dynamic stochastic whirligigs don't seem to look out the windows and see the real world. The forecasters didn't look at their fuel gage either. I really think the collapse of the housing bubble was one of the worst results as opposed to being a cause. Seems to me the housing bubble would have burst eventually as all bubbles do. But the real wake up call was the inability to increase oil supply in step with the roaring world economy and population.
That has naught to do with Keynes or neoclassical nutters. It is just reality.
Brian Leiter had posted on July 16, 2004, at:
http://leiterreports.typepad.com/blog/2004/10/is_economics_a_.html
"Is Economics a 'Science'?"
that is relevant to issues raised by Krugman and Grim.
Greg Mankiw's 9/10/09 post "How Did Economists Get It So Wrong?" provides a link to Barry Eichengreen's answer: "The Last Temptation of Risk" by Barry dated 4/30/09 from the May/June 2009 issue of the National Interest.
Reading all of this is for me, a non-economist, like observing an autopsy. Query: Is hindsight truly 20-20 in economics? Or is the "cause of death" uncertain?
Shag,
As one non-economist to another, I think you should re-read Keynes' "THE LONG-TERM PROBLEM OF FULL EMPLOYMENT" posted here by Sandwichman:
“It becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours.”
Keynes clearly predicted this crisis. He states clearly the reducing hours of work would become necessary - not optional, not a good idea, necessary! - and within 15 years of the end of World War II - (1960)
I think it is no coincidence that the Keynesian Revolution had run aground by the mid-1970s
I found that Barry Eichengreen's article was much tougher on economics/economists than Paul Krugman's article. Barry does not mention as many names as Paul does. Perhaps Barry's audience at The National Interest differs from that of Paul's in the NYTimes Magazine. I note that Barry is described as a Professor of Economics and Political Science, giving him, perhaps, a bigger pair. Barry's article closes with:
"Should this reassure us that we can avoid another crisis? Alas, there is no such certainty. The only way of being certain that one will not fall down the stairs is not to get out of bed. But at least economists, having observed the history of accidents, will no longer recommend removing the handrail."
Today's (9/12/09) LATimes includes an interview by Patt Morrison of "Phil Angelides: The Columbo of Wall Street" reminding readers of the Financial Crisis Inquiry Commission that will address what happened. The Commission's full report is due by Dec. 15, 2010. Meantime, hopefully, there will be extensive coverage of the Commission's activities. Maybe Barry and Paul will appear before the Commission.
Greg Mankiw's blog has added a link to John Cochrane's "How did Paul Krugman get it so Wrong?" Cochrane of the "Chicago School" is obviously miffed that Krugman had critically mentioned him by name in his article. I'll let you know if Cochrane demonstrates whether he himself got it right (i.e., correct, as we know he is "right"). The cat-fight continues.
I think the conclusion to be derived from Cochrane's response is that economists got it wrong because Krugman is an a-hole.
Just a few comments on Johnny Cochrane:
At page 6 he states: "A science that moves forward almost never ends up back where it started. Einstein revises Newton, but does not send you back to Aristotle."
At page 8 he states: "Why argue for a nonsensical future for economics? Well, again, if you don't regard economics as a science, a discipline that ought to result in quantitative matches to data, a discipline that requires crystal-clear logical connections between the 'if' and the 'then,' if the point of economics is merely to to provide marketing and propaganda for politically-motivated policy, then his [Krugman's] writing does make sense."
Is it Cochrane's position that economics is a science in the same sense as Einstein's science? And if Einstein's scientific method were applied to economic models that Cochrane supports, would that confirm the resulting financial crisis?
At the top of page 8 he asks: "Why publish an essentially personal attack on an ever-growing enemies list that now includes practically every professional economist?" Has he fact-checked such list? (Are the EconoSpeak professional economists on that list, any of them?) Cochrane seems to be suggesting that it is only Krugman who is out of step among professional economists. How accurately have all these professional economists excepting Krugman been predictive (as opposed to hinsight) regarding the financial crisis?
I have finally looked at the Cochrame piece, and it is abysmal. His "the economics profession" amounts to a bunch of economists at Chicago and a few of their allies. He continues to diss Keynes, and his excuse for not calling it is that efficient market theory says nobody can predict anything because it is all a random walk.
"Is it Cochrane's position that economics is a science in the same sense as Einstein's science?"
No. Actually, I think his argument is that Einstein's theory fails because Hawkings is an a-hole.
What is in common between the Krugman and Cochrane is the acknowledgement that markets can fail. What is not understood by economists is why markets must fail...
If Cochrane indeed called for a "science" that provides "quantitative matches to data" (didn't read him myself), he has no clue. The number of theories that can be calibrated to data is much larger than the number that can survive rigorous falsification tests. And how much of the Chicago catechism would survive?
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