Slides for a Talk: Thoughts on Making a Better Economics
Economic Methodology, Economic History, and Economic Thinking
Creating and supporting intellectual spaces in which insightful thoughts about how the economies of the present and the future work can be thought. As I see it, this requires combining a broad catholic range of empirical and theoretical inputs with effective quality control. But how?
Four Gaps:
- Between what economists should say and what they do say
- Between what economists do say among themselves and what they are heard to say outside the community
- Between what economists are heard to say and what the public sphere concludes
- Between what the public sphere concludes and what policies are actually implemented
- Concentrate for now on the first two
What Went Wrong?:
- In the development of economic theory
- In the application of theory to policy before 2008
- In the application of theory to policy since 2008
- What economics was relevant?
- Larry Summers and Martin Wolf at Bretton Woods
- Bagehot, Minsky, Kindleberger
- (Eichengreen, Akerlof, Woodford)
What Is Good and Bad Theory?:
- Good theory is and can be nothing other than crystalized history
- Microfoundations from first principles?
- Paul Dirac’s relativistic electron’s magnetic moment: 1, 1.00118, 1.00115965221±4
- Does this help us with protein folding and pharmaceutical molecule design?
- Isaac Newton: “I can calculate the movement of the stars, but not the madness of men”
- Lost £20000
- True then, true now
Bad Theory:
- Assuming infinitely-lived rational-expections representative agents
- Waving your hands
- Hoping that all heterogeneity and frictions will cancel out
- Almost as bad theory
- Assuming ILRERA
- Adding one friction
- Hoping that all other heterogeneity and frictions will cancel out
- Robert Solow:
- “Attaching a realistic or behavioral deviation to the Ramsey model does not confer microfoundational legitimacy on the combination”
- “Quite the contrary: a story loses legitimacy and credibility when it is spliced to a simple, extreme, and… irrelevant special case”
Two Branches:
- Creating space to build better economic theory * Better communicating economic theory
- Second branch easier
Second Branch: Better Communicating Economic Theory:
- What does history teach us?
- Keynes: The End of Laissez-Faire
- J.R. McCulloch’s parrot
- Triumph of the popularizers
- Marketeers: markets are efficient, governments are incompetent or corrupt
- In Keynes’s day there were planners: governments harness collective purpose to technocratic plans, markets are wasteful
- Need a grammar of forms of organization–market, hierarchy, plan, collective, yardstick competition, regulated monopoly, etc.–and when they work and when they do not
- Consider that, historically, education, health, pensions, infrastructure, technology, security not amenable to market provision–and that those are growing
First Branch: Space to Build Better Economic Theory:
- Knowledge of history the sine qua non
- Catholic approach to modeling strategies–broadening the tool set
- Somehow, exercising effective quality control