For anyone looking for a cohesive macroeconomic theory drawing from the economists mentioned here (e.g. Minsky, Godley, and others at the Levy Institute), I highly recommended taking a gander at Modern Monetary Theory
Non-economists have tendency to look down economists when they go astray
.. and then immediately jump into the most fringe and unsound theories that provide "comprehensive" or radical world view, like Modern Monetary Theory or Austrian economics.
We look down mainstream economists (macro) because their level of knowledge is more similar to alchemy than to physics, and because they never change their theories never mind what happens in the real world.
For instance (and there are more examples), here(1) is an explanation of how commercial bank loan funds. This explanation comes from the Bank of England, who, I suppose, know a few things about the subject. This explanation, of how reality works, have nothing to do with what a mainstream macroeconomics book explain. How is that possible?
Can you find some physics book that explain something that the engineers say it's not true?
My personal opinion is that, at the end of the day, the problem is that economics is a political subject. Maybe the only political subject that matters, because it's about who does the work and who keep the results. So, it's not incompetence what we are dealing here, but too many different interests trying to control the narrative.
Posts like this support nabla9's point. Contrary to the straw men MMT economists like to draw in their blogs, the majority of modern macroeconomists neither disagree with the Bank of England's explanation of how commercial bank loan funds work, nor is it particularly pertinent to their theories. The money multiplier is not some foundational macroeconomic article of faith, it's a pedagogical tool to illustrate how leverage can expand the money supply beyond the monetary base to first year undergrads (which also happens to be a historically correct explanation of why the private banking sector ended up with de facto money creation privileges)
On the other hand, MMT is deeply concerned with institutional arrangements in the banking system, and still elides central banks and governments in its explanations of how the system works because doing so avoids the inconvenience of explaining that the main reason budget deficits result in long term repayment obligations for governments under current institutional arrangements is because central banks fundamentally disagree with MMTers that systematically buying up all newly emitted government debt and pushing interest rates down to permanent zero is compatible with low inflation.
I think a lot of engineers would have issues with more arcane theoretical stuff like string theory too (and most physicists would have issue with engineers abstracting away certain details because the approximations they work with are good enough...)
It seems to me that if the "the majority of modern macroeconomists neither disagree with the Bank of England's explanation" and it's only a pedagogical tool or an historical explanation, they would do well in saying so. Specially to their first year undergrads and in their textbooks.
I have been following this debate for a while and it's only now that we heard "well, of course, we knew it all the time".
>>because central banks fundamentally disagree with MMTers
Maybe central banks disagree but we can't really know, because they are forbidden to buy public debt directly. What is that prohibition but an institutional arrangement? And why are those institutional arrangement in place in the first case? It's true that MMT is deeply concerned about that and it seems pretty relevant to me.
An engineer using Newtonian physics is very aware that is a simplification. Here the situation is the opposite, the physics (the economists) are simplifying away what the engineer (the BOE people) see in the reality, so their theories work.
The Bank of England article you linked to was mainstream trained economists who devise mainstream economic models in their day job explaining how the money creation process works and why it makes certain classes of model more suitable than others for measuring economic shocks. And the role of credit creation has been part of the loanable funds literature the paper is critical of since "fiat money" was a purely theoretical idea. Ultimately if you overlook the evidence of a link you actually posted yourself in favour of preferring to believe the bad faith characterisation of "what mainstream economists really believe" on blogs written by self-styled dissidents, it says more about you than the economists...
> Maybe central banks disagree but we can't really know, because they are forbidden to buy public debt directly. What is that prohibition but an institutional arrangement? And why are those institutional arrangement in place in the first case? It's true that MMT is deeply concerned about that and it seems pretty relevant to me.
Central banks being unable to lend to governments or purchase government debt directly is a total non-factor in them consistently declining to match government debt emission dollar for dollar with government bond purchases on the secondary market (no MMT economist would disagree either). They are free to complement fiscal expansions with monetary expansions (at least over periods longer than changeable monthly base interest rate targets) as MMT would prefer, or take the opposite approach, which they sometimes do. If central banks thought MMT was fundamentally right, we wouldn't have seen them ever pull money out of the system to push up interest rates...
>"[..] it says more about you than the economists..."
I think I will be cavalier about that comment.
>"[..] what mainstream economists really believe [..]"
This is something that always puzzle me in this kind of discussion, maybe you can help me with that. What mainstream economists really believe?
I mean, here (1) is a review of what text-books say about money creation. In my opinion (and it seems yours too) this is not the same that we see in practice.
So, my question would be, do mainstream economist believe different things that what they write in the textbooks?
Undergraduate physics textbooks provide introductory examples using simple friction-free Newtonian classical mechanics. It's just there isn't a school of dissident physicists citing undergraduate textbooks to argue that the mainstream physics profession consists of stupid ignoramuses who don't believe in friction.
And the reality of money creation is pretty fuzzy too and depends a lot on what you define as "money supply" and the "banking sector" (funnily enough, even pretty basic physics has a degree of this problem too, which is why you get concepts of waves and particles that both fit some of the facts, though you don't get anyone inside or outside the mainstream very strongly committed to arguing against wave-particle duality...).
Ultimately private banks both intermediate between deposits and savers and create credit borrowed from central banks.
They're only permitted to do the latter because their role in doing the former makes the government unwilling to let them fail. The "credit creation" emphasisers are right to emphasise that the limits on individual bank credit creation are soft because the "bank capital" they are permitted to borrow against is not a fixed variable, the intermediation emphasisers are right to note that when the commercial banking system borrows more money, the central bank tends to pull money out of the rest of the economy in the very short term, and propose raising interest rates in the slightly less short term, and so the banking system is only really able to expand the money supply when the central bank is comfortable with it doing so.
More generally, it's possible to entirely agree with Werner and MMT on banks' present role being far better described as primarily one of credit creation and entirely disagree with their respective alternative preferred policy approaches to central banking (or vice versa for that matter). What mainstream economists are primarily concerned with is the principle that raising interest rates for a variety of reasons (including but not limited to its effect on demand for bank credit) somewhat reduces inflation (and demand) and lowering them somewhat increases demand (and inflation) which is pretty much the most theoretically and empirically sound conclusion ever reached in macroeconomics (despite a few edge cases where it might not be true).
So, if I understand what you are telling me, when, for instance, Krugman, write his text book and his New York Times columns, he is just writing a simplification.
Because he thinks that the notion that private banks create money as an account operation, and they search reserves after giving a credit, and not before, is too complicate for his readers.
Fair enough, but you have to recognize that, then, it's not so strange, and hardly their fault, that MMT economists end writing "straw men" posts (as you said before).
> So, if I understand what you are telling me, when, for instance, Krugman, write his text book and his New York Times columns, he is just writing a simplification.
Any time an expert is writing for a non-expert audience, they are usually writing a simplification tailored for the audience and the purpose of the writing.
> Because he thinks that the notion that private banks create money as an account operation, and they search reserves after giving a credit, and not before, is too complicate for his readers.
Or because the general idea of a multiplier effect works either way, and his columns are unlikely to depend on the mechanics of the simplified computation of the multiplier as an estimator of the maximum level of the multiplier effect under the simplifying assumptions that apply to that calculation.
If you have a specific problematic column in mind, we could have a less abstract discussion about the problem you have with it.
One would expect that MMT economists might understand what mainstream economists think, and understand it at a somewhat deeper level than that of an NYT column. One would therefore expect that they could avoid strawmen, because they could argue against the mainstream economists' real position.
> On the other hand, MMT is deeply concerned with institutional arrangements in the banking system, and still elides central banks and governments in its explanations of how the system works because doing so avoids the inconvenience of explaining that the main reason budget deficits result in long term repayment obligations for governments under current institutional arrangements is because central banks fundamentally disagree with MMTers that systematically buying up all newly emitted government debt and pushing interest rates down to permanent zero is compatible with low inflation.
I’m not sure what MMT books you’ve been reading...
> The money multiplier is not some foundational macroeconomic article of faith, it's a pedagogical tool to illustrate how leverage can expand the money supply beyond the monetary base to first year undergrads
Particularly, it's a tool for estimating a limit of an effect in a particular idealized policy circumstance and with other simplifying assumptions.
The simplifications don't represent real world conditions, so the computation is of little real-world relevance though the effect is.
Much of a first-year physics text will be simplifications that apply in idealized conditions that are broadly similar, IME.
Where MMT goes wrong is the relevance of all this. They succumb into "banking mysticism" and assume far too large macroeconomic role to banking.
Banks don’t create demand out of thin air by providing loans.
While banks can create loans "out of thin air" in some extent (careful with technical details), they are limited by their reserves. Central bank controls the size of the money supply, because it is the source of bank reserves and capital requirements.
>>Banks don’t create demand out of thin air by providing loans.
This is exactly what MMT says (and the reason of their support for fiscal policies), but not what mainstream says.
See the mainstream justification for 'quantitative easing': improve the reserves of the commercial banks so they 'decide' to loan.
MMT have always said that this is not how it works. Banks don't loan because they have more money, because banks don't create demand. By the way, MMT have always said also that this was not the way to go but this would not generate inflation, as some critics pointed.
>>While banks can create loans "out of thin air" [..] they are limited by their reserves.
My understanding is that this is not exactly true, and here MMT proves mainstream wrong again. As you say we have to be careful with the technical details.
Banks don't look into how much reserves they have and, then, they decide what they are going to loan. The credit departments of banks loan whenever they think they can make a good business and then the bank search for the reserves.
If they can't find enough reserves in the inter-bank market, they will go to the central bank. The central bank always will cover the commercial bank needs. What the central bank can control is how expensive it's going to be to cover those needs. The money multiplier theory is also wrong.
> "comprehensive" or radical world view, like Modern Monetary Theory or Austrian economics
This sounds as if being comprehensive or radical is something bad. Keep in mind the earth not being flat and orbiting the sun was both radical (at that time) and comprehensive in terms of laws governing that movement.
If we are going to invoke the history of human knowledge, we should note that historically, the idea being compared to the great revolutions in knowledge almost never measures up.
Trying to comprehensively and radically replace a mainstream view by taking as the starting point the assumption that the entire mainstream profession is not only wrong but also malicious is far more often the modus operandi of the field's equivalent of homeopaths than the field's equivalent of heliocentrists...
I don't look down on economists at all but I am highly critical of them because they have the ears of our politicians when it comes to predicting the future.
The biggest problem I have with economist is when it comes to discussing technology and economy. While they have no problem having opinions about the effect of technology most treat it as an externality and not something central to their models.
Yet any economist worth their salt should do exactly that as technology has a bigger impact on the economy than what you can find in behavioral economics.
So the problem isn't the economist themselves but the power they have on public policy and that should be critiqued for the nonfactual base it is.
>While they have no problem having opinions about the effect of technology most treat it as an externality and not something central to their models.
This is not true at all.
I think you are confusing talking heads and pundits in TV with academic economics. Productivity, technology and economic growth
Technology and it's relation to economics is included in growth theories and it's important subject that it subject of active study. It's in the A in Solow–Swan model. The model predicts that in the absence of continuing improvements in technology, growth per worker must ultimately cease. More modern theories take the technology even more seriously.
Exponential growth isn't (economist don't like that because it creates radical uncertainty)
There are a few people like Tyler Cowen who take it seriously but most models used by governments (Like the Danish DREAM model) aren't even close to factoring those things in. And they are the ones who the politicians end up listening to.
Austrians do not "keep predicting hyperinflation."
A few fringe Austrians (only one with academic credentials) have mentioned hyperinflation as a possibility. An additional few Austrians suggested a high possibility of something like 7-10% inflation, which was still controversial among Austrians. Of the Austrians actually active in academia (which is a higher number than many would guess), I can think of one assistant professor who predicted rising inflation.
Ron Paul has predicted it pretty consistently for about ~25 years at least and as far as I'm aware the mises institute has agreed with him all of that time. He is probably the most high profile Austrian adherent that I know of and mises the most high profile think tank dedicated to it.
I'd be interested in hearing about all of these academic Austrians who have argued that they are both to be full of shit.
Sure, but first, who are all of these Austrian economists who think Ron Paul, the most famous proponent of their brand of economics, is full of shit and when did they call him out on it?
Ron Paul is a politician, and the Mises Institute (which is not a think tank and not the most high profile Austrian/Austrian-inclusive organization) has largely disagreed, other than Gary North and Doug French, who are both about as low profile and unserious as you can get.
Also, Ron Paul usually doesn't predict hyperinflation, though I would agree that he's very hyperbolic.
MMT is extreme to the other end. Critics (most of them mainstream Keynesian) say that it oversimplifies Keynesian model. Usually simple theories that are internally consistent miss some variables.
Basic observation: Government that issues debt (or money) in it's own currency can't go bankrupt. This is essentially correct and it even works in practice. Hyperinflation is a problem only if you have to pay foreign debt in foreign currency.
Where MMT differs from mainstream is that in their model this ability can be exploited freely. The fiscal-monetary conflict goes away. They also assume that the only feedback loop goes trough taxation–taxation is seen as the tool reducing the money supply. Other ways money creation affects the economy don't exist or don't matter.
>How is that confusing in the context of everything else I wrote?
Because when you declare a school of thought to be "extreme" it's kind of weird to agree with the core (and most controversial) concepts and only disagree on unspecified details.
On the one hand, it's like declaring that the Catholic Church is run by religious extremists because their wafers are exactly the wrong shade of pale off-white. On the other hand, it's exactly like that as well.
A lot of middle to upper class people who would like to buy real estate in a major city in Canada have certainly witnessed a form of hyperinflation.
Just because a government publishes a 1% inflation number (that may be derived from heavily manipulated statistics) doesn't real mean inflation isn't happening.
TL;DR: MMT starts by saying that governments that manage their own currencies have unlimited spending ability – they can simply create money when they need it. And that's obviously true, to the extent that people are willing to accept that money in exchange for their goods and services (an extent which is not infinite). Then, building on that premise, MMT basically claims that nobody needs to get hurt when governments create money out of thin air. The explanations for this are pretty wonky and hard to follow, but they amount to saying that the theory generally predicts no harmful inflation of the currency.
Analysis: Hasn't mankind already concluded that governments can't just create and spend money boundlessly without harming the economy and the people who constitute it? I'm looking at Argentina, Venezuela and Zimbabwe right now, where the governments have each created money to finance their spending, and people are truly suffering as a result. And those are just some contemporary examples – human history offers many more, and they're quite consistent. If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect.
Radical alternative theory: Governments should be fiscally responsible, practicing balanced budgets and promoting currency stability. Outlandish, true. But it turns out that historically this has been a very winning formula. More efficient economies, less corrupt governments, fewer innocent people getting hurt.
>>" If MMT doesn't predict inflation as a result of arbitrary creation of currency, then it seems we can conclude MMT is incorrect."
That is not at all what MMT says and I don't understand how an honest reader of the MMT literature would arrive to that conclusion.
What they say is that public debt and public deficits are irrelevant (there goes your "outlandish true" of balanced budgets) but they also say that inflation is the most important constraint in public spending.
>> And that's obviously true, to the extent that people are willing to accept that money in exchange for their goods and services (an extent which is not infinite)
In the MMT framework, there is always demand for the currency in what taxes have to be payed. That's obviously true. That doesn't mean that inflation is not a factor.
Translation: Countries can incur as much debt as they want, because they can "print" their way out of it without harmful consequences.
> inflation is the most important constraint in public spending
Translation: People's economic suffering is the most important constraint in government spending.
> most cases of hyperinflation in history, including the infamous Zimbabwe, are due to a supply shock
Translation: Most cases of hyperinflation in history were due to economic crisis.
Hyperinflation is due to creating far too much new money. Enough to foster price increases of at least 50% per month. Economic crisis does not necessitate doing that.
By the way, in the case of Zimbabwe, it was the government economic mismanagement that created the economic crisis that you blame for the monetary mismanagement. From your article: "From an economic perspective though the [government] farm take over and collapse of food production was catastrophic." Then the government chose to try "printing" its way out of the problem. Hyperinflation wasn't mandatory, it was a consequence of reckless behavior.
> how an honest reader of the MMT literature would arrive to that conclusion
The only substantial concession to inflation risk I've seen in the MMT literature is in conditions of "full employment." Feel free to set me straight if that's not correct.
Empirically speaking, inflation follows injecting money into an economy, and inflation is quite harmful. It seems MMT resists at least the first conclusion, if not both.
While we're on the topic of honesty, doesn't MMT feel like an economic "get rich quick" scheme to you?
> What they say is that public debt and public deficits are irrelevant (there goes your "outlandish true" of balanced budgets) but they also say that inflation is the most important constraint in public spending.
I heard this story in a debate between an MMT economist and an Austrian economist
Imagine a husband and wife having the following conversation :
Husband : Let's go and buy a new mansion, a Lamborghini and a private jet
Wife : Are you sure we have enough money to do all that ?
Husband : Well, if we don't, I can always pick up my shotgun and hold up the nearby bank
Wife : Are you crazy ? You could go to prison. Or get shot by the police
Husband : Well, I know that. But I just wanted to point out that not having enough money was irrelevant. Going to jail or getting shot was the most important constraint from spending all that money.
This misses THE central point of MMT, the fundamental difference between currency issuer (souvereign authority) and currency user (households, firms, regional governments, etc).
Governments have not historically kept balanced budgets more often than not, and when they have it's not a winning formula. Some of the worst economic crises have occurred after some of the most successful runs of 'responsible' Government balanced or surplus budgets, because it saps net financial assets from the private sector, with the only way for growth to happen being private debt (which eventually leads to deleveraging when the private sector can't take on more debt, which pretty much always results in recession). The only way run a Government surplus and avoid this is to run a big trade surplus (like Germany) - but that's a zero sum game so not everyone can.
Argentina, Venezuela and Zimbabwe aren't in any way representative of the results of "printing money". They are much more complicated than that, and MMT actually has much more explanatory power to explain what went wrong (variously - huge supply shocks leading to massive unemployment, attempting to maintain a peg to a foreign currency, and having debt denominated in a foreign currency, etc.).
One of the leading MMT researchers, Prof. Bill Mitchell is especially interested in inflation, and they have actually generated a pretty strong theoretical framework for how it happens that again has better explanatory power than competing theories (i.e. Austrian economics that predicted hyperinflation due to QE, monetarism that can't explain why inflation is so sluggish with such low interest rates, etc.). He publishes a lot of info on this his blog nearly every weekday, it's definitely worth a read.
Any theory of money needs to explain how the US went from subsistence farming in 1800 to superpower in WW1 on the gold standard (which more or less means balanced budgets).
That's definitely in spite of being on the gold standard. Have a look at the history of financial crises in the US [1]. In the time period you mentioned, there were 21 recessions, five 'panics' and three depressions.
If you look at the CPI history, it was largely deflationary (which is good if you do like recessions and depressions), but also times where inflation reached 27% [2]. The gold standard can't stop price inflation, and when inflation takes off it makes currency pegs impossible to hold, which is why pretty much every commodity convertible currency has eventually failed.
A gold standard does not imply currency pegs. I think we can all agree that pegs never work.
As for the panics etc. in the 19th century, yes they happened, and were usually the result of government monkey business with the economy. Note that with fiat money we've still had panics, depressions, and recessions, including the Mother Of All Depressions.
The last one was just 10 years ago.
> The gold standard can't stop price inflation
If it doesn't, then you don't actually have a gold standard. You have pegging a currency to gold, which is something quite different.
> Since the government at the time did pay off the national debt
There was a brief period in the early half of the 19th Century where it paid off the debt, but the
it ramped up beforen the secession crisis, went sky high during the civil war, and was never paid off after that, so, no, in net budgets weren't balanced in the Revolution to WWI period.
Also, other problem with your scenario is that the US didn't start as a subsistence farming economy (which would have made it near worthless as a set of colonies.)
What governments should do is spend appropriately to maximize the welfare of their people which includes not having runaway inflation and also borrowing and spending during economic slumps.
> What governments should do is spend appropriately to maximize the welfare of their people
Are you suggesting that people aren't capable of spending appropriately to maximize their own welfare, and that the government would do a better job of it (after taking a cut of the money)?
> What governments should do is ... borrowing and spending during economic slumps
Even if this were true, and I think global economic malaise since the financial crisis is evidence it's not, it omits the corollary that governments should then repay debt and save during economic booms. You can't responsibly have one without the other, can you?
> balanced budgets [are a bad idea]
So debt is a good idea? We should finance current spending at the cost of future spending? That's a pretty radical statement. The burden of proof is on you.
And that is what MMT actually suggests, when one do not leave out half their argument.
Their argument is that taxation can be used to take money out of the economy while government spending puts it in. Balance the two and you also control inflation.
His however hinges on the economy being largely self-sufficient, or has tight controls on imports.
Across history, the nations that has gotten into trouble over "money printing" have actually run a massive current account deficit, meaning that they are importing way more than they are exporting.
> His however hinges on the economy being largely self-sufficient, or has tight controls on imports.
So, not actually applicable to the US. (Unless you're going to argue that the US's imports aren't enough to matter. If you want to try to make that argument, go ahead, but it's clearly an additional step that's needed before you can argue that we should actually try to apply MMT.)
In MMT, taxation acts as the ultimate sink. It is the combination of taxation and government spending that acts to "balance" the national economy.
This flip the normal budget worries on the head, as taxation comes after spending rather than before.
Note though that unlike your example, MMT requires a nation that is internally self-sufficient when it comes to basic supplies. The problem for both Venezuela and Zimbabwe (i am not up to speed on Argentina) is the amount of imports needed to sustain the population.
When imports overtake exports, the exchange rate suffers, and exchange rates can't be fixed by printing more money.
Venezuela got into the predicament it is in because the government thought they could use oil exports, that were at the time an all time high, to counterbalance the imports used to help the poor. But then the oil price tanked. And Venezuelan oil is a particularly expensive oil to process, so it was the first to go when refineries cut back on production.
> MMT requires a nation that is internally self-sufficient when it comes to basic supplies
To be fair, isn't this a lot like saying, "MMT requires conditions that don't generally exist"? What modern economy isn't shopping internationally for the best prices on basic supplies?
Ultimately this condition seems to imply that MMT requires either 1) a subject economy to be the most efficient producer of all basic supplies (probably impossible, and if achieved then impossible for any other economy) or 2) a prohibition on the import of basic supplies (despotic and economically dysfunctional). Is this correct?
This is making me think of Import Substitution Industrialization (ISI) in Latin America. It was a strategy to become economically self-sufficient, but it didn't work out well.
For me the sad part of "economics" and their number trickeries is the unsustainable usage of natural resources. I could argue all they really did is inflate current value and allow "loaning" from future resources to boost the current economy.
Global warming in this context is the (possibly too late) push back in this systems equilibrium.
Regard for natural resources is actually a pretty mainstream idea in economics. The concepts of tragedy of the commons, public goods, pollution as a negative externality, etc. are quite well-established.
I'm far from knowledgeable on the technicalities of economics (I'm in the software engineering business), but observing the dialogue that takes place between economists and seeing the results, its hard to accept economists actually make effort to factor this in, my experience is that they are only reacting to public outcry.
I find it hard to believe they even have the tools to factor environmental impact into their models. (don't tell me factoring damage due to sea rise as a "tool".)
There's kind of an issue with discount rates though in that if you say a dollar today is worth say $1.05 next year it implies you should discount global warming damage a couple of centuries ahead by a factor of over 17000. But I'm not sure that's reasonable.
In every age those in power attracted charlatans and philosophers, to declare the kings work and world the best world there is, his doing the only plausible way and the attempt to errect a hypothesis heresy.
Communism at least made itself testable, it prognosed and proposed- and thus it could fail and be held against attempts to revive it unchanged. Economics never even got to this stage- they shirk simulations and hard data for the kings funds could cease, if they would propose testable scenarios or scenario trees.
Economics im afraid to admit, is less of a science, then some ideologys, who willingly submitted themselves to the killing fields of the experimental method.
Poor choice words I suppose - I'd much rather be submitted to the "killing fields of the experimental method" than the actual "killing fields" of a Communist regime.
IMHO the important question is, as consumers of expertise, how do we manage its risk? Can we predict the risk, the likelihood and/or magnitude of failures?
One issue might be our standards of 'success' and 'failure' for economists and other experts. The standard probably shouldn't be, 'predict 100% of economic events accurately', though that's an ideal to strive for. IIRC, some geologists were put on trial in Italy for failing to predict an earthquake; AFAIK there's no known way to do it reliably. Is 'predict 75% accurately' realistic for economics? Too high? Too easy? Is the thing even measurable? I don't know. And when the housing market crashes, saying 'I got the other 3 predictions right' doesn't matter much to people nor is it evidence that you weren't incompetent in this case. Maybe a standard should be, 'no incorrect predictions on critical issues' (i.e., it's better to say nothing than risk being wrong), but maybe that would result in no predictions on critical issues; also, in many situations such as earthquakes, no prediction infers the null hypothesis: No earthquakes today. Regardless, likely any standard should rely on degree of error: The housing market predictions weren't off by a few percent but by orders of magnitude.
Can we create a model that accurately predicts where expertise fails and its magnitude? Perhaps large errors simply occur in unstable systems which have high magnitude variation in outcomes (e.g., earthquake or no earthquake), and thus unavoidably larger errors. Also, I'd expect accuracy to correlate with (high volume of quality research + consensus). If there's consensus based on low volume of quality research, that seems ripe for failure. Based on only a little research, it was popularly said (I don't know if it was consensus of scientists) in the 1970s that there would be an ice age soon; that was wrong. Based on a mountain of research, scientific consensus accurately has predicted global warming. But I'm guessing at the factors involved in predicting the risk of expertise. Has anyone researched this?
If you could create such a model, you'd become very rich of course if you put your money where your mouth is and you are correct. These type of contrarian investors exist (i.e. black swan investors). The problem is that their funds lose money every year, year over year, and people think they are crazy until some unforseen crisis hits and they become "prescient" all of the sudden.
In game theory there is more and more research pointing towards ambiguity and how people deal with that. Ambiguity is defined as sourced of probability which are generally unknown but people still prefer one over the other. A well known example is the Ellsberg paradox [0]. In this paradox there are two turns, one contains 50 red and 50 black balls and the other contains 100 balls of unknown proportion of red/black. People often prefer to bet on the known urn (even on complmentary bets) leading to probabilistic contradictions (i.e. probabilities stop summing to one)
There's also a lot of research on behavioral finance and in particular behavioral macro, these models show that even with only a small number of heterogenous agents you can create chaotic models ...
The point I'm trying to make is that we, as economists create models, based on certain assumptions, that seem to work well, until they don't.
> If an expert can't give a convincing argument for their claims, why believe them?
IME, there's weak correlation between an expert's persuasiveness to a non-expert on one hand and the truth on the other hand:
* As an expert in my field, I could convince non-experts of almost anything; they have no idea what I'm talking about: Is it true? Have I omitted key things? Twisted other things? I wouldn't do that, but I've seen others do it. As an example we're all familiar with, U.S. intelligence officials have said, 'we're only collecting metadata about U.S. citizens, not content, so don't worry'. Obviously these experts knew that bulk collection of metadata is just as invasive as content, but it convinced the non-experts who don't understand that.
* In fields in which I'm non-expert, I used to think I could evaluate expert claims based on their persuasiveness. I was wrong - I was a mark, a sucker; I was the kind of person that propagandists, experts in persuasion, count on; my overestimation of my own powers, my ego, was my weakness. Eventually I observed a pattern: Later, when more facts came out or I knew more, what had been persuasive was actually BS. And a key point: It hadn't become wrong; it was always wrong and I had been conned by it. And what about those situations where I just never learned I was wrong, and the con continued indefinitely? In fields where I read a variety of experts and have some minor sophistication, I've learned that newspaper op-eds, which many find persuasive (people love to send them to me to read) are not infrequently dogs-t piled on a foundation of horses-t, with a few grains of truth sprinkled on top.
IME, the general wisdom that most people gain through years of painful experience is that persuasiveness has a small place, but far more you need to learn who to trust with what, who not to, and how to tell the difference. That's the only solution.
Obviously that's a risk, but so is blind faith in trusted experts. I don't think your examples really relate to this situation, because there wasn't a convincing expert argument that the housing bubble was economically sustainable, the arguments that it was unsustainable were simply ignored by trusted experts, for the most part. I mean, I think I found Nouriel Roubini through a post by Brad DeLong, but I don't think DeLong ever actually addressed his concerns.
One point which I haven't seen made here is that perhaps economics is a reductionist approach to something which cannot be easily modelled in a reductionist way.
Nobody here expects everything we know about Physics to become largely irrelevant tomorrow. But deep within is the assumption that the underlying models we build today will hold true tomorrow. An electron will always be an electron.
Now let's look at biology: a frog today may not be a frog two-hundred years ago. Microbiologists are finding new species that simply didn't exist 50 years ago. But there's a shred of something fundamental there at the physical level: a reaction involving biological building blocks can be deemed to be as true as hundred years from now; whether or not organisms develop more stable sets of chemical reactions.
Psychology and social sciences are changing because people are changing and their environment is changing. Pretty much the only thing that remains constant is that people have fundamental needs. As people become aware of cognitive biases, and more are exploited by them, suppressing them becomes not just an issue of utility but of survival.
Yet somehow, we expect economics, which in many ways is the study of a very dynamic system which builds on social sciences where the underlying rules are changing and the very reductionist terms we are using are changing, to yield results which are accurate and work at all times. Can we build better macroeconomic models? Almost certainly. Will they be valid in 100 years time? That depends.
If we think to Physics, Thermodynamics gives a field that seems to be universally true -- if you come up with a model that violates the second law of Thermodynamics, it's fair to say your model is wrong. It doesn't matter if you're studying distant stars or subatomic particles. At the same time its predictions are somewhat vague -- we can derive upper and lower bounds on things, and say with an almost certain degree of belief what cannot happen and use this to derive models that are consistent.
We don't seem to have much like that for economics, although if we focus on resources we can clearly see there is a physical upper bound. That seems like it might be a better direction to approach the problem in than from the end were even the idea that employers employ people to create more value than the money they pay them cannot be taken to be universally true.
Of course, nobody has any incentive for denying most Physics, with the exception of the 2nd law of thermodynamics -- because there is immense money to be made by charlatans promising infinite energy in exchange for lots and lots of money. Given economics deals with matters that can have direct implications for those with lots of money, we would be naive to not assume the same to have happened there.
Mainstream macroeconomic theory -- both in its "freshwater" and "saltwater" traditions -- has become mainstream because of a variety of reasons. The OP quotes Keynes:
"That it reached conclusions quite different from what the ordinary uninstructed person would expect added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority."[a]
That rings true: New macroeconomic theories can become mainstream only if they earn the support (for example, by favoring the vested interests) of educational institutions, governmental institutions, and -- last but not least -- the business establishment.
That's the vibe of the article, but of course it's nonsense.
Economists' objective is to collect observations and use that to build predictive theories. Therefore in intent (and largely in method, depending on the area of economy) they are exactly like scientists. Whether they are successful at it or not is another question.
In practice economists guess a lot, as do priests and research scientists, and many other people. (Clarification: I use here "research scientists" to distinguish them from people who have been trained as scientists but in their day-to-day don't really occupy themselves with questions with unknown answers. Of course, those people don't guess at all. They are usually either teacher/professors or engineers.)
Sure, everyone makes guesses. The question is, are they held accountable for their guesses? Is there an epistemological framework mandating an empirical basis for the guesses, and which brings the guesses into closer alignment with reality over time? I don't see any evidence that economics has a robust framework of that sort.
The point about them being priests is that economists are subjected to incentives to reach specific incorrect conclusions which physicists are not.
One example is the notion that raising the minimum wage does not cause unemployment - there is a massive amount of pressure put on economists to reach the opposite conclusion because raising it hits profit margins in a big way. Krueger talked about the way economists reacted to his paper - many acted as if they had been betrayed.
Similar stuff happens in physics over pet theories but there is no overarching imperative driven by access to prestigious jobs, money, publications, etc.
> Neoclassical economics still has no plausible answer for the Anything Goes theorem:
What should it be answering? You linked to a theorem, not a question. And even if it were a question that a certain theory doesn't have an answer to, that's perfectly normal. Theories come with their domains of applicability. Go outside that and they "don't have an answer". For a comparison to physics, that would be like saying "centuries after the findings were published, Newton's theory still can't explain the speed of light being the same in every reference frame, I find it hard to conclude this is the method of an established science."
> I find it hard to conclude this would be the method of a established science.
What are you referring to when you say "this"? The thing you linked to is a theorem, not a method.
I think you might be assuming from me knowledge and context that I don't have.
You said that in intent and methodology they are like scientists. My point was that the use of random assignment and the experimental method makes them completely different from scientists. Experimentation using random assignment is a different beast than collection of extant or real world data. You may disagree but if you do I think you should read a bit more about the importance of these methodologies.
The academic side of economics pushes towards norms like Math and Physics (that's what gets you prestige). AKA you come up with something like the Black-Scholes model and you've got yourself a Nobel Prize [1].
Which is cool, but skips over the aspects of economics related to unpredictable bags of meat buying things that are more like psychology/sociology and other "soft" sciences [2]
On that note: one thing I didn't see mentioned in the article or the discussion here was prediction markets. Prediction markets are interesting as its a meeting point of the two sides. "Think your model is better? put $50 in and we'll see in a month". I really wish they were more widely used/officially accepted, but the stigma of "betting" has pretty well killed them.
a brief overview: https://www.thenation.com/article/the-rock-star-appeal-of-mo...
A not so brief overview: http://neweconomicperspectives.org/2011/06/modern-money-theo...