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May 04, 2018

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Peter K.

a footnote -
Myron Scholes, who went on to co-found the hedge fund Long Term Capital Management with Noble prize winner Robert Merton.

LTCM has to be bailed out by the New York Fed, lest its failure spur a crisis in the late 90s. This presaged the epic housing bubble and 2008 financial crisis.

The ruling ideas come from the ruling class. They must be doing something right b/c they have the money and power.

Luis Enrique

one small literature that I follow is misallocation, which is one attempt to add substance to that 'measure of what we don't know' - the Solow residual. It's been interesting to watch this evolve and get closer to the data, some recent papers suggesting that what was hitherto thought of evidence of misallocation is actually measurement error. Here are some examples:

http://www.econ.pitt.edu/sites/default/files/Udry_Heterogeneity%2C%20Measurement%20Error%2C%20and%20Misallocation.pdf

http://klenow.com/misallocation-mismeasurement-paper.pdf

https://sites.tufts.edu/neudc2017/files/2017/10/paper_325.pdf

this stuff is what my day to day experience of economics is like. It's hard to square with what I read about economics in the culture wars

Jason Smith

In my defense, I was thinking of macro models (GDP, unemployment rates, inflation) when I wrote that, not financial models (which are often agnostic about the underlying causes of the empirical regularties — in a good way!). In fact, I have taken a look at financial econ attempting to understand the empirical regularities with my own model:

https://informationtransfereconomics.blogspot.com/2016/12/stocks-and-k-states.html

Blissex

«I was thinking of macro models (GDP, unemployment rates, inflation) when I wrote that, not financial models»

Here lies an important reason why I think that our blogger's post here is entirely misguided, the argument that there is “both good and bad in economics”.

The orthodoxy in Economics is pretty much pervasive and dominating, and shapes careers with the necessity if "internal consistency". Consider for example:

http://www.bradford-delong.com/2018/05/warning-reading-marxs-capital-can-introduce-serious-bugs-into-your-wetware-hoisted-from-2006.html
«reading Karl Marx's Capital — something that, I am becoming convinced, should only be done by somebody with immunity to the mental virus — by a trained intellectual or social or economic historian, or by a trained neoclassical economist....»

Then there are many "something economy" fields that have been largely created to allow people to avoid challenging the orthodoxy and thus being ostracized by "top journals" and "tenure committees" and donors for having "anti-american" attitudes.
For example "behevioural economics" is the same as "microeconmics", but labeled differently; and various "something economics" studies are done in business schools that don't necessarily conform to the JB Clark orthodoxy.

If there is a claim that research into "something economics" show that there is something good in orthodox Economics that is at best naive and most likely propaganda, because those studies are done to work around and usually in opposition to Economics.

As to the specific case of finance economics, large parts, those that are used for right-wing propaganda, actually rely on and are meant to repeat Economics as in “more a theory of equilibrium prices”, other parts are empirical (mostly in business schools), fairly interesting and again done to work around Economics.

As to the details, there is not one EMH, but at least a dozen, and several are drastically different in terms of their import, never mind the generic EMH but “applied to individual stock prices rather than the overall level of share prices”.

Nanikore

Diane Coyle writes

"Our models are written with mathematical notation as a shorthand and to enforce logical consistency, just as historians use models—”the causes of the First World War”—but write them out with lots of words."

I would dispute this. Historians do not use models for very good reasons. An historian builds the story from the ground up. They use archival material, which critically includes unquantifiable information. There's a minefield of information out there - in fact there always has been for the genuinely inquisitive. Then you put the pieces of evidence together - and build up your story. You NEVER start with a model or theory - even if your finding confirms a model or theory later. But almost certainly your new material (including unquantifiable evidence) will bring new perspectives. And almost certainly the most interest things cannot be modelled.

I am pleased to see that one person was constructing a large data set on colonial railways - but this is the norm in history departments - not the exception. I have not seen this particular paper, but I wonder how deeply it really goes into the history.

Blissex

«constructing a large data set on colonial railways - but this is the norm in history departments - not the exception»

But the study of the "longue duree" and quantitative history ("cliometry") have some important advantages:

* They are dull boring work, so it does not have a direct political value to potential sponsors. Economists useful to sponsors like L Summers get $600,000 base salary at Harvard, or like G Hubbard get £1,200 per hour consultancy fees, it is hard for historians to be so richly rewarded. N Ferguson has had to veer into Economics to achieve his usefulness.

* That kind of work originates in continental Europe, where professors are usually civil servants and content to draw an upper-middle class salary and to be "public intellectuals", and where sponsors don't have an overwhelming influence on the funding of departments (reminder: Ken Lay of Enron "fame" funded 35 [thirty five] endowed chairs in his name).

* "Internal consistency" with JB Clark's "3 fables" (or clever working around that requirement by doing "something economics") is not essential to career progress in the field.

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