The Failings of Economic Theory

Paul Krugman has given an address entitled "The Profession and the Crisis" which excoriates economists for failing to understand the 2008 crisis. Here is one bit from that lecture:

But what became clear in the policy debate after the 2008 crisis was that many economists — including many macroeconomists — don’t know the simplest multiplier analysis. They literally know nothing about models in which aggregate demand can be determined by more than the quantity of money. I’m not saying that they have looked into such models and rejected them; they are unaware that it's even possible to tell a logically consistent Keynesian story. We’ve entered a Dark Age of macroeconomics, in which much of the profession has lost its former knowledge, just as barbarian Europe had lost the knowledge of the Greeks and Romans.

As long as monetary policy could bear the burden of macroeconomic stabilization, this didn’t seem to matter too much: even as equilibrium business cycle theory became increasingly dominant in graduate study, central banks, like medieval monasteries, kept the old learning alive. But once we were hit with such a severe banking and balance sheet crisis that monetary policy hit the zero lower bound, it was crucial that the economics profession be able to weigh in knowledgeably and coherently on other possible actions. And it turned out that it couldn’t.

You often hear people saying that the crisis has revealed the need for new economic thinking, for new ideas about macroeconomics. Yet the first priority seems to be to resuscitate old ideas. Brad DeLong describes an interview of Larry Summers by Martin Wolf as follows: “Asked to name where to turn to understand what was going on in 2008, Summers cited three dead men, a book written 33 years ago, and another written the century before last.” And in my view, Summers basically got it right.

How did all this knowledge get lost? Well, being the age I am, I was able to watch the transformation of macroeconomics in real time, and I’d say that what happened was a runaway social process.

First, success in academic economics came from publishing “hard” papers — meaning papers that used rigorous and preferably difficult mathematics. This in itself biased publication toward equilibrium business cycle models, as opposed to the ad hoc modeling typical of what I consider useful macroeconomics. Graduate education, in turn, became increasingly focused on the kind of work that could get published and lead to tenure. Successive cohorts of students were trained only in the newly rigorous version of macro, which had lost touch with the field's previous intellectual achievements.

And as these cohorts became professors in their turn, they closed off both publication and promotion to anyone who questioned the dominant academic approach. Robert Lucas wrote more than 30 years ago — approvingly! — about how participants in seminars would “whisper and giggle” when someone presented a Keynesian analysis. No wonder that any non-equilibrium ideas dropped out of the curriculum and the conversation.

All of this would have been OK if the triumph of anti-Keynesianism was justified by superior empirical success. But it wasn’t. As I read the history of the equilibrium approach, it's a story of failing upward. Lucas-type models clearly failed to account for the duration of slumps; rather than reconsider flexible prices and rational expectations, Lucas's followers moved on to real business cycles (RBC). RBC models failed to generate any strikingly successful predictions, and in fact lost whatever plausibility they had once productivity started becoming pro-cyclical rather than counter-cyclical. But by that time the people doing these models didn’t know that there was any alternative.

And the result was that faced with a severe economic crisis, the profession spoke with a cacophony of voices. Or maybe a better way to put it is that the policy debate of 2009–2010 was virtually indistinguishable from the policy debate of 1931–1932. Long-refuted doctrines that should have been consigned to the dustbin of history were stated as if they were fresh new ideas — and they were fresh and new to many economists, because our profession had lost so much of its heritage.

In short, in responding to the crisis, the profession presented a sorry spectacle of unnecessary ignorance that didn’t even recognize itself as ignorance, of bitter debate over issues that were resolved many decades earlier. And all of this, of course, made the profession mostly useless at a time when it could and should have been of great service. Put it this way: we would have responded better to this crisis if macroeconomics had been frozen at the level of knowledge it had in 1948, when Paul Samuelson published the first edition of his famous textbook. And the result has been to leave actual policy discussion without any discipline from the people who should be shaping that discussion: politicians and officials have been free to follow their prejudices and intuitions, never mind the lessons of history and analysis. Economists have failed to fulfill their social function.

The failure of economics is much more than a professional failure. It has demonstrated that the system of economics education, promotion and jobs, the publishing of papers, etc. has failed utterly. It has allowed smart people to convince themselves that they could ignore reality and focus on their "pretty models". Worse, it allowed them to actively purge dissidents and close up the professional shop. Sadly, this is exactly what climate scientists are doing with their models and the doling out of IPCC favoured funding. Like Keynes said of economics (in the long run we are all dead) can be said of science (it is a self-correcting search for truth, but in the short run it can be drastically wrong and the "long run" in which truth is finally achieved may effectively be so far in the future as to be non-existent, i.e. "science" can become a cult and not truly science at all).

Paul Krugman on Global Warming

I like Paul Krugman. I read most of what he writes and find him to be very bright and I generally agree with him. But I part company with him when he puts his "climatologist" cap on and pontificates as he has in his latest NY Times op-ed column:

The second part of Mr. Perry’s statement is, as it happens, just false: the scientific consensus about man-made global warming — which includes 97 percent to 98 percent of researchers in the field, according to the National Academy of Sciences — is getting stronger, not weaker, as the evidence for climate change just keeps mounting.

In fact, if you follow climate science at all you know that the main development over the past few years has been growing concern that projections of future climate are underestimating the likely amount of warming. Warnings that we may face civilization-threatening temperature change by the end of the century, once considered outlandish, are now coming out of mainstream research groups.

But never mind that, Mr. Perry suggests; those scientists are just in it for the money, “manipulating data” to create a fake threat. In his book “Fed Up,” he dismissed climate science as a “contrived phony mess that is falling apart.”

Krugman and I agree on holding Rick Perry in low esteem for his anti-science views. But I disagree with Krugman over global warming.

Take a look at this 130 year record of temperature anomaly data from NASA (note: "anomaly" means deviation from the average over the 130 year baseline):

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I don't see any "trend" and certainly no "runaway global warming" in the above graph.

OK... I cheated a bit. That is the continental US data. I trust that more than the global datasets because the network of stations in the US is thicker and is more likely to be monitored and calibrated better than measurements around the world. Also, the "world" is 3/4 ocean and there really are no stations gathering data there (sure some buoys and radiosondes that are occasionally dropped) like the coverage of the US. Here is the NASA global anomaly data:

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I prefer the following satellite temperature observations which uses the same sensor over the whole face of the earth. The only problem with satellites is calibrating the sensor and degradation of the sensor over time. But I trust the satellite more than I trust all the stations in the above "world" datasets (especially the “missing” stations covering 3/4 of the face of the earth, i.e. the oceans which aren't measured but "extrapolated" and sometimes for hundreds and even a thousand miles)

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To my eye, the above shows no discernible temperature "trend". Sure you can fit a line through the data and get a slight rise over time, but the signal is lost in the noise. I wouldn't trust that "trend".

The satellite is the most reliable, objective, global measure of "warming" and it doesn't support the purple prose of Paul Krugman:

we may face civilization-threatening temperature change by the end of the century

Neither Krugman nor I are climatologists. When Krugman cites 97% of "researchers in the field" believe in "global warming", I say so what? If you had canvased physicists in 1905 for a "belief" in warped space and time dilation you would have found 99.9% rejected the theory as preposterous. But Einstein's theory is true and is used every day in GPS systems and in the appropriate physics calculations. Science isn't a democracy where you vote on your favourite theory to establish its truth. It is consensus. But not a voting consensus. It is a hard fought consensus arrived at over time by experiment and working with the theory. Global warming isn't anywhere near that kind of "established" science right now.

I believe Paul Krugman is wrong and time will prove it. In the interim, I continue to admire him and agree with most things he says. I simply ignore his pontificating on "climate change". We both agree 100% that climate is changing and has always been changing. Where we disagree is over "anthropocentric global warming". I will admit that CO2 and other green house gases are increasing temperatures but I think he has the basic science corrupted by a reliance on computer modeling. I think the models are misleading. I think the science is incomplete:

• I believe that studies of cloud formation such as Svensmark's theory of sun-cosmic ray-cloud interaction will change "received" opinion


• I believe that Roy Spencer's cloud feedback mechanism will change "received" opinion


• I believe that Richard Lindzen's critique of climate models will change "received" opinion

I'm not a climatologist. I may be completely wrong. But I do read and I don't see the "consensus" that Al Gore, the IPCC, and Paul Krugman claim has "settled the science". I do see ambiguous data. I do see ideas struggling for a hearing. And I'm aware of how the funding agencies are creating a "false consensus" by putting money out there for "global warming" research. For years I've watched senior scientists who are beyond the tyranny of the funding agencies struggle with theories outside the "mainstream" of global warming. They struggle for a hearing. Since science isn't a beauty contest, I believe that eventually these voices will be heard and the simple "greenhouse gas" story will end up extensively revised by a much more sophisticated understanding of climatology.

Oh... and I heartily agree with Krugman's complaint about the anti-intellectualism and anti-science of the Republican party:

Now, we don’t know who will win next year’s presidential election. But the odds are that one of these years the world’s greatest nation will find itself ruled by a party that is aggressively anti-science, indeed anti-knowledge. And, in a time of severe challenges — environmental, economic, and more — that’s a terrifying prospect.

Tim Harford's "Adapt: Why Success Always Starts with Failure"

This is an excellent survey of adaptation as a strategy to deal with complex environments in which a top-down rational planning simply can't find solutions. There are many excellent stories, but this one bit speaks to me, a 1960s generation person:

When the US Army faced the 'disruptive innovation' of guerrilla warfare in Vietnam, there was great reluctance to accept that it had changed the nature of the game, making obsolete the Army's hard-won expertise in industrial warfare. As one senior officer said, "I'll be damned if I permit the United States army, its institutions, its doctrine, and its traditions to be destroyed just to win this lousy war."

That ranks up there with the infamous statement by a US Major "It became necessary to destroy the town to save it." as reported by Peter Arnett.

This book is richly illustrated with examples of how an evolutionary strategy can find a solution where managerial dictum or top-down planning fails miserably. Some of the best examples are from business.

He does a very good job of reviewing:

• The disaster of the US invasion of Iraq and how a bottom-up effort by rebellious colonels and captains finally changed the US military tactics off their dangerous track and toward a more successful approach.


• The regulatory failures and coupled risks that led a meltdown in a constrained "sub-prime real estate" market to the globe straddling collapse of financial markets in 2008. He walks the reader through the failure to listen to whistle-blowers and the reluctance to effectively change the banking rules to prevent another catastrophe.


• The mindless simplifications of a greenhouse gas enthusiast compared to the known complexities of trying to identify a proper "green strategy". He walks through a day's choices of "green alternatives" and shows why each and every one was wrong because the underlying reality is far more complex than the simplistic green enthusiast ever could imagine.


• He examines nuclear safety and shows how the various catastrophes were waiting to happen because the systems are designed with too much complexity and coupled failure modes.


• He looks at two big oil rig diasters, the Piper Alpha in July 1988, and the Deepwater Horizon in April 2010. He walks through the failure in design and safety systems. He shows why these were accidents waiting to happen.

I like his discussion of Philip Tetlock who did a scientific study of the ability of pundits, gurus, and consultants to provide accurate predictions of the future. In a previous post I reviewed Dan Gardiner's book "Future Babble" that explores this topic more deeply.

I worked in a company where they paid lip service to the idea that "there is no failure, just a learning opportunity" and that projects, especially in the R&D lab, should expect a high failure rate. But in reality, failures were punished, so creativity was suppressed and lessons really weren't learned. Tim Harford gives a glowing review of Google as a learning environment with adaptive engineering practices, but I'm cynical. It is hard for managers to accept failure. Corporations are always going to get atherosclerosis. The big old successful corporations are always going to fall to the young, rising whippersnappers.

I also worked closely with QA (Quality Assurance) people and watched them play their role. In theory they were the frontline defence against obfuscation and deception on the part of managers and teams that are failing but want to pretend that things are going teckety-boo. The org chart showed them reporting independently right up to the CEO to ensure independent and timely information about project problems. But in reality project managers had a "right" to demand issues first be heard by them and they could muscle most QA auditors into silence. Similarly, I was involved in a ISO 9000 initiative within the company and quickly discovered that most of our "learning organization" capabilities, such as our extensive audited written procedures, were in fact window-dressing. In short: it is hard to build and maintain a truly adaptive organization that uses evolutionary strategies for problem-solving. Humans don't like uncertainty and they love hierarchical organizations. I like the message in Tim Harford's book, but I'm sure it will get more lip service than real implementation.

There is much wisdom in the book, much to learn, I strongly recommend it to everyone. It will open your eyes to the complexity that is out there. It will stun you to realize how badly our engineered "safety systems" have failed. And it will give you an appreciation for a need for more experimentation and a healthy acceptance of failure as the technique for learning.

McDonald's Shows Its "Values"

Sadly. McDonald's is more concerned about repressing facts and maintaining a synthetic "image" than in letting truth be told. They fired an employee for releasing a video of a savage beating in a McDonald's restaurant. Obviously McDonald's policy is: pretend that their restaurants are a haven from the real world with McFood as a synthetic substitute for reality.

Here is a bit from an article by Maureen Dowd in the NY Times. I've bolded the key bit:

April is the cruelest month for Chrissy Lee Polis.

The 22-year-old stopped by the Rosedale, Md., McDonald’s, just east of Baltimore, last week.

Two patrons, an 18-year-old woman named Teonna Monae Brown and a 14-year-old girl, seemed to come out of nowhere and began ferally assaulting Polis.

The savage pair may have been disturbed at the prospect that Polis was transgender. “They said, ‘That’s a dude. That’s a dude. And she’s in the female bathroom,’ ” Polis told The Baltimore Sun.

The attackers spit on her, threw her on the floor, kicked her in the face and back, punched her in the nose, ripped her earrings out of her earlobes, dragged her by her hair across the restaurant and only stopped when she began to have an epileptic seizure and an older woman in a white track suit intervened.

A McDonald’s employee, who captured it all on his cellphone, was fired after his video went viral on YouTube.

Baltimore is the scene of multiple crimes:

• Sexual bigots savagely attack a transgendered woman because they didn't personally approve of this "lifestyle". (I'm waiting for people with perms and hair colouring to be beaten to a pulp by the Puritans who think this kind of cosmetic alteration insults God. In the good old days this got you into the stocks and I'm sure some are ready to put the offenders on faggots and set them afire so that the smoke of the offering can loft up to the heavens and please a most jealous God.)


• The good people of Baltimore who "witnessed" the assault acted more like Romans at the Coliseum watching a gladiatorial fight or Christians being fed to the lions. I'm surprised that the news report didn't identify whether the onlookers offered a thumbs up or thumbs down for the vicious beating.


• McDonald's management tops the list of infamy by deciding that fiction is more real at McDonalds that truth. If you dare show something inside their restaurant that undermines the corporate "image" you get fired. Truth be damned. It is the burnished image that counts.

I find this bit comical:

The suspects have been charged with assault and the Baltimore County state’s attorney office is determining whether it classifies as a hate crime.

I wonder what qualifies as a "hate" crime in this county if this beating doesn't. I can only guess that Baltimore county officials are "hard at work" trying to figure out what "policy position" they should take. On the one hand you have bigots beating somebody to a bloody pulp. But on the other hand, I guess there are just so many transgendered beatings in this county that it is hard to decide if this one is "special" and should be treated as a hate crime, or is just one of any number of run-of-the-mill beat the gays, beat the transgendered, beat the mentally retarded, beat the blacks, beat the foreigner, beat the homeless crimes that go on in that blighted part of the world. It must be tough to pick out "hate" crimes when you have so many to choose from. Right?

The good news from Maryland is that this story helps announce "open season" on beatings:

A week before the attack, Maryland’s Senate shelved a measure extending anti-discrimination protections to people who openly change their gender identity even though, as The Sun editorialized, “It would have sent a powerful signal that transgender people are not fair game for bigots.”

Wonderful. The legislators in Maryland have decided that it is discrimination if you beat up the handicapped and mentally retarded or the homeless, but it isn't a crime if you beat up the transgendered. I guess that since Michael Vick is out of the dog fighting business, maybe the more "progressive" elements of the Baltimore business community figure they can attract tourists to watch the transgendered beatings. Maybe move these from McDonald's to a bigger arena, sell tickets, and put Baltimore on the map as a tourist "destination" for non-hate crime beatings. I can see that the legislators are going to be busy trying to figure out that since transgendered beatings don't qualify as a "hate" crime, what else can they add to the mix to make for a more exciting offering to attract tourists. Maybe beatings for midgets or fly in Finns from Europe that can be put into a ring and beaten to a pulp to excite the tourists. The possibilities are endless!

Making the World Safe for Conformity and Blind Obedience

I sometimes get into debates with those who argue for school uniforms. I understand the benefit of eliminating peer pressure, and how clothes are used establish social status, and I understand the tyranny of money and class, but I enjoy freedom more. I don't buy the idea that we all need to be look-alikes to get along. I enjoy individuality. I enjoy quirky people and I enjoy conformists. I just don't want anybody mandating that I must be quirky or conformist. Let those who want to create a "club" or social group wear identical uniforms to give themselves a smug feeling of "belonging". But let those who want to stick out in a crowd, do their thing as well.

Here's an example of the mad power of bureaucrats. This is a post by Cory Doctorow on the BoingBoing blog:

English school principal announces zero tolerance for mismatched socks

The City of Ely Community College in Cambridgeshire, England has decided to restore discipline to its student body by nonsensically conflating genuinely disruptive behavior (talking in class) with mere individualism (wearing mismatched socks or brightly colored hair-bobbles). School principal Catherine Jenkinson-Dix is hell bent on producing a generation of young Britons who can't tell the difference between cooperating with your peers and blind conformity -- just what the future needs (assuming that the future won't require any original thought).
Nonetheless, some shocked parents are attacking the new rules and accusing Ms. Jenkinson-Dix of turning the school into a "prison."

"I'm absolutely appalled. They are wrecking pupils' education and turning it into a prison," Amanda King, 34, who pulled her 12-year-old son Ben and daughter Shannon, 14, out of classes, told the Cambridge News.

"Staff are nit-picking for everything -for behaviour, for what they wear. Apparently they are not allowed to wear any accessories or even coats in school now."

Another mother, who asked not to be named, said, "Yes, children should be taught to respect their teachers but to punish them for wearing bright hair bobbles or having their mobile phones is petty. I'm not happy about the new rules at all."

U.K. school cracks down on bad manners.

Conformity & Authority

Everybody knows the eerie feeling when we are on the street and suddenly people around us look up as if they see something. We feel compelled to follow their gaze and "look up" as well. If they act as if they see something we will struggle mightily to try as see "it" as well. We feel certain that there must be something there that has caught their attention.

There is a classic psychology experiment that builds on this. Here's a video of Asch's conformity experiment with some analysis of why people feel compelled to bend to group pressure:



This "conformity" was tested further by Stanley Milgram in an obedience to authority experiment. This was his attempt to understand how Germans so easily gave into the murderous Nazi regime in Germany:



A variant of conformity was the infamous Philip Zimbardo prison study experiment at Stanford: