Wednesday, August 3, 2011

The Great Divide is Between Thoma's View of Reality and Reality

I saw this piece by Mark Thoma a while back, yawned, and went on to something else. When I got back from vacation, in the course of catching up and following links to my posts, I discovered that there is actually a reference to one of my posts hiding in there (more on that later), so I thought it was worthwhile to rebut his nonsense.

We'll skip the bad analogy at the beginning of the piece. Mark's point is essentially a standard one. Academics are out of touch with the "real world" and basically spend their time staring out the window thinking deep thoughts for their own entertainment.

Apparently, as we keep hearing from the usual rabble-rousers, academics failed to predict the financial crisis, so what are they good for anyway? Further,
...a few practitioners saw the housing bubble coming.
Who were those people anyway? They must have made a killing! Did they predict the turning point in housing prices in 2006? Did they predict that prices would fall from their peak by about 35% (or whatever)? What exactly is a bubble anyway? Do those practitioners have a good definition of this phenomenon? What do they think caused it? Do they know when the housing market will turn around if they are so smart?

What's at the root of the problem?
Economics has lost the connection between the practitioners and the academics. This may have something to do with the desire among economists to become more of a science – a heavy focus on theory and math is the result.
So, we would do much better if we did not use the tools that Newton, Pontryagin, Bertsekas, Arrow, Debreu, Samuelson, Solow, Nash, Harsanyi, Selten, Hurwicz, Maskin, Myerson, etc., gave us. Then we could better communicate with those in the trenches and the world would be a better place.

There is no great divide between academics and practitioners in economics. When I go to conferences and go out to give seminars I meet people working in many different fields in economics. Plenty of them move around among institutions where people think about policy and advise policy makers, institutions where the main job is doing frontier research and educating students, and consulting work. Go to any business school and you will find loads of applied economics that people find useful not only as an organizing tool to make sense of the world but for making money. In business schools applied economics sometimes is called finance, accounting, or marketing.

One of the great successes in economics is auction theory. This started off in a quite abstract, mathematical fashion, and ultimately expanded into empirical work in the hands of people like Robert Porter, Ken Hendricks, and Harry Paarsch, for example. Auction theory has been used successfully in the design of auctions of bandwidth and oil leases, and there are currently economists working for Yahoo and Google who use their knowledge of auctions to contribute in important ways to making those companies profitable.

Closer to home, there are plenty of high-level academics who are willing to get their hands dirty at regional Federal Reserve Banks and at the Board of Governors in Washington. In this respect, there is far more interaction between academics and the Federal Reserve System than was the case 10, 20, or 30 years ago, thanks in part to the pathbreaking work done by people like John Kareken, Art Rolnick, Tom Sargent, Gary Stern, and Neil Wallace at the Federal Reserve Bank of Minneapolis in the 1970s.

Now, here's where Thoma mentions me:
Academic economists do evaluate policy proposals theoretically and empirically, and they do provide forecasts of the economy. But forecasting in particular is not the main focus of their efforts, , and they’ve all but ignored – even looked down their noses upon – forecasters and practitioners in the government and business communities. They are often viewed as data grubbers who use old-fashioned models and techniques, and are thus unworthy of attention from high-minded academics.
Notice what he's up to. Mark fancies himself as a very high-minded and fair individual who would never stoop to name calling, but he's essentially calling me an arrogant twit. If you go back and read my post, you'll see that it was a response to some interview comments by Larry Meyer that included this:
My views would be considered outrageous in the academic community, but I feel very strongly about them. Those models [modern macro models] are a diversion. They haven’t been helpful at all at understanding anything that would be relevant to a monetary policymaker or fiscal policymaker. So we’d better come back to, and begin with as our base, these classic macro-econometric models.
Meyer essentially disparages post-1980 modern macroeconomics as a waste of time, and I thought that deserved a response. The gulf there is not a problem for modern macro, it's a problem for Meyer, who has not taken the time and trouble to understand what macroeconomists are doing and how he can make use of it. Why Mark Thoma can't see that is beyond me.


  1. Yes, I have watched with dismay the downhill slide of Thoma's blog which used to be a good one but has become a repository of unthinking feel-good liberal Keynesian sludge.
    But it serves its purpose of course as a place for those with no knowledge of macro theory and who think Krugman is a macro economist to get their prejudices confirmed on a daily basis.
    I doubt U. of Oregon students are getting much of an economics education, poor souls.

    anon from tx

  2. I don't want to be too hard on the guy. There's a particular political slant to the blog, but he performs a useful service in collecting a lot of information and links.

  3. "Notice what he's up to. Mark fancies himself as a very high-minded and fair individual who would never stoop to name calling, but he's essentially calling me an arrogant twit."
    I think if he had literally called you an arrogant twit it would be a far worse offense. He's just holding you up as an example of someone he strongly disagrees with. Maybe he inaccurately represented your perspective, but that's not the same thing as insulting.

  4. It's hard to know what the grounds for disagreement are exactly. It seems he thinks I should have a better opinion of Larry Meyer. I don't have any problem with Larry Meyer's line of work. He seems to be a very successful forecaster.

  5. Auctions are a great example here. Amazingly, Vickrey thought his work was "of minor significance in terms of human welfare" because it was too theoretical.

  6. Edward,

    Yes, it's a useful lesson on why, as a profession, it helps to have a lot of irons in the fire. People can pick up on apparently useless and esoteric ideas and turn them into gold, and sometimes the early innovators don't quite know what they have done.

  7. I see Thoma leads off his new links today with an article titled "Quiggin destroys Williamsons arguments".
    I think I am starting to get what economics is: its really an art form. When Arnold Schoenberg revolutionized music a hundred years ago, he was vilified. I think the dsge guys are like Schoenberg: they have revolutionized macro. Its a question of whether it is to your taste or not intellectually. Its really no more scientific than music - though anyone who has tried to analyze Bach's contrapuntal works or Bartok will know its more intellectually challenging than anything you learn in intermediate economics!

  8. These things happen in every field of study, I think, but in some fields experimental evidence can make it clear that some ideas should die. Though of course experimenters can tinker with the experiments and the data to get the results they want, so that's not infallible either. Generally, in economics the good ideas rise to the top, and the central core of the profession seems to be focused on good science. There are plenty of disgruntled fringe groups that survive, though. Sometimes those people can't keep up with the current technology and just want to justify their existence. Quiggin is somewhat unusual, as he appears to have no shortage of technical knowledge. As far as I can tell he's politically motivated, and seems to imagine that modern macro is a tool of evil right-wingers, which is entirely wrongheaded.

  9. "Who were those people anyway? They must have made a killing!"

    John Paulson for one, you can read about him in the book, "The Greatest Trade Ever"

  10. Ummm, could anyone post a comment on who exactly predicted the bubble? Specifically which Monetarists?