Economics to non-economists – Part II

One of the great problems economics has as a discipline right now is its inability to communicate clearly with non-economists.  To make it worse, people like Paul Krugman, who are political commentators, use the language of economics to lend credibility to their political assertions – typically using very bad economics.  More than anything, the politicization of macoeconomics has contributed to the public perception of economics as a non-scientific discipline.

I don’t post to other blogs or news sites very often, but in this case, I got a response from the author, so I continued being contentious… This is long and ridiculous, so don’t worry about it if you don’t want to read the whole thing… some comments I removed for brevity (hah!) but you can find the whole thing by clicking here.

“B” is me… and I admit, my first post was a little rude.  I think I was annoyed.

  • You’re correct, you are not an economist and you clearly do not understand the discipline. Stop reading political economists (like Paul Krugman) and crack open an Econometrica article. That’s where real economic research is happening – and yes, economists agree on a set of general principles.

    • No need to be so defensive. And sorry, but pointing to a subscription only journal (or “society” as they call themselves) doesn’t really defend your views. I don’t doubt that there’s a lot of good empirically based economics occurring. In fact, I regularly point it out. But it’s certainly not mainstream. And there’s certainly no agreed upon set of general principles influencing mainstream economics. Unless of course, you can convince me that the three basic questions I posed are uniformly agreed upon. But we know that’s not the case. So there’s little more than rhetoric behind your overly defensive comment.

      If you have some factual basis for your view and something other than a subscription based link then please inform the group. I am certainly not so closed minded that I wouldn’t want to be corrected here….

        • Or the cause of unemployment. Or the concept of “inflation”. In economics, these should be the equivalents of physics concepts like gravity, basic elements or similarly basic concepts, but in economics, they’re not even remotely agreed upon. And of course, now that lots of people are realizing the very basic flaws in the way economics is done, many economists (not all) are getting very upset that people think they haven’t developed the field in a very useful manner….

          • I think that for many macro economists that the basics are well understood, just as in Physics. There is real productivity and real consumption. Roughly that’s it. I would hope that anyone with a college education understands that.

            Take it one step further, and you have the accumulation, decay, and distribution of past productivity. Immediately you have a system which is very complex relative to a lot of physics. And we haven’t even introduced abstractions like money.

            Money is a completely artificial human construct no matter how you define it. It seems unrealistic to compare this to nature (physics). Analytically we can construct a system where all productivity and consumption is accounted for in real time and so the quantity of money is zero at all times. But although easy to write down mathematically and easy to understand if math (calculus and differential equations, …) is your language, it doesn’t work for people in general who don’t think that way. Most people probably don’t want to know that money is a completely artificial, and therefor meaningless economic entity.

          • Exactly, economists should follow the operational definition principle as in physics to define physical units (i.e kg, cm, …) for measuring the quantity of physical concepts such as gravity, etc.

            I do not see any problem in defining various sets M as some combination of MB, M1, M2, M3, MZM, others in economics. The important is that basic economic notations must be computable or in terms of other measurable notations. It is tortured in reading economics papers with undefined or no measurable notations such as M defined as something like “quantity of money”, U defined as some utility function, etc.

            Currently, economists do not have any set of “principles”. What they really have is a set of “assumptions” in each school of economic thought, These assumptions often are not self-obviously true and cannot be used for basic principles as axioms for further deduction in a sound methodology. It is not problem in math. It is the problem in applying abstract math to real economic entities.

      • It’s old and tiring to see non-economists judge an entire discipline. For an example of agreed upon general principles of economics, pick up any undergraduate or intermediate graduate level text book. The agreed upon principles of economics generally come from microeconomics, where the foundations are solid and well proven (think of something as basic as the concepts of supply and demand, or the intertemporal allocations of consumption and investment). I don’t know what you mean by “mainstream economics,” but perhaps you are referring to the larger macroeconomic debates playing out in the public sphere, and I agree that those are overly political and extensively biased. The links between the well established microeconomic foundations of economics and the field of macroeconomics are often theoretical and evolving. This is analogous to the links between quantum physics and general relativity being under debate and evolving – economics is dynamic and evolutionary just like any good science. Unfortunately, a few economists have politicized it.

        I would argue that many of the good research articles published in top-tier journals are in fact mainstream, but are not necessarily “sexy”. They involve questions such as “what happens when financial regulations limit deposit taking institutions’ abilities to engage in risk,” or “how will globalized and mobile labor forces impact agricultural development,” the dynamics of which are challenging for laypersons, but are very mainstream, timely, and important questions. 99 percent of economists are engaged in answering questions such as this, or constructively adding to the discipline’s growth.

        The three questions you asked are macroeconomic and conditioned on systemic and microeconomic forces that create significant “noise” in the answers – it’s like asking “where does dark matter originate?” The fact that physicists can’t answer the question does not call into existence their scientific discipline, does it? Why is economics different? Is it not a science permitted to evolve to answer questions of significant complexity? You can’t pose three questions out of thousands of potential questions and then judge an entire discipline based on its inability to provide specific answers. Most economists would tell you there are “many” potential factors involved in unemployment and inflation, and that we neither know them all nor how they interact. Check back in 50 years and maybe we will be further along.

        • “The agreed upon principles of economics generally come from microeconomics, where the foundations are solid and well proven (think of something as basic as the concepts of supply and demand, or the intertemporal allocations of consumption and investment).”

          I not sure about this. In science, researchers do not “agree” about principles, but rather they create objective (or as objective as possible) methodologies by which to test a theory. In economics, however, it is true and documented that economists had decided early on to “agree” on a set of principles in order to start somewhere, since they could not apply the experimental method to economics (see e.g. P. Samuelson’s writings about the need to “assume” the validity of the ergodic hypothesis).

          An actually those foundations you mention are anything but solid. Steven Keen deals with a lot of this in his book “Debunking Economics”, especially regarding the micro foundations. Then there is the problem of the connection between the micro and the macro foundations. For example, it cannot be demonstrated that the aggregation of individual upward sloping supply and demand curves results in an aggregate supply-demand curve which is also upward sloping.

          I am sure some other bloggers will have to disagree with this very strongly …

          • By the way, it is also true that the standard textbook economics is dominated by the classical current of economics, which has come to dominate the academic world for a variety of more or less legitimate reasons.

            In reality, there are many alternative currents of economic thought that are deliberately never mentioned. While every theory has its flaws, the uncritical way that the classical theory is taught is a problem. Look no further than e.g. monetary theory.

          • Yes, you are correct on several points:
            1. Economics has a well agreed upon set of methodologies by which it tests theories.
            2. Economics is challenged by its inability to apply true laboratory testing to its subjects/theories.

            I also agree (and stated in my post above) that the links between micro and macro economics are challenging and incredibly complex. Economics does not have the answers, only theories. However, the theories are themselves built on the foundations of classical economics, which are mainstream because they are generally observable. You are correct that the extrapolation of microeconomic theories, observable at the microeconomic level as valid, to macroeconomic theories often does not work (disclaimer: I am not a macroeconomist). My analogy above was to indicate that this is no different than the ongoing research in physics to find links between quantum physics and the theory of relativity.

            But I disagree with the statement “those foundations you mention are anything but solid.” I would argue that the majority of economists accept them as testable and observable, hence the reason (one of them) that they make up the body of classical economics and are taught as mainstream.

        • I studied finance at Georgetown and took a number of basic and advanced economics classes. I’ve also been a financial professional for over a decade so I am not exactly a “layperson” or someone who hasn’t developed a sophisticated and well entrenched understanding of these concepts. So I am very familiar with the curriculum, textbooks and economics in general. And I would respectfully disagree that your “general principles” are well taught or even necessarily accurate. For instance, the concepts of the money multiplier, IS/LM curves and even the concept that savings = investment are all “basic” concepts that are simply wrong or incorrectly explained in many of the textbooks.

          I also don’t think the concept of “money” is anything remotely similar to the concept of dark matter. Money is actually something that should be very easy to define, but is not defined well in economics because economics is poisoned by policy biases. The same is true for concepts like unemployment and inflation.

          I agree that I am being (necessarily) general (as is the nature of blog posts), but I don’t necessarily think that makes my criticisms invalid. I am sorry if you take my criticisms personally. Frankly, I think the criticism is welcome because it will force more people to think differently about the field and push to make better changes. Maybe you don’t see it that way. If so, I apologize. It’s nothing personal.

          • You have selected some “basic” principles that are very old and have been built upon significantly. If you want to see some modern and relatively interesting financial economics (which I admit is not my specialty) then read John Cochrane’s blog (although the blog is sometimes political, his research is not). Additionally, I do not know why you posit that the concepts are “wrong in many textbooks,” which to me is a return to your original argument that there is little more than rhetoric behind your comment. Are they wrong because they have not stood the test of time, or because new theories have replaced them, or because they do not reflect what we see in the world at this time? Or are they too simplified to explain everything we see?

            It is interesting that your selected topics are entirely from macroeconomics; why ignore the microeconomic principles and methods that are well accepted as the foundations of economics? I am not taking it personally, but I totally disagree with the idea that you can judge a discipline based on three unanswered questions. Am I allowed to call into question the discipline of finance because it cannot tell me why market volatility is near all time lows? Or is it possible that there are many unknowns?

            • I would actually hope that you do call into question my assertions and the field of finance! The world of monetary economics is, by definition, filled with unknowns because it is a construct of the human mind. A monetary economy is not like physics or the physical world. It is something we completely made up to serve our various needs. In many ways, it’s like the concept of beauty. What the hell is that? Does anyone know what beauty really is? Or did we just construct it in our minds to serve as an explanation for something we think we know/understand?

              Anyhow, I am being admittedly general with my criticisms. Yes, there are sound microfoundations, but aren’t we ultimately trying to understand macro concepts like what causes inflation, what causes unemployment, what causes the economy to grow, contract, etc? Maybe those aren’t the things you’re interested in, but this is a macro focused finance/econ blog so those tend to be the things I focus on. And I think modern economics has done a pretty miserable job explaining these things. And it’s my opinion that this is, in large part, because macroeconomists don’t do a very good job of understanding the real world.

              I could be totally wrong of course. I don’t doubt that. But from my view it looks like there are some big flaws in the way economics has come to some of its most important conclusions (or lack thereof).

              • Macroeconomics has a long way to go, but I would caution you against short-changing it because it can’t answer your questions up front. Economics as a discipline has significant furthered our understanding of the world in many fields and brings methodologies to bear that contribute significantly to many fields of study, from finance to behavior to agriculture.

                I find your argument to be a straw-man: the fact that we “made it up” should not preclude our ability to study and understand it. It does not follow that because it is a construct of human invention we cannot eliminate the unknowns. If you want someone to show you beauty, go to a marketing firm that designs advertisements – they will show you a generally agreed upon vision of “beauty.” Whether you agree or not is up to you, but they can guarantee that their version of beauty will sell.

                You said it yourself: a monetary economy is here to serve our various needs. That is the most fundamental, undergraduate definition of economics: the use of scarce resources to meet our needs.

                As to your question: no, many economists are not engaged in trying to understand the macro environment, because believe it or not, the microeconomics of everyday situations impact you far more than the macro environmental conditions. What stores charge for products, how much production to undertake, the optimization of investments, risk/insurance pricing, agricultural production, business strategy, etc… are all microeconomic concerns that impact your life every day.

                I realize this is a macroeconomics blog, but I would caution you against making sweeping generalizations of an entire discipline because one sub-field of study has not satisfactorily answered your questions.

                • Your marketing firm example is a good example of how modern economics is achieved though. A marketing firm takes the concept of what they think other people PERCEIVE to be “beauty” and then they design something and sell it to them. In macroeconomics, economists often take a political position, apply a policy to it and then “sell it” with their preferred model. It’s the same basic approach. You’re not selling what they necessarily need. You’re selling people what they think they need.

                  And yes, one of the main points I would disagree with is your definition of economics as the use of scarce resources to meet our needs. Economics should be much more than that, but it has been built up from precisely that foundation of the use of scarce resources, which is precisely why so many economists don’t actually understand monetary economics. They view a barter world in a monetary world and almost universally fail to understand what money is and why it matters because of this focus on the concept of scarce resources.

                  I also don’t agree that micro matters more than macro. I don’t know if I’d say that one “matters” more than the other, but for formulating a micro understanding of the world, I’d say it’s necesssary to first formulate a sound macro understanding. But we seem to be projecting lots of opinion and little else. In other words, I don’t think we’re making lots of progress. :-) But I certainly appreciate the pushback and I totally agree that I come across as dogmatically rejecting an entire field of thought, which is pretty stupid of me, but an unfortunate consequence of the brief narrative that arises from a blog format….

                  Anyhow, I gotta run. Thanks for the comments. Lots for me to chew on. If you have reading recommendations I am all ears. Take care.

          • “Money is actually something that should be very easy to define, but is not defined well in economics”

            I don’t think this is true at all. In fact, in comparison with Physics, we should understand that money is impossible to define. Almost everyone uses the term “money” to refer to both rough equivalents of “energy transfer” and “heat content” which are not dimensionally the same. Even in physics, rigorous definition of heat is only possible in a closed system.

            We tend to think of our holdings of both money and non-money assets as something like a quantity of heat even while we all hopefully realize this is a complete fiction.

            In the Thermodynamic analogy, considering the earth as a closed system, we roughly have the current level of real productivity as work done on the system and current consumption of real productivity as work done by the system, and accumulated (but entropically decaying) saved productivity (heat). But while that holds at the macroscopic level (unless you reject Thermodynamics) it doesn’t really help to define money as almost everyone thinks about it (and thinks about it differently).

            Given the history and difficulty of even agreeing on a definition of heat in physics, and then agreement really only covers certain closed systems, is it that surprising that we can’t define money?

            As far as gravity goes, another example you used, this is also not really something as simple as you think. Understanding gravity between two bodies in a single inertial frame of reference is conceptually simple, but from General Relativity we think that in fact gravity is not this simple.

            • Money is a medium of exchange, which, in a monetary economy is a financial construct. Full stop. It’s pretty easy to go through different financial instruments and apply a level of moneyness from there. It’s not a difficult concept. But macroeconomists don’t even consider bank deposits to be “money”. This shouldn’t be a controversial or difficult concept. Money is not like dark matter and I don’t know why academics or people with a science background would imply such a thing.

              As for your assertion, that my point on general principles is wrong because of my example of gravity, well, we both know that’s simply not true so I don’t know what point you’re making there. You’re just cherry picking gravity for the sake of, well, I don’t know what. If you think it’s bad example for me to use, then maybe. But it doesn’t mean my main point is wrong so why waste time there?

              You seem to take the other end of this argument to an extreme in your views by thinking that science can actually be applied in some structurally consistent way to economics in the same manner which math is applied to physics. I just don’t agree with that approach. It doesn’t mean math is useless in economics, but I am skeptical that math is as useful in economics as we’d like to think….

    • “and yes, economists agree on a set of general principles.”

      I too am eagerly awaiting examples of this set of general principles.

        • Unfortunately, many important effects are left out of the basic foundation, like e.g. game theory and behavioral economics. There have been some attempts to add these effects more recently, but still within an “equilibrium” framework.

          The biggest problem with standard economic concepts is that they rely solely on equilibrium models.

          “It’s old and tiring to see non-economists judge an entire discipline”

          Please check people’s credentials before saying this … besides, non-economists are often more open and less biased than academic economists who are married to their theories and are far less critical.

          • I tried to check Mr. Roche’s credentials. All I know is what he admits: “I studied finance at Georgetown and took a number of basic and advanced economics classes. I’ve also been a financial professional for over a decade so I am not exactly a “layperson” or someone who hasn’t developed a sophisticated and well entrenched understanding of these concepts.” Which is a far cry from a professional economist. I am a true believer that to uniformly critique a discipline, you should know it first. Plenty of economists acknowledge challenges within the discipline, which is what makes it dynamic and interesting.

            Why are equilibrium models problematic?

            • Some of the greatest economists who ever lived were not technically “economists”. Keynes, Marx, Godley, Smith to name a few. So I think it’s pretty narrow minded to claim that only people with a professional “economics” designation are capable of criticizing the field. It certainly adds to the credibility of a criticism, but that doesn’t mean we should just broadly dismiss any critique that comes from outside economics….

              I also wouldn’t say the discipline is all that dynamic. It’s basically a revolving door dominated by two general schools of thought. And if you don’t agree with those schools of thought then you’re basically on the outside looking in.

 AFTERNOTE: the link above contains Hayek’s comments on treating economics like a science and the risk that economists will come to believe (or convince others) that behavior can be predicted.  It is excellent and should be standard reading for economists.