Tuesday, July 15, 2014

Ancient Economists: Two Views

John Cochrane, reporting from the NBER Summer Institute:
The use of ancient quotations came up several times. I  complained a bit about Eggertsson and Mehrotra's long efforts to tie their work to quotes from verbal speculations of Keynes, Alvin Hansen, Paul Krugman and Larry Summers. Their rhetorical device is, "aha, these equations finally explain what some sage of 80 years ago or Important Person today really meant."  Ivan Werning really complained about this in Paul Beaudry's presentation. What does this complex piece of well worked out "21st century economics" have to do with long ago muddy debates between Keynes and Hayek? It stands on its own, or it doesn't. (In his view, it did, so why belittle it?) 
Physics does not write papers about "the Newton-Aristotle debate." Our papers should stand on their own too. They are right or wrong if they are logically coherent and describe the data, not if they fulfill the vague speculations of some sage, dead or alive. It's especially unhelpful to try to make this connection, I think, because the models differ quite sharply from the speculations of the sage. Alvin Hansen certainly did not think that a Taylor interest rate rule with a phi parameter greater than one was a central culprit in "secular stagnation." I haven't checked against the speech, but I doubt he thought that inflation would completely cure the problem in the first place. 
Sure, history of thought is important; tying ideas to their historical predecessors is important; recognizing the centuries of thinking on money and business cycles is important. But let's stand up for our own generation; we do not exist simply to finally put equations in the mouths of ancient economists. 
But, tying it all up, perhaps I'm just being an old fogey. Adam Smith wrote mostly words. Marx like Keynes wrote big complicated books that people spent a century writing about "this is what they really meant." Maybe models are at best quantitative parables. Maybe economics is destined to return to this kind of literary philosophy, not quantified science.
(via Suresh, who was also there.)

For the case in favor of ancient economists, here is Axel Leijonhufvud:
According to Sir Peter Medawar
A scientist's present thoughts and actions are of necessity shaped by what others have done and thought before him: they are the wave-front of a continuous secular process in which The Past does not have a dignified independent existence of its own. Scientific understanding is the integral of a curve of learning; science therefore in some sense comprehends its history within itself.
... Not every field of learning can claim to "comprehend its history within itself." For the current state of the art to be the "integral of past learning" in Medawar's sense, the collective learning process must be one that remembers everything of value and forgets only the errors and the false leads. But this requires the recognized capability to decide what is correct or true and what is in error or false. These decisions, moreover, must compel general assent. Once an answer is arrived at, it must be generally agreed to be the answer. The field must be one in which answers kill questions so definitively that the sense of alternative possibilities disappears. ... 
A science, or a subfield within it, may come to approximate these conditions because of its positive successes. But two other mechanisms that are not so nice will also be at work. First, the people in the field agree that certain questions, which they would have a hard time deciding, are somebody else's responsibility. So economics among the social sciences, like physics among the natural sciences, had first pick of problems and left the really hard ones, on which their methods did not give them a firm grip, for the younger sister disciplines to deal with as best they might. Second, the insiders to the field will agree to exclude some people who refuse to assent to the manner in which certain important questions have been settled. Both the exclusion of undecidable questions from the field of inquiry and the exclusion of undecided people from the professional group help to achieve collective concentration and intensive interaction within the group. … 
These reflections … offer some suggestions about when scientists might find the history of their field relevant and useful to current inquiry. One suggestion is to look for situations when a research program has bogged down, when anomalies have cropped up that cannot be reduced to or converted into ordinary puzzles within the paradigm. Another is to look for cases in which three conditions seem to be met:
a) certain central questions cannot be decided in a way that commands assent,
b) the (for the time being) undecidable questions cannot very well be left for somebody else to worry about, and
c) the people who withhold their assent from some popular suggested answer cannot be ignored or excommunicated.

... Economists are wont to reduce everything to choices. Economics itself develops through the choices that economists make. To use the past for present purposes, we should see the history of the field as sequences of decisions, of choices, leading up to the present. Imagine a huge decision tree, with its roots back in the time of Aristotle, and with the present generation of economists -- not all of them birds of a feather! -- twittering away at each other from the topmost twigs and branches. 
The branching occurs at points where economists have parted company, where problematic decisions had to be made but could not be made so as to command universal assent. The two branches need not be of equal strength at all; in many cases, universal agreement is eventually reached ex post so that one branch eventually dies and falls away. The oldest part of the tree is, perhaps, just the naked trunk; but the sap still runs in some surprising places. 
If you want to translate Medawar's image of science into my decision tree metaphor, you will have to imagine his sciences as fir trees -- with physics, surely, as the redwood – majestic things with tall, straight trunks and with live branches only at the very top. Economics, in contrast, would come out as a rather tangled, ill-pruned shrub … 
As long as "normal" progress continues to be made in these established directions, there is no need to reexamine the past … Things begin to look different if and when the workable vein runs out or, to change the metaphor, when the road that took you to the "frontier of the field" ends in a swamp or in a blind alley. A lot of them do. Our fads run out and we do get stuck occasionally. Reactions to finding yourself in a cul-de-sac differ. Tenured professors might often be content to accommodate themselves to it, spend their time tidying up the place, putting in a few modern conveniences, and generally improving the neighborhood. Braver souls will want out and see a tremendous leap of the creative imagination as the only way out -- a prescription, however, that will leave ordinary mortals just climbing the walls. Another way to go is to backtrack. Back there, in the past, there were forks in the road and it is possible, even plausible, that some roads were more passable than the one that looked most promising at the time. At this point, a mental map of the road network behind the frontier becomes essential.


  1. I read Cochrane's note as a concession to critics of RBC/NK and all that.

  2. I have to say Axel Leijonhufvud’s long-winded reply does not in any way answer John Cochrane’s provocation. AL just recapitulates the usual excuses of marginalized malcontents who can’t mount a persuasive alternative to the orthodoxy, namely, 1) the orthodoxy sweeps under the carpet all the problems it can’t explain; and 2) the economics establishment oppresses and silences dissidents. And his only remedy is the usual sectarian consolation: return to the sacred texts of Marx and Keynes, who must have been right because they asserted that orthodoxy was wrong.

    Cochrane is right about the intellectual bankruptcy of that approach, but he doesn’t go far enough. The fact that ancient economists are still mined for fresh insights means that economics is not a science at all. The very essence of science is progress: later practitioners refine, redact, supersede and eventually discard the consensus of the past as evidence accumulates and methodologies improve. The reason we don’t still ponder the Newton-Aristotle debate is that physics settled it; it’s a true science capable of resolving questions once and for all as its technologies and concepts grow more sophisticated and rigorous. If centuries-old debates and theorists are still current, if economists now cannot decisively pass judgment on the errors and misunderstandings of their predecessors, then the field is by definition sterile—incapable of building on foundations to achieve new and better insights.

    Heterodox economists are the worst culprits. They don’t realize that by constantly talking up Marx’s relevance and quoting Capital they are demonstrating conclusively that Marxism is bankrupt. If it were not, then Marx would have long since been relegated to the domain of intellectual history and his discoveries would have been assimilated into textbooks and then corrected by subsequent textbooks. If heterodox economics had any scientific relevance than Marx would be considered personally irrelevant now and his intellectual heirs, as Cochrane suggests, would have forgotten about him; they would no more read Capital than physicists read Newton or orthodox economists read Smith. Keynes is in textbooks, but the fact that he is still read in the original is a serious blot on his reputation; real scientists make themselves obsolete.

    1. Will, I some ways I sympathetic but I am not sure it is so simple. There are academic fields other than economics which aspire to being scientific but where data (i.e, the results of random experiments) is fairly hard to come by (due to reasons of cost, practicality or even ethics). This is actually true of biomedical science to a disturbing degree. And the fact that "human sciences" study on object (humans) whose behavior is affected by their beliefs and values is a well known philosophical complication.

      The advantage that physics has is that its laws can be expressed in relatively compact mathematical form. I am not sure this is necessarily true for economics. Much of the sweeping under the rug of unrealistic assumptions and blindness to evidence works is done in the name of "tractable" math. We need to be open to the possibility this type of formulation of economic laws may not be possible (or we should not assume that it is). I.e, we can't assume there there will ever be an econophysics, probably because the behavior of real economies through history will be too complex in relation to the amount data
      data that can be collected from them.

      I think the work that that is being done in agent based models (i.e. computer based simulations) might someday give models that could actually give results that parallel the data from real economies (though evaluating such models might be tricky since I assume these types of simulations may well be dynamically unstable, chaotic).

      The point though is that this methodology will depend on the computer software modeling behavior of consumers, firms, banks and all the other agents and the looking for the aggregate effects. But how one decides if the rules for the actions of the agents is "realistic" is exactly one that involves (in part) applying economic insights or understandings that come from books by dead famous economists.

      The above reasons are why heterodox expressions of the need to move beyond critique to something constructive (including by OGH) are problematic. The problem with poor access to evidence won't be solved easily (and maybe is unsolvable). Heteros and mainstream are caught in the same epistemological trap, one which new theory can't be itself resolve. Computer simulation that tries to comprehensively model and aggregate human and institutional behavior might be an advance but evaluating the models won't be straight forward.

    2. Will-

      I agree this is how things ought to work. Real scientists do make themselves obsolete and science is the kind of knowledge we should be aiming for. But what if things don't seem to be working that way? What if you find that a lot if questions you're interested in seem to have better answers in ild books than in modern work? And what if referring to those old books is the most efficient way to communicate with other people interested in those same problems?

      Of course the real sution is not to become an economist at all. But given that we are committed to this pre-scientific field, I'm not sure that pretending that it is a science is any help.

    3. Incidentally I would never introduce someone to Keynes by giving them the General Theory. (I'd probably recommend Minsky's John Maynard Keynes or Lance Taylor's Maynard's Revenge.) And you are right, the fact that Keynes' own writings have to some extent been superseded is a sign of his success.

  3. What drove Cochrane to make the concession if that's what it is? Waldman recently discussed the distinction between positive and normative economics with the neoclassical tradition possessing a drive to make economics positive and close off normative questions. They want to make it "objective" or appear so which is why math is valued over "words."

    I see the Fed as the Supreme Court of economics and the arbiter of economic traditions and of what's useful. Their job is to maximize employment and price stability in the context of the government's regulatory, fiscal and trade policies. Under Greenspan and Bernanke, the Fed's positive economics failed. Under a "pro-free market," pro-deregulation policy they allowed a shadow banks system which was vulnerable to a Diamon-Dybvig bank run to arise. Likewise they didn't recognize the importance (or existence) of the housing bubble until it was too late and even then Bernanke wrongly believed its effects would be minimal and on the order of what happened with the tech stock bubble.* According to the neomonetarists the Fed was also wrongly focused on energy inflation as the bubble was deflating and the financial system's house of cards was quivering. And then the panic came and the employment-population ratio dropped drastically. The entire financial system was bailed out a la socialism for the rich.

    So people go back to reading the old books and their faith in models is shaken. The "old" economic problems weren't solved after all. Also, old solutions to the "new" problems worked.
    *Bernanke's reasoning was that something *new* was happening in the economy so the old rules no longer apply. Real estate prices were justified. Earlier the tech stock bubble was rationalized because of a "new economy."

  4. A similar but different complaint from David Glasner about economics preference for axiomatization.


    A guy who recently rhetorically curb-stomped Cochrane:


  5. Sorry for the many comments but the post was thought provoking. Cochrane's Republican/neoclassical economics is colliding with reality. From today's news, so is the Tea Party. (see below)

    Above I said the Fed is the arbiter and the measure of contemporary economics. There's also the private sector. In tjhe second of the Glasner links above, he wrote "These models, whether in their New Keynesian or Real Business Cycle versions, do not generate better empirical predictions than the old fashioned Keynesian models, and, as Noah Smith has usefully pointed out, these models have been consistently rejected by private forecasters in favor of the traditional Keynesian models."


    "Late yesterday, the GOP-controlled House overwhelmingly passed a temporary $10.9 billion fix to the Highway Trust Fund, replenishing it until next spring. The White House had warned insolvency could grind state infrastructure projects to a halt and cost as many as 700,000 jobs. As Glenn Kessler explains, this figure is probably overstated. But economic firms such as Moody’s Analytics were warning that failure could imperil the recovery just when it may be poised to accelerate.

    The House GOP fix is loaded with gimmicks, and it defers the tougher decisions over how to keep the fund going over the long term. But it avoids a short term disaster, so the White House is supporting it grudgingly. I’m told the Dem-controlled Senate will likely pass it. “We’ll probably end up passing theirs,” a Senate Dem aide emails.

    Conservative groups such as Heritage Action had warned darkly that Republicans must not “bail out” the HTF. Yet the HTF fix passed the House by 367-55. As the New York Times observes, this was “another in a series of defeats for conservative groups” who think “responsibility for highways and bridges should return to state and local governments.”"

  6. I think that Cochrane has it wrong, for this reason:

    Mostly, what C. dislikes is the lack of "precision" in models, that means that people can give fuzzy and contradictory explanations for everithing and pass this as "science". However he implies (prob. without realizing it) that the correct way to model stuff mathematically is the one currentlly in use.

    A simple example, with my beloved LTV: C. says that "Das Kapital" is a ponderous book full of words and devoid of math, but in facts Marx's theory was really simple and really mathematical. For some reason C. discounts "ricardian" mathematics but (I suppose) thinks that the sentence "workers are paid their marginal productivity" makes more sense, even if said productivity is not measurable (other than referring to the worker's wage, that makes the sentence totally circular). Note that the problem is not at all a difference in "mathemathics" or in "precision", and there is no reason to say that Marx's (or Ricardo's) theory was less mathematically precise, it is just that C. doesn't like their mathematics.
    I think that the same is true for Keynes, that is C. doesn't like a mathematic description that is based on aggregates, and thus says that it is "not mathematics" - but it isn't really more or less mathematic.

    I think that economics (like basically all sciences excluding strictly hard ones) is very much in what Kuhn called the "prescience" stage, and it is very likely that this is a permanent feature. But, because we live in a world were there is a definite scientific community for this sort of things (that wasn't true in the past, say in the 19th century) we perceive these sciences as if there were in their "normal" phase, and infighting between the various schools as "paradigm shifts".

    (For those who didn't read Kuhn's "Structure of scientific revolutions" here is the link to wikipedia:
    and this should be the whole book, from the wiki page:
    I did read the book some years ago and is just fantastic).

  7. the Fed is the arbiter and the measure of contemporary economics.

    The interesting thing is that this is not true at all. It would be more accurate to say that the Fed has nothing to do with contemporary economics. There is an almost complete split between the kind of macroeconomics used by practical policymakers at central banks (and in government, and by business forecasters), on the one hand, and the academic macroeconomics as found in top departments and journals, on the other. Cochrane's latest post is very good on this issue: http://johnhcochrane.blogspot.jp/2014/07/lucas-and-sargent-revisited.html. I'm hoping to write a followup on it.

    1. One thing Cochrane takes care to note is that Lucas and Sargent say, "econometric" quite deliberately. There was a great enthusiasm in the 1960s for elaborate simultaneous equation models of the National Accounts, run by the IBM 360 computers many universities acquired. Many, many young academics were involved in this work. Its failure was thorough, and deeply felt in people's careers, in both academia and big banks and corporations, where a lot of planning activity had been organized around these models. The retrospective storytelling that focuses on the tale of stagflation as a policy failure tends to miss both the strenuous efforts of the Keynesians to implement countercyclical fiscal policy -- efforts that were ultimately done in not by Keynesian ideology but by Nixon's re-election mania, as well as this more academic tale of woe and disappointment affecting that most vital aspect of the academy, personnel.

    2. Well you are correct and I wasn't very articulate. I meant the arbiter of "practical policy" and as i put "what's useful." The Fed still botched it this past 20 years with deregulation, hiking rates in 2007, etc. but as you say central banks and business forecasters use a different economics than what's regnant in academia.

  8. Ah, economists.

    In France, ancien régime refers to the time before 1789. In some history book I read, it referred to the time before the Dark Age. But for economists, ten years is "the long term", so some guy who died three years before I was born must be "ancient".

    A little more on-topic, I hold that "the" business cycle is simply the obvious one; there is also the Kondratieff, and David Hackett Fisher's "great wave" and, beyond that, a Cycle of Civilization which is nothing more than a very large scale business cycle. Anyway, I try to fit things like Say's law into their proper chronology in this cycle, and I see the result as a tentative description of the cycle.

    This way I get to *agree* with all those "ancient" economists that everyone else disputes. To everything there is a season...

  9. Jane Goodall went into the forest and saw that the chimpanzees were making and using tools. And it was something important that no Western scientist knew, so even though she didn't really have any scientific training and probably made a lot of mistakes (like training previously wild animals to depend on the bananas she provided), it was important science.
    A lot of economics is the absolute opposite: we live in the forest, we in fact are the chimpanzees stripping leaves from twigs and sticking them into termite mounds.
    "What are you doing?" the social scientist asks us. "How did you make that tool?"
    "Mmm...delicious," we reply, as several errant termites crawl around on our chin.

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