Economics, Economists and What's Hard?

In a recent paper by one of the staff of the Richmond FED, one Kartik Athreya, the author states:

For my part, seventeen years after my first PhD coursework, I still feel ill at ease with my grasp of many issues, and I am fairly confident that this is not just a question of limited intellect....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.

I find this amazing! Dynamic Considerations and Feedback! How about uncertainty, after all Keynes wrote a whole book on that part, he struggled with what he meant by it...and he may not have reached a good conclusion.

Let me offer some comments:

1. Macroeconomics in a Keynesian sense is a top down analysis. It was forced to be that way since the tools to do otherwise were not available. It is akin to dimensional analysis in hydrodynamics and fluid flow. It is not a science as much a way to collect, coordinate, and correlate data. The underlying "physical processes" are either not understood or not even conceived of.

2. Having an economist take the mantle of dynamic systems and control, as if they never heard of WW II and fire control systems, the very beginning of feedback, and Norbert Wiener! Amazing, in fact I have found macro-economists falling into two camps; (i) the one which has discovered the theory and then are want to be mathematicians and spend all their time flipping equations with total gross neglect of what the reality is that their equations are to reflect, and (ii) those who have no clue of the complexity of their equations and just move forward in elegant bliss.

3. Consider the concept of inflation, it is in may ways an amalgam of monetary structure and human expectations. The Government can print tons of money but if people have no trust in the Government it may never get spent and thus never result in inflation. Perhaps that is what we are seeing now. That strange phenomenon of human interaction has been poorly modeled, and perhaps will always be such, that people and their actions often control what will happen. Perhaps also that is why Krugman is so much of an Asimov fan, the Foundation novels, where a small set of academic types can foresee all of society and act to control its evolution. In reality what is found is that whatever the ruling class does there is always another class which seeks to undo it! That is the game of civilization.

4. The sign of an effective methodology is its ability to predict future events or happenings, like the structural stability of a bridge, and a methodology upon which such a predictability can be agreed upon, like Newton's laws and the laws of statics, dynamics, and the strength of materials. Namely, we can have civil engineers gather about a table and generally reach a consensus. They can take Professional Engineer exams and agree on the answers. Now note what the author states as the basic qualification in order to opine, PhD coursework in a decent economics department (and passed their PhD qualifying exams, and I would argue that one such department differs dramatically in fundamentals from another, it is not the quality of teaching as much as the belief in fundamentals. Such a situation opens the discussion open to anyone with a brain, not someone who has "passed ...qualifying exams"). In fact my quals at MIT were a shocker. I had already written my first book, started my first company, written a dozen papers, and had been teaching at MIT as a junior faculty member, and had all the equations and theories down pat. Bob Gallager then asked to to tell them how a phased locked loop worked and do not use a single equation! I was terrified but it changed my life, I realized that until I could do such a feat I truly understood nothing, and I was was working on something and did not reach that point of understanding it was not understood. Thus to this young man, you have not yet reached that point.

5. Now consider one of my favorite areas, that of externalities. By definition I would argue it is a personal or political decision and there can never be truly a theory to deal with it. Coase proposes a solution based upon the somewhat well founded belief that the Government will distort any decision reached between parties. Pigou will make a decision which assumes the Government is the ultimate arbiter and is a benevolent one. He further assumes the collection of a tax has a positive effect. One can and does argue that taxes take funding from the creation of new jobs, especially if one is an entrepreneur. Thus all of the discussions around these areas are ad hoc propiter hoc arguments, the classic be the Baumol Willing theorem in telecommunications. They are all theories manipulated to prove a belief! That is one of the major faults of the macro-economists,

The author continues:

The question is: can they provide you, the reader, with an internally consistent analysis of a dynamic system subject to random shocks populated by thoughtful actors whose collective actions must be rendered feasible? For many questions, I and my colleagues can, and for those that the profession cannot, the blogging crowd probably can’t either. You might say, “you’re telling us to leave everything to the experts, so why should I believe you are adequately policed?” This is a fair question, but as someone who has worked for a decade to publish in leading academic journals (with some, but hardly overwhelming, success), I now have the referee reports to prove that I live in a world where people are not falling over themselves to believe my assertions.

All too frequently we are dealing with Government and governing. That means the people do have an input. You the brilliant macro-economist may have your position but the people may want something else. Guess what happens, it is like one of those science fiction moves, things just do not turn out the way we always want them to.

However I really did find this posting a bit arrogant. Perhaps people with experience making things happen, creating jobs, analyzing and building complex dynamic feedback control systems, may bring some insight to the world of the macro economist...then again perhaps they will never listen!

Having come back after after a day of work, I read Scott Sumner's blog regarding the aforementioned paper and I agree with some if not most of his points. I do however strongly disagree with his statement:

I don’t recall ever reading a ... post that I didn’t feel knowledgeable enough to write. On the other hand I’ve read lots of ... posts that I didn’t feel clever enough to write. That’s an important distinction. ... is a great economist in the “scientific” tradition, and he’s a great blogger—but for completely different reasons.

He is referring to the eminent Harvard economist whose positions on the Pigou's tax and recent position on the soda tax I take significant umbrage towards. As I responded to the soda tax with my recent White Paper on Obesity and Type 2 Diabetes, there are times when an economist steps beyond their knowledge base. It is not that they could extend themselves, they may be just too lazy to do so since the position they posit may be too much of their liking that the facts may just get in the way. You see what I did was based upon some forty years of experience went back to the literature and created a compelling argument that the Professor was wrong, reducing carbs, reducing weight, will have a positive effect in reducing demand. The Professor did what we call on Cape Cod, "shingling the roof in the fog.." where there is a point when you find there is not roof under you.

You see the problem is not just knowing the catechism of macroeconomics, but having the knowledge that is applicable to doing something that is repeatable and works. The problem with macroeconomics is much more sever than what its practitioners would ever admit, it lacks stringing rules of verifiability. Imagine if medicine were practiced that way, malpractice insurance rates would be multiples of the GDP.

I believe that this paper will evoke much more comment since it raises the issue of verifiability and projectability. Just because some economist got it right once, is not proof of the method. Just go to the track!

The author from the Richmond FED also continues:

"Why should anyone accept uncritically that Economics, or any field of human endeavor, for that matter, should be easy either to process or contribute to? To some extent, people don’t. Would anyone tolerate the equivalent level of public discussion on cancer research? Most of us readily accept the proposition that Oncology requires training, and rarely give time over to non-medical-professionals’ musings. Do we expect advances in cell-biology to be immediately accessible to anyone with even a college degree? Science journalists routinely cite specific studies that have appeared in specific journals. They generally do not engage in passing their own untrained speculations off as insights. But economic blogging and much journalism largely does not operate this way."

The field of oncology has both clinical and scientific elements. On the clinical side one learns more from experience than research and the more academic approach. On the scientific side one may often find an amalgam of expertise coming together to better understand the problem. One need look no further than the best academic institutions and see systems modelling of the genetic pathways in cancer development and then using that to ascertain therapeutic options. To practice clinical oncology is akin to practicing neurosurgery. There is an outcome or set pf outcomes and you are judged accordingly. The patient lives or dies. The well educated professional who has added to the base of scientific knowledge can continue to expand their knowledge to encompass expanding fields. I remember my fi9rst genetics course with Watson's first edition of The Molecular Biology of the Gene. Still on my shelf along with 45 years more knowledge. I now am intrigued with micro RNA and their control of pathways whereas then their existence was non existent. The point is that the author is quite simplistic in the statement that a vetted academic degree is the sine qua non, for one may have a PhD from a first ranked institution but that does not gurantee anything other than hopefully the ability to follow, get ahead, and expand. Practicing clinical oncology is hard, understanding and contributing to the body of knowledge of clinical oncological pathways using one's expertise in an adjacent area is what researchers do. Thus the author sets up artificial walls when the author should be breaking them down.

Thus if I am asked if the comment in Seeking Alpha that reading this will not make you dumber, then the answer is yes it will if I believe what the author purports to convey. For the Seeking Alpha piece reiterates my thoughts quite well"

"...the real problem we moronic bloggers have with economists is twofold: 1) they prove REPEATEDLY that their models are ill equipped to handle reality, largely because 2) human behavior cannot be modeled like the other inputs can...."

You see an oncologist has a scientific base upon which to build, albeit a bit shaky at times, and they also have outcomes to deal with. The macro types have to deal with humans, not a reliable entity to analyze without difficulty.

Within one day this posting by the FED employee has caused the predicted firestorm. Yglesias goes on and states:

But now to Athreya. His essay seems to partake of the conceit that what economic policymakers do is just economics and that for political pundits to second-guess their decisions would be on a par with me trying to second-guess someone doing particle physics. Completely apart from the fact that the “science” of economics is a good deal less developed than what you see in real sciences, the fact is that economic policy is economics plus politics.

One must strongly agree. Economics is as much politics and public policy as it is some pristine science, if science at all. If I were a particle physicist, and doing that research lead to no harm, then science would be science. But all one must do is look back at the recombinant DNA work of the early 1970s which became a policy debate. The biologists welcomed the public into the debate, they did not wrap themselves in some cloak of defense, and look down upon the people. They were forced to explain what they were doing and why it was important and how they would protect humanity. And this was real science, yet there was some uncertainty, infinitesimal as compared to economics.