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Upgrade your cargo cult for the win Meaningness

If you create a good enough airport—the cargo will come.

What does it take for an individual to do innovative intellectual work, such as scientific discovery? Mere mastery of methods is not good enough.

What does it take for a community or institution to address a volatile, uncertain, complex, and ambiguous world effectively? Mission statements, structures, principles, and procedures are not good enough.

Cargo cult science

Richard Feynman-the foremost physicist of the mid-20th century-gave a famous commencement address on "cargo cult science."1

During World War II, many Pacific islands that previously had little or no contact with the modern world were used as air bases by the Americans or Japanese. Suddenly, enormous quantities of food, clothes, tools, and equipment, such as the islanders had never seen, appeared out of the sky in magic flying boats. Some of this "cargo" trickled down to the natives, and it was fabulous. Then the war ended, the planes vanished, and-no more cargo!

How to make the cargo flow again? The islanders had observed that, just before cargo arrived, the foreigners performed elaborate rituals involving inscrutable religious paraphernalia. Clearly, these summoned the sky spirits that brought cargo.

Religious entrepreneurs founded cults that duplicated sky spirit rituals using locally-produced copies of the paraphernalia. They imitated the actions of the airstrip ground crews using wicker control towers, coconut headsets, and straw planes (such as the one photographed above). Some cargo cults are still going, generations later, despite their failure to deliver even one landing by the sky spirits. Ha ha, stupid primitive savages!

Except, this is a perfect metaphor for most of what is called "science," done by people with PhDs.

"Cargo cult science" performs rituals that imitate science, but are not science. Real science sometimes delivers cargo (fame and promotions for scientists; profits for R&D companies; technologies for everyone else). So, you think, OK, what do I have to do to make that happen? How did those guys do it? So you look to see what they did, and you do the same thing. But usually that doesn't work well.

"Doing what scientists do" is not doing science, and won't deliver-just as "doing what a ground crew does" doesn't bring planes. It's just going through the motions.

But exactly why doesn't it work? And what does work? What makes the difference between cargo cult science and the real thing?

Cargo cults everywhere

"Cargo cult" describes not just science, but much of what everyone does in sophisticated rich countries. I'm not speaking of our religions; I mean our jobs and governments and schools and medical systems, which frequently fail to deliver. Companies run on cargo cult business management; states run on cargo cult policies; schools run on cargo cult education theories (Feynman mentioned this one); mainstream modern medicine is mostly witch doctoring.

An outsider could see that these cannot deliver, because they are scripted busy-work justified by ideologies that lack contact with reality. Often they imitate activities that did work once, for reasons that have been forgotten or were never understood.

So how do you go beyond cargo cultism? How do you do actual science? Or economics or policy; education or medicine?

And why is cargo cultism so common, if it keeps failing to deliver?

Upgrading

In some video games, you direct the technical and economic development of a handful of hunter-gatherers in straw huts. You start them farming, and they multiply. They build a wooden palisade to keep out hostile strangers. You invent the plow, so their farms become more efficient, and the village grows into a small town. You start them mining, and they build stone houses, and a stone wall to repel invasions. You discover copper smelting and they can make metal plows and swords. And so on-upgrading technology step by step, until eventually your people develop fusion power, take over the whole earth, build spaceships, and set off to colonize the galaxy.

So what about those stupid savages, doing their silly rituals on their Pacific islands?

Suppose they got their imitation runway level enough, and put tarmac on it, and upgraded the control tower from straw to wood to concrete, and installed modern radar and landing control systems, and sent their "ground crew" to Pittsburgh to be trained and certified.

What then?

Imitation and learning know-how

Campy scientists

Let's say you are a new graduate student starting a science PhD program. What you learned as an undergraduate were an enormous number of facts, a few calculation methods, and basic familiarity with some experimental equipment. You learned mainly by being lectured at in classrooms, by reading, by solving artificial puzzle-like problems, and in lab courses where you used the equipment to try to get the known-correct answer to make-believe "experiments." None of this is anything like actual science: discovering previously-unknown truths.2

Much education assumes the wrong idea that learning consists of ingesting bits of knowledge (facts, concepts, procedures), and storing them, and when you have enough, you can make useful deductions using innate human reasoning. A more sophisticated wrong idea is that there are methods of thinking, and once you have learned them, you can use them reliably. Both of these are partly true-you do need to learn and remember and use facts, and learn and practice and use rational methods-but they are not sufficient.

You can't learn how to do science from classes or books (although what you do learn there is important). You certainly can't figure out how to do it from rational first principles! No one has any detailed rational theory of how science works.3 More generally, you mostly can't learn doing from books or classes or reasoning; you can only learn doing by doing.

In doing, ability precedes understanding, which precedes representation. Knowing-how is not reducible to knowing-that.4 Riding a bicycle is the classic example: no amount of classroom instruction, or rational reflection, could enable a novice to stay upright.

How do you learn know-how?

Imitation is one powerful and common way-one that is unfortunately underemphasized in current American theories of education. The Melanesian cargo cults were founded on the accurate observation that imitation often results in new abilities that you do not understand-at first, at least.

In fact, you start doing science-or any serious intellectual work-by imitation, by going through the motions, not seeing the point of the rituals. Gradually you come to understand something of how and why they work. (If you are smart and lucky; many people never do.) Gradually, you find yourself doing the real thing. At some point, you can improvise, step into the unknown, and create your own methods.

In other words, you can only begin your career as a scientist by doing cargo-cult science. Eventually-if you are smart and lucky-you can upgrade. But almost all scientists get stuck at the cargo cult stage; and almost all supposed science is cargo culting.

Cargo cult science, and cargo cult government and management and education, are based on the perfectly sensible principle of imitation. Why doesn't that work? Why isn't classroom science instruction plus learning through imitation good enough?

Why isn't imitation a sufficient upgrade?

Actually… Why don't the literal cargo cults work? The answer is not quite as obvious as it may seem at first!

The first obvious answer is: Ha ha, straw airplanes can't fly, and coconuts are not headphones. But that's wrong. Proper technology is neither necessary nor sufficient for a functional airport:

  • I have landed (as a passenger) at a remote airport in Alaska that consisted of a dry river bed with the larger rocks cleared off, plus a closet-sized wooden shed with emergency fuel and repair supplies.
  • If someone installed a complete airport facility with all the latest technology on one of the cargo cult islands, and then left, that would be a useless pile of junk. Without a competent ground crew, the buildings and equipment are not an airport.

Better technology would be a significant upgrade-but it is not the whole answer, or even the main one. It would not make the cargo come.

The second obvious answer is: Ha ha, the cargo cultists are only imitating a ground crew; they have no understanding, so they are just going through the motions. But this isn't right either. Imitating is often a good way of learning, and understanding an activity is often neither necessary nor sufficient to performing it-even to performing it excellently.

You don't need understanding to ride a bicycle. In fact, almost no one has an accurate mental model of how a bicycle works.5 I am pretty confident that much of what an expert ground crew does, they don't understand either.

Better understanding, like better technology, would be a significant upgrade for a cargo cult. The same is true in cargo cult science. One commonly suggested antidote is to understand the principles of the field, so you know why its methods work, and aren't just performing experiments as inscrutable rituals. I advocated this in "How to think real good," and it's important enough that I'm working on a post just on it, to follow up this one.

What are "principles" and how do you find them? If they are so great, why aren't they just taught in the introductory class? Partly because even the best people in the field can't quite say what the principles are, because tacit understanding does not always enable explicit explanation. Also, many methods are worked out by trial and error, by many people over many years; they do work, but it's not clearly known why.

Anyway, I doubt a ground crew knows, or is taught, any profound principles of airport operation. The problem with imitation is not solely or primarily lack of deep understanding.

What is missing?

Feynman found the question awkward:

[Cargo cult scientists] follow all the apparent precepts and forms of scientific investigation, but they're missing something essential.

Now it behooves me, of course, to tell you what. But it would be just about as difficult to explain to the South Sea islanders how they have to arrange things so that they get some wealth in their system. It is not something simple like telling them how to improve the shapes of the earphones.

He goes on to suggest that "utter honesty" is the key. He also describes this as "scientific integrity." And, he points out ruefully, this is rarely taught:

But this long history of learning how to not fool ourselves-of having utter scientific integrity-is, I'm sorry to say, something that we haven't specifically included in any particular course that I know of. We just hope you've caught on by osmosis.

If this is as important as he-and I-believe, we ought to ask why it is not taught in universities. (I'll suggest a reason later in this post.)

I vaguely remember being taught something like this in high school, or even grade school. At that point, it's irrelevant because you can't understand what scientific honesty even means until you do your own research.

Until then, there's only what Feynman calls "conventional honesty," meaning you don't make things up. If the meter read 2.7, you put 2.7 in your report, even though 3.9 would be much more exciting.

Although I do consider "utter honesty" important, I don't think it's quite right that this is what cargo cult science lacks.6 Or anyway, it's not the whole story. I think it points in a promising direction, however: toward epistemic virtue.

Epistemic virtue and epistemic vice

Honesty is a moral virtue. It is also an epistemic virtue. Epistemic virtues are cognitive traits that tend to lead to accurate knowledge and understanding. Tenacity, courage, generosity, conscientiousness, and curiosity are some other epistemic virtues-which is why I said I think "utter honesty" is not the whole story.7

Cargo cult science is bad science; and "bad" is a moral, or at least normative, term. Upgrading a cargo cult is, I think, a moral responsibility. Doing bad science is wrong-in a specialized way that goes beyond everyday morality.

What did Feynman mean by "utter honesty"? He didn't explain exactly, but he did say that it's not mostly about scientific fraud. Avoiding that is a very low bar, and fraud is relatively rare,8 and easy to eschew. Not committing fraud is, as he puts it, "conventional honesty," not the special "utter honesty" required in science-and, I would argue, in all intellectual work.

Utter honesty, I suspect, means not just telling the truth, but caring about the truth. Feynman uses the phrase "bending over backward" to suggest a higher standard. You will go to extreme lengths to avoid fooling yourself-partly because then you won't fool others, but more importantly because you really want to know what's going on.

"Utter honesty" is about overcoming the "good enough" mediocrity of cargo cult science. Mediocrity comes from going along with the social conventions of your field; accepting its assumptions uncritically; using its methods without asking hard questions about whether they actually do what they are supposed to.

Cargo cultism is the bureaucratic rationality of blindly following established procedures and respecting authority. In the moral domain, that can lead ordinary people into committing genocide without reflection; in science, it leads to nutritional recommendations that may also have killed millions of people. When you look into how those recommendations were arrived at, it becomes obvious that honesty would compel the entire field of nutrition science to resign in recognition of its total failure-both scientific failure and moral failure.

Unflinching lustful curiosity

Important as honesty is, I might rate even higher curiosity, courage, and desire. These are not separable from each other, or from honesty, but it may be helpful to present them as facets of epistemic virtue.

Be curious!

Yeah, good, whatever…

Exhortations to epistemic virtue, and lists of virtues, are not helpful by themselves. We need details. For that, we need to look carefully at specific cases in which epistemic virtue or vice led to success or failure. From them, we can extract heuristics and principles.9

Curiosity

Feynman's best case study is the rat-running one. (It's a little too complicated to explain here; it's near the end of his talk if you still haven't read that!) It seems to me that the scientists who got this wrong weren't dishonest. They were incurious: they didn't actually care about rats. They lacked intellectual desire. They lacked the courage to say "maybe we keep getting inconsistent results because our experimental apparatus is defective." At some level, they understood that admitting this would lead to a lot of boring difficult work, for which there would be no career reward. (As, Feynman says, occurred: the guy who figured out the problem was ignored and never cited.)

Honesty comes out of curiosity, mostly, I think. If you really do want to know, there's much less motivation to promote a wrong answer-arrived at either through deliberate fraud or sloppy, inadequately-controlled experimentation.

A reliable recipe for "how to be curious" is impossible (and probably undesirable-you need to choose skillfully what to be curious about). However, we can and should give descriptions of what curiosity is like, so you can recognize when you are curious-and when you are not. Cargo cult science comes from merely going through the motions because you don't care enough about understanding the phenomena you are studying. It is common for graduate students, or postdocs, or professors, to gradually lose interest in their field without even noticing. Then you do bad work.

Desire

Curiosity is not just caring about which facts are true versus false. It is lust for understanding. What matters is that you want, above all else, to figure out what is actually going on.

Where does curiosity come from? It is not "disinterested," as some philosophers of science would advocate. You want to know what is actually going on because the thing is cool. If you don't love your phenomenon of study, you won't care enough to want to understand it. I would guess that liking rats, finding them cute and funny and interesting and enjoying their company, can make you a better rat-running scientist.

I wrote about this in "Going down on the phenomenon," making an extended metaphor with sexual desire-which is why I use the term "lust" here.

Beyond respect, one must care about the phenomenon. It seems to me that most academic intellectuals I talk to do not genuinely care about their subject matter. They are more interested in getting papers out of it than they are in learning about it. Analogously, many people in approaching sex are more interested in getting something out of someone than they are in learning about another person (and themselves).

Courage

Rangda
Rangda

Every scientist (probably-me for sure) sometimes screws up and promotes an attractive idea that isn't actually right. That's unavoidable, probably. Courage and honesty means recognizing and admitting this when it happens, and being as transparent as possible so other people can detect it.

Courage and honesty may also demand that you be transparent about going beyond the boundaries of your discipline. That can be a taboo-but breaking it is a virtue, because mindlessly adhering to disciplinary conventions is a main cause of cargo cult science. A seminal and excellent paper on research management10 explains:

Research has come to be as ritualistic as the worship of a primitive tribe, and each established discipline has its own ritual. As long as the administrator operates within the rituals of the various disciplines, he is relatively safe. But let him challenge the adequacy of ritualistic behavior and he is in hot water with everyone.

The first conviction of the research specialist is that a problem can be factored in such a way that his particular specialty is the only important aspect. If he has difficulty in making this assumption, he will try to redefine the problem in such a way that he can stay within the boundaries of his ritual. If all else fails, he will argue that the problem is not "appropriate." Research specialists, like all other living organisms, will go to great lengths to maintain a comfortable position. Having invested much time and energy in becoming specialists in a given methodology, they can be expected to resist efforts to expand the boundaries of the methodology or to warp the methodology into an unfamiliar framework.

I'll give one example. It is self-serving, but I hope you'll forgive that if you find it funny. It was a time while I was a graduate student in the MIT Electrical Engineering and Computer Science Department. When anyone asked what I was up to, I replied honestly:

I'm reading about the Balinese Rangda-Barong ritual so I can use existential phenomenology to figure out how to make breakfast.

This was something of a risk.11 It is not the sort of thing EECS students are encouraged to spend their time on. My research was funded by the US Department of Defense. The DOD might not have looked favorably on having their money spent on tantric rituals, phenomenology, or breakfast-making. On the other hand, my understanding of those things led directly to new technical methods and insights that underlie the current generation of military robots. (For better or worse.)

If you do realize that you have lost interest in your field-the fire has gone out of your romance-it may take huge courage to admit that and leave. It's the right thing to do, though.

Legitimate peripheral participation

Earlier, I asked: why isn't learning know-how through imitation (plus learning facts through classroom instruction) good enough? Part of the answer is: you need feedback, not just a passive source of emulation.

Consider learning to drive a car. When you take a driving class, you get a bit of lecturing, and there's a booklet you're supposed to read, but they don't tell you anything that isn't obvious. Are you ready to learn by imitation? No, that would be disastrous. As I wrote elsewhere:12

You need someone to teach you how to drive; someone who will sit beside you and explain the controls, and give directions, and watch you screw up, and tell you what to do instead. The skill can only be transmitted by apprenticeship.

Situated learning theory explains apprenticeship as legitimate peripheral participation in a community of practice.13 Let's unpack that.

You learn know-how by doing. However, in most cases, just doing on your own is inadequate. Imitation is also mainly inadequate-as the Melanesian cargo cults so dramatically illustrate. Participation means doing with other people who know what they are doing. Typically, we learn from collaboration, not from observing and then accurately duplicating the action by ourselves. We aren't that smart!

Legitimate means that you are accepted as part of the group activity, and given a role within it that everyone agrees to. If you walk out onto an airport landing strip and start "helping," you probably won't learn anything (even if you aren't immediately dragged away by security dudes). Members of a ground crew have complex, interlocking duties; you have to fit into that schema to participate.

Becoming a junior member of a research team grants you the legitimacy needed for participation in its scientific activity. This cognitive apprenticeship is the only way to learn to be a scientist.

Peripheral means that the group initially assigns you a minor role: simple, low-risk tasks that are nevertheless useful. As you master each, you are given increasing responsibility, and trickier, more central roles.

Legitimate peripheral participation is a major reason someone would bother to tutor you. In formal instruction, teachers get paid. But most learning is informal, and most "teaching" is unpaid. The learner's valuable labor gets exchanged for tuition. This is part of the science system, too: graduate students and postdocs contribute to their professor's research program.

Legitimate peripheral participation is a more powerful motivation for accurate feedback than money. If a student's labor contributes to the success or failure of your project, you want to be sure they are doing it right-and so you will scrutinize their work carefully, and give detailed corrective advice.

Feedback is not the whole story, however. People learn from collaboration in ways that go beyond both imitation and explicit correction. We pick up a great deal "by osmosis," as Feynman put it. The situated learning research program has observed this carefully in hundreds of diverse contexts, and has gone some way toward explaining how it works.

The problem with the cargo cults is not that they are imitating. It's that their members are not legitimate participants in airport operation.

Imagine a cargo cult downloaded all the manuals for ground crew procedures from the web, and watched thousands of hours of videos of competent ground crews doing their jobs. Imagine they learned them perfectly, and were able to execute them perfectly.

Still no airline would be willing to use their airport. The cult is not certified for operation; it is not legitimate. The proper bureaucratic rituals have not been observed. These rituals are rational: there has to be a fixed procedure for assuring that a ground crew is competent, and making special exceptions could be disastrous. "These cultists sure seem to know what they are doing; let's create a set of tests to verify that, without putting them through our usual training regimen"? That would risk airplanes and lives, and would probably end the careers of everyone involved.

Communities of practice

A community of practice develops informally and automatically among any group of people who engage in an activity that requires specialized know-how. Whether you are getting seriously into knitting or tokamak optimization, you want and need to talk to other people doing that.

Informal contact naturally develops into a feeling of community. That typically becomes increasingly structured, with multiple communication channels, central authorities, cliques and factions, scheduled and spontaneous group events, and so on. Leaders may formalize the community into an organization, with defined roles and procedures. Air transport organizations take formal bureaucratic rationality to extremes; science somewhat less so.

A community of practice develops its own culture, worldview, and way of being. That includes its own ethical norms, and its own epistemic norms. These may be partly formalized, but remain mainly tacit. They are absorbed by osmosis, as know-how more than as know-that. They are "the way we do things," which members can gesture at, but not necessarily explain. Becoming a ground crew member, or a scientist, requires a process of enculturation to acquire this tacit knowledge.

Tacit knowledge often contradicts explicit standards-and therefore could not, even in principle, be learned from manuals. In every workplace, there are the official rules, and then there is "the way we do things," which involves extensive implicit exceptions.14 Those are not ethical norm violations-from the community's point of view, at least-because "the way we do things" is the ethical standard of the workplace. In every laboratory, there is the protocol manual's way to run an assay, and there is the way "we" run the assay. That is not an epistemic norm violation-from this research group's point of view, at least-because the way "we" run the assay is better; or at least takes a lot less hassle and "works perfectly OK." (Which may very well be true-or not.)

Every social group has two inseparable aspects: it is an invaluable and inescapable resource, but also a zone of socially-enforced conformity, thought-taboos, and dysfunctional practices and attitudes. Every intellectual community transmits to its members a mixture of epistemic virtues and epistemic vices. Some are far more virtuous than others, but none is perfect, nor perfectly depraved.15

Epistemic virtue and vice are not just learned from a community of practice, they inhere in it. The ways that community members interact, and the way the community comes to consensus as a body, are epistemically virtuous or depraved partly independent of the epistemic qualities of individuals. Just as moral preference falsification can lead a community of good people to do terrible things, epistemic preference falsification can lead a community of smart people to believe false or even absurd things.

The problem with nutrition "science" is not that individual nutritionists are stupid, ill-informed, or malicious. It is that the collective epistemic practices of the community are self-serving, wicked, wanton, paranoid, and deranged.16

Like other eternalisms, Melanesian cargo cults involve ideological "beliefs" that work quite differently from pragmatic beliefs like "my bicycle is blue." Many Christians profess to "believe" the Rapture is imminent, but usually their actions show that this is not a belief in the ordinary sense. Cargo cultists may "believe" that their rituals will bring cargo, but this "belief" is probably as remote and theoretical as Christians'. Such "beliefs" have important functions in maintaining religious identity, membership, and institutions, and in advancing the careers of religious professionals, but they are not taken literally.

The "belief" that particular ritual activities will bring about scientific breakthroughs is often similarly unconnected with scientific discovery. Yet it is similarly important to the smooth functioning of "scientific" institutions and careers.

The replication crisis: mo' betta rationality vs. epistemic vice

Clueful scientists have recognized for decades that most supposed science is actually cargo culting-but it seemed little could be done.

As Feynman said, cargo cult scientists "follow all the apparent precepts and forms." The problem is mostly not disregard for epistemic norms; it is that the norms themselves are inadequate. But it is those very norms that define the epistemic community.

The current replication crisis is driven largely by broad moral outrage.17 That motivates a research practices reform movement, seeking to correct epistemic failures that are due to rampant, collective epistemic vice. The moral character of that vice is stressed by some scientific community members-and resisted by others.

The old guard's attitude is: We followed all the rules, so we deserve to be rewarded accordingly. To which the rebels say: Yes, but the things you thought you discovered weren't true.

Leaders of cargo cults-in science as well as religion-usually fight to keep their status, power, and income, by opposing attempts at epistemic reform. "Science advances one funeral at a time," wrote Max Planck:

A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it.18

The current reform movement in academic psychology is led mainly by junior members of the epistemic community, and instigated partly by outsider skeptics. However, some senior members have demonstrated heroic epistemic courage by retracting their own earlier work and advocating epistemic reform.

Reformers-in psychology and other fields such as medical research-advocate better explicit research practice standards. These valuable methods of technical rationality include, for example, more frequent replications; experiment pre-registration; publishing all negative results; reporting effect sizes; and abandoning the famously flawed p<0.05 significance test. If adopted, these will be significant upgrades in epistemic communities that have been practicing mainly cargo cult science. This will be a big win, I think!

Unfortunately… it also embodies the essential epistemological failure of cargo culting. That is the belief that there must be some definite method that will reliably bring the desired results. Then you just need to follow the recipe, and cargo will arrive, summoned by magic out of the sky.

But Campbell's Law19 says that if you set up any explicit evaluation criteria, people will find ways to game the system. They'll find ways to excel according to the standards, without producing your desired outcome. They'll follow the letter of the rules, but not the spirit. John Ioannidis, who has done more than anyone to improve medical research standards, details exactly how and why this happens in his searing "Evidence-based medicine has been hijacked." Institutional changes cannot guarantee science (or government, or education, or software development) that goes beyond cargo-cultish adherence to procedures.

So, better explicit epistemic norms are a significant upgrade, but they aren't the answer. There is no substitute for actually trying to figure out what is going on. That requires technical rationality-but it also requires going beyond technical rationality.

There is no method: only methods

Do not seek to follow in the footsteps of the wise; seek what they sought.20

"There is no method" is a Dzogchen slogan. Dzogchen is unique among branches of Buddhism in offering no path to enlightenment. This may seem paradoxical at first, because Dzogchen offers innumerable methods-probably more than any other Buddhist approach-and is widely considered the most reliable path to enlightenment.

There is no "The Scientific Method," and science offers no path to truth. That may seem paradoxical at first, because science offers innumerable, excellent methods, and is the most reliable path to truth.

"The Scientific Method" is the central myth of rationalist eternalism. It is scientism's eternal ordering principle-the magical entity that guarantees truth, understanding, and control. But no one can say what it is-because it does not exist. No one can explain how or why science works in general, nor how to do it.

We can say a lot about how and why specific methods work-and that is critical. Nevertheless, blind faith in any specific method separates you from the reality of what is actually going on. That is the essence of cargo culting.

The kind of upgrade you need to advance from cargo cult airport operation is critically different from the advance beyond cargo cult science:

  • Bureaucratic and technical rationality routinize airport operations, making them reliably good-enough. Conforming to the ritual norms of the ground crew practice community makes you a fully competent ground crew member.
  • Science-and any intellectual work involving innovation-addresses the unknown, and therefore must not be routinized, ritualized, or merely rationalized. Conforming to the ritual norms of a practice community does not produce discovery.

The reason Feynman's "utter honesty" is not taught is that there is almost nothing to say about it-in general. Epistemic virtues are not methods; they are attitudes, and meta to methods.

Recognizing the limitations of rationalist rituals does not mean abandoning them. You have to use methods, and you also have to relativize them. You need meta-rational competence to recognize when a method is appropriate, and when it is not.21 There is no explicit method for that-but, like riding a bicycle, it can be cultivated as tacit know-how. "Reflection-in-action" describes that meta-level learning process.

For the individual, becoming an actual scientist requires two shifts in identity and membership:

  • First, you become a cargo cultist: a devout member of the community of practice. Acquiring know-how-explicit and tacit-is most of the work here. The way of being of a cargo cult scientist is social conformity.
  • When you have mastered the community's methods, you see their limitations, and you transcend its epistemic norms, without abandoning them. Developing meta-rational know-how is part of this second shift. However, a shift in your relationship with the scientific community, from mere membership to meta-systematicity, is the key change in the way of being.

Being meta to your community implies critical reflection on its norms. It implies taking responsibility for community development, for upgrading it, while continuing your involvement in it.

Upgrade your community of practice

Despite heroic mythology, lone geniuses do not drive most scientific, cultural, business, or policy advances. Breakthroughs typically emerge from a scene: an exceptionally productive community of practice that develops novel epistemic norms. Major innovation may indeed take a genius-but the genius is created in part by a scenius.

"Scenius" stands for the intelligence and the intuition of a whole cultural scene. It is the communal form of the concept of the genius.

Individuals immersed in a scenius will blossom and produce their best work. When buoyed by scenius, you act like genius. Your like-minded peers, and the entire environment inspire you.22

There is no systematic method for creating a scene, for improving epistemic norms, for conjuring scenius, or for upgrading a community of practice. These are "human-complete" meta-systematic tasks.

There is no method-but there are methods. There are activities, attitudes, and approaches that encourage scenius. These are available to individuals, institutions, or both. Neither can change a community's epistemic norms unilaterally, but both can contribute to upgrades.

Kevin Kelly describes some scene features that individuals can contribute to:

  • Mutual appreciation - Risky moves are applauded by the group, subtlety is appreciated, and friendly competition goads the shy. Scenius can be thought of as the best of peer pressure.
  • Rapid exchange of tools and techniques - As soon as something is invented, it is flaunted and then shared. Ideas flow quickly because they are flowing inside a common language and sensibility.
  • Network effects of success - When a record is broken, a hit happens, or breakthrough erupts, the success is claimed by the entire scene. This empowers the scene to further success.

Management theorists describe "learning organizations" that don't base themselves on fixed structures, principles, and procedures. Rather, they conduct continuous meta-systematic reflection on their own commitments, and revise those accordingly. Such organizations also foster the learning and development of their members so they can take on increasingly challenging, interesting, and valuable responsibilities. There are abstract and concrete steps an organization can take to transform itself from a cargo cult into a dynamically innovating scene.23

As one example, making it easier for members to switch fields would represent a major upgrade out of cargo cultism in universities and other large institutions. It would take enormous institutional reforms allow that, and enormous resources to support people in transition, and that would require enormous institutional courage-but it may pay off enormously, too. Fields often advance rapidly when they are joined by talented outsiders who bring powerful, different ways of thinking. And, clearing out the deadwood of people who have fallen out of love with their disciplines would allow vigorous new growth in the fields they leave-without requiring funerals!

Recap: For the win!

Too much of life is wasted going through the motions, playing it by the book, acting according to systems no one really believes in and that fail to reflect a volatile, uncertain, complex, and ambiguous world. This is deadening for individuals, and for society a vast loss of opportunities for prosperity and innovation.

The lesson of cargo cult science for all human activity is that fixed systems are inadequate, because they never fully engage with the nebulosity of reality. We can, and must, upgrade to better ways of thinking, acting, and organizing our communities.

As individuals, we acquire basic competence through legitimate peripheral participation in communities of practice. In becoming a member, we absorb the community's explicit and tacit norms-including ethical, epistemological, and process norms. Some communities of practice have mainly functional norms; some are highly dysfunctional.

Communities can upgrade their norms-the research practices reform movement is my main example in this post-and individuals can contribute such upgrades. Still, acting according to even the best norms can produce only routine performance, and it inhibits fundamental innovation and discovery.

As individuals, innovation and discovery demand meta-systematic competence. Once we have achieved mastery of the methods of a community of practice, we can reflect on how and when and why they do and do not work well. Then we can accurately select, combine, revise, discover, and create methods.

Communities (including, but not only, institutions) can take a meta-systematic view of themselves. They can reflect on their own goals, structure, dynamics, and norms. These activities may afford much greater leverage than incremental process optimization.

In plainer words: win big!

Comments on "Upgrade your cargo cult for the win" Meaningness

Great post!

I՚m surprised you didn՚t mention an over-reliance on formalism as an particular form of cargo-cultism, particularly in AI and economics. Maybe those aren՚t sciences enough to be cargo-cult science.

The kind of epistemic virtue you are promoting requires a certain intellectual fearlessness. I think most institutions and cultures are not set up to support this, because people are spending most of their energy competing for scarce resources (money or position). Which is why it is found mostly in people like Feynman who are so smart they don՚t have to worry about competition, or in scenes or fields that are new and interdisciplinary enough that the rules haven՚t yet ossified.

Here՚s something sort of relevant I posted awhile back: http://omniorthogonal.blogspot.com/2012/06/great-and-universal-ignorance... The first step in learning anything is admitting that you don՚t already know it, and admitting ignorance is showing weakness, so officially discouraged by almost everything in our culture.


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[Dec 21, 2019] The Economics Debate, again and again

Dec 21, 2017 | rodrik.typepad.com
The Economics Debate, again and again The debate on the economics profession – its alleged ills and failings -- abates at times, but never ends. A recent piece in The Guardian taking the profession to task for its lack of reform has prompted a response from a group of economists. I thought it was time to re-up my own views on this debate, in the form of two sets of ten commandments. The first set is directed at economists, and the second to non-economists.
Ten commandments for economists
1. Economics is a collection of models; cherish their diversity.
2. It's a model, not the model.
3. Make your model simple enough to isolate specific causes and how they work, but not so simple that it leaves out key interactions among causes.
4. Unrealistic assumptions are OK; unrealistic critical assumptions are not OK.
5. The world is (almost) always second-best.
6. To map a model to the real world you need explicit empirical diagnostics, which is more craft than science.
7. Do not confuse agreement among economists for certainty about how the world works.
8. It's OK to say "I don't know" when asked about the economy or policy.
9. Efficiency is not everything.
10. Substituting your values for the public's is an abuse of your expertise.
Ten commandments for non-economists
1. Economics is a collection of models with no predetermined conclusions; reject any arguments otherwise.
2. Do not criticize an economist's model because of its assumptions; ask how the results would change if certain problematic assumptions were more realistic.
3. Analysis requires simplicity; beware of incoherence that passes itself off as complexity.
4. Do not let math scare you; economists use math not because they are smart, but because they are not smart enough.
5. When an economist makes a recommendation, ask what makes him/her sure the underlying model applies to the case at hand.
6. When an economist uses the term "economic welfare," ask what s/he means by it.
7. Beware that an economist may speak differently in public than in the seminar room.
8. Economists don't (all) worship markets, but they know better how they work than you do.
9. If you think all economists think alike, attend one of their seminars.
10. If you think economists are especially rude to non-economists, attend one of their seminars.

I have spent enough time around non-economists to know that their criticism often misses the mark. In particular, many non-economists tend not to understand the value of parsimonious modeling (especially of the mathematical kind). Their typical riposte is: "but it is more complicated than that." It is of course. But without abstraction from detail, there cannot be any useful analysis.

Economists, on the other hand, are very good at modeling but not so good at navigating among their models. In particular, they often confuse a model, for the model. A big part of the problem is that the implicit scientific method to which they subscribe is one in which they are constantly striving to achieve the "best" model.

Macroeconomists are particularly bad at this, which accounts in part for their dismal performance. In macroeconomics, there is too much of "is the right model the classical or the Keynesian one" (and their variants), and too little of "how do we know whether it is the Keynesian or the classical model that is the most relevant and applicable at this point in time in this particular context."

Posted at 10:11 AM | Permalink | Comments (5)

[Dec 20, 2017] Bill Black DSGE Dilettantes v. ADM God Devotees

Notable quotes:
"... By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Originally published at New Economic Perspectives ..."
"... A dilettante is a person who cultivates an area of interest, such as the arts, without real commitment or knowledge. The Dilettante Doctrine takes modern macro's arrogance to a new pinnacle. Only their model is legitimate, and it is illegitimate to criticize their DSGE models, even though they repeatedly fail. Instead, we must all "like" their models. We cannot make any statements about macroeconomics unless we "like [DSGE] models." The Dilettante Doctrine is a sure-fire means of winning academic disputes. You demand that your critics endorse your views, or you dismiss them as dilettantes unworthy of respect. ..."
"... Readers may recall that the scientific method works in the opposite direction of the Dilettante Doctrine. Modern macro proposes a theory (DSGE) and tests its predictive ability. The DSGE models fail recurrently, on the most important macro events, and the failures are massive. The scientific method requires the theorist of the failed model to declare it falsified. Economists who "like" repeatedly falsified DSGE models are, as Paul Romer famously declared, engaged in "pseudoscience." ..."
"... BTW, one of the best takes of macroeconomics I've encountered is Steve Keen's work, which I gratefully acknowledge I first read here on NC. Keen's critique of DSGE models is utterly spot-on and mathematically sophisticated. Part of the problem with economics is that it has been afflicted with 'math envy' since its earliest days, and the ADM results were proved with Banach Space methods, so they just *had* to be right. Google the phrase "spherical cow" for more on this mindset, not to mention one of the few really funny math jokes I know. ..."
Dec 20, 2017 | www.nakedcapitalism.com

By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Originally published at New Economic Perspectives

The truly exceptional thing about 'modern macroeconomics' devotees is not that they are so consistently and horrifically wrong or that they persist in their errors – but their exceptional combination of arrogance and disdain for those who have dramatically better records and broader and more relevant expertise. Kartik Athreya, the Richmond Fed's Research Director, led the modern macro parade on June 17, 2010 with his blog (which he later withdrew in embarrassment) when he announced the Athreya Axiom of Absolute Arrogance.

So far, I've claimed something a bit obnoxious-sounding: that writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy. Taken literally, I am almost certainly wrong. Some of them have great ideas, for sure. But this is irrelevant. The real issue is that there is extremely low likelihood that the speculations of the untrained, on a topic almost pathologically riddled by dynamic considerations and feedback effects, will offer anything new. Moreover, there is a substantial likelihood that it will instead offer something incoherent or misleading.

Modern macro devotees suffered far worse substantive embarrassment than Athreya's personal embarrassment. After Athreya (briefly) published his Axiom, a flurry of the world's top economists issued devastating critiques of modern macro's foundational myths in their dynamic stochastic general equilibrium (DSGE) models. The takedowns enraged and humiliated modern macro devotees, and because they are incapable of staying embarrassed, they doubled-down on Athreya's Axiom by announcing the Dilettante Doctrine .

People who don't like dynamic stochastic general equilibrium (DSGE) models are dilettantes. By this we mean they aren't serious about policy analysis.

Lawrence J. Christiano, Martin S. Eichenbaum, and Mathias Trabandt, authored "On DSGE Models on November 9, 2017. Christiano and Eichenbaum are freshwater modern macro devotees trained largely at the University of Minnesota, and now holding prominent positions at Northwestern. Trabandt is a German modern macro devotee.

A dilettante is a person who cultivates an area of interest, such as the arts, without real commitment or knowledge. The Dilettante Doctrine takes modern macro's arrogance to a new pinnacle. Only their model is legitimate, and it is illegitimate to criticize their DSGE models, even though they repeatedly fail. Instead, we must all "like" their models. We cannot make any statements about macroeconomics unless we "like [DSGE] models." The Dilettante Doctrine is a sure-fire means of winning academic disputes. You demand that your critics endorse your views, or you dismiss them as dilettantes unworthy of respect.

Readers may recall that the scientific method works in the opposite direction of the Dilettante Doctrine. Modern macro proposes a theory (DSGE) and tests its predictive ability. The DSGE models fail recurrently, on the most important macro events, and the failures are massive. The scientific method requires the theorist of the failed model to declare it falsified. Economists who "like" repeatedly falsified DSGE models are, as Paul Romer famously declared, engaged in "pseudoscience."

Athreya then inadvertently compounded modern macro's failures by putting in writing a bit too many of modern macro's darker secrets in his 2013 book about macroeconomics. Athreya confirmed many of the most fundamental criticisms of modern macro devotees, revealed additional failures that were even more devastating, and illustrated perfectly the blindness of modern macro's devotees to their dogmas and logic. Athreya did recognize clearly one dogma that made modern macro devotees unable to spot even the world's largest bubble – but treated that failure as if it were a virtue. Modern macro devotees train macroeconomists to be unable to identify warn against, or take action to end even the most destructive bubbles. This is like training surgeons to believe that shock cannot occur and they should ignore shock in treating patients.

I will return to these errors in subsequent columns, but in this initial column, I introduce Athreya's most embarrassing and devastating admission. Athreya goes on for over 100 pages on how wondrous his fellow modern macro devotees are. They are brilliant specialists who are the world's top practitioners of ultra-rigorous logic and ultra-sophisticated mathematics skills that make it impossible for them to be anything other than transparent and scrupulously honest. In particular, Athreya tells the reader that the paramount problem in macro and microeconomics is recognizing, understanding, and countering deceit, the defining element at law of fraud. (Actually, he does that only in an exceptionally opaque manner.) On p.103, however, Athreya admits that modern macro devotees know that their vaunted DSGE models rest on a fatal premise that is so preposterous and embarrassing that they dare not state it. "A silent assumption of the ADM model" is that "the ADM God" perfectly prevents all crimes, predation, and deceit – at no cost. Note that this means that modern macro devotees (silently) designed their DSGE models to be incapable of recognizing, understanding, measuring, or countering deceit, which they admit is their paramount and fatal failure.

It is never good to be arrogant. It is always dangerous and limiting to be (proudly) ignorant of fields that are likely to have superior understanding of issues such as deceit, fraud, and predation. Athreya's book displays his pride in both of these faults.

The authors of the Dilettante Doctrine inadvertently revealed another embarrassing modern macro failure of great importance. It is the combination of repeated, devastating failure and unfailing arrogance that defines (and dooms) modern macro as pseudoscientists. In fairness to the authors, they announced their Dilettante Doctrine in the context of an article admitting catastrophic errors in modern macro. They also unintentionally admit the non-scientific nature of their enterprise. Consider this passage:

For [IMF's leader] to take DSGE model-based recommendations seriously, the economic intuition underlying those recommendations has to be made in compelling and intuitive ways.

Yes, they actually wrote that for anyone to take DSGE models "seriously" their "economic intuition" must "be made intuitive." Wow, who knew science could be so 'intuitive?' Not satisfied with announcing their new "intuitive method" as a substitute for the scientific method, the authors double-down on the concept that 'intuition' is the secret sauce of economics declaring that the super-secret is to keep that 'intuition' "simple."

To be convincing, it is critical for a DSGE modeler to understand and convey the economic intuition behind the model's implications in simple and intuitive terms.

Notice that the authors are not stating the conditions required to make the DSGE models 'correct.' They are only interested in what practices will make the models' results "convincing" to the bosses.

The bosses decide "actual policymaking." The Dilettante Doctrine authors declare policymaking to be even less scientific than relying on 'simple' 'intuition' to convey DSGE model results. It turns out that DSGE models are the 'canvas' on which modern macro devotees "see the combined effect of the different colors" of their "art."

Inevitably, actual policymaking will always be to some extent an art. But even an artist needs a canvas to see the combined effect of the different colors. A DSGE model is that canvas.

These passages are not simply embarrassing, they are revealing. DSGE is a substantive farce that repeatedly fails because modern macro devotees shaped their models from the beginning to embrace laissez faire dogmas. The 'simple' 'intuitions' underlying DSGE models are the most destructive laissez faire dogmas. Narayana Kocherlakota's sly use of the word "almost" reveals his agreement with this point.

[A]lmost coincidentally -- in these [early DSGE] models, all government interventions (including all forms of stabilization policy) are undesirable.

The authors of the Dilettante Doctrine agree with Kocherlakota's observation about the original DSGE models.

The associated policy implications are clear: there was no need for any form of government intervention. In fact, government policies aimed at stabilizing the business cycle are welfare-reducing.

Modern macro is proud that its 'freshwater' and 'saltwater' factions have achieved a grand fusion. The saltwater types agreed to use DSGE models and the freshwater types agreed that the freshwater types could add 'frictions' to the DSGE models that would allow the models to at least purport to address some of the actual macroeconomic problems. There is a misleading view that because the 'saltwater' types often call themselves "New Keynesians" they must have views sympathetic to Keynesian thought. The Dilettante Doctrine authors make the useful point that "New Keynesian" dogma is actually Milton Friedman's core laissez faire dogmas.

Prototypical pre-crisis DSGE models built upon the chassis of the RBC model to allow for nominal frictions, both in labor and goods markets. These models are often referred to as New Keynesian (NK) DSGE models. But, it would be just as appropriate to refer to them as Friedmanite DSGE models. The reason is that they embody the fundamental world view articulated in Friedman's seminal Presidential Address .

The Dilettante Doctrine authors admit that DSGE models failed at the most fundamental level – they could not even spot that the economy was becoming progressively more dangerous and harmful.

Pre-crisis DSGE models didn't predict the increasing vulnerability of the US economy to a financial crisis.

The authors go badly wrong in multiple ways when they attempt to explain the DSGE models failures and their implications for economic theory and policy.

There is still an ongoing debate about the causes of the financial crisis. Our view, shared by Bernanke (2009) and many others, is that the financial crisis was precipitated by a rollover crisis in a very large and highly levered shadow-banking sector that relied on short-term debt to fund long-term assets.19

The trigger for the rollover crisis was developments in the housing sector. U.S. housing prices had risen rapidly in the 1990's with the S&P/Case-Shiller U.S. National Home Price Index rising by a factor of roughly 2.5 between 1991 and 2006. The precise role played by expectations, the subprime market, declining lending standards in mortgage markets, and overly-loose monetary policy is not critical for our purposes. What is critical is that housing prices began to decline in mid-2006, causing a fall in the value of the assets of shadow banks that had heavily invested in mortgage-backed securities. The Fed's willingness to provide a safety net for the shadow banking system was at best implicit, creating the conditions under which a roll-over crisis was possible. In fact a rollover crisis did occur and shadow banks had to sell their asset-backed securities at fire-sale prices, precipitating the Great Recession.

In sum, the pre-crisis mainstream DSGE models failed to forecast the financial crisis because they did not integrate the shadow banking system into their analysis.

I begin with the most fundamental failure – the failure to ask the right questions. Two prominent examples are why didn't the DSGE models warn us decades ago that the economy was systematically misallocating assets and creating the largest bubble in world history and what should we do to change the perverse incentives harming the economy and economic stability? Kocherlakota, in the same article from which I quoted above, emphasized that modern macro failed to warn about the coming financial crisis and the Great Recession and failed to provide effective policies to respond to them.

The dilettante article only uses the word 'bubble' once – to describe the tech bubble. It never labels the vastly larger housing bubble a 'bubble.' The dilettante article's authors claim it is not relevant for their purposes to know how the bubble arose, why it continued to inflate for over a decade, why it burst, or why it triggered the global financial crisis and the Great Recession. Only a dilettante could make or believe that claim.

Recall that Athreya emphasizes that deceit is the key factor that screws up economies – and that DSGE models "silently" assume "the ADM God" makes deceit impossible. I have explained in scores of columns why deceit, fraud, and predation were the central causes of the housing bubble hyper-inflating, the financial crisis, and the creation of the Great Recession. The dilettante authors refusal to call the housing bubble a bubble does not change the fact that they claim that the dramatic fall in housing values after 2005 was the paramount "trigger" of the financial crisis and the Great Recession.

The dilettante authors create a fiction about what "precipitat[ed] the Great Recession.

In fact a rollover crisis did occur and shadow banks had to sell their asset-backed securities at fire-sale prices, precipitating the Great Recession.

The dilettante authors then make their twin ' mea culpa ' on behalf of modern macro.

Against this background, we turn to the first of the two criticisms of DSGE models mentioned above, namely their failure to signal the increasing vulnerability of the U.S. economy to a financial crisis. This criticism is correct. The failure reflected a broader failure of the economics community.

The failure was to allow a small shadow-banking system to metastasize into a massive, poorly-regulated wild west-like sector that was not protected by deposit insurance or lender-of-last-resort backstops.

We now turn to the second criticism of DSGE models, namely that they did not sufficiently emphasize financial frictions. One reason why modelers did not emphasize financial frictions in DSGE models is that until the recent crisis, post-war recessions in the U.S. and Western Europe did not seem closely tied to disturbances in financial markets. The Savings and Loans crisis in the US was a localized affair that did not grow into anything like the Great Recession. Similarly, the stock market meltdown in the late 1980's and the bursting of the tech-bubble in 2001 only had minor effects on aggregate economic activity.

At the same time, the financial frictions that were included in DSGE models did not seem to have very big effects.

The dilettante authors have no idea how important their concessions are. Their premise is that it was government regulation, deposit insurance, and the central bank's 'lender of last resort' function that prevented prior epidemics of accounting control fraud from causing anything worse than "minor effects on aggregate economic activity." The obvious problem is that since its inception 30 years ago modern macro ideologues have claimed the opposite is true – that governmental action is unnecessary and harmful. They constructed their DSGE models to valorize their Friedmanite dogmas.

The less obvious problem is that freshwater modern macro has claimed that the lesson of the financial crisis is the opposite. Athreya and the Richmond Fed have preached for years that the federal safety net caused the housing problem, the financial crisis, and the Great Recession. The Richmond Fed claims that the key policy response to future financial crises is allowing the shadow sector to collapse in an orgy of "rollover cris[e]s."

The broader problem is why the dilettante authors are so wedded to their failed models, which at their core assume out of existence the institutions and events they say are most critical to explaining the catastrophic failures of their models. Why, for example, start with a general equilibrium model based on absurdly utopian assumptions (stated and unstated) that invariably produces equilibrium when the things we most need to study involve the failure of markets to function? It is nonsensical to make contradictory assumptions in different parts of your model about human behavior. Modern macro models keep failing and their devotees' response is to add (over time) dozens of fudges that posit that humans typically act in a manner that contradicts to the explicit and unstated assumptions of the DSGE model about human behavior. DSGE models increasingly resemble Borg constructs. The Borg also claim that there is no alternative to assimilation into their collective.

Aaron Layman , December 20, 2017 at 10:23 am

Excellent points. Helps to explain how you get a supposedly serious site covering real estate falling for ridiculous tripe about the root cause of the housing crisis (aka Great Recession). Take a careful look at the bombshell "working paper" and the new "narrative" cited, and you can see the groupstink of the Fed written all over it
https://betterdwelling.com/forget-subprime-canadian-real-estate-buyers-investors-crashed-the-us-market/

diptherio , December 20, 2017 at 11:07 am

Great article.

Modern mainstream macro is like a police detective whose model of the world states that people are nice and the body heals itself, and that therefore we will all live happily ever after. When confronted by a murder victim lying in a pool of their own blood, and that fact's apparent incompatibility with their model of the world, they respond, "My model is correct only, you see, it failed to account for sudden massive blood loss. How that loss of blood happened is beyond the scope of my investigation, the important thing is that I've now incorporated that knowledge in my new improved model, which proves that we will all live happily ever after -- except in cases of a sudden, massive loss of blood ."

Altandmain , December 20, 2017 at 12:01 pm

There has not been a big mea-culpa from neoliberal economists after the 2008 Financial Crisis. I don't think there will be. Many are essentially the equal of religious fundamentalists.

However, we should also remember that the very wealthy have backed the neoliberal economists against the general public. Neolibe3ralism provides a pseudoscientific economic excuse for what amounts to turning society into a plutocracy, which is precisely what the rich want.

shinola , December 20, 2017 at 2:10 pm

" essentially the equal of religious fundamentalists."

Yes – nailed it!

flora , December 20, 2017 at 3:26 pm

aka: The divine right of markets. /s

Skip Intro , December 20, 2017 at 3:12 pm

The GFC worked out very well for the neoliberal agenda. What you can't predict, you don't need to prevent or protect against. If the result happens to be a massive transfer of funds from states to speculators that eases the path to austerity and asset stripping, what's to apologize for?

Matthew G. Saroff , December 20, 2017 at 12:16 pm

What is ADM, aside from the agribusiness?

Robert Denne , December 20, 2017 at 12:50 pm

ADM is the Arrow-Debreu-McKenzie (ADM) model, as revealed in the blurb for the Athreya book on Amazon.

Jean , December 20, 2017 at 12:31 pm

Lack of higher math skills precludes citizen involvement in economics.
Blame it on the math card in PCs that makes doing it by hand and thus learning and understanding how numbers work.

voislav , December 20, 2017 at 1:28 pm

Most economists lack higher math skills too, but that doesn't seem to be obstacle for them. It's spherical chickens in a vacuum, models that are supposedly related to real world but are simplified beyond recognition because most economists are ignorant of even rudimentary statistics.

djrichard , December 20, 2017 at 1:31 pm

You don't need math to follow the money.

Amfortas the Hippie , December 20, 2017 at 3:59 pm

and you don't need math to discover that the holy Models rely on downright silly assumptions about Human Beings.
"rational actors with perfect information".
lol.
Most of the economic actors I know do not even remotely resemble that.
and whomever said that modern econ is akin to fundamentalist religion is right on.
I can't read "Money" or watch CNBC without thinking about Pat Robertson or Billy Graham.
It's just a different god they worship.
With this in mind, I think it's hilarious that the current hyperventilation about "cryptocurrency" could possibly be the bubble that, in popping, brings the whole mess down.
"Masters of the Universe", indeed.

Know Thy Farmer.

Synoia , December 20, 2017 at 12:48 pm

Personally I believe economic as practiced is an example of telling the boss (the King) what they want to hear.

Economist appear descended form a long line of Court Magicians, telling the futures from the entrails of an animal, consulting the spirits for guidance, or using a Chrystal ball.

Of more pointedly Bullshit, baffles brains.

Prof Black make the point that he DSGE models assume away fraud. They also assume people are "rational actors, driven only by logic," that is: we are all Vulcans from Star Trek.

A simple view of women's fashions (high heels) with regard to comfort or safety would demolish any theory of people as "rational actors." Or men's behavior over their "sports teams."

To assume away human behavior and emotion, and thus chaos or catastrophe theory, would put economists at odds with their masters, and cut their income, by the nearly always fatal, or career limiting "telling truth to power."

It's interesting to speculate what would be the scope or size of common ground in a dialog between anthropologists and economists. Null set perhaps?

PB , December 20, 2017 at 1:28 pm

Hi all,

Just a quick note for those who were initially confused by Bill Black's use of "modern macroeconomic theory" and thought "modern monetary theory". (I know I did, and was initially really confused by his take, and had to re-read the first three paragraphs a few times to re-set my mental pointers). As far as I know (and I did a year of Ph.D economics at Stanford, so I pass Arthreya's first test) I haven't heard of "modern" applied to DSGE macro but that probably reflects my choice of reading material more than anything else. In short, "modern macro" is bad, "modern monetary" is good.

BTW, one of the best takes of macroeconomics I've encountered is Steve Keen's work, which I gratefully acknowledge I first read here on NC. Keen's critique of DSGE models is utterly spot-on and mathematically sophisticated. Part of the problem with economics is that it has been afflicted with 'math envy' since its earliest days, and the ADM results were proved with Banach Space methods, so they just *had* to be right. Google the phrase "spherical cow" for more on this mindset, not to mention one of the few really funny math jokes I know.

Cheers,

P

[Jul 05, 2017] NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false

Notable quotes:
"... NAIRU is a specific claim and estimate about the way the economy works. As you discovered yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of accelerating inflation. So there is literally nothing redeeming about the theory except to say that there is some relationship between supply labor, and inflation. Which is to say, that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are correct. ..."
"... The answer is that there is no unemployment rate that generates accelerating inflation. As inflation is not simply a relationship between unemployment and prices. Inflation is a result of many different types of inputs. ..."
"... There are literally zero examples of low unemployment rates, even below 1% during WWII, that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand on. ..."
"... You make the same mistake as all illiterate persons, that is, you cannot read. What I have clearly stated is: "NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false."* The measurement problem is a side issue.** ..."
"... "better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule," ..."
"... Good line here Tom... they don't have a function... ..."
"... I've closely followed this NAIRU argument here and on other threads. I don't have a dog in this fight, but it seems perfectly obvious from all this that Auburn and Brian have this exactly right. And for the life of me I cannot fathom how anyone can misunderstand their argument: there may be a link between employment and inflation, but the NAIRU doesn't capture it. There may be a link between dogs barking at a full moon, but my theory of a moon made out of green cheese doesn't capture it. ..."
"... Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not vaguely true, or evolutionary true as David Glasner maintains, but provable false. ..."
Jul 05, 2017 | mikenormaneconomics.blogspot.com

Ralph Musgrave said... February 28, 2017 at 4:06 PM

Brian,

For the second time, you claimed "Nobody says there is no relationship between supply, employment, and inflation." My answer is the same as before: what does Brian Romanchuk mean by saying NAIRU should be "bashed, smashed and trashed". Seems a pretty outright condemnation of the whole idea to me.

Tom,

You say "Probably better to say that there is no necessary or constant relationship…". Quite agree. But whoever said there WAS a constant relationship? Certainly not the Fed. Anyone with a bit brain ought to realise that NAIRU will vary with a whole host of variables: standards of education, recent unemployment levels (hystersis) and so on.

EK-H,

You make the naïve mistake many people make of thinking the because something cannot be measured accurately that therefor it does not have a precise value. The amount of iron in the Moon has a very very precise value indeed. Ask God how much iron there is on and in the Moon and he'd tell you the figure to the nearest 0.00000001%. In contrast, astronomers might not know the quantity to better than plus or minus 10% for all I know. It is therefor perfectly permissible to write equations or get involved in discussions which assume a very very precise value for the amount of iron in the Moon. Same goes for NAIRU.

Much of the stuff I've written makes the latter assumption: it is helpful to make that assumption sometimes.

Auburn Parks said.. February 28, 2017 at 4:39 PM .

No Egmont, its not about scientific idiocy. Its about the nature of the subject. Economics is not different than social psychology in this regard.

Ralph-

NAIRU is a specific claim and estimate about the way the economy works. As you discovered yourself, the Fed literally produces a NAIRU estimate and uses that estimate to determine policy. NAIRU cannot be estimated accurately, and furthermore there is zero evidence of accelerating inflation. So there is literally nothing redeeming about the theory except to say that there is some relationship between supply labor, and inflation. Which is to say, that your support of the thing is wrong, and all of our criticisms that NAIRU is trash are correct.

What is the unemployment rate that would correspond to accelearating inflation right now Ralph?

Auburn Parks said.. February 28, 2017 at 4:42 PM .
The answer is that there is no unemployment rate that generates accelerating inflation. As inflation is not simply a relationship between unemployment and prices. Inflation is a result of many different types of inputs.

There are literally zero examples of low unemployment rates, even below 1% during WWII, that have resulted in accelerating inflation. You and the NAIRU crowd have no legs to stand on.

AXEC / E.K-H said.. February 28, 2017 at 4:43 PM .
Ralph Musgrave

You say: "You make the naïve mistake many people make of thinking the because something cannot be measured accurately that therefore it does not have a precise value."

You make the same mistake as all illiterate persons, that is, you cannot read. What I have clearly stated is: "NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false."* The measurement problem is a side issue.**

Egmont Kakarot-Handtke

* See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
** See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html

AXEC / E.K-H said.. February 28, 2017 at 5:11 PM .
Auburn Parks

The moronic part of economists, i.e. the vast majority, maintains that economics is a social science. Time to wake up to the fact that economics is a system science.#1

Economics is NOT a science of individual/social/political behavior - this is the social science delusion - but of the behavior of the monetary economy . All Human-Nature issues are the subject matter of other disciplines (psychology, sociology, anthropology, biology/ Darwinism, political science, social philosophy, history, etcetera) and are taken in from these by way of multi-disciplinary cooperation.#2

The economic system is subject to precise and measurable systemic laws.#3

Egmont Kakarot-Handtke

#1 See 'Lawson's fundamental methodological error and the failure of Heterodoxy'
http://axecorg.blogspot.de/2016/03/lawsons-fundamental-methodological.html
#2 See 'Economics and the social science delusion'
http://axecorg.blogspot.de/2016/03/economics-and-social-science-delusion.html
#3 See 'The three fundamental economic laws'
http://axecorg.blogspot.de/2016/03/the-three-fundamental-economic-laws.html

Tom Hickey said.. February 28, 2017 at 6:19 PM .
But whoever said there WAS a constant relationship? Certainly not the Fed.

Not now. They had to learn this by first the NAIRU model that assumed a natural rate and cet. par., and then the difficulty of writing a rule that could be applied across time.

Too many confounding factors involved that are not directly related to employment or the interest rate.

And there are still people calling for a rule.

Noah Way said.. February 28, 2017 at 7:30 PM .
"Economic science" is an oxymoron.
AXEC / E.K-H said.. March 1, 2017 at 5:39 AM .
Noah Way

You say: "'Economic science' is an oxymoron."

It is, first of all, of utmost importance to distinguish between political and theoretical economics. The main differences are: (i) The goal of political economics is to successfully push an agenda, the goal of theoretical economics is to successfully explain how the actual economy works. (ii) In political economics anything goes; in theoretical economics the scientific standards of material and formal consistency are observed.

Political economics has produced NOTHING of scientific value in the last 200+ years. The four majors approaches - Walrasianism, Keynesianism, Marxianism, Austrianism - are mutually contradictory, axiomatically false, and materially/formally inconsistent.

A closer look at the history of economic thought shows that theoretical economics (= science) had been hijacked from the very beginning by the agenda pushers of political economics. These folks never rose above the level of vacuous econ-waffle. The whole discussion from Samuelson/Solow's unemployment-inflation trade-off to Friedman/Phelps's natural rate to the rational expectation NAIRU is a case in point.

The NAIRU-Phillips curve has zero scientific content. It is a plaything of retarded political economists. Samuelson, Solow, Friedman, Phelps, and the rest of participants in the NAIRU discussion up to Wren-Lewis are fake scientists.*

Egmont Kakarot-Handtke

* See also 'Modern macro moronism'
http://axecorg.blogspot.de/2017/02/modern-macro-moronism.html

Matthew Franko said.. March 1, 2017 at 8:13 AM .
"better to say that there is no necessary or constant relationship between employment and inflation that can be expressed either as a function or a rule,"

Good line here Tom... they don't have a function...

But I would point out that with the employment issue, we have had an unregulated system interface (open borders) for decades which is ofc going to result in chaos..

Ralph Musgrave said.. March 1, 2017 at 10:20 AM .
EK-H,

I see: so you're saying the "underlying employment theory" of NAIRU "is false": i.e. you're saying there is no relationship between inflation and unemployment.

Why then don't you advocate a massive increase in demand. Think of the economic benefits and social problems solved.!!

Reason you don't advocate that is that, like all the other NAIRU deniers, you know perfectly well that THERE IS a relationship between inflation and unemployment.!!

AXEC / E.K-H said.. March 1, 2017 at 1:43 PM .
Ralph Musgrave

It would be fine if you could first learn to read and to think and to do your economics homework.

The point at issue is the labor market theory and the remarkable fact of the matter is that economists have after 200+ years NO valid labor market theory. The proof is in the NAIRU-Phillips curve. So what these failures are in effect doing is giving policy advice without sound theoretical foundation. Scientists don't do this.

What is known since the founding fathers about the separation of politics and science is this: "A scientific observer or reasoner, merely as such, is not an adviser for practice. His part is only to show that certain consequences follow from certain causes, and that to obtain certain ends, certain means are the most effectual. Whether the ends themselves are such as ought to be pursued, and if so, in what cases and to how great a length, it is no part of his business as a cultivator of science to decide, and science alone will never qualify him for the decision." (J. S. Mill)

The first point is that economists violate the separation of politics and science on a daily basis.#1 The second point is that their unwarranted advice is utter rubbish because they have NO idea how the economy works. The problem society has with economists is that it would be much better off without these clowns.

You ask me: "Why then don't you advocate a massive increase in demand. Think of the economic benefits and social problems solved.!!"

Answer: The business of the economist is the true theory about how the economic system works and NOT the solution of social problems. This is the proper business of politicians. In addition, an economist who understands how the price and profit mechanism works does not make such a silly proposal, only brain-dead political agenda pushers do.#2

What I am indeed advocating is that retarded econ-wafflers are thrown out of economics and that economics gets finally out of what Feynman aptly called cargo cult science.#3

Economists claim since more that 200 years that they are doing science and this is celebrated each year with the 'Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel'. Time to make this claim come true.

The only thing economist like you can actively do to contribute to the progress of economics is switching on TV and watching 24/365.

Egmont Kakarot-Handtke

#1 See 'Scientific suicide in the revolving door'
http://axecorg.blogspot.de/2016/11/scientific-suicide-in-revolving-door.html
#2 See 'Rethinking deficit spending'
http://axecorg.blogspot.de/2016/12/rethinking-deficit-spending.html
#3 See 'Economists and the destructive power of stupidity'
http://axecorg.blogspot.de/2017/02/economists-and-destructive-power-of.html

Ralph Musgrave said.. March 1, 2017 at 2:14 PM .
EKH,

"The business of the economist is the true theory about how the economic system works and NOT the solution of social problems. This is the proper business of politicians."

"The business of the economist" is not just "true theory": it is also to give the best economic advice they can even where the theory is clearly defective. In the case of the relationship between inflation and unemployment, the EXACT nature of that relationship is not known with much accuracy, but governments just have to take a judgement on what level of unemployment results in too much inflation. Ergo economics have a duty to give the best advice they can in the circumstances.

Re social problems, your above quote also doesn't alter the fact that economists are in a position to solve HUGE social problems if they promote an increase in demand where that is possible. So why are you so reluctant to solve those social problems by advocating a huge increase in demand. It's blindingly obvious.

Like all the other NAIRU deniers, you know perfectly well there is a relationship between inflation and unemployment!!

David Swan said.. March 1, 2017 at 3:23 PM .
To say that there is "a" relationship between inflation and unemployment does not even remotely support the claims inherent in the NAIRU, nor does it justify its use to guide the macroeconomic framework. NAIRU does not claim that there is "a" relationship between inflation and unemployment (that lesser claim is covered adequately by the Phillips Curve). NAIRU claims that low levels of unemployment generate ACCELERATING inflation (i.e. "hyperinflation"), a claim based on pure sophistry and nothing else. If you would like to support the NAIRU's utterly fallacious claim that low unemployment generates ACCELERATING inflation, then please provide data to support that claim.

Furthermore, "a" relationship between unemployment and inflation in no way justifies the central bank intervention of choking off economic growth to prevent "too many jobs". Is the inflation harmful or benign? With the historical perspective available to us from nearly 5 decades of NAIRU, all that is required is to look at the chart of hourly wage growth vs productivity and observe that real wages growth took a sharp right turn at the very time NAIRU was implemented worldwide. There has not been one iota of real wage growth since the 70's (despite low inflation), whereas the real wage grew steadily prior to that (despite moderate inflation). If that is the price of "protecting" us from inflation, then in what way is it beneficial to do so?

Brian Romanchuk said.. March 1, 2017 at 3:38 PM .
I see Ralph Musgrave referred to my article again.

Good Lord, how can I make what I wrote simpler to understand?

The DEFINITION of NAIRU is the level of the unemployment rate at which the price level starts to accelerate. Sure, there's usually another variable in there mucking up the works, but it's going to be a second order effect in the current environment.

AXEC / E.K-H said.. March 1, 2017 at 4:42 PM .
Ralph Musgrave

You say: "Ergo economics have a duty to give the best advice they can in the circumstances."

The only duty of scientifically incompetent economists is to throw themselves under the bus. Economists are a menace to their fellow citizens as Napoleon already knew: "Late in life, moreover, he claimed that he had always believed that if an empire were made of granite the ideas of economists, if listened to, would suffice to reduce it to dust." (Viner)

Economists do NOT solve social problems they ARE a social problem.

You repeat your silly question: "So why are you so reluctant to solve those social problems by advocating a huge increase in demand. It's blindingly obvious."

Yes it is blindingly obvious that deficit spending does NOT solve social problems but CREATES the social problem of an insanely unequal distribution (see the references above).

This follows from the true labor market theory which is given with the systemic employment equation.#1 "The correct theory of the macroeconomic price mechanism tells us that ― for purely SYSTEMIC reasons ― the average wage rate has in the current situation to rise faster than the average price. THIS opens the way out of mass unemployment, deflation, and stagnation and NOT the blather of scientifically incompetent orthodox and heterodox agenda pushers."#2

Right policy depends on true theory: "In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion." (Stigum)

Economists do not have the true theory. They have NOTHING to offer. The NAIRU-Phillips curve is provable false. Because of this ALL economic policy conclusions drawn from it are counterproductive, that is, they WORSEN the situation. So, Samuelson, Solow, Friedman, Phelps and the other NAIRU-Phillips curve proponents bear the responsibility for mass unemployment and the social devastation that comes with it.

From the fact that the NAIRU labor market theory is false follows that economists are incompetent scientists and that ALL their economic policy proposals are scientifically worthless.

Egmont Kakarot-Handtke

#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
#2 See 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html

John said.. March 2, 2017 at 9:53 AM .
I've closely followed this NAIRU argument here and on other threads. I don't have a dog in this fight, but it seems perfectly obvious from all this that Auburn and Brian have this exactly right. And for the life of me I cannot fathom how anyone can misunderstand their argument: there may be a link between employment and inflation, but the NAIRU doesn't capture it. There may be a link between dogs barking at a full moon, but my theory of a moon made out of green cheese doesn't capture it.
AXEC / E.K-H said.. March 5, 2017 at 5:29 AM .
NAIRU and economists' lethal swampiness.

Comment on David Glasner on 'Richard Lipsey and the Phillips Curve Redux'

David Glasner contributes to the NAIRU discussion#1 by reproducing essential content of his 2013 paper. Back then he propagated Lipsey's concept of multiple equilibria or band of unemployment (NAIBU) which is consistent with a stable rate of inflation. The NAIBU concept is a fine example of the tendency of economists to soften, relativize, qualify, and semantically dilute every concept until it is senseless and useless.

It is the very characteristic of economics that there are no well-defined concepts and this begins with the pivotal economic concepts profit and income. The habit of swampification keeps the discourse safely in the no man's land where "nothing is clear and everything is possible" (Keynes) and where anything goes.

Swampification is what Popper called an immunizing strategy. The beauty of vagueness and ambiguity is that it cannot be falsified: "Another thing I must point out is that you cannot prove a vague theory wrong." (Feynman)#2

David Glasner applies the concept of evolution in order to swampify the NAIRU: "The current behavior of economies … is consistent with evolutionary theory in which the economy is constantly evolving in the face of path-dependent, endogenously generated, technological change, and has a wide range of unemployment and GDP over which the inflation rate is stable."

In other words, presumably there is a relationship between unemployment and inflation but nobody knows what it is. While science is known to strive for uniqueness, economics is known to strive for ambiguity and obfuscation. This swampiness is rationalized as realism. After all, reality is messy, isn't it?

To recall, the Phillips curve started as a simple and remarkably stable EMPIRICAL relationship between wage rate changes and the rate of unemployment. The original Phillips curve was reinterpreted and thereby messed up by Samuelson and Solow who introduced the economic policy trade-off between inflation and unemployment which was finally thrown out again with the NAIRU.

A conceptional error/mistake/blunder slipped in with the bastardization of the original Phillips curve that was never rectified but in effect buried under a huge heap of inconclusive economic shop talk. This means that until this very day economics has no valid theory of the labor market.

See part 2

AXEC / E.K-H said.. March 5, 2017 at 5:34 AM .
Part 2

So, the microfounded NAIRU-Phillips curve has first of all to be rectified.#3 The macrofounded SYSTEM-Phillips curve is shown on Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC62.png

From this correct employment equation follows in the MOST ELEMENTARY case that an increase of the macro-ratio rhoF=W/PR leads to higher total employment L. The ratio rhoF embodies the price mechanism. Let the rate of change of productivity R for simplicity be zero, i.e. r=0, then there are three logical cases, that is, THREE types of inflation.
(i) If the rate of change of the wage rate W is equal to the rate of change of the price P, i.e. w=p, then employment does NOT change NO MATTER how big or small the rates of change are. That is, NO amount of inflation or deflation has any effect on employment. Inflation is neutral, there is no trade-off between unemployment and inflation.
(ii) If the rate of change of the wage rate is greater than the rate of change of the price then employment INCREASES. There is a POSITIVE effect of inflation on employment.
(iii) If the rate of change of the wage rate is smaller than the rate of change of the price then employment DECREASES. There is a NEGATIVE effect of inflation on employment.

So, it is the DIFFERENCE in the rates of change of wage rate and price and not the absolute magnitude of change that is decisive. Every PERFECTLY SYNCHRONOUS inflation/deflation is employment-neutral, that is, employment remains indefinitely where it actually is. The neutral inflation can start at ANY point between full and zero employment. The crucial fact to notice is that there is no such thing as "inflation", there are THREE types of inflation.

The systemic employment equation defines the causal relationship of "inflation" on employment. However, there is the inverse causality of employment on "inflation".

Common sense suggests that positive inflation (ii) is more probable the closer actual employment is at full employment and negative inflation (iii) is more probable the farther away actual employment is from full employment. In other words: the market economy is inherently unstable. The feed-back loop between employment and "inflation" is the very antithesis to the idea of equilibrium. To recall, the NAIRU is DEFINED as an equilibrium. Standard economics has built equilibrium right into the premises, i.e. into the axiomatic foundations. All of economics starts with the idea that the market economy is an equilibrium system. It turns out that this premise is false, just the opposite is the case.

Standard labor market theory as it is incorporated in the NAIRU-Phillips curve is not vaguely true, or evolutionary true as David Glasner maintains, but provable false.

Egmont Kakarot-Handtke

#1 See 'NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather'
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html
and 'NAIRU and the scientific incompetence of Orthodoxy and Heterodoxy'
http://axecorg.blogspot.de/2017/02/nairu-and-scientific-incompetence-of.html
#2 "By having a vague theory it is possible to get either result. ... It is usually said when this is pointed out, 'When you are dealing with psychological matters things can't be defined so precisely'. Yes, but then you cannot claim to know anything about it."
#3 See 'Keynes' Employment Function and the Gratuitous Phillips Curve Disaster'
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421

[Jun 14, 2017] Krugman as a less then necessary additional singer in the shrill liberal chorus

Jun 14, 2017 | economistsview.typepad.com

anne, June 13, 2017 at 12:18 PM

https://krugman.blogs.nytimes.com/2017/06/12/macroeconomics-the-simple-and-the-fancy/

June 12, 2017

Macroeconomics: The Simple and the Fancy

By Paul Krugman

Noah Smith has a nice summation * of his critique of macroeconomics, which mainly comes down, as I read it, as an appeal for researchers to stay close to the ground. That's definitely good advice for young researchers.

But what about economists trying to provide useful advice, directly or indirectly, to policy makers, who need to make decisions based on educated guesses about the whole system? Smith says, "go slow, allow central bankers to use judgment and simple models in the meantime." That would be better than a lot of what academic macroeconomists do in practice, which is to castigate central bankers and other policymakers for not using elaborate models that don't work. But is there really no role for smart academics to help out in this process? And if so, what does this say about the utility of what the profession does?

The thing is, those simple models have done pretty darn well since 2008 - and central bankers who used them, like Ben Bernanke, did a lot better than central bankers like Jean-Claude Trichet who based their judgements on something else. So surely at least part of the training of macroeconomists should prepare them to be helpful in applying simple models, maybe even in making those simple models better.

Reading Smith, I found myself remembering an old line ** from Robert Solow in defense of "fancy" economic theorizing:

"In economics I like a man to have mastered the fancy theory before I trust him with simple theory because high-powered economics seems to be such an excellent school for the skillful use of low-powered economics."

OK, can anyone make that case about modern macroeconomics? With a straight face? In practice, it has often seemed that expertise in high-powered macroeconomics - mainly meaning dynamic stochastic general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics, largely IS-LM and its derivatives.

I don't want to make a crude functional argument here: research that advances knowledge doesn't have to provide an immediate practical payoff. But the experience since 2008 has strongly suggested that the research program that dominated macro for the previous generation actually impaired the ability of economists to provide useful advice in the moment. Mastering the fancy stuff made economists useless at the simple stuff.

A more modest program would, in part, help diminish this harm. But it would also be really helpful if macroeconomists relearned the idea that simple aggregate models can, in fact, be useful.

* http://noahpinionblog.blogspot.fr/2017/06/summing-up-my-thoughts-on-macroeconomics.html

** https://books.google.com/books?id=7ABgM8-ExXsC&pg=PA44&lpg=PA44&dq=solow+simple+fancy+economics+trust&source=bl&ots=XflZaM5HLV&sig=vsqDgLLShG5gBda-NBTxyjmclI0&hl=en&sa=X&ved=0ahUKEwjSxZ6ShLnUAhVMNT4KHW9VBIUQ6AEIOjAE#v=onepage&q=solow%20simple%20fancy%20economics%20trust&f=false

Christopher H. - , June 13, 2017 at 12:20 PM
I don't understand why you feel the need to put a link from today's link list into a comment, without any comment from you.
Paine - , June 13, 2017 at 02:05 PM
Often we can't activate the articles because we don't have a NYT sub
Or have used up our free monthly quota

Besides this blog post on macro
Is a gem --

Worth a thousand copies

Christopher H. - , June 13, 2017 at 02:58 PM
fair enough.
$mart $$$$ Behind The Curve - , June 14, 2017 at 04:37 AM
https://www.leg.state.nv.us/Session/79th2017/Bills/AB/AB374_EN.pdf
anne - , June 13, 2017 at 12:50 PM
https://en.wikipedia.org/wiki/Dynamic_stochastic_general_equilibrium

Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.

Paine - , June 13, 2017 at 02:11 PM
Too general

some variants include different assumptions
But common assumptions include

No banks
No nominal prices
Micro founding with a single representative agent
An infinite time horizon
A fixed inter temporal fiscal budget
Continuous market clearance
No private debt

On and on one must go

anne - , June 13, 2017 at 04:15 PM
DGSE:

Too general

some variants include different assumptions
But common assumptions include

No banks
No nominal prices
Micro founding with a single representative agent
An infinite time horizon
A fixed inter temporal fiscal budget
Continuous market clearance
No private debt

[ Perfect. ]

anne - , June 13, 2017 at 12:51 PM
http://en.wikipedia.org/wiki/IS%E2%80%93LM_model

The IS–LM model, or Hicks–Hansen model, is a macroeconomic tool that demonstrates the relationship between interest rates and real output, in the goods and services market and the money market (also known as the assets market). The intersection of the "investment–saving" (IS) and "liquidity preference–money supply" (LM) curves is the "general equilibrium" where there is simultaneous equilibrium in both markets. Two equivalent interpretations are possible: first, the IS–LM model explains changes in national income when the price level is fixed in the short-run; second, the IS–LM model shows why the aggregate demand curve shifts. Hence, this tool is sometimes used not only to analyse the fluctuations of the economy but also to find appropriate stabilisation policies.

The model was developed by John Hicks in 1937, and later extended by Alvin Hansen, as a mathematical representation of Keynesian macroeconomic theory. Between the 1940s and mid-1970s, it was the leading framework of macroeconomic analysis. While it has been largely absent from macroeconomic research ever since, it is still the backbone of many introductory macroeconomics textbooks.

anne - , June 13, 2017 at 02:00 PM
http://krugman.blogs.nytimes.com/2011/10/09/is-lmentary/

October 9, 2011

IS-LMentary
By Paul Krugman

A number of readers, both at this blog and other places, have been asking for an explanation of what IS-LM is all about. Fair enough – this blogosphere conversation has been an exchange among insiders, and probably a bit baffling to normal human beings (which is why I have been labeling my posts "wonkish").

[IS-LM stands for investment-savings, liquidity-money -- which will make a lot of sense if you keep reading.]

So, the first thing you need to know is that there are multiple correct ways of explaining IS-LM. That's because it's a model of several interacting markets, and you can enter from multiple directions, any one of which is a valid starting point.

My favorite of these approaches is to think of IS-LM as a way to reconcile two seemingly incompatible views about what determines interest rates. One view says that the interest rate is determined by the supply of and demand for savings – the "loanable funds" approach. The other says that the interest rate is determined by the tradeoff between bonds, which pay interest, and money, which doesn't, but which you can use for transactions and therefore has special value due to its liquidity – the "liquidity preference" approach. (Yes, some money-like things pay interest, but normally not as much as less liquid assets.)

How can both views be true? Because we are at minimum talking about *two* variables, not one – GDP as well as the interest rate. And the adjustment of GDP is what makes both loanable funds and liquidity preference hold at the same time....

Paine - , June 13, 2017 at 02:04 PM
Yes yes yes

U admonished my humble self
For blasting krugman as a less then necessary additional singer in the shrill liberal chorus

But here is where he belongs

This is a giant strike at the last generation
Of the on going macro theorist academic clique

Mr and ms university
Tear down that model


That is the new classical model and it's pitiful off spring new Keynesianism

[Jun 14, 2017] IS-LM stands for investment-savings, liquidity-money and is a junk model

Notable quotes:
"... Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles. ..."
"... expertise in high-powered macroeconomics - mainly meaning dynamic stochastic general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics, largely IS-LM and its derivatives. ..."
Jun 14, 2017 | economistsview.typepad.com
anne , June 12, 2017 at 03:01 PM
http://krugman.blogs.nytimes.com/2011/10/09/is-lmentary/

October 9, 2011

IS-LMentary
By Paul Krugman

A number of readers, both at this blog and other places, have been asking for an explanation of what IS-LM is all about. Fair enough – this blogosphere conversation has been an exchange among insiders, and probably a bit baffling to normal human beings (which is why I have been labeling my posts "wonkish").

[IS-LM stands for investment-savings, liquidity-money -- which will make a lot of sense if you keep reading.]

So, the first thing you need to know is that there are multiple correct ways of explaining IS-LM. That's because it's a model of several interacting markets, and you can enter from multiple directions, any one of which is a valid starting point.

My favorite of these approaches is to think of IS-LM as a way to reconcile two seemingly incompatible views about what determines interest rates. One view says that the interest rate is determined by the supply of and demand for savings – the "loanable funds" approach. The other says that the interest rate is determined by the tradeoff between bonds, which pay interest, and money, which doesn't, but which you can use for transactions and therefore has special value due to its liquidity – the "liquidity preference" approach. (Yes, some money-like things pay interest, but normally not as much as less liquid assets.)

How can both views be true? Because we are at minimum talking about *two* variables, not one – GDP as well as the interest rate. And the adjustment of GDP is what makes both loanable funds and liquidity preference hold at the same time.

Start with the loanable funds side. Suppose that desired savings and desired investment spending are currently equal, and that something causes the interest rate to fall. Must it rise back to its original level? Not necessarily. An excess of desired investment over desired savings can lead to economic expansion, which drives up income. And since some of the rise in income will be saved – and assuming that investment demand doesn't rise by as much – a sufficiently large rise in GDP can restore equality between desired savings and desired investment at the new interest rate.

That means that loanable funds doesn't determine the interest rate per se; it determines a set of possible combinations of the interest rate and GDP, with lower rates corresponding to higher GDP. And that's the IS curve.

Meanwhile, people deciding how to allocate their wealth are making tradeoffs between money and bonds. There's a downward-sloping demand for money – the higher the interest rate, the more people will skimp on liquidity in favor of higher returns. Suppose temporarily that the Federal Reserve holds the money supply fixed; in that case the interest rate must be such as to match that demand to the quantity of money. And the Fed can move the interest rate by changing the money supply: increase the supply of money and the interest rate must fall to induce people to hold a larger quantity.

Here too, however, GDP must be taken into account: a higher level of GDP will mean more transactions, and hence higher demand for money, other things equal. So higher GDP will mean that the interest rate needed to match supply and demand for money must rise. This means that like loanable funds, liquidity preference doesn't determine the interest rate per se; it defines a set of possible combinations of the interest rate and GDP – the LM curve.

And that's IS-LM:

[Graph]

The point where the curves cross determines both GDP and the interest rate, and at that point both loanable funds and liquidity preference are valid.

What use is this framework? First of all, it helps you avoid fallacies like the notion that because savings must equal investment, government spending cannot lead to a rise in total spending – which right away puts us above the level of argument that famous Chicago professors somehow find convincing. And it also gets you past confusions like the notion that government deficits, by driving up interest rates, can actually cause the economy to contract.

Most spectacularly, IS-LM turns out to be very useful for thinking about extreme conditions like the present, in which private demand has fallen so far that the economy remains depressed even at a zero interest rate. In that case the picture looks like this:

[Graph]

Why is the LM curve flat at zero? Because if the interest rate fell below zero, people would just hold cash instead of bonds. At the margin, then, money is just being held as a store of value, and changes in the money supply have no effect. This is, of course, the liquidity trap.

And IS-LM makes some predictions about what happens in the liquidity trap. Budget deficits shift IS to the right; in the liquidity trap that has no effect on the interest rate. Increases in the money supply do nothing at all.

That's why in early 2009, when the Wall Street Journal, the Austrians, and the other usual suspects were screaming about soaring rates and runaway inflation, those who understood IS-LM were predicting that interest rates would stay low and that even a tripling of the monetary base would not be inflationary. Events since then have, as I see it, been a huge vindication for the IS-LM types – despite some headline inflation driven by commodity prices – and a huge failure for the soaring-rates-and-inflation crowd.

Yes, IS-LM simplifies things a lot, and can't be taken as the final word. But it has done what good economic models are supposed to do: make sense of what we see, and make highly useful predictions about what would happen in unusual circumstances. Economists who understand IS-LM have done vastly better in tracking our current crisis than people who don't.

anne - , June 12, 2017 at 03:02 PM
https://en.wikipedia.org/wiki/Dynamic_stochastic_general_equilibrium

Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.

Paine - , June 13, 2017 at 01:50 PM
This on academic macro since the seventies

Is the Paul krugman I respect

His hysterics about the trump menace ?

Not so useful

Paul leave that rote tub thumping to hacks

Paine - , June 13, 2017 at 01:50 PM
"expertise in high-powered macroeconomics - mainly meaning dynamic stochastic general equilibrium - positively incapacitates its possessors from the use of low-powered macroeconomics, largely IS-LM and its derivatives."

Amen

[Apr 13, 2017] personal.lse.ac.uk

Notable quotes:
"... He writes a DSGE model where banks hold sovereign debt, so that bad news about a possible future sovereign default both puts a strain on the funding of banks but also induces them to cut their leverage as a precautionary reaction. ..."
"... This channel for the diabolic loop linking banks and sovereign debt fits reasonably well the behavior of credit spreads across Italian banks and firms, and predicts that the ECB's interventions had a small effect. ..."
Apr 13, 2017 | lse.ac.uk
Luigi Bocola (2014, Penn, Northwestern): Bocola tries to explain the depth of the crisis in Italy after 2011. He writes a DSGE model where banks hold sovereign debt, so that bad news about a possible future sovereign default both puts a strain on the funding of banks but also induces them to cut their leverage as a precautionary reaction.

This channel for the diabolic loop linking banks and sovereign debt fits reasonably well the behavior of credit spreads across Italian banks and firms, and predicts that the ECB's interventions had a small effect.

[Mar 26, 2017] There is no such thing as a natural rate of interest

Mar 26, 2017 | economistsview.typepad.com
RGC, March 26, 2017 at 07:06 AM
In short, there is no such thing as a "natural rate of interest".

........................

What then? It is difficult to say, exactly, whether the prevalent confusions are the result of sloppy thinking, an incoherent textbook pedagogy, or a deliberate desire to cover for the Federal Reserve and to obstruct potential criticism of the independent central bank. As a next step, let us ask: is there a better theory of interest rates out there, somewhere in the great work of the economists?

In the CEA paper, as in most of this so-called literature, the 20th century British economist John Maynard Keynes is not cited. Yet it is a fact that Keynes did write an influential book with the word "Interest" in the title. It was called The General Theory of Employment Interest and Money, published in 1936. In which Keynes states, of the classical theory of interest – that theory of loanable funds overlying a natural rate – that his own analysis "will have made it plain that this account of the matter must be erroneous" (p. 177). Perhaps it is worthwhile to seek Keynes's counsel at this point?

Keynes's theory of interest does not rest on the capital stock. And in Keynes as in the real world, there is no "capital market" that equates household saving with business investment.

Instead, Keynes's theory of interest is about the market for money – a market that definitely does exist in the real world. He wrote: "The rate of interest is not the 'price' which brings into equilibrium the demand for resources to invest with the readiness to abstain from consumption. It is the 'price' which equilibrates the desire to hold wealth in the form of cash with the available quantity of cash" (p. 167). In other words, interest rates are a portfolio issue. They are determined in the money markets, by how – in what form – people with wealth choose, at any given time, to hold that wealth. You pay interest, in order to get people to hold their wealth in less-liquid forms, such as bonds – and this is what provides firms with a secure source of financing, which then permits them to invest.

Keynes's theory of interest is the pure common sense of how financial markets work. So why is it treated, by our leading liberal economists, as though it didn't exist? Why all this confusing folderol about natural and neutral rates? The apparent answer is damning. In the theories our economists like, a technical theory of interest creates a technical theory of income distribution, since interest rates govern the incomes of creditors against debtors, of the rich against the poor, of profits against wages. Thomas Piketty's recent book is a nice instance of this point, with its argument that the great inequalities of capitalism are due to interest rates higher than the rate of economic growth. If interest somehow reflects the physical productivity of the capital stock, then the consequences may be unfortunate – but they are inevitable and not something of which it is proper to complain.

http://www.paecon.net/PAEReview/issue78/Galbraith78.pdf

RGC -> RGC... , March 26, 2017 at 07:39 AM
"Why all this confusing folderol about natural and neutral rates? The apparent answer is damning. In the theories our economists like, a technical theory of interest creates a technical theory of income distribution, since interest rates govern the incomes of creditors against debtors, of the rich against the poor, of profits against wages..........If interest somehow reflects the physical productivity of the capital stock, then the consequences may be unfortunate – but they are inevitable and not something of which it is proper to complain."

[Is that clear enough?......Galbraith is accusing mainstream economists of acting as apologists for rentiers.]

[Jan 03, 2017] Some problems with ISLM model

Notable quotes:
"... Credit creation and the financialization above the consumer level of this new-money creation is an unlimited privlege held by financial system actors, we saw this blatantly in 2000-2006, so IS is demonstrably not true, the amount of available Investment funds Is unlimited. There is no such thing as loanable funds at the macro level, the financial system can make financial positions then manages the cash liquidity (until ... .). ..."
"... Defining currency as a liability on a set of books for a thing called a central bank and talking about Quantity Theories of Money, are all demonstrably weak notions, at keast in huge economies. The approach by China ignores a lot of this theory in practice as they Spend to improve the economic potential of their people, a ka Keynes. They do care about closing the supply gaps in housing and transport, and clean power, sure, but they care more about helping more and more and more chinese to get a connection to a modernizing economy. Sure wish Krugman cared the same way rather than caring fir the cloture of the ISLM theory. He may have been kinder to Sanders and more challenging of Clinton too. ..."
"... Krugman is willing to explain that the US can borrow at low rates to build public goods and other assets and get it paid for by returns, but somehow direct Spending, even using phoney debt processes to push the financing outward as the chinese do (which is simply helicopter money) cant do the same. ..."
Jan 03, 2017 | economistsview.typepad.com
JF -> Peter K.... January 03, 2017 at 09:46 AM
Krugman believes deeply in the ISLM model and cant seem to admit that there are stunning implications to the following :
  1. Credit creation and the financialization above the consumer level of this new-money creation is an unlimited privlege held by financial system actors, we saw this blatantly in 2000-2006, so IS is demonstrably not true, the amount of available Investment funds Is unlimited. There is no such thing as loanable funds at the macro level, the financial system can make financial positions then manages the cash liquidity (until ... .).
  2. Defining currency as a liability on a set of books for a thing called a central bank and talking about Quantity Theories of Money, are all demonstrably weak notions, at keast in huge economies. The approach by China ignores a lot of this theory in practice as they Spend to improve the economic potential of their people, a ka Keynes. They do care about closing the supply gaps in housing and transport, and clean power, sure, but they care more about helping more and more and more chinese to get a connection to a modernizing economy. Sure wish Krugman cared the same way rather than caring fir the cloture of the ISLM theory. He may have been kinder to Sanders and more challenging of Clinton too.

Krugman is willing to explain that the US can borrow at low rates to build public goods and other assets and get it paid for by returns, but somehow direct Spending, even using phoney debt processes to push the financing outward as the chinese do (which is simply helicopter money) cant do the same.

Right now I see the chinese approaches as undermining credulity to monetary theories while it is consistent with Keynes not so the extended theories.

JF -> JF... , January 03, 2017 at 09:59 AM

And of course I hope I am right for the chinese, no surprise to me if this is the case.

The sky is falling view does come to mind if you believe some of the economic theories, oh look, so much debt. But as Adair wrote this week,and I commented upon it a year or so ago probably, if you dont believe in these theoretic tales you can just erase the 'debt' held by the chinese people via their government when it makes sense, no harm, almost all good.

But I have to say, without the US as its major buyer and without their ability to accumulate dollar-asset in reserve to the level they have, one wonders if there would be less lattitude. This raises the question about why Trump continues to voice that the rug will be pulled out soon. Why? I am pretty sure it isnt because he wants to prove the economic theorests to be right.

anne -> Peter K.... , January 03, 2017 at 10:47 AM
http://www.nytimes.com/2016/01/08/opinion/when-china-stumbles.html

January 7, 2016

When China Stumbles

By Paul Krugman


http://www.bradford-delong.com/2015/12/ever-since-i-became-an-adult-in-1980-i-have-been-a-stopped-clock-with-respect-to-the-chinese-economy-i-have-said-alw.html

December 1, 2015

China's Market Crash Means Chinese Supergrowth Could Have Only 5 More Years to Run
By Brad DeLong

Now that 90 days have passed, from the Huffington Post from Last August: China's Market Crash Means Chinese Supergrowth Could Have Only 5 More Years to Run *

Ever since I became an adult in 1980, I have been a stopped clock with respect to the Chinese economy. I have said--always--that Chinese supergrowth has at most ten more years to run, and more probably five or less. There will then, I have said, come a crash--in asset values and expectations if not in production and employment. After the crash, China will revert to the standard pattern of an emerging market economy without successful institutions that duplicate or somehow mimic those of the North Atlantic: its productivity rate will be little more than the 2%/year of emerging markets as a whole, catch-up and convergence to the North Atlantic growth-path norm will be slow if at all, and political risks that cause war, revolution, or merely economic stagnation rather than unexpected but very welcome booms will become the most likely sources of surprises....


* http://www.huffingtonpost.com/brad-delong/china-market-crash-5-years_b_8045742.html

anne -> anne... , January 03, 2017 at 10:52 AM
http://www.bradford-delong.com/2016/04/must-read-i-do-not-understand-china-but-it-now-looks-more-likely-than-not-to-me-that-xi-jinpings-rule-will-lose-china.html

April 5, 2016

I do not understand China. But it now looks more likely than not to me that Xi Jinping's rule will lose China a decade, if not half a century... *

* http://www.economist.com/news/china/21695923-his-exercise-power-home-xi-jinping-often-ruthless-there-are-limits-his

-- Brad DeLong

[ Losing a decade, if not half a century? ]

sanjait -> Peter K.... , January 03, 2017 at 11:59 AM
If you want to put money in China given their still extant massive imbalances ... go right ahead.

I'm still predicting a massive slowdown, if not a crash.

The central government in China has a big warchest and a lot of catchup growth that can keep it afloat, but at a macro level there simply must be big adjustments (i.e., investment to consumption demand), which can be put off but not avoided entirely.

Julio -> sanjait... , January 03, 2017 at 03:54 PM
Why should an adjustment from investment to consumption cause a massive slowdown or a crash?
anne -> Julio ... , -1
Why should an adjustment from investment to consumption cause a massive slowdown or a crash?

[ No matter, after 40 years of an average 9.7% yearly real Gross Domestic Product growth and 8.6% yearly per capita GDP growth, Western analysts been all but unconcerned with how such growth was managed, especially since no other developing country came anywhere close. Why no other developing country has come close to matching China in growth, I would think, would make for an important extensive study, but evidently not. ]

[Dec 25, 2016] Why Central Bank Models Failed and How to Repair Them

Notable quotes:
"... Popular pre-financial crisis versions of the model excluded banking and finance, taking as given that finance and asset prices were merely a by-product of the real economy. ..."
"... The centre-piece of Paul Romer's scathing attack on these models is on the 'pretence of knowledge' ..."
"... he is critical of the incredible identifying assumptions and 'pretence of knowledge' in both Bayesian estimation and the calibration of parameters in DSGE models. ..."
"... A further symptom of the 'pretence of knowledge' is the assumed 'knowledge' that these parameters are constant over time. A milder critique by Olivier Blanchard (2016) points to a number of failings of DSGE models and recommends greater openness to more eclectic approaches. ..."
"... The equation is based on the assumption of inter-temporal optimising by consumers and that every consumer faces the same linear period-to-period budget constraint, linking income, wealth, and consumption. ..."
"... In the basic form, consumption every period equals permanent non-property income plus permanent property income defined as the real interest rate times the stock of wealth held by consumers at the beginning of each period. Permanent non-property income converts the variable flow of labour and transfer incomes a consumer expects over a lifetime into an amount equally distributed over time. ..."
"... However, consumers actually face idiosyncratic (household-specific) and uninsurable income uncertainty, and uncertainty interacts with credit or liquidity constraints. ..."
"... The 2000 Commodity Futures Modernization Act (CFMA) made derivatives enforceable throughout the US with priority ahead of claims by others (e.g. workers) in bankruptcy. ..."
"... 2004 SEC decision to ease capital requirements on investment banks increased gearing to what turned out to be dangerous levels ..."
"... Similar measures to lower required capital on investment grade PMBS increased leverage at commercial banks. These changes occurred in the political context of pressure to extend credit to poor. ..."
"... The importance of debt was highlighted in the debt-deflation theory of the Great Depression of Fisher (1933). 5 Briefly summarised, his story is that when credit availability expands, it raises spending, debt, and asset prices; irrational exuberance raises prices to vulnerable levels, given leverage; negative shocks can then cause falls in asset prices, increased bad debt, a credit crunch, and a rise in unemployment. ..."
"... In the financial accelerator feedback loops that operated in the US sub-prime crisis, falls in house prices increased bad loans and impaired the ability of banks to extend credit. As a result, household spending and residential investment fell, increasing unemployment and reducing incomes, feeding back further into lower asset prices and credit supply. ..."
"... The transmission mechanism that operated via consumption was poorly represented by the Federal Reserve's FRB-US model and similar models elsewhere. ..."
"... Reminds me of a young poseur at engineering school, who exclaimed during a group study session, "I've got it all jocked out. Now I just need the equations!" ..."
"... I have been aware of that for a few years now, but I doubt that one person in a hundred (or a thousand) knows when they listen to some economist on a news program or a business channel that the person speaking thinks that how much debt people have does not substantively affect their spending. ..."
"... If I used or invented an econ model that left out the "consumer", and modeled it with a "consumption agent object" having a single independent input variable being the Fed zero term, zero risk interest rate, I'd be too embarrassed to admit it. I would probably just very quietly make a career change into one of the softer sciences. Maybe writing fictional romance novels, or some such thing. ..."
"... The worst thing about these types of mea culpas from the mainstream is the cited criticisms from other mainstream economists only. It can only be a valid criticism if it was published in a mainstream journal ..."
"... That 'political pressure' turned out to be the bait and switch for a system that shifted power via debt creation. ..."
"... What we have not yet come to terms with are the implications of David Graeber's anthropological insights: how does debt affect social relationships, alter social norms, and affect relationships among individuals? ..."
"... Debt is a form of power, but by failing to factor this into their equations, the Central Bankers are missing the social, political, and cultural consequences of the profound shifts in 'credit market architecture'. In many respects, this is not about 'money'; it's about power. ..."
"... The Central Bankers' models can include all the parameters they can dream up, but until someone starts thinking more clearly about the role and function of money, and the way that 'different kinds of money' create 'different kinds of social relationships', we are all in a world of hurt. ..."
"... Now, maybe it is just a coincidence, but it is hard for me not to notice that the explosion in consumer credit matches up nicely with the rise in inequality. ..."
"... " .. debt does not make society as a whole poorer: one person's debt is another person's asset. So total wealth is unaffected by the amount of debt out there. This is, strictly speaking true only for the world economy as a whole .. " Paul Krugman "End this Depression Now". ..."
Dec 25, 2016 | www.nakedcapitalism.com
By John Muellbauer, Professor of Economics, Oxford University. Originally published at VoxEU

The failure of the New Keynesian dynamic stochastic general equilibrium models to capture interactions of finance and the real economy has been widely recognised since the Global Crisis. This column argues that the flaws in these models stem from unrealistic micro-foundations for household behaviour and from wrongly assuming that aggregate behaviour mimics a fully informed 'representative agent'. Rather than 'one-size-fits-all' monetary and macroprudential policy, institutional differences between countries imply major differences for monetary policy transmission and policy.

The New Keynesian DSGE models that dominated the macroeconomic profession and central bank thinking for the last two decades were based on several principles.

  1. The first was formal derivation from micro-foundations, assuming optimising behaviour of consumers and firms with rational or 'model-consistent' expectations of future conditions. For such derivation to result in a tractable model, it was assumed that the behaviour of firms and of consumers corresponded to that of a 'representative' firm and a 'representative' consumer. In turn, this entailed the absence of necessarily heterogeneous credit or liquidity constraints. Another important assumption to obtain tractable solutions was that of a stable long-run equilibrium trend path for the economy. If the economy was never far from such a path, the role of uncertainty would necessarily be limited. Popular pre-financial crisis versions of the model excluded banking and finance, taking as given that finance and asset prices were merely a by-product of the real economy.
  2. Second, a competitive economy was assumed but with a number of distortions, including nominal rigidities – sluggish price adjustment – and monopolistic competition. This is what distinguished New Keynesian DSGE models from the general equilibrium real business cycle (RBC) models that preceded them. It extended the range of stochastic shocks that could disturb the economy from the productivity or taste shocks of the RBC model. Finally, while some models calibrated (assumed) values of the parameters, where the parameters were estimated, Bayesian system-wide estimation was used, imposing substantial amounts of prior constraints on parameter values deemed 'reasonable'.

The 'Pretence of Knowledge'

The centre-piece of Paul Romer's scathing attack on these models is on the 'pretence of knowledge' (Romer 2016); echoing Caballero (2010), he is critical of the incredible identifying assumptions and 'pretence of knowledge' in both Bayesian estimation and the calibration of parameters in DSGE models. 1

A further symptom of the 'pretence of knowledge' is the assumed 'knowledge' that these parameters are constant over time. A milder critique by Olivier Blanchard (2016) points to a number of failings of DSGE models and recommends greater openness to more eclectic approaches.

Unrealistic Micro-Foundations

As explained in Muellbauer (2016), an even deeper problem, not seriously addressed by Romer or Blanchard, lies in the unrealistic micro-foundations for the behaviour of households embodied in the 'rational expectations permanent income' model of consumption, an integral component of these DSGE models. Consumption is fundamental to macroeconomics both in DSGE models and in the consumption functions of general equilibrium macro-econometric models such as the Federal Reserve's FRB-US. At the core of representative agent DSGE models is the Euler equation for consumption, popularised in the highly influential paper by Hall (1978). It connects the present with the future, and is essential to the iterative forward solutions of these models. The equation is based on the assumption of inter-temporal optimising by consumers and that every consumer faces the same linear period-to-period budget constraint, linking income, wealth, and consumption. Maximising expected life-time utility subject to the constraint results in the optimality condition that links expected marginal utility in the different periods. Under approximate 'certainty equivalence', this translates into a simple relationship between consumption at time t and planned consumption at t +1 and in periods further into the future.

Under these simplifying assumptions, the rational expectations permanent income consumption function can be derived. In the basic form, consumption every period equals permanent non-property income plus permanent property income defined as the real interest rate times the stock of wealth held by consumers at the beginning of each period. Permanent non-property income converts the variable flow of labour and transfer incomes a consumer expects over a lifetime into an amount equally distributed over time.

However, consumers actually face idiosyncratic (household-specific) and uninsurable income uncertainty, and uncertainty interacts with credit or liquidity constraints. The asymmetric information revolution in economics in the 1970s for which Akerlof, Spence and Stiglitz shared the Nobel prize explains this economic environment. Research by Deaton (1991,1992), 2 several papers by Carroll (1992, 2000, 2001, 2014), Ayigari (1994), and a new generation of heterogeneous agent models (e.g. Kaplan et al. 2016) imply that household horizons then tend to be both heterogeneous and shorter – with 'hand-to-mouth' behaviour even by quite wealthy households, contradicting the textbook permanent income model, and hence DSGE models. A second reason for the failure of these DSGE models is that aggregate behaviour does not follow that of a 'representative agent'. Kaplan et al. (2016) show that, with these better micro-foundations, quite different implications follow for monetary policy than in the New Keynesian DSGE models. A third reason is that structural breaks, as shown by Hendry and Mizon (2014), and radical uncertainty further invalidate DSGE models, illustrated by the failure of the Bank of England's DSGE model both during and after the 2008-9 crisis (Fawcett et al. 2015). The failure of the representative agent Euler equation to fit aggregate data 3 is further empirical evidence against the assumptions underlying the DSGE models, while evidence on financial illiteracy (Lusardi 2016) is a problem for the assumption that all consumers optimise.

The Evolving Credit Market Architecture

Of the structural changes, the evolution and revolution of credit market architecture was the single most important. In the US, credit card ownership and instalment credit spread between the 1960s and the 2000s; the government-sponsored enterprises – Fannie Mae and Freddie Mac – were recast in the 1970s to underwrite mortgages; interest rate ceilings were lifted in the early 1980s; and falling IT costs transformed payment and credit screening systems in the 1980s and 1990s. More revolutionary was the expansion of sub-prime mortgages in the 2000s, driven by rise of private label securitisation backed by credit default obligations (CDOs) and swaps.

The 2000 Commodity Futures Modernization Act (CFMA) made derivatives enforceable throughout the US with priority ahead of claims by others (e.g. workers) in bankruptcy. This permitted derivative enhancements for private label mortgage-backed securities (PMBS) so that they could be sold on as highly rated investment grade securities. A second regulatory change was the deregulation of banks and investment banks. In particular, the 2004 SEC decision to ease capital requirements on investment banks increased gearing to what turned out to be dangerous levels and further boosted PMBS, Duca et al (2016). Similar measures to lower required capital on investment grade PMBS increased leverage at commercial banks. These changes occurred in the political context of pressure to extend credit to poor.

The Importance of Debt

A fourth reason for the failure of the New Keynesian DSGE models, linking closely with the previous, is the omission of debt and household balance sheets more generally, which are crucial for understanding consumption and macroeconomic fluctuations. Some central banks did not abandon their large non-DSGE econometric policy models, but these were also defective in that they too relied on the representative agent permanent income hypothesis which ignored shifts in credit constraints and mistakenly lumped all elements of household balance sheets, debt, liquid assets, illiquid financial assets (including pension assets) and housing wealth into a single net worth measure of wealth. 4 Because housing is a consumption good as well as an asset, consumption responds differently to a rise in housing wealth than to an increase in financial wealth (see Aron et al. 2012). Second, different assets have different degrees of 'spendability'. It is indisputable that cash is more spendable than pension or stock market wealth, the latter being subject to asset price uncertainty and access restrictions or trading costs. This suggests estimating separate marginal propensities to spend out of liquid and illiquid financial assets. Third, the marginal effect of debt on spending is unlikely just to be minus that of either illiquid financial or housing wealth. The reason is that debt is not subject to price uncertainty and it has long-term servicing and default risk implications, with typically highly adverse consequences.

The importance of debt was highlighted in the debt-deflation theory of the Great Depression of Fisher (1933). 5 Briefly summarised, his story is that when credit availability expands, it raises spending, debt, and asset prices; irrational exuberance raises prices to vulnerable levels, given leverage; negative shocks can then cause falls in asset prices, increased bad debt, a credit crunch, and a rise in unemployment.

In the 1980s and early 1990s, boom-busts in Norway, Finland, Sweden, and the UK followed this pattern. In the financial accelerator feedback loops that operated in the US sub-prime crisis, falls in house prices increased bad loans and impaired the ability of banks to extend credit. As a result, household spending and residential investment fell, increasing unemployment and reducing incomes, feeding back further into lower asset prices and credit supply.

The transmission mechanism that operated via consumption was poorly represented by the Federal Reserve's FRB-US model and similar models elsewhere. A more relevant consumption function for modelling the financial accelerator is needed, modifying the permanent income model with shorter time horizons, 6 incorporating important shifts in credit lending conditions, and disaggregating household balance sheets into liquid and illiquid elements, debt and housing wealth.

Implications for Macroeconomic Policy Models

To take into account all the feedbacks, a macroeconomic policy model needs to explain asset prices and the main components of household balance sheets, including debt and liquid assets. This is best done in a system of equations including consumption, in which shifts in credit conditions – which have system-wide consequences, sometimes interacting with other variables such as housing wealth – are extracted as a latent variable. 7 The availability of home equity loans, which varies over time and between countries – hardly available in the US of the 1970s or in contemporary Germany, France or Japan – and the also the variable size of down-payments needed to obtain a mortgage, determine whether increases in house prices increase (US and UK) or reduce (Germany and Japan) aggregate consumer spending. This is one of the findings of research I review in Muellbauer (2016). Another important finding is that a rise in interest rates has different effects on aggregate consumer spending depending on the nature of household balance sheets. Japan and Germany differ radically from the US and the UK, with far higher bank and saving deposits and lower household debt levels so that lower interest rates reduce consumer spending. A crucial implication of these two findings is that monetary policy transmission via the household sector differs radically between countries – it is far more effective in the US and UK, and even counterproductive in Japan (see Muellbauer and Murata 2011).

Such models, building in disaggregated balance sheets and the shifting, interactive role of credit conditions, have many benefits: better interpretations of data on credit growth and asset prices helpful for developing early warning indicators of financial crises; better understandings of long-run trends in saving rates and asset prices; and insights into transmission for monetary and macro-prudential policy. Approximate consistency with good theory following the information economics revolution of the 1970s is better than the exact consistency of the New Keynesian DSGE model with bad theory that makes incredible assumptions about agents' behaviour and the economy. Repairing central bank policy models to make them more relevant and more consistent with the qualitative conclusions of the better micro-foundations outlined above is now an urgent task.

Endnotes

[1] Part of the problem of identification is that the DSGE models throw away long-run information. They do this by removing long-run trends with the Hodrick-Prescott filter, or linear time trends specific to each variable. Identification, which rests on available information, then becomes more difficult, and necessitates 'incredible assumptions'. Often, impulse response functions tracing out the dynamic response of the modelled economy to shocks are highly sensitive to the way the data have been pre-filtered.

[2] This important research was highly praised in Angus Deaton's 2015 Nobel prize citation: http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2015/advanced.html

[3] See Campbell and Mankiw (1989, 1990) and for even more powerful evidence from the UK, US and Japan; Muellbauer (2010); and micro-evidence from Shea (1995).

[4] Net worth is defined as liquid assets minus mortgage and non-mortgage debt plus illiquid financial assets plus housing assets, and this assumes that the coefficients are all the same.

[5] In recent years, several empirical contributions have recognised the importance of the mechanisms described by Fisher (1933). Mian and Sufi (2014) have provided extensive micro-economic evidence for the role of credit shifts in the US sub-prime crisis and the constraining effect of high household debt levels. Focusing on macro-data, Turner (2015) has analysed the role of debt internationally with more general mechanisms, as well as in explaining the poor recovery from the global financial crisis. Jorda et al. (2016) have drawn attention to the increasing role of real estate collateral in bank lending in most advanced countries and in financial crises.

[6] The FRB-US model does build in shorter average horizons than text-book permanent income. It also has a commendable flexible treatment of expectations, Brayton et al (1997).

[7] The use of latent variables in macroeconomic modelling has a long vintage. Potential output, and the "natural rate" of unemployment or of interest are often treated as latent variables, for example in the FRB-US model and in Laubach and Williams (2003), and latent variables are often modelled using state space methods. Flexible spline functions can achieve similar estimates. Interaction effects of latent with other variables seem not to have been considered, however. We use the term 'latent interactive variable equation system' (LIVES) to describe the resulting format.

Jim Haygood , December 24, 2016 at 9:08 am

'the omission of debt and household balance sheets more generally'

putting these eclownometric [sic] models at about the same level of technical sophistication as the Newcomen steam engine of 1712, which achieved about one (1) percent thermodynamic efficiency.

'a macroeconomic policy model needs to explain asset prices and household balance sheets. This is best done in a system of equations.'

Yes indeedy. Reminds me of a young poseur at engineering school, who exclaimed during a group study session, "I've got it all jocked out. Now I just need the equations!"

fresno dan , December 24, 2016 at 12:37 pm

Jim Haygood
December 24, 2016 at 9:08 am

' the omission of debt and household balance sheets more generally '

You beat me to it. I have been aware of that for a few years now, but I doubt that one person in a hundred (or a thousand) knows when they listen to some economist on a news program or a business channel that the person speaking thinks that how much debt people have does not substantively affect their spending.

Really, 5 year olds describing how they get toys from Santa have a better grasp of economics than most "economists"

craazyboy , December 24, 2016 at 2:04 pm

If I used or invented an econ model that left out the "consumer", and modeled it with a "consumption agent object" having a single independent input variable being the Fed zero term, zero risk interest rate, I'd be too embarrassed to admit it. I would probably just very quietly make a career change into one of the softer sciences. Maybe writing fictional romance novels, or some such thing.

TiPs , December 24, 2016 at 9:41 am

The worst thing about these types of mea culpas from the mainstream is the cited criticisms from other mainstream economists only. It can only be a valid criticism if it was published in a mainstream journal

readerOfTeaLeaves , December 24, 2016 at 11:14 am

Of the structural changes, the evolution and revolution of credit market architecture was the single most important . In the US, credit card ownership and instalment credit spread between the 1960s and the 2000s; the government-sponsored enterprises – Fannie Mae and Freddie Mac – were recast in the 1970s to underwrite mortgages; interest rate ceilings were lifted in the early 1980s; and falling IT costs transformed payment and credit screening systems in the 1980s and 1990s. More revolutionary was the expansion of sub-prime mortgages in the 2000s, driven by rise of private label securitisation backed by credit default obligations (CDOs) and swaps. The 2000 Commodity Futures Modernization Act (CFMA) made derivatives enforceable throughout the US with priority ahead of claims by others (e.g. workers) in bankruptcy. This permitted derivative enhancements for private label mortgage-backed securities (PMBS) so that they could be sold on as highly rated investment grade securities. A second regulatory change was the deregulation of banks and investment banks . Similar measures to lower required capital on investment grade PMBS increased leverage at commercial banks. These changes occurred in the political context of pressure to extend credit to poor.

That 'political pressure' turned out to be the bait and switch for a system that shifted power via debt creation.

What we have not yet come to terms with are the implications of David Graeber's anthropological insights: how does debt affect social relationships, alter social norms, and affect relationships among individuals?

Debt is a form of power, but by failing to factor this into their equations, the Central Bankers are missing the social, political, and cultural consequences of the profound shifts in 'credit market architecture'. In many respects, this is not about 'money'; it's about power.

After Brexit, Trump, and the emerging upheaval in the EU, it's no longer enough to just 'build better economic models'.

The Central Bankers' models can include all the parameters they can dream up, but until someone starts thinking more clearly about the role and function of money, and the way that 'different kinds of money' create 'different kinds of social relationships', we are all in a world of hurt.

At this point, Central Bankers should also ask themselves what happens - socially, personally - when 'debt' (i.e., financialization) shifts from productivity to predation. That shift accelerated from the 1970s, through the 1990s, into the 2000s.

Allowing anyone to charge interest that is usurious is the modern equivalent of turning a blind eye to slavery.

By enabling outrageous interest, any government hands their hard working taxpayers over to what is essentially unending servitude.

This destroys the political power of any government that engages in such blind stupidity.

Frankly, I'm astonished that it has taken so long for taxpayers to show signs of outrage and revolt.

jsn , December 24, 2016 at 11:45 am

Voters in the U.S. react under radical new action retarding constraints:

  1. IT enhanced agnatology: kick ass propaganda
  2. Suburbanization: deportation of the working class from the collective action friendly urban geography
fresno dan , December 24, 2016 at 12:51 pm

readerOfTeaLeaves

December 24, 2016 at 11:14 am

I think you have come up with a good insight – I very much agree its about power and not money.

Now, maybe it is just a coincidence, but it is hard for me not to notice that the explosion in consumer credit matches up nicely with the rise in inequality.

And one other thing I would point out – it doesn't take usurious interest rates. If squillionaires have access to unlimited, essentially cost free money in which the distributors of money are guaranteed a profit, NO MATTER HOW MUCH THEY HAVE LOST, while the debts on non-squillionaires are collected with fees, penalties, and to the last dime, than it doesn't matter if interest rates are essentially zero.

Who gets bailed out is not due to logic or accounting that says that the banks' losses have to be made whole, but not home owners – that is an ideology called economics .

craazyboy , December 24, 2016 at 2:23 pm

I wouldn't downplay how cool the money part is, however. It's no fun making questionable, dodgy loans unless you can charge fees up front and then sell the risk off to a large crowd of suckers. Hence the importance of securitization and other "insurance" type derivatives. Then, if you run out of willing suckers, you need a place to stuff it all, say pension plans and maybe even privatized social security.

But if they allow this to happen in the real world, shouldn't the models have a piece reflecting this behavior as well? Full circle of course, where the "consumer balance sheet" contains his bad debt investment and savings assets* offsetting his liabilities. Then everyone would be more like a bank?

* we still need to model bubble assets – like real estate and stocks. This sounds like it's starting to get tricky!

José , December 24, 2016 at 12:19 pm

"Another important finding is that a rise in interest rates has different effects on aggregate consumer spending depending on the nature of household balance sheets".

This is a point that Warren Mosler and other MMTers have been making since the 1990s: depending on circumstances, lower interest rates may well have contractionary effects and higher interest rates may stimulate the economy.

The tool of choice to fight recessions and control inflation should thus be fiscal instead of monetary policy.

Again, MMT had the analysis right long before mainstream theory started to admit there might be serious problems with its favorite approaches (without ever giving appropriate credit to MMT, of course!).

Very sad!

craazyboy , December 24, 2016 at 2:50 pm

I think the Samarians knew that 5000 years ago. The Templars certainly knew it 1300 years ago. And most definitely, "modern" European banking knew it 300 years ago.

susan the other , December 24, 2016 at 12:25 pm

of note to me is just how simplistic Keynesian statistics were/are, based on almost fantasy-assumptions. And that was followed by Stiglitz et al's theory of asymmetric information models. And this above does give us a dose of all the different variables involved in accurately analyzing an economy – an economy that exploded with financialization, but nobody could keep up. As was proven in 2008. It shouldn't be this confusing. "Repairing CB policies to make them more relevant is now an urgent task." I think it is urgent enough to nationalize the banks and start over using a sovereign money model.

OpenThePodBayDoorsHAL , December 24, 2016 at 2:10 pm

Let's take an infinitely complex system (the economy) that is widely affected by human emotion, then we'll leave out the mechanism by which money itself is created and distributed and then let's "model" it.
We'll have two fans of Stalin's communist "command and control" economy (Keynes and Harry Dexter White) pretend they could create a stable system based on Ph.Ds divining future economic and trade flows and then "managing" them by price fixing the price of money. We'll set policy based on the national conditions of the country with the global reserve currency despite the fact that 2/3 of that currency is outside that country. And with a system where trade never settles so massive imbalances can persist indefinitely. Then let's put self-interested private institutions in charge of all money creation and distribution .and we'll be sure their system operates in secret and is never audited. When the system blows up we'll have these central overlords step in as uneconomic buyers of assets with no consideration for asset quality or price, with no economic need to ever sell, and with "unlimited" funds with which to buy more such assets. At the end we'll continue to call the system "capitalism" and we'll continue to call the scrip "money" and hope nobody notices.

End the Fed.

Plenue , December 24, 2016 at 5:32 pm

*sigh*

Congress creates the money when it passes budget legislation. The Fed merely enacts their decree.

Sound of the Suburbs , December 24, 2016 at 2:21 pm

Economics has long been known as the dismal science.

The IMF forecast Greek GDP would have recovered by 2015 with austerity.
By 2015 it was down 27% and still falling.

The IMF can attract some of the best economists in the world but a technocrat elite trained in a dismal science aren't up to much.

In 2008 the Queen visited the revered economists of the LSE and said "If these things were so large, how come everyone missed it?"

The FED is full of PhDs from America's finest universities but a technocrat elite trained in a dismal science aren't up to much.

The FED will have been looking at the US money supply, let me show you what they missed:

http://www.whichwayhome.com/skin/frontend/default/wwgcomcatalogarticles/images/articles/whichwayhomes/US-money-supply.jpg

Everything is reflected in the money supply.

The money supply is flat in the recession of the early 1990s.

Then it really starts to take off as the dot.com boom gets going which rapidly morphs into the US housing boom, courtesy of Alan Greenspan's loose monetary policy.

When M3 gets closer to the vertical, the black swan is coming and you have a credit bubble on your hands (money = debt).

The mainstream are all trained in neoclassical economics which is spectacularly dismal.

Steve Keen sits outside the mainstream and saw the credit bubble forming in 2005, you can see it in the
US money supply (money = debt).

In 2007, Ben Bernanke could see no problems ahead (dismal).

Irving Fisher looked at the debt inflated asset bubble after the 1929 crash when ideas that markets reached stable equilibriums were beyond a joke.

Fisher developed a theory of economic crises called debt-deflation, which attributed the crises to the bursting of a credit bubble.

Hyman Minsky came up with "financial instability hypothesis" in 1974 and Steve Keen carries on with this work today. The theory is there outside the mainstream.

To understand the theory you have to understand money:

" .. debt does not make society as a whole poorer: one person's debt is another person's asset. So total wealth is unaffected by the amount of debt out there. This is, strictly speaking true only for the world economy as a whole .. " Paul Krugman "End this Depression Now".

This is the neoclassical economic view of money and it's totally wrong and will always leave you blind to events like 2008, e.g.

1929 – US (margin lending into US stocks)
1989 – Japan (real estate)
2008 – US (real estate bubble leveraged up with derivatives for global contagion)
2010 – Ireland (real estate)
2012 – Spain (real estate)
2015 – China (margin lending into Chinese stocks)

Norway, Sweden, Canada and Australia have been letting their real estate bubbles inflate because their mainstream economists and Central Bankers don't know what's coming.

Money and debt are opposite sides of the same coin.
If there is no debt there is no money.
Money is created by loans and destroyed by repayments of those loans.

If you want to understand how money really works:

From the BoE:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

Advanced:
"Where does money come from" available from Amazon

You need to understand how money works to understand why austerity doesn't work in balance sheet recessions, the cause of the dire prediction from the IMF that I started with.

You can look at the money supply/debt levels (the same thing) to see how well the economy is doing.

The money supply is contracting – the economy will be doing badly and the risk of this turning into debt deflation is high, there is positive feedback tending to make the situation worse. Debt repayments are larger than the new debt being taken out, the overall level of debt is decreasing.

The money supply is stable – this is stagnation, in the ideal world the money supply should be growing at a steady pace.

The money supply is growing steadily – the ideal.

The money supply is growing very rapidly – you've got a credit bubble on your hands and the "black swan" is near. The FED didn't understand money and debt before 2008 so they missed it.

Richard Koo explains:
https://www.youtube.com/watch?v=8YTyJzmiHGk

Mario is still doing austerity now, no wonder those Italian banks are full of NPLs.

It's too late for Norway, Sweden, Canada and Australia's mainstream economists and Central Bankers, but we need to get this dismal neoclassical economics updated before the whole world descends into debt deflation.

It's almost here, there isn't much time.

Chuck another trillion in to keep this sinking ship afloat Central Bankers, we need to get our technocrat elite up to speed.

Sound of the Suburbs , December 24, 2016 at 2:23 pm

In brief:

Just look at the rate of change of the money supply/debt.

When it's rising rapidly you're in trouble as a credit bubble is forming.

A negative gradient is also a bad sign as it means your money supply is contracting, your economy is in trouble and debt deflation could be on its way.

Economists do waffle.

Sound of the Suburbs , December 24, 2016 at 2:50 pm

Now Mrs. Yellen, put that on a Post-It note on your desk and you won't make the same mistake as your predecessor.

Skip Intro , December 24, 2016 at 2:38 pm

I am shocked, shocked I tell you, that a model with 'Equilibrium' right in the name fails to predict crises. They could probably do better just aggregating results from a big multi-player version of The Sims.

Dick Burkhart , December 25, 2016 at 2:26 am

Better models should start from scratch, assuming non-linearity. They could take the Limits-to-Growth system of nonlinear pde's as a starting point, for example, to get a good handle on long range dynamics. Then add detailed submodels for money and debt, for different countries, for trade, for different economic sectors, etc. Use realistic agent based models where standard models are inadequate.

To do all, start by sending all those economics Ph.D.s back to school in other fields where they know how to do modern applied mathematics.

See original post for references

[Aug 03, 2015] Freshwater's Wrong Turn

"... This reminds me of the "we create reality" stuff from the neo-cons. Maybe it's just more infection of Straussian "ethics" at UofC (see Shadia Drury).
Aug 2, 2015 | Economist's View

Paul Krugman follows up on Paul Romer's latest attack on "mathiness":

Freshwater's Wrong Turn (Wonkish): Paul Romer has been writing a series of posts on the problem he calls "mathiness", in which economists write down fairly hard-to-understand mathematical models accompanied by verbal claims that don't actually match what's going on in the math. Most recently, he has been recounting the pushback he's getting from freshwater macro types, who seem him as allying himself with evil people like me - whereas he sees them as having turned away from science toward a legalistic, adversarial form of pleading.
You can guess where I stand on this. But in his latest, he notes some of the freshwater types appealing to their glorious past, claiming that Robert Lucas in particular has a record of intellectual transparency that should insulate him from criticism now. PR replies that Lucas once was like that, but no longer, and asks what happened.
Well, I'm pretty sure I know the answer. ...

It's hard to do an extract capturing all the points, so you'll likely want to read the full post, but in summary:

So what happened to freshwater, I'd argue, is that a movement that started by doing interesting work was corrupted by its early hubris; the braggadocio and trash-talking of the 1970s left its leaders unable to confront their intellectual problems, and sent them off on the path Paul now finds so troubling.

Recent tweets, email, etc. in response to posts I've done on mathiness reinforce just how unwilling many are to confront their tribalism. In the past, I've blamed the problems in macro on, in part, the sociology within the profession (leading to a less than scientific approach to problems as each side plays the advocacy game) and nothing that has happened lately has altered that view.

Posted by Mark Thoma on Sunday, August 2, 2015 at 11:54 AM in Economics, Macroeconomics, Methodology | Permalink Comments (20)

pgl said...
When I first heard this Lucas island - also known as Friedman-Phelps - story about business cycles being driven by unanticipated inflation, it initially stuck me as interested. Then I thought about the fact that the Rational Expectations version would have trouble explaining why nominal shocks affect real events for more than a few months.

No - it did not take long to realize that this nice neat model could not explain the real world. But what we usually got back then is a large parade of statistical techniques that just confused matters even more.

At which I began to wonder what I was interested in macroeconomics in the first place.

eightnine2718281828mu5 said in reply to pgl...
---
the braggadocio and trash-talking of the 1970s left its leaders unable to confront their intellectual problems
---

iow, assigning a higher value to their accumulated research (reputation?) than it was actually worth.

sticky prices indeed.

RC AKA Darryl, Ron said in reply to eightnine2718281828mu5...
:<)

[For most of us then:]

"...Freedom's just another word for nothing left to lose
Nothing don't mean nothing honey, if it ain't free
Feeling good was easy, Lord, when he sang the blues
You know, feeling good was good enough for me
Good enough for me and my Bobby McGee..."
ARTIST: Kris Kristofferson
TITLE: Me and Bobby McGee

*

[For most of them then freedom is just a matter of low-regulation low-tax supply side economic policy. TO which end their statistics demand many degrees of "freedom" and they have taken increasingly more extensive "freedoms" with their theories ever since Uncle Milty taught us about "Capitalism and Freedom," why the initial conclusions reached by Keynes were all wrong, and why monetarism was sacred. (barf)

I remember the 1970's well. The terminal punctuation was Reagan's election in 1980. When I was drafted in 1969 I still retained some hope, although much diminished since MLK was murdered a year earlier. By the time I returned from Viet Nam it was just one slap in the face after another. All our (the social movement that happened alongside the hippies) hopes from the 60's were dashed. Blacks were to be "locked" into ghettos by public policy and the working class was to be sacrificed on the alter of corporatism one merger or outsource at a time. ]

anne said...

https://en.wikipedia.org/wiki/Real_business_cycle_theory

Real business cycle theory models (RBC theory) are a class of New classical macroeconomics models in which business cycle fluctuations to a large extent can be accounted for by real (in contrast to nominal) shocks. Unlike other leading theories of the business cycle, RBC theory sees business cycle fluctuations as the efficient response to exogenous changes in the real economic environment. That is, the level of national output necessarily maximizes expected utility, and governments should therefore concentrate on long-run structural policy changes and not intervene through discretionary fiscal or monetary policy designed to actively smooth out economic short-term fluctuations.

anne said in reply to anne...
http://krugman.blogs.nytimes.com/2014/02/17/the-trouble-with-being-abstruse-slightly-wonkish/

February 17, 2014

The Trouble With Being Abstruse (Slightly Wonkish)
By Paul Krugman

Political scientists who write clearly for a broader audience are upset * with Nick Kristof ** for saying that political scientists no longer write for a broader audience. I'm not going to get into that fight. I do want to register one point, however: In my field there is indeed a problem with abstruseness, with the many academics who never even try to put their thoughts in plain language.

And what is the nature of that problem? It's not that laypeople don't understand what the academics are saying. It is, instead, that the academics themselves don't understand what they're saying.

Don't get me wrong: I like mathematical modeling. Mathematical modeling is a friend of mine. Math can be a powerful clarifying tool. So, in some cases, can jargon, which used right can both save time and add clarity to the discussion. If I talk about Dixit-Stiglitz preferences, or for that matter the zero lower bound, technically trained economists immediately know whereof I speak, where plain English would both take longer and leave room for misunderstanding.

But it's really important to step away from the math and drop the jargon every once in a while, and not just as a public service. Trying to explain what you're doing intuitively isn't just for the proles; it's an important way to check on yourself, to be sure that your story is at least halfway plausible.

Take real business cycle theory – I know it's a horse I beat a lot, but it's not dead, and it's a prime example within economics of what I have in mind. I still want to spend at least some time explaining that theory to my undergrads, so I've been looking for a simple, intuitive explanation by an RBC theorist of what's going on. And I haven't been able to find one!

I mean, I could do it myself. Strip the story down to basics – make it a steady-state model, not a growth model, and drop the capital accumulation; what you're left with is fluctuations in the marginal productivity of labor, which have a magnified impact on output because workers choose to work less when the technology is bad and more when the technology is good. As I've written before someplace, it's the story of a farmer who stays inside when it's raining and puts in extra hours when the sun is shining.

But the RBC theorists never seem to go there; it's right into calibration and statistical moments, with never a break for intuition. And because they never do the simple version, they don't realize (or at any rate don't admit to themselves) how fundamentally silly the whole thing sounds, how much it's at odds with lived experience.

I once talked to a theorist (not RBC, micro) who said that his criterion for serious economics was stuff that you can't explain to your mother. I would say that if you can't explain it to your mother, or at least to your non-economist friends, there's a good chance that you yourself don't really know what you're doing.

Math is good. Sometimes jargon is good, too. But plain language and simple intuition are important to keep you grounded.

* http://crookedtimber.org/2014/02/16/look-who-nick-kristofs-saving-now/

** http://www.nytimes.com/2014/02/16/opinion/sunday/kristof-professors-we-need-you.html

mulp said in reply to anne...
Freshwater economists, free lunch economists, speak very clearly.

Its too good to be true which makes everyone who wants a free lunch to believe it.

For example, free lunch economists say lower prices are achieved by lower wages, fewer workers, tax cuts, and higher profits, which creates wealth, and the unemployed and working poor spend more using money the will never pay back because of the wealth effect, with mathiness to backup their claims.

What they never do is put them all together like I have done so the words are revealed as nonsense and the math is 1+2-3 = 10 and thus obviously bogus.

Note fresh water economists NEVER state that consumer spending is driven by wage income, as in real wage income, not the income from capital gains which sorta lots like wages but is really rent seeking aka private tax on the savings of workers.

How can lower wages to get lower prices ever result in higher GDP without lots of debt that can never be repaid?

Lafayette said in reply to anne...
TO APE ONE ANOTHER

{PK: with the many academics who never even try to put their thoughts in plain language.}

Ha! I like that!

Tis True. How many times do we see the word "exogenous". Many. How often, "endogenous"? Never.

Anybody for a hard look at the "endogenous" factors causing economic cyclicity? How about the human ability to "ape" one another's consumer habits that builds patterns increasing in intensity - until the "bubble" bursts? ("Cyclicity"? Wow! Nice word? Hardly used! Here we go again!!!;^)

Like lemmings falling off a cliff - cyclic in nature but deadly in consequence.

DeDude said...
When your math is incompatible with the observations from the real world - its the math that's wrong. I don't have a 3 page formula, but just trust me on this one.
GeorgeK said...
You will find the answers to all your questions in this book
http://www.amazon.com/Wiser-Getting-Beyond-Groupthink-Smarter/dp/1422122999/ref=sr_1_1?s=books&ie=UTF8&qid=1438554831&sr=1-1&keywords=Group+think+getting+beyond

bakho said...

Science advances one funeral at a time. - Max Planck

They are too invested in their mistakes to accept criticism.
The next generation of economists will accept that they were wrong.

likbez said...
Before becoming columnist Krugman was mathiness practioner ;-)

reason said...

Anne
"That is, the level of national output necessarily maximizes expected utility"

We could stop right there. Clear nonsense. (You can always INCREASE utility by redistributing from rich to poor - at least with any sensible definition of utility.

See this discussion
http://crookedtimber.org/2015/07/24/utilitarianism-with-the-potentially-left-wing-bits-stripped-out/comment-page-2/

Egmont Kakarot-Handtke said...

Here it comes: the sexit
Comment on 'Freshwater's Wrong Turn'

There is political economics and theoretical economics. In political economics it suffices to tell a plausible story, in theoretical economics scientific standards are observed. Because economists since Adam Smith pursued these two hares simultaneously, coherence got eventually lost. As a result, economists never developed a theory about how the market economy works that satisfies the scientific criteria of material and formal consistency (Klant, 1994, p. 31).

Economics is a failed science. Therefore, Paul Romer is in for a second big surprise. Until now he thought: "As you would expect from an economist, the normative assertion in 'X is wrong because it undermines the scientific method' is based on what I thought would be a shared premise ..."

Now he learns: "In conversations with economists who are sympathetic to the freshwater economists ... it has become clear that freshwater economists do not share this premise. What I did not anticipate was their assertion that economists do not follow the scientific method, so it is not realistic or relevant to make normative statements of the form 'we ought to behave like scientists'."

What is the difference between political and theoretical economics?

"A genuine inquirer aims to find out the truth of some question, whatever the color of that truth. ... A pseudo-inquirer seeks to make a case for the truth of some proposition(s) determined in advance. There are two kinds of pseudo-inquirer, the sham and the fake. A sham reasoner is concerned, not to find out how things really are, but to make a case for some immovably-held preconceived conviction. A fake reasoner is concerned, not to find out how things really are, but to advance himself by making a case for some proposition to the truth-value of which he is indifferent." (Haack, 1997, p. 1)

The fact of the matter is that theoretical economics has from the very beginning been hijacked by the agenda pushers of political economics. Smith and Mill were agenda pushers against feudalism. Marx and Keynes were agenda pushers and so were Hayek and Friedman. However, all these economists insisted that they were doing science. This has changed now: "... the evidence ... suggests that freshwater economists differ sharply from other economists."

The freshwater economists simply state the obvious, that is, that they are committed to politics and not to science. This marks the beginning of a voluntary scientific exit (sexit for short). What Romer has not yet realized is that most saltwater economists have to leave through the same door.

Egmont Kakarot-Handtke

References
Haack, S. (1997). Science, Scientism, and Anti-Science in the Age of Preposterism. Skeptical Inquirer, 21(6): 1–7. URL http://www.csicop.org/si/show/science_scientism_and_anti-science_in_the_age_of_preposterism.
Klant, J. J. (1994). The Nature of Economic Thought. Aldershot, Brookfield, VT: Edward Elgar.

lagarita said...

This reminds me of the "we create reality" stuff from the neo-cons. Maybe it's just more infection of Straussian "ethics" at UofC (see Shadia Drury).

Lafayette said in reply to lagarita...

APART FROM BERNIE

{"we create reality"}

Their entire existence revolves around such vapid, empty simplisms because they have no theoretical substance to their politics. It is either their lack of intelligence or their selfish perfidy that reduces their theoretical foundation of political views.

They are hooked on the fallacy of wealth-creation as the sole credible goal/consequence of an economy. Piketty put that thought to shame in his work on Income Disparity, as did Domhoff on Wealth Disparity. The statistical facts (ie., the "numbers") could not be more clear.

What should bother us most is not only the generation of enormous wealth, and the influence it has on a moneyed electoral system, but the dynastic tendency of such riches. The Koch Bros are already the first generation - will we be contending with the political antics of second, or third, or fourth generations?

The last time historically that happened in Europe, called Inheritance Aristocracy, it all came apart in bloodshed.

And yet the better notion of Social Justice, which supposes that all humans are created with the equal right to fairness and equitability, has taken decades upon decades to come to the fore.

It is still no where near dominating political thought in America. Apart from Bernie, that is ...

Lafayette said...
LOOK IN THE MIRROR

{the braggadocio and trash-talking of the 1970s}

Of the 1970s?

This type is still the mainstay of American parlance, whether political or business or just blogging. The aggressiveness of the language employed knows no bounds.

The intent in commentary, whether verbal or written, whether political or otherwise, is overly combative and largely "ad hominem". The real subject of controversy is lost in the personalization of the rebuttals. The issues that largely determine the political consensus thus become secondary and confused.

Really 'n truly puerile ... like the children they were and they remain, particularly in politics. Propelled by one and only one goal - to win, win, win.

And without politics or politicians, what is a democracy? It's an autocracy. With them, its a manifested willfulness by a moneyed few to dominate electoral outcomes - and we are pawns in the game.

My point? As an electorate, the people we chose to represent us personify as well the kind of people we are. So, complaining about the politicos in LaLaLand on the Potomac is useless.

Seeking someone to blame? Look in the mirror ...

[Jun 2, 2008] Supply-Side Fairy Tales by Steve Waldman

Supply side economic (aka "voodoo economics") is a classic example of cargo cult science. Steve Waldman insightful comments on Greg Mankiw's proposal to cut corporate taxes... (hat hit to Mark Thoma)

Supply side fairy tales, by Steve Waldman: Greg Mankiw offers a strong endorsement of a proposal to cut the corporate income tax from 35 to 25 percent, claiming "It is perhaps the best simple recipe for promoting long-run growth in American living standards." ... A good case can be made for cutting or even eliminating the corporate income tax. But Mankiw's argument does not cohere.

Let's start positive. Mankiw is right to point out that the "incidence" of the corporate income tax might not in fact be as progressive as its proponents would wish. He quotes studies suggesting that workers end up paying 70% to 92% of the taxes in the form of lower wages. I'm skeptical of those numbers, but it is surely true that some fraction, perhaps even a large fraction, of the corporate tax burden falls on workers and customers rather than presumptively wealthier investors. Mankiw does us all a service by reminding us of this.

Then he tells us a fairy tale ...

... ... ...

Supply side economics is a nice story, a hopeful story. It offers a clean, plausible policy framework: encourage investment, always and everywhere, and prosperity is sure to follow. But this decade has been about a pure a test of that idea as we could hope for. Capital in the United States was incredibly cheap, and what did we do? We destroyed a lot of wealth. We don't need more capital (although we might soon, if our foreign backers get skittish). We need more discriminating capital. In the meantime, the only thing I'm sure "works" about the supply side story is that it shifts the tax burden from richer to poorer. I'd rather that stop working so well.

See also discussion Economist's View Supply-Side Fairy Tales

Back to amateur science?

ben goertzel has some thoughts on how academic papers are stuffed with irrelevant filling, and how this impedes real progress:

what strikes me is how much pomp, circumstance and apparatus academia requires in order to frame even a very small and simple point. References to everything in the literature ever said on any vaguely related topic, detailed comparisons of your work to whatever it is the average journal referee is likely to find important -- blah, blah, blah, blah, blah.... A point that I would more naturally get across in five pages of clear and simple text winds up being a thirty page paper!

I'm writing some books describing the Novamente AI system -- one of them, 600 pages of text, was just submitted to a publisher. The other two, about 300 and 200 pages respectively, should be submitted later this year. Writing these books took a really long time but they are only semi-technical books, and they don't follow all the rules of academic writing -- for instance, the whole 600 page book has a reference list no longer than I've seen on many 50-page academic papers, which is because I only referenced the works I actually used in writing the book, rather than every relevant book or paper ever written. I estimate that to turn these books into academic papers would require me to write about 60 papers. To sculpt a paper out of text from the book would probably take me 2-7 days of writing work, depending on the particular case. So it would be at least a full year of work, probably two full years of work, to write publishable academic papers on the material in these books!

the lack of risk-taking is particularly evident in computer science:
Furthermore, if as a computer scientist you develop a new algorithm intended to solve real problems that you have identified as important for some purpose (say, AI), you will probably have trouble publishing this algorithm unless you spend time comparing it to other algorithms in terms of its performance on very easy "toy problems" that other researchers have used in their papers. Never mind if the performance of an algorithm on toy problems bears no resemblance to its performance on real problems. Solving a unique problem that no one has thought of before is much less impressive to academic referees than getting a 2% better solution to some standard "toy problem." As a result, the whole computer science literature (and the academic AI literature in particular) is full of algorithms that are entirely useless except for their good performance on the simple "toy" test problems that are popular with journal referees....
his first scenario makes me wonder if amateur scientists could again make meaningful contributions to research, combined with a wiki-like process that (hopefully) would identify promising directions better than today's peer reviews:
And so, those of us who want to advance knowledge rapidly are stuck in a bind. Either generate new knowledge quickly and don't bother to ram it through the publication mill ... or, generate new knowledge at the rate that's acceptable in academia, and spend half your time wording things politically and looking up references and doing comparative analyzes rather than doing truly productive creative research.

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Richard P. Feynman, the late Nobel laureate in physics, stressed the importance that scientists not fool themselves by referring to the cargo cult people of the South Pacific after the war (Feynman, 1985). These aboriginal islanders wanted to make U.S. cargo planes return with all kinds of goods, so they erected towers and wooden antennas near the airstrip, acted like controllers, and waited for the planes to come in. Their form was correct but no planes came in. He calls this "cargo cult science," where you do all the right things, you think, but you are wrong, nevertheless. You either leave something out or draw the wrong conclusion. What is missing, Feynman says, is "utter scientific integrity," meaning "a kind of utter honesty, a kind of leaning over backwards," the duty "to report everything you think might make your conclusion invalid," and "giving details that could throw doubt on your interpretation." It's this type of integrity, this care not to fool yourself, that he says is missing in much of the research in cargo cult science. He gives examples of investigators fudging data not fitting the theory they wanted to prove. "The first principle is that you must not fool yourself - and you are the easiest person to fool," he says.

Feynman's first principle applies to any type of important investigation. In child abuse cases the absence of investigative integrity reduces the process to cargo cult medicine and law. Law and medicine rely on each other to such a degree that each suffers from the investigative flaws of the other in these cases. These flaws include improper belief systems or biases, institutional pressures, carelessness, and lack of proper training. Doctors and social workers in the medical system claim they are not investigators. However, the legal system often takes action based on what they said and did with the child before the police entered the picture, and on the conclusions they draw.



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