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February 13, 2013

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paulc156

"a stronger welfare state or macro markets"
Macro markets sounds like a way of financialising the part of the economy that is as yet untainted by finance. Sounds suicidal to me. Why not go for the establishment of full worker ownership of the means of production and the establishment of soviets throughout the kingdom to aid co-ordination?

Luis Enrique

well I agree that, for example, the size of the fiscal multiplier depends on a set of circumstances. But suppose you do a good job of identifying the most quantitatively important set of circumstances, call them X, and measuring them, just how unstable do you suppose the relationship between the size of the fiscal multiplier and X is?

If, conditional on X, we can put some reasonably tight probability distribution over the size of the multiplier, then isn't fiscal policy still a useful tool? After all, we don't need to perfectly stabilize output, we just want to improve the situation (say, reduce unemployment) at a reasonable cost (some measure of bang for buck - which is what the multiplier is). We can tolerate some error in our educated guess concerning the size of the multiplier - better to act and improve the situation somewhat than use uncertainty as an excuse for inaction. We can say macropolicy is hydraulic-ish.

This may say more about my ignorance of macro research than anything else, but I think it's surprising we don't see more research directed at identifying X. We see lots of papers that propose new mechanisms in isolation, but fewer that explicitly attempt to locate the most relevant set of mechanisms, whose importance depends on a set of circumstances, and proceeds to measure those circumstances.

but I agree with your main point that the greater is our inability to stabilize output or unemployment or whatever, the greater should be our provision of collective insurance against bad outcomes.

Nick

I don't see how this challenges NGDP targeting. It might be easy or hard to hit a target, but you can be virtually assured that you won't hit it if you brief against it, or say that you fear hitting it. Its because central bankers don't really know what they want to do, or disagree too much, that they have been so impotent.

Its quite different from a hydraulic view of the economy. Water doesn't fill a volume just because you announce that the volume will be filled.

aragon

Perhaps I should be selected as the economy looks pretty hydraulic to me :)

I agree with paulc156 about Macro Markets.

Physics and Engineering are complex disciplines, and Hazlitt will remind you economics is about self-interest and about the impact on all groups.

https://en.wikipedia.org/wiki/Economics_in_One_Lesson

If no-one pays corporation tax, or IHT then reducing it is unlikely to have much impact. Indeed Alistair Heath would like to see IHT abolished, but IHT has huge potential for change.

http://www.telegraph.co.uk/finance/comment/9865475/Axe-inheritance-tax-it-causes-too-much-economic-damage.html

Hydraulics does not work if their is no working fluid in the pipes or the resevoir. No amount of pulling leavers will make any difference.

Wealth is concentrated in too few hands and financialization is further concentrating wealth while finance controls the money supply without reference to the real economy.

I have a macro economic model with direct controls, and finance as a parasite killing the host.

Keith

This seems to be an age of Depression and apathy in economics. Like the Labour Cabinet of 1931 the message is "we have done nothing and there is nothing we can do." Its decline for me and for you.

A great advert for the dismal science.

Metatone

Have to agree with Keith.

Engineering in particular does a lot of work with shifting parameters. I'd be the last to say that the state of the art in engineering could solve everything, but economists seem ignorant of basic principles in dealing with uncertainty.

It's worth remembering at this juncture that many things were engineered - boats and aeroplanes come to mind - ahead of a full understanding of the science or ahead of an real understanding of operating parameters.

So, things that economists are (often on purpose) ignorant of:

- Safe to fail experiments
- Safety margins (also overshoot and recovery techniques)
- The efficiency vs robustness/resilience trade-off
(You can add to this, measurements of the cost of volatility)
- The difference between resilience of a system and the well-being of the actors in the system.

I could go on, but there's plenty there to get started with.

I've been thinking recently more about how the followers of Hayek dragged us down this rabbit hole of learned uselessness. I've half-formulated an analogy:

Economists think they are physicists, studying fundamental laws of science.
In fact, they are car engineers, like the Toyota ones from the 1930s. In studying a system (a GM or a Ford) they are reverse engineering a built thing. Underneath that built thing are some principles of physics - but mostly they are studying the design decisions, which are just that, engineering tradeoffs/design decisions.

A second key misunderstanding is that economists who deal with policy think their purpose is trying to identify a platonic ideal of a moving vehicle, whereas what we need them to do right now is identify practical ways to make our vehicle work just a little bit better. And frankly, right now in much of Europe, it's to make our vehicle work at all.

The result of all this is that post-Hayek we get endless navel-gazing from economists about what can possibly work and a refusal to look at evidence of what does work. All because they think they are studying nature (e.g. subject to gravity, things basically go down) whereas our economy is a machine (pistons go up and down.) Now physics does underlie the explanation of why pistons go up and down, but economists are stuck shouting "it can't go up, there's nothing in the natural system that makes things go up that way."

Dan Kervick

To me the most obvious alternative stabilization regime is direct hiring of the unemployed. That is clearly achievable, no matter what happens with other variables. Employing everyone, and providing every single person with that minimum level of security and dignity predictable employment provides, is more important than the rate of economic growth or other macroeconomic goals.

Dave T

I don't think anyone should find this point too surprising. The difference between economics and physics or engineering has always been that people, unlike the natural world, behave differently once their behavior is described and published. See Soros's discussion of reflexivity, the expectations-adjusted Phillips curve, etc.

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