http://www.nytimes.com/2010/03/26/opinion/26brooks.html?emc=eta1
People in politics are looking toward the fall elections and in terms of what they have to do to keep their jobs (i.e. Senator McCain and Sarah Palin making headlines, the Obama Administration looking at how to "spin their win", etc.).
We had the chance today to see three of the most interesting people we follow on one TV show which was a good "perspective getter" for us: Peggy Noonan, George Will and Paul Krugman. It's a good thing when TV tries to "inform" as opposed to when it gets hijacked by one side or the other in some political debate. In this particular case, ABC had Will and Noonan on one side of the "round table" and Krugman with Donna Brazille on the other (we make the assumption that party affiliation would be "implied").
The moderator of this discussion was very careful to balance inputs from each of the parties in their responses to various issues: the one of most interest to us was health care. Here, we began to wonder what we were watching. George Will seemed very Republican about what the health care bill wasn't (and we stress, at this point, that we are not "Republican or Democrat" on this site or in our classrooms): it cost too much, it will save nothing, there was a better bill that could have gotten Republicans on board ... Peggy Noonan, a great writer with her own column at the WSJ, and, not a "sound bite" person, sort of went on about why there isn't more bi-partisanship (it's hard to remember what she said) ... Paul Krugman was sort of placed on the different "side" of the table and introduced into the discussion as the only Nobel Economist in that conversation: as the only panelist who'd read the bill (which is now north of 2,300 pages), he said that many of the cost saving provisions will actually come to pass and that it's "positives" will far outweigh it's negatives (here, we couldn't agree more ... see prior posts on adding 30 million more people to coverage, preventing insurance companies from dropping policy holders from coverage because their illnesses cost too much, etc.).
We want to salute Krugman here for his willingness, as an economist, to appear publically and advocate for, or inform about, what is really happening that touches us all.
Not all economists have that attitude or intention.
David Brooks' OP-ED contribution to the NY Times (3/26/10 - attached) is an absolute classic in this regard. There is a reason why "Economics" is called the "Dismal Science" and that reason has something to do with the inability of most of its practitioners to relate what they do to reality: do we need go any further than the worldwide financial crisis? The best of them suggest that only a few of them saw it coming. And, further, they have continually debated about what to do about it!
Brooks puts the history of modern economics into "Acts". So, Act I would be the "Era of Economic Scientism": the period when economists based their work on a crude vision of human nature (the perfectly rational, utility-maximizing autonomous individual) and built elaborate models based on that creature. That was the era we grew up in at Wharton where the first ever econometric model was created while we were in school - how modern! The only problem was that all that "math" was based on "history."
Act II would occur over the past few decades as a few brave economists tried to move beyond the "stick-figure" view of humanity.
This leads us to Act III, the economic crisis of 2008 and 2009. Here, all the wonderful financial models helped wipe out $50 trillion in global wealth causing immense human suffering.
So, by Brooks' view, that brings us to Act IV, the period of soul searching that we are in now. There is no concensus on what caused the crisis! "Economists" are fundamentally re-evaluating their field. Brooks quoting Russ Roberts of George Mason University: "... why is economics even considered a science?" Again, from Roberts: "The bottom line is that we should expect less of economists."
This is a refreshing perspective and one we have advocated for a long time. If Act IV becomes, as Brooks predicts, "... economists taking baby steps into the world of emotion, social relationships, imagination ...", we applaud the trend. We also applaud Brooks' prediction that Act V "... will blow up their whole field." At the end of Act V: "... economics will be realistic, but it will be an art, not a science."
What we most admire about Paul Krugman is his humility. He is brilliant technically but he doesn't try to use that to upend others when he has the TV stage. He tries to inform without talking down. He sees his basic economics textbook as his legacy. He and his wife work tirelessly to keep it current and informative. He understands all of the econometric theory and quantitative hupla but only uses it to counter some of the most preposterous theories that his profession has come up with. And, oddly enough, he comes out at the same place as someone like, for example, Warren Buffet, who took the position that we were way to small in our economic stimulus package to make a dent in the massive and long lasting unemployment situation we face.
So, if we could build on Brooks' perspective, we would suggest the "economic model" for the new modern economist would be: Paul Krugman. We hope that "Act V" produces more like him.
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One of the best articles yet from Brooks, who is an incredibly talented writer. I am glad you blogged about it.
ReplyDeleteGreat post - thanks for sharing.
ReplyDeleteI agree that a fundamental flaw in economics is that people behave rationally. At SXSW Interactive a few weeks ago, I had the chance to listen to Dan Ariely, author of Predictably Irrational (highly suggest the book!), and this is a huge issue with the field of Economics.
I applaud various schools of thought such as the Austrian Economists (http://en.wikipedia.org/wiki/Austrian_School) and Behavioral Economists that are starting to drift away from the traditional mathematical and econometric models, and take into account psychological tendencies of people. Actually, from the wikipedia article you see that "Austrian School economists hold that the complexity of human behavior makes mathematical modeling of the evolving market extremely difficult."
However, I have to disagree with Brooks' prediction that Economics will be an Art. Just like Psychology, Counseling, Sociology and all the other "natural" sciences have evolved over time with hard scientific proof to back them up, I believe Economics can be considered a full-on science. However, we have to remember that Economics is a relatively new science, and just how new discoveries are made every day in Physics or Biology, the same is true with Economics. Heck, a few hundred years ago we all completely agreed that the sun revolved around the Earth :)
An evolving science that is learning new things is not an art, it's just a new field of study. The pioneers will continue to push the envelope.
On another note - a huge trend I saw at SXSWi (which tends to be at the forefront of business & marketing thought today) was this idea of taking into account irrational human behavior to create great products. This isn't just a trend in Economics, but I believe it's a wider trend we'll see as "mental health" gains more traction and isn't just wacky Freudians. Remember, Psychology as a field is barely 100 years old (Freud lived from 1853 - 1938 and is considered the starting point of Psychology), and new discoveries are being made every day. But of course, this is coming from the guy who's engaged to a Counselor :)
Tracey and Marcelo: Thanks for your input! Whether or not we agree with Brooks, what he wrote was important.
ReplyDeleteSome further thoughts:
(1) Why are the PhD "Economists" shocked by a financial meltdown? Why are PhD "Economists" shocked by the financial markets NOT "self-policing"? Why can't PhD "Economists" agree that a certain balance between free markets and regulation is appropriate (or appropriate even by industry)?
(2) Why can't the "models" for the economy (econometric, mathematical, etc.) include the behavioral, and/or random aspects of U.S. markets? Make some assumptions and test them. Talk to Mark Zandi about what would work.
Larry Summers on his own profession: "... look around, they're all idiots."
Nassim Taleb on Nouriel Roubini: "... Yes, Roubini got it right (predicting the worldwide financial crisis). But Roubini wasn't right because he's an academic economist. He was right because he is a very insightful fellow. He is so good he managed to surmount his education in economics."
I believe the issue when it comes to your questions about a balance between regulation and free markets is that the regulators are always playing catch up. Although theoretically they play a great role, it's difficult to assume that the government is "smarter" than the companies. As a matter of fact, I'd say the people working in the free markets are probably smarter than the government types, just based on salary and other benefits.
ReplyDeleteRegulation in theory works, but these financial markets (before the meltdown) WERE regulated in what we thought were the best of our abilities. Things like the Credit Rating agencies were supposed to assess risk independent of the firms. The government didn't' know any better - no one really did until it all fell apart.
So yes, there can be a balance, but there is the inherent flaw that the regulators will always be playing catch up. You can't regulate issues that don't exist yet.
Marcelo: Another excellent contribution! The problem with the "regulators" is that they are often "political appointments". Christopher Cox, a former Republican congressman from California, retired as chairman of the SEC in January, 2009. He slowed down the enforcement process in an agency that was already overtaxed. Who appoints the "regulators"? And, what should their qualifications be?
ReplyDeleteProfessor Hazzard, you should write a book on changing HR policy in the US Government. Do you think changing hiring and firing practices along with connecting performance to pay will improve the government in the long term? Perhaps the real question is about its political viability.
ReplyDeleteFrom what I remember, regulators were not doing a good job. Furthermore, a humongous chunk of the market was not regulated. Our government pressure companies to put more people in houses. The government is reactive, not proactive. Its nature exists due to patterns of political pressure. Citizens generally are shortsighted. They do not think about what will happen over the next five years. Ergo, politicians, regulators, government executives, etc... act likewise.
Regulators also tend to originate from companies they will later regulate. The revolving door is ever... revolving. Furthermore, politics can heavily influence regulators actions and the resources at their disposal. I can remember one of the first time I seriously watched CSPAN. The Director of the FDA was basically saying they needed more money and people to improve quality and capacity to do its job. The SEC in the past has been bullied into agreeing to corporate preferences through obtaining the necessary political influence to reduce their funding. Did anyone catch the PCAOB budget woes? Ultimately, few people bother to pay attention to reform. Citizens do not care for such dull issues. However, corporations tend to understand their effect on the bottom line and take action accordingly, even when their action might cause damage to the larger system. This selfish behavior is just the way the world works, but it creates crises that wake masses up - eventually. Then again, citizen apathy and corporate selfishness come with a price. Hopefully, humans will eventually understand and act in the best ways in the future. No large mistake ever stays hidden, so this will like occur at least in the next several centuries.
A Harvard economist responded to Brooks' comments by saying that most economists are not forecasters. They are academics that that test theories as opposed to applying them in the real world. The crisis is a wakeup call for the necessity of incorporating the other social sciences into economics instead of missing the entire picture (i.e. long term mortgage performance). Furthermore, I think it is low blow for writers like Brooks to go out criticizing others like this. He is just riding a wave of rage asserted by readers. Nothing will happen through criticism. Economists already know they messed up big time. Brooks establishes a long term evaluation of the future of economics, but it is rooted in his bias. Economics will always involve a large amount of calculation. They will just acknowledge more frequently the incalculable situations while encompassing a greater range of variables to measure the economy and human nature. Art is a joke. There is always wiggle room for instinctive suggestion, to examine the soul through a medium of expression incapable through traditional means. However, everything in the world is very calculable now, even art. Art, religion, politicians, etc... since the dawn of time have been used to explore and explain the unknown. Now, humans have the tools to explain the unknown through exploration of the data. When several thousand hypotheses are tested, usually some new information and innovations comes out of it all to merit the costs. The value of non-data based means of answering questions of the unknown do not exist among the best of the best. They simply acknowledge there are unknowns and their effects should be minimalized or optimized to maximize return versus risk.
Krugman seems okay. He obviously writes in a biased way, but does respect others to a respectable extent. Even if he read the whole bill there is no way he understands it all. There will be many loopholes, amendments, appeals and more that will alter its nature. Furthermore, it has quite a few assumptions that may or may not occur. It is risky, and politics tends to drive people to hold emotions above reason. Whatever the case may be, it is impossible to truly know the complete effects for the next few years. Hopefully, we will look back on this as a profitable investment in our nation.
ReplyDeleteFinally, Summers is a bit off. They are probably "idiots" due to "siloed" thinking and research efforts. If Summers feels his peers are beneath him, perhaps he should raise them up instead of pontificating. This kind of leadership is all too frequent in government. Bad leadership makes a bad organization. I am not saying the US Gov is bad. It could be much better, but nobody seems to take up much of a strategic effort despite its budget of about several trillion dollars a year. Perhaps your students will look upon contemporary failures as inspirational instead of sensational. We need change, but not much will change without citizens changing.
PS:
When did Roubini predict the crisis? If he was so wise, why did he not profit from it like John Paulson, Paolo Pelligrini, and Goldman Sachs?
I know the buck stops with Cox, but I bet the situation is far more complex. Could any other regulator at the time do much more than Cox?
Econometrics is basically applied statistics. It is only as the data inputed and questions asked. Mess up either/both of them, and you will get bad results. Marcelo is sort of right. Their is much still to be learned, but these sciences have been around for as much time as any other science. I think it is fair that we need to acknowledge the limitations of science instead of blindly trusting it. Also, I believe regulators could be more proactive, but this will never happen without the right political pressure. Regulators could work hand in hand with companies to constantly assess the evolution of the markets and create new policy based upon collaboration with audit boards or upper management. All and all, I think we all have much to learn and achieve. We should never say never, and continue to innovate in the massive $3 trillion behemoth that is the US Government.
Josh: All of your points are good - just a point about "regulators": Alan Greenspan was in his job because of an outstanding professional career with the Council of Economic Advisers and the FED (and in private practice). As head of the Fed, he should have known the extent of sub-prime lending yet he said he did not. Why?
ReplyDelete