Pursuit of Truthiness

Studying for the comprehensive exam in economics meant wading through a lot of difficult math that still vastly oversimplifies things. It is enough to make anyone wonder, what is the point of it all? This post is my attempt to explain what the point is.  There are a lot of different ways to carve up what a field is, so I will make a brief attempt at several.

End Goal: Most simply, macroeconomics is the study of how to make national economies work well, meaning how to bring about material conditions that make people in general happier.

Intermediate Goals: high GDP growth (more stuff), low unemployment (people who want jobs can get them), and stable prices (a monetary system that facilitates trade). All else equal, these things tend to make people happier, and they are a lot easier to measure than happiness.

Time Frame: We find it useful to divide the field of macroeconomics into growth (long-run) and business cycles (short run), because we think there is little overlap between the best ways to increase long-run growth and the best ways to prevent or reverse sharp declines (recessions). Denying that difference is sometimes seen as denying macroeconomics.

Conclusions: Keynesians think the best way to end recessions is with fiscal policy (government lowering taxes and/or increasing spending).  Monetarists thought we could prevent recessions and high inflation by stabilizing the growth of the money supply; market monetarists now think we can accomplish these goals by stabilizing the expected growth of nominal GDP.  New Classicals think the government can’t really do anything to end recessions.  One can divide macro into many more schools based on such policy conclusions.

History: Recessions in the modern sense (where we have an industrial economy able to recess) begin happening in the early 1800′s, so people begin trying to explain them.  Some like are JS Mill are “under-consumptionists”, saying the economy gets so productive we have trouble consuming all the production or finding useful work for people to do.  Jevons comes up with a sunspot theory, that every 10 years or so sunspots will change the earth’s weather and reduce the productivity of agriculture. A growing thread focuses on the importance of interest rates and money.  The biggest recession of all hit in 1929, leading to the perception that macroeconomics is its own separate crucial field. Governments and public opinion seem to prefer economists who tell them to do something rather than nothing. I can go on with history for a long time, and I haven’t even discussed the history of growth theory, so that is enough for now.

Tools: Often it is not differing goals or conclusions that seperates people but rather the tools they use. Economics began with Adam Smith who was trained as a moral philosopher and whose main tools were eyes to examine the world and a pen to write verbal arguments. David Ricardo turned the profession toward abstract models, looking at a simplified and formalized world about which we can make stronger and more certain statements than we could about the real world in all its complexity. Alfred Marshall brought in graphs and algebra; Jevons and Walras brought calculus. Paul Samuelson showed that most questions in economics could be posed as constrained optimization problems using Lagrangians.  Later economists used the more complex optimization tools of Hamiltonians, dynamic programming and stochastic calculus. Another thread pioneered by Ken Arrow turned up the formalism another notch by using set theory and real analysis; after the 1950′s it is common to speak of theorems and proofs. At any given time some “institutional” or “historical” school is pushing back against the ever-increasing use of math.  Many fear that excess formalism limits the set of questions we think we can answer or even ask. The last great tools-war on the theoretical side is the debate over the use of Dynamic Stochastic General Equilibrium in the 1970′s and 80′s. It is said that many Keynesians objected because they thought the tool would inevitably lead to certain (small-government) conclusions, then stopped objection once it was shown that the tool could be used to support many different conclusions.

There has been a whole separate evolution of tools on the empirical side.  For one thing the quantity and variety of data and the capacity and power of computers has kept expanding. Alongside this has come the gradual development of modern statistics and econometrics.  The many-equation macro models developed in the 1950′s have mostly been displaced by Vector Autoregressions and calibration.

Analogous fields: We have physics envy. We may have succeeded in emulating string theory. The predominant modern paradigm of DSGE uses a mathematical advance to beautifully and elegantly unify of micro, growth, and business-cycle theory.  It also does a poor job of describing the real world.

Stylized facts: Are there any? See jokes.

Jokes: The three scariest words in the English language are “macroeconomists agree that”.  The difference between microeconomics and macroeconomics is that microeconomists are wrong about specific things, while macroeconomists are wrong about things in general.

1. Icelandic Sagas, especially the Grettis Saga.  I admit I was pretty silly at age 18, but the tales are engaging and show how people can live and prosper in essentially stateless societies.

2. Proust, Recherche des Temps Perdu.  For the account of interior life.  Vastly superior in the original French.

3. Spinoza, Tractatus Theologico-Politicus.  It was after reading this that I realized the great books were becoming my friends.

4. Herbert Spencer, Social Statics.  Ideas don’t always imply what you may think.  Spencer’s premises are so close to those of Darwin and Marx yet his reasoning leads to very different conclusions.

5. Michel Foucault, The Order of Things.  Everyone reads Discipline and Punish but Foucault’s best insights are found here.

6.Douglas Hofstader, Gödel, Escher, Bach.  I would have got more out of this had I finished high school math first.

7. Roger Penrose, The Emperor’s New Mind. Thought-provoking but in the end I was not convinced.

8. Sir Arthur Conan Doyle, The British Campaign in France and Flanders: 1914. All his war journalism is excellent, however in this book above all one gets the sense that Conan Doyle wants to tell the story of a few heroic characters but is unable to do so as they keep dying too quickly. Just as the Great War challenged ideas of what military conflict meant, so too did it challenge conventional ideas of heroism and narrative.

9. Neal Stephenson, Snow Crash.  For the internet, for the microstates, for the Babylonian-Pentecostal mind control, but most of all for reshaping my idea of what protagonists could be named.

Just Kidding!!!

I’ve only even read the last two.  Some of the others are on the to-read list, especially GEB.

Do check out the link though, the idea is hilarious.

I’m not proud of this, but its seems no one in the whole wide internets had done it yet, and it needed to be done:

Ackbar realizes he's trying to push on a string

The best part is that our solution to the liquidity TRAP was a TARP.  Now let’s hear the Bernanke/Ackbar jokes.

I was just reminded of the Macro Flame War again, and I realized that one thing both sides agree on is that the other is setting economics back by decades through their ignorance and the resurrection of old fallacies.

But this very fact seems to favor one of the sides in the debate.  It reminds me of one of my favorite economics jokes:

A Keynesian encounters a Real Business Cycle theorist and says, “you idiots have set the field back twenty years !”, to which the RBC theorist replies “so you DO believe in negative productivity shocks!”

Don’t hurt yourself laughing now.  Anyhow, what does it remind you of that each side here is saying, “I thought we had dispatched these old fallacies, but here they are again moving about in broad daylight and going for people’s brains”?  Zombies of course!  We are dealing with at least one set of idea-zombies, or zombie-ideas.

But given the current economic environment, we can see that the zombie invasion is spreading.  After the bailouts, there are zombie banks too!  You must be on the lookout to protect your money and your delicious brains.

I’m spending this week at a seminar put on by the Institute for Humane Studies, which involves people listening to lectures on lots of topics from a libertarian perspective and drinking free beer.  It is odd being in a place where most people around me also love to talk about economics and libertarianism, since the vast majority of Americans are not libertarians or economics majors.  But is this newfound consensus a good thing?

In some ways its great; conversations can flow at a much higher level when you can presume that most participants have taken the same classes and read the same books.  There aren’t many other places people laugh at my “how many Austrian economists does it take to screw in a light bulb?” jokes.

On the other hand, there is the potential for “groupthink”, the lack of imagination and the lazy arguments that are so easy to succumb to when there is no real live person to represent opposing views.  So a diversity of opinion can be good just to keep everyone on their intellectual best behavior.

But there can be a greater benefit to diversity than merely avoiding groupthink.  Sometimes the interplay between varying ideas allows great progress to be made; there can be an intellectual division of labor and specialization.  Richard Feynman said that other physicists thought him a math genius, but in reality he was not better at math than them, he just had a different approach; and though their approaches may be equally good on the whole, they would only come to him with problems to which their approach had failed.  There’s no reason this can’t apply in economics, or even to some extent in political philosophy.

Another way of thinking about this is the diminishing marginal returns of a political philosophy; perhaps a conservative could come here and argue libertarians out of the worst 10% of their ideas, or vice-versa in the real political world if a minority of libertarians can keep the worst 10% of the ruling party’s ideas from becoming policy.

Here are some ideas I’ve come up with.  I look forward to hearing some others from you.

1) Tea Party (the drinking kind)- Throw a tea party.  But instead of tea, serve coffee with a dash of Kentucky bourbon.  And instead of crumpets, use deep-fried apple pies.  Then watch an appropriate movie like 1776, the Patriot, or Red Dawn.

2) Tea Party (the ship-attacking kind)- What is the modern equivalent of highly taxed tea in British ships?  I would say supertankers filled with oil from OPEC countries.  We don’t need their oil!  Take over a ship and dump its oil in the harbor! (ok, perhaps we should find a more water-soluble product to feel oppressed by)

3) Down with the Brits!- Take over your nearest British consulate or embassy, then present the British government with a document detailing their “long train of  abuses” and a list of your demands.  If you’re feeling really ambitious, kidnap the royal family instead.

4) Fight for our Freedom- on a more serious note, the real restrictions on our freedoms nowadays don’t come from the British or from foreign enemies; they come from ourselves and our government.  The 4th is a great day to work to protect existing liberties and regain new ones.  Donate your time or money to a liberty-enhancing think tank, legal foundation, political action committee, or other NGO (say, Wikileaks).  If this constructive approach to enhancing liberty sounds too boring or difficult, you can simply celebrate in classic style by breaking some oppressive laws- like those against fireworks and marijuana!

Happy 4th to all however you celebrate.  I spend much of the year thinking about how the country could be better but its nice to think every once in a while about how good things already are.

How can America have so many Counties when our only Counts are on Sesame Street and cereal boxes?  Maybe its time to bring the position back.  Can you just declare yourself Count?  Or must you get the County Commissioner to swear fealty to you?  I’ll get to work on both.

My last post was a lengthy attempt to explain how the two World Wars changed Europeans’ philosophy, making another major European war unlikely.

In this post I will propose a shorter, simpler explanation.

It’s all about technology.

Before World War One, the logistics of transportation and supply did not allow for large armies to take the field. From the First World War on, each major combatant was able to send millions to war, greatly expanding the amount of casualties possible. Combined with new weapons like poison gas and machine guns, this meant war killed more soldiers, faster than ever before.

People had second thoughts about going to war.

World War Two brought the carnage home with massive fleets of powerful bombers. Going to war meant not only risking the lives of millions of young men, but also the entire infrastructure, economy, government, indeed the entire civilian population- every man, woman and child was in danger of the rain of steel and fire.

The benefits of winning a war have stayed relatively constant over history; indeed, they have diminished as the structure of the economy makes plunder relatively less lucrative. But the cost of losing, and the cost of fighting at all no matter the outcome, have risen dramatically.

“Total” war, where everyone is a target, means war isn’t a very good deal. People really started to look for other ways to solve problems.

Then came the Cold War, when both sides had large nuclear arsenals. Now not only were soldiers bound to be killed, not only were the civilians of the combatants afraid of being bombed; now those who would start a war were forced to consider the possibility that they might annihilate the entire human race.

Major European wars, where both sides possessed weapons of such power, became really bad ideas.

People changed their philosophies, morals, and world-views as necessary to ensure their continued survival.

Now Europeans sort out political issues by arguing in Brussels, and reserve their aggression for soccer riots.

The atomic world is a bright one after all.

Superbowl Sunday is the new July 4th.

I am officially acculturated and assimilated, purged of French idées and cultures.

Playing basketball was a good start; watching the Superbowl with friends patriotic; but the burgers, mozzarella sticks, and hundreds of wings are the real secret.  This food is enough to make a man’s heart burn with revolutionary fervor.

About a dozen Bangor-area churches set up a league.  It pretty fun and a good way to get to know the people in the church my family is going to.

But above all, its a great opportunity to make offensive jokes and bad puns.

Playing the Latter Day Saints:

“So, have two of them come over to your dugout and asked you to join their team?”

Playing St. Mary’s Catholic tonight,  hoping to avoid a 30-inning war ending in defenestration.

Its good there aren’t any real prosperity-gospel churches here (that I know of); losing a game as a church might cause them to lose their faith, or drive them to a week of penance so God will love them again.