I know that some will find this boring, but I think it is very important. I think that John Mauldin describes very well why it is important to understand the many schools of economic thought. He mentions an analogy of a train. I would expound on that a little. It is supremely important to know where the train is headed. Many reading this blog will know about the time President Hinckley had to find a train car that was supposed to be shipped to a city in the south and found it in the upper north. It was just one little move on the switch that sent the train car way off track. The economic policy that our leaders are following right now is in line with Keneysian in theory, though not strictly applied. I suggest reading up on it a little to decide whether or not you agree with that philosophy as it pertains to our current economic struggles.
From John Mauldin:
"Among the economists and writers I regularly read, there are some who, if they agree with me, I go back and check my assumptions - I must have been wrong. Paul Krugman is one of those thinkers. I admit to his brilliance, but his left-leaning philosophy does not particularly square with mine, and I find that most of the time I disagree.
"That being said, I strongly encourage you to read his essay in the New York Times Magazine, which comes out this weekend. It is worth the high price of the Times to read it, if you can't get it online. It is a very hard critique and analysis of the failure of current macro and financial economic thought, which didn't even come close to predicting the current financial malaise. Indeed, as he points out, most schools of thought said the state we are in could not happen. You can read at the essay if you are a member, or register for free if you are not. http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=1.
"Krugman writes, as I have in repeated columns, that we have taught two generations of economists and financial practitioners faulty theories. Even now, believers in the Efficient Market Hypothesis and CAPM hold to their beliefs in the face of clearly contrary evidence. It is a very thought-provoking piece and worthy of a long weekend read. He names specific names and pulls no punches. This is as close to starting a barroom brawl as you get in economic circles.
"He calls for a return to and fresh analysis of Keynesianism. Sigh. I would go further. A plague on all their houses. Whether Keynes or Friedman (monetarism) or von Mises (the Austrian school of economics) or the rather new school of behavioral economics, they all have deficiencies and (sometimes gaping) holes in their logic. At the same time, they all contribute to our general understanding of the world, and there are benefits to studying them.
"Let me risk an analogy. It is like reading about some religious scheme for interpreting the world and then becoming a true believer, arguing for that point of view as received wisdom - it's your belief system. Five Nobel laureates say this and seven say that. My guru is smarter than your guru. Look at how the math proves this point. And so on...
"Krugman concludes: "So here's what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit - and this will be very hard for the people who giggled and whispered over Keynes - that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they'll have to do their best to incorporate the realities of finance into macroeconomics.
"'Many economists will find these changes deeply disturbing. It will be a long time, if ever, before the new, more realistic approaches to finance and macroeconomics offer the same kind of clarity, completeness and sheer beauty that characterizes the full neoclassical approach. To some economists that will be a reason to cling to neoclassicism, despite its utter failure to make sense of the greatest economic crisis in three generations. This seems, however, like a good time to recall the words of H. L. Mencken: 'There is always an easy solution to every human problem - neat, plausible and wrong.'"
"I agree we need to examine our assumptions. I am not sure that makes me want to unreservedly embrace Keynes. Keynesians missed as badly as anyone else in this crisis. Yes, the Austrians generally called some of the problem, but their solutions call for 25% unemployment and an unworkable global economy and a serious depression. Not sure that I want to sign up for that, either. And, they totally discount the concept of the velocity of money, which we will look at next week.
"We need a new and better economic understanding, not some semireligious adherence to dogma laid down by men who were in no way familiar with current world conditions. Keynes, von Mises, Fisher, Schumpeter, Minsky, Hayek, Smith, et al. were giants. They absolutely must be read and understood. But a real science builds on the work of the former generations and does not hold onto theories as if they were scripture.
"As much as many economists would like to think so, economics is not a precise science. A global economy cannot yield to hard math in the way that one can model a protein, at least not with any model that has yet been offered. At best, the models let us see through a glass darkly, suggesting the potential for connections between a few variables, while assuming that all others are held constant. It is precisely the illusion that we can model the economy that got us into the current mess.
"(By the way, good friend Paul McCulley has written a very interesting essay on why the Fed has to change their models on inflation targeting - the Taylor Rule is not up to the task - and whether or not to deal with bubbles before the fact, rather than mopping up after they burst. What was assumed has clearly not worked. You can read it at www.pimco.com.)
"I am often asked what school of economic thought I adhere to, and the answer is, none. I would rather try to get it right. And rather than argue for one policy or another (which admittedly I sometimes do), it is more important to figure out what those who actually will effect policy will do, and then make sure we are not in the way of the train they are sending down the tracks. Agree with Krugman or not, he is one of the principal conductors on the train."
3 weeks ago
Posts
3 comments:
Just a short thought. The theories all fall short because they do not take into account whether the groups are focused on evil or good. How could they be, or even measuer that? Yet the "madness" comment inherently admits that there is both wrong and right group behavior in the world. As it becomes wrong, things go wrong, because markets and economies are based upon trust. Without it, there is no economy. Free enterprise assumes adherence to rules for it to work, just as our form of government does.
I agree. If you read through Krugman's article (I have a hard time forcing myself to read through his articles but I did read this one), he talks about how free market thinking without the keneysian theory regarding control just doesn't work. You always end up with bubbles when you leave it to free markets, therefore free markets don't work. Unfortunately that is what the Democrats ran on in the election and the Republicans didn't argue the point which only gave power to the Democrat argument.
My point is similar to yours. You can't write off an entire way of doing business because there will inevitably be a few who don't do the right thing. Currently the government's answer for those who hurt the system is to become so involved they mess up the free market for everyone who did behave themselves and leave it open for others to still manipulate the system. The current problems came about because of the government's over-involvement during the last recession.
It's as if they created a lot of red tape to make it harder for anyone to plug the hole in the dam and then poked some holes themselves under the guise of needing to relieve some of the pressure.
It was a very interesting article. I, for one, think there should be good, hearty debate on policy issues, and that there isn't a single economic school of thought that has all of the answers.
Our problem, though, is that the powers that be don't see it that way. During the campaign, President Obama spoke about a solution to the economic problems. In one speech, he completely discounted naysayers to FDR's New Deal and Keynesian economics by saying, in essence, that the science was settled.
Post a Comment