My friend Unlearning Economics has a series of seven posts that pour cold water over the economics profession’s ridiculous defences of their demonstrated incompetence surrounding the financial crisis.
For those who haven’t read them, here’s the seven arguments linked to their respective posts.
- But we did a great job during the boom
- The Efficient Markets Hypothesis (EMH) claims that crises are unpredictable, so the fact that economists didn’t predict the crisis is not a problem for economics at all
- Economists aren’t oracles. Just as seismologists don’t predict earthquakes and meteorologists don’t predict the weather, we can’t be expected to predict recessions
- Mainstream economics cannot be blamed for politicians inflating housing bubbles/pursuing austerity/deregulating the financial sector; our models generally go against this. Clearly, we do not have that much influence over policy
- We got this one wrong, sure, but we’ve made (or are making) progress in macroeconomics, so there’s no need for a fundamental rethink
- Sure, modern macroeconomics is pretty weak. But most economists don’t even work on macro, so they are unaffected
- Economists had the tools in place, but we overspecialised and systemic problems caught us off guard
He argues in a senile ‘grandpa’ style - a label used by Matt Bruenig to describe his opponents illogical ramblings over inequality in the ‘Grandpa Sumner debates’. It’s argumentation as you’d expect from uninformed grandpa yelling from his rocking chair and shaking his cane in the air. Maybe I'll call him the 'rocking chair economist' from now on.
The article deserves fisking. Here we go.
As recently as a few months ago, doctors were held in high esteem and educated people believed that medicine could be useful. All that changed, of course, with the medical profession’s stunning failure to prevent or even predict the breakout of ebola in West Africa. Worse yet, many doctors to this very day cling to their old ways of thinking, writing prescriptions, setting broken bones, and performing surgery in bull-headed defiance of the urgent need to jettison everything we know about medical practice and start over from scratch.
Nobody, of course, writes such nonsense about medicine. Why, then, do so many write equivalent nonsense about economics?This is nonsense attempting to be humour. Maybe Landsburg is unaware of epidemiology, which is entirely devoted to the spread of disease in the population. Governments have guidelines, programs and procedures in place for epidemics, and universities even have whole departments dedicated to this research.
Did economists have a standing warning about economic crises? Or standing plans and programs in place? Did they develop guidelines on how to react and monitor certain types of financial crisis? Did the lobby for ‘economic vaccinations’?
This is a poor attempt at defences 2 and 3.
Most economists failed to predict the 2008 financial crisis and ensuing recession for pretty much the same reason most doctors failed to predict the 2014 ebola epidemic — their attention was, quite reasonably, directed elsewhere. It’s easy to say in hindsight that if economists had paid more attention to the shadow banking system, they’d have seen what was coming. But attention is finite, and if economists had paid more attention to the shadow banking system, they’d have paid less attention to something else.More nonsense. It is not that economists didn’t predict this particular crisis, but they didn’t even predict the possibility of the crisis. This is completely unlike in medicine, or seismology or any other study of complex systems. Seismologists do predict the chance of earthquakes, and epidemiologists do predict the likely structure of epidemics and study how to contain them.
For a little perspective, have a look at this chart showing U.S.~per capita income in fixed (2005) dollars:
That little downward blip you see near the top is the recent crisis. The somewhat bigger downward blip in the 1930s is the Great Depression. The moral is that in the overall scheme of things, recessions don’t matter very much. At the trough of the Great Depression, people lived at a level of material comfort that would have seemed unimaginably luxurious to their grandparents. Today, while Paul Krugman continues to lament “the mess we’re in”, Americans at every income level live far better than Americans of, say, 1980. If you doubt that, you surely don’t remember what life was like in 1980. Here’s how to fix that: Pick a movie from 1980 — pretty much any movie will do — and count the “insurmountable” problems that the protagonist could have solved in an instant with the technology of 2014. Or reread any of the old posts on this page.This is an attempt at defence 1: We did great job during the boom. But I still have some bones to pick. First, stating that living standards are higher now that some arbitrary time in the past could have been made at any point in history, regardless of the state of economic knowledge. This is not a defence of economic understanding.
If you care about human well-being, recession-fighting is small potatoes. It’s that long-term upward trend that matters. And economists, fortunately, understand a lot about what it takes to nourish that trend — things like well-enforced property rights, the rule of law, free trade, sound money, limited regulation and low marginal tax rates. Even more fortunately, economists have managed, however imperfectly and with fits and starts, to impress that understanding on the minds of policymakers. As a result (and going back, at least, to the repeal of the Corn Laws), we’ve had better policies and greater prosperity.
Moreover, saying recessions don’t matter much is like the medical profession saying that cancer doesn’t matter much. After all, every dies, we should be grateful that we are living longer than ever. Aren’t we glad doctors were out there studying other things while taking credit for the fact that people are born at all?
Importantly, Landsburg seems to think that economists can take credit for the development of human society for the last 230 years or so. That’s sheer nonsense.
Even the specific policies that economists believe ‘nourish’ the long run growth trend - well-enforced property rights, the rule of law, free trade, sound money, limited regulation and low marginal tax rates - are pretty debatable, and often wrong.
Is Landsburg suggesting that China would have even more rapid growth if it followed his prescriptions? Or is he just reciting the biblical passages from the mainstream bible.
To throw out all that hard-won knowledge because we failed to prevent a financial crisis would be like closing all the hospitals because doctors failed to prevent an epidemic.No it wouldn’t. See above.
Moreover, it’s entirely possible that some of the best policies for fighting recessions are inimical to long-term growth. It could easily follow that even if you knew exactly how to fight recessions, you might prefer not to.Sure. It could be possible. But no one knows this. It is just like saying we could send people to Mars, but then aliens might invade us, so if that’s the case we wouldn’t want to go to Mars. It’s internally logical, but externally pretty stupid.
It’s a very good thing that some economists are trying to understand recessions, and a very good thing that they’re accounting for the lessons of the past few years. It’s also a very good thing that most economists are working in the myriad of other areas where we’re capable of doing good. Another very good thing is historical perspective. The current so-called “mess” that economists have (partly) gotten us into is not just the most prosperous era in human history; it is prosperous beyond the wildest imaginings of your parents’ generation. And yes, economists helped get us here.I would respond by asking, do economists know more about recessions today than they did a century ago? Not really would be my answer.
Again, he suggest economists should take some credit for the boom, as if they made it happen.
Put your cane down Landsburg and take your medicine.