I see that over on the Twitter machine Noah Smith is engaging Paul Romer, in an attempt to get Paul to elucidate his “Mathiness” paper. I think Noah Smith misunderstands Paul Romer.

As I see it, Paul Romer believes that George Stigler laid down the methodological principal that one should always assume perfect competition in one’s microfoundations, and in so doing Stigler was acting as an ideologue rather than a technocrat, and that this is harmful.

It seems to me that Paul is more right than wrong.

It seems likely to me that Paul Romer has properly classified George Stigler in his beastiary. As I see it, George Stigler thought we did not need to evaluate whether Chamberlinian and other models of imperfect competition were true because we already knew that they were intellectually dangerous: not good to think with. Why? Because they gave an intellectual opening to “planners”–who were completely unaware of thie magnitudes of potential government failure–to argue for their interventionist “planning”.

A sound analysis, I think Stigler thought, would take account of the magnitudes of potential government failures. It would lead to the correct conclusion that, even if Chamberlinian features were true, and even if they were included in the model, anything other then letting the market rip would be a bad policy mistake. However, Chamberlinian models that ignored government failure could be used to argue for all kinds of destructive interventionist policies–antitrust policies, Keynesian policies, you name it. In this context, requiring that models assume perfect competition in their microfoundations as a methodological principle was a “Noble Lie”, a proper esoteric teaching. It led those who could not grasp the true esoteric teaching about the magnitude of government failure to the right and true conclusions. And one could teach those who could handle it the esoteric teaching–including the point that perfect competition was the proper microeconomic foundation to assume in the course of teaching gentlemen, and was a proper part of the methodology of positive and normative economics.

The problem is that Paul Romer wants to analyze issues in which perfect competition is not an assumption that leads one to anything like the True Knowledge about appropriate policies for economic growth. And yet Lucas and company are insisting that he make it. And it is to this, I think, that Paul Romer objects–most strongly.

And I think Noah misses this. Paul objects not to simplified microfoundations, and not to math, but rather to “mathiness”, which is restricting your microfoundations in advance to guarantee a particular political result and hiding what you are doing in a blizzard of irrelevant and ungrounded algebra.

Noah writes:

Noah Smith: Paul Romer on Mathiness: “Paul Romer… comes down harshly ‘mathiness’ in growth theory…

…us[ing] math in a sloppy way, to support their preferred theories. Romer warns direly that the culture of econ theory has become a lot more tolerant of mathiness…. Romer has now joined the chorus of old famous guys–Krugman, Solow, Stiglitz, Farmer–who are very vocally mad about the way mainstream economics theory is done…. Interestingly, although he’s talking only about growth theory… most of the people he’s mad at are the same guys that the Keynesians are mad at – Robert Lucas, Ed Prescott, and David K. Levine…. Prescott and McGrattan…. Boldrin and Levine…. Moll….

I think Romer is on to something about the culture of econ theory… [where] people seem to view math more as a tool for stylized description of ideas than as a tool for quantitative prediction of observables…. But… [even in] earlier models, I don’t really see much more tight connection of variables to observables…. [The] Solow model… tie[s] capital K to observable things like structures and machines and vehicles. But you’ll be left with a big residual, A. Then you can break A down and extract another term for human capital, H. Can you really measure human capital?… I don’t really see a huge difference between that and the ‘location’ used by Prescott and McGrattan (2010)…. Mathiness isn’t anything new, it’s just the way these econ fields work…

What Noah misses, I think, is what Bob Solow wrote the Solow model down do. The first point of the Solow model is that you cannot account for the coming of modern economic growth via any increase in the savings rate–in the accumulation of buildings and machines–as long as you think factors of production are paid their marginal product. The second point of the Solow model is that, properly calibrated, if factors are paid their marginal products, accumulation accounts for only a small part of per-capita growth at the frontier over any time period as long as a decade or so. The third point is that with the ancillary assumption that ideas can be learned by looking at the successful one would expect swift convergence to the frontier. The fourth point is that human capital–number of years of schooling–does not do much to resolve the modern economic growth puzzle.

Romer’s point is that good theory seeks strong correlations between observables that it then tries to explain as emergent properties resulting from some usefully-modeled market-structure foundations. Good theory does not theorize about unobservables. From this perspective, the Solow model is (mostly) a demonstration of approaches that do not work, and is useful because it rules things out–and it is thus the exact opposite of explaining modern economic growth via unobservables.

Must-Read: As I often say, you win the game of economic theory working in the Chicago tradition if you come up with a theoretical reason why a situation that appears rife with externalities and market failures is in fact one in which the bare-market allocation is in some sense Pareto Optimal. People who start out from the belief the governments are incompetent by necessity and that private property as always the greatest thing–even greater than sliced bread–should not work in the Chicago tradition, as what they produce is lousy. (conversely, you win the game of economic theory working in the Berkeley tradition if you come up with a theoretical reason why a situation in which it looks like the market works is actually rife with market failures and externalities. People who start out from the belief the government failure does not exist do not do good work in the Berkeley tradition.)

Now comes Paul Romer to say the Chicago tradition has become hopelessly corrupt: that they are no longer trying to win the game via argument and insight, but just pointlessly going through the motions with mathiness:

Joshua Gans: [Paul Romer and] Mathiness: A Guide for the Perplexed: “Paul Romer [has] levelled an attack on many macroeconomic [growth] theorists…

…including his advisor Bob Lucas…. Romer… thinks that economic theory, mainly macroeconomic [growth] theory, is itself in a bad equilibrium…. Theory… has become [mere] entertainment… a relatively sloppy thing… at best, a sideshow to some other game… [and] a device being used by academics to further a political agenda…. Here his thinking is murkier…. [For example,] Lucas and Moll… a model where… knowledge [can] be created under perfect competition…. When you can demonstrate that something occurs under perfect competition, there is a belief that you are somewhat absolved from saying that there is a policy problem….

How to accelerate knowledge creation is a hard problem…. There is more, much more, to it than that, and mathiness and its tendency to direct people towards the wrong questions (can this work even under perfect competition?) and away from the right (what is the mechanism driving knowledge creation and diffusion?) is the proverbial drunk search for keys under a lamp post. Nonetheless, outside of macroeconomics, I am not sure that it is politics as much as some narrow thinking driving theorists to produce big papers with big empirical implications…. The organization of our knowledge in economics leaves a lot to be desired and is distorting the way that knowledge is being created…

I think Paul is right. I think his targets are going down the road that the Austrians went down long ago–the road of saying that if my theories are inconsistent with the facts and cannot be marked-to-market, so much the worse for the fact and for the idea of marking one’s beliefs to market…

Must- and Should-Reads:

• Must-Read: Paul Krugman: Fraternity of Failure
• Michael Leachman and Michael Mazerov: State Personal Income Tax Cuts: Still a Poor Strategy for Economic Growth
• Must-Read: Ta-Nehisi Coates: President Obama on Color-Blind Policy and Color-Conscious Morality
• Must-Read: Larry Elliott: Thomas Piketty to Investigate Inequality in New Role at LSE
• Must-Read: Ezra Klein: Why Adam Posen Thinks Obama’s TPP Is Worth Passing
• Elias Isquith: Bruce Bartlett: “Utter Insanity and Stupidity”
• Must-Read: John Herrmann: Notes on the Surrender at Menlo Park
• Must-Read: Martin Sandbu: Free Lunch: Below potential, But How Far?
• Paul Krugman (1998): America the Boastful
• Jagdish Bhagwati (1998): The Capital Myth: The Difference between Trade in Widgets and Dollars

Might Like to Be Aware of:

• Ishmael: The Time I Spent On A Commercial Whaling Ship Totally Changed My Perspective On The World
• Peter Daou: Looks like Amanda Terkel and Sam Stein of Huffington Post just decimated the argument that Hillary Clinton isn’t progressive enough…”
• Hope Jahren: “Heaven knows that the internet hasn’t been stingy in its supply of discussion as to the legitimacy of the trigger warning.  Everybody and his brother have an opinion about it, ranging from the New Republic to the NYT to the AAUP, each of whom have graced us with their cyber-statements.  I wrote this because no where within this raging verbstorm can I find a convincing description of triggering, which (for me) is a physiological phenomenon.  And I think it matters…”
• If the Republican presidential primary field were to be played upon the stage, I would condemn it as an implausible fiction… https://www.facebook.com/photo.php?fbid=10204296627961406&set=a.3829230134825.2134829.1399981420&type=1
• Cosma Shalizi
• Kevin Drum: Lunatic Conspiracy Theories Aren’t What They Used to Be

Must-Read: I understand that voters have short memories, And thus the politicians who predict that, say, the 1993 Clinton tax increase would crater the economy may evade the consequences of having recommended bad policies and remain in office. But they do want to enact policies that will work. So you would think that a Paul Ryan would be thinking twice right now about palling around with a John Cochrane, a Stephen Moore, a Cliff Asness, or an Arthur Laffer. Yet somehow…

I do not understand it:

Paul Krugman: Fraternity of Failure: “Jeb Bush wants to stop talking about past controversies….

…And you can see why…. Bush’s response… [was] ‘going back in time’ is a ‘disservice’ to those who served in the war…. Take a moment to savor the cowardice and vileness of that last remark. And, no, that’s not hyperbole. Mr. Bush is trying to hide behind the troops…. Wait, there’s more… Bush resorted to the old passive-voice dodge… ‘mistakes were made.’ Indeed. By whom?…. Bush released[‘s]… chief advisers on foreign policy… [is] a who’s-who of mistake-makers…. In Bushworld… a record of being disastrously wrong on national security issues seems to be a required credential….

[And] in economic policy… economists who appear to have significant influence on Republican leaders… nearly all… agreed… there was no housing bubble… the American economic future was bright… the Federal Reserve’s efforts to fight the economic crisis… would lead to severe inflation… Obamacare… would be a huge job-killer…. You might think that there would be some room in the G.O.P. for economists who didn’t get everything wrong. But there isn’t. Having been completely wrong… seems… a required credential….

Extreme tribalism… [means] anyone who questioned whether the Federal Reserve was really debasing the currency was surely an enemy of capitalism and freedom…. Simply raising questions about the orthodoxies of the moment leads to excommunication…. So the only ‘experts’ left standing are those who made all the approved mistakes… a fraternity of failure… united by a shared history of getting everything wrong, and refusing to admit it…

Duncan Black: And Their Enablers): “Krgthulu:

So the only ‘experts’ left standing are those who made all the approved mistakes. It’s kind of a fraternity of failure: men and women united by a shared history of getting everything wrong, and refusing to admit it. Will they get the chance to add more chapters to their reign of error?

But the ‘approved mistakes’ aren’t simply approved by Fox News and The Right, they’re also generally approved by the Washington Elite Consensus. Maybe we’re at the point where the Iraq war was a wee mistake, bygones, but all the people who supported it supported it for the right reasons and the hippies were still wrong. Inflation didn’t happen, but it’s still around the corner, etc. The Right still rules our discourse.

Must-Read: The more I look at the British labor market, the more likely it seems to me that low productivity growth is the result of two things: (a) the reduction in financial services’s profitability in London, and (b) a reemployment system gone mad which is creating an awful lot of low productivity matches between workers and jobs: people who are to be holding out for a job with more hours at which they could be more productive, but were being driven to take whatever will get the social insurance system off their backs–hence the huge number of zero-hour jobs and the large number of people who are not employed, really, but are rather casual labor who might be called on next week. And if aggregate demand in Britain picked up, my guess would be that a lot of the low productivity would turn out to be a mirage.

Martin Sandbu: Free Lunch: Below potential, But How Far?: “The central issue in the Inflation Report published yesterday by the Bank of England is…

…the poor productivity growth that has burdened the UK economy since the crisis…. Monetary policy makers must soon think they are getting close to the point where monetary stimulus leads the economy to overheat rather than pick up slack, and rate rises are in order even if growth is slow…. That raising productivity is hard does not mean it is impossible…. There are some deep lessons to draw for policy thinking from the importance of ‘tweaking’. One is that ‘capacity is not well defined’, as Hendel and Spiegel write. Another is that productivity gains may rely on protecting or putting in place conditions where workers themselves can and want to figure out how to do things better. This complements the conjecture that labour market flexibility may be behind the UK’s poor productivity growth. At the very least it should make us question what sort of flexibility works best. High rates of churn and the shorter employment relationships they imply may help reallocate labour from low-productivity to high-productivity sectors, but also impair workers’ ability or incentive to improve productivity on the job.

Must-Read: It used to be the bookstores collected order flow and then ordered books from distributors who ordered them from publishers who edited and printed them from manuscript by authors. Then Amazon appeared and is still seeking to eliminate as many intermediaries between authors and book readers as it can. Is Facebook about to try the same thing? And how long before reporters with followings start collecting their paychecks from Facebook directly? Interesting questions…

John Herrmann: Notes on the Surrender at Menlo Park: “Platforms grow by incorporating the labor of users and partners…

…they tend, over time, to regard the presence of the partners as an inefficiency. Twitter asks developers to make a bunch of apps using its data, so people make a bunch of mobile apps, then Twitter notices that these apps are actually very important to Twitter, and so Twitter buys one of the apps and takes steps to expel all the other apps…. [Facebook’s] publishers are app developers… working… to find ways to increase Facebook’s share of user attention and satisfaction. If they… succeed… Facebook will take note. Perhaps Facebook will then devise a way to compensate reporters, or content creators, directly, rather than through the publications they work for. Maybe they’ll just buy a publication! Or many publications…. A word of caution about Facebook is not a wish to return to some non-existent ideal time. Print media was broken, TV was broken, commercial and public radio were broken, local media was broken, web media was very broken…. Worrying about the details of the coming future is merely taking that future seriously. People who insist otherwise? They have their reasons…. One of the great triumphs of Silicon Valley is its success in framing its companies’ objectives as missions, and their successes as pure contributions to progress…

Today’s best piece I have read on the internet is by the extremely sharp John Quiggin:

John Quiggin: The Last Gasp of (US) [Left-]Neoliberalism: “US neoliberalism is… closer to Blair’s Third Way than to Thatcher….

…[US] neoliberalism maintained and even extended ‘social liberalism’, in the US sense of support for equal marriage, reproductive choice and so on. In economic terms, its central claim was that the goals of the New Deal… could best be pursued through market-friendly policies that would earn the support of the financial sector…. [The] signature issues for US neoliberals were free trade, cuts in ‘entitlement’ spending, and school reform… a ‘grand bargain’, in which Republicans would accept minimal increases in taxation in return for the abandonment of most of the Democratic program. The Clinton administration was explicitly neoliberal…. And, while Obama’s 2008 election campaign was masterfully ambiguous, his first Administration neoliberal through and through…. But developments since then, including the global financial crisis, the failure of school reform and increasing awareness of entrenched inequality have destroyed the appeal of neoliberalism…

I think that John Quiggin is largely correct–if you correct “abandonment” to “reconfiguration”.

Thatcherite right-neoliberalism is the claim that social democracy was one huge mistake–that it created a North Atlantic of takers who mooched off the makers. It holds that if we got rid of social democracy, we would have a utopia because the makers wouldn’t have to carry the takers on their backs and the takers would shape up–or if the takers did not shape up, serve them right! The moochers would then wallow in their much deserved squalor and misery. And the makers would not have to, as they do now, suffer the pain of watching the moochers live tolerable lives.

Right-neoliberalism is alive and kicking.

(Bill) Clintonian left-neoliberalism makes two twin arguments.

The first is addressed to the left: it is that market mechanisms–properly-regulated market mechanisms–are more likely than not a better road to social democratic ends than command-and-control mechanisms.

The second is addressed to the right: it is that social democracy is the only political system that can in the long run underpin a market economy that preserves a space for private property and private enterprise. Therefore the right had better shut up and try to make social democracy work, or else.

The true underlying problem with left-neoliberalism, I think, is that with the Brezhnevite stagnation of the Soviet Union the second claim addressed to the right was no longer convincing. Hence the right went into its dismantle-social-democracy mode. And once the right was committed to dismantling social democracy, the ability to construct and maintain the proper regulations needed to make market mechanisms tools to achieve social democratic ends fell apart as well.

This leaves those who want to present electorates with a broader menu of political choices than simply right-neoliberalism and its even more conservative relatives with the task of figuring out another political-economic agenda to repair the flaws in the post-WWII Fordist economic regulation model that led to the original development of left-neoliberalism in the first place. But I am at my wit’s end as to what alternative political-economic agenda could both (a) work technocratically and (b) be sold to North Atlantic electorates politically. Hell, our failure to maintain political coalitions to even implement Milton Friedman’s cures for depression, let along John Maynard Keynes’s, is terribly depressing.

Must-Read: The key negotiating questions on TPP are how to make the pharmaceutical IP carve-out work, and how to make sure ISDS levels regulatory playing fields up rather than down. The judgment call from a technocratic point of view is how much are these worth–should they be put forward as negotiating-position dealbreakers, and should they really be dealbreakers?

Ezra Klein: Why Adam Posen Thinks Obama’s TPP Is Worth Passing: “Companies, Posen continues, have taken ISDS…

…much too far…

We’re now getting into things that aren’t like buying a mine. We’re getting into issues of cultural property, health, and safety. It’s legitimate for a poor country as much as a rich country to say, “If you want to trade here, you need to follow our domestic rules on things like food safety and local content on films.” And some companies, including US companies, have gone to extremes to try to get these local regulations interpreted as forms of expropriation. I don’t think that’s right or necessary. I don’t think ISDS should be a back door for companies to get around local regulations they don’t like….

Posen is broadly supportive of the IP provisions in the deal, but he thinks the critics have some fair points:

I do think there is a lot of room for increasing enforcement of rich countries’ brand protections, diminishing pirated films and music (though less of an issue in today’s digital world), and especially protecting industrial technologies…. [But] on pharma, there has to be some sort of constructive compromise so that the US isn’t overdoing the protection of profits and costs to poor people…

Posen… backs a proposal by Caroline Freund that would shorten the TPP’s pharmaceutical patent exclusivity from 12 years… to seven….

A major part of TPP is potentially orienting, if not anchoring, important developing markets on a market-friendly outwards-facing, and yes pro-US and pro-democracy, path….

The way TPP will turn countries towards the US, in Posen’s telling, isn’t through the governments, but through the ‘business and political integration through trade,’ the ‘winning hearts and minds’ that comes through foreign investment and more routine business dealings…

Must-Read: Larry Elliott: Thomas Piketty to Investigate Inequality in New Role at LSE: “The LSE has announced that the author of Capital in the Twenty-First Century…

…has been appointed centennial professor at its International Inequalities Institute (III)… to look at why inequality has been rising across the world and to develop ways of responding to the growing gaps between rich and poor…. ‘I am thrilled by my appointment to work in LSE’s new International Inequalities Institute,’ Piketty said:

Rising inequalities is one of the great challenges of our time, which we desperately need to address. We have a unique opportunity at the LSE to create a truly dynamic and exciting interdisciplinary centre which will make a real difference to our understanding of the causes and consequences of inequality…