Rethinking economics

Tony Yates wrote a snarky post about how science needs to rethink itself so that it can be more practical and in tune with the people.  I am pretty sure he was mocking pundits who insist that economics needs to be “rethought” because… …Trump won in two rust-belt swing states we didn’t expect him to?

My initial reaction to the piece was that it was funny but that economics does, in fact, need to be rethought and that comparing economics with physics really disparages the latter.  But the main thing about the piece is that it is preemo snark and very appropriate to the moment. So on reflection, I retract my quibbles.

Economists are often accused of falling for the Ricardian Vice – of confusing a world that can be modeled with one that might actually exist.  That is a fair criticism, IMV, but it has absolutely nothing to do with Trump getting elected. And his election “proves” nothing about how economists should view trade, or income distribution, or regional development policy or whatever.

Which brings me to the point I want to add to Yates’ good ones. Economists are also accused of parading libertarian ideology as a technical result arising out of the disinterested arithmetic of optimization.  My favorite example of this is pareto optimality and the premise that the benefit of the doubt — which is pervasive — always goes to the free-market result.

That may be a good value judgment. Who knows? But it is a value judgment brought to economics, not something that arises from it.  I think it is a huge scandal that academic economists are not generally more honest about that. (The term “efficiency” is particularly appalling.) And it seems fair to me to see economics occasionally hoist because of it.  (Here is Brad Delong being fun on the subject. No endorsement implied or withheld, because much of it is beyond me. )

But if economists want to establish themselves credibly as scientists, then the last thing they want to do is throw out libertarian ideology and replace it with whatever nonsense the voters for Hair Club presumably believe.

I was reminded of this when I read this morning a Bloomberg article asserting – without much evidence beyond the Trump victory – that economists have been “wrong” to “dismiss” the decline of manufacturing employment.

Apparently, falling manufacturing employment pissed off some guys in the rust belt and allowed Trump to squeeze through in a couple swings states. Which proves what about economics? Perhaps economists should just take a poll?

This quote from a business professor at Harvard, cited in the Bloomberg story, seemed to me to be very telling:

I’m a big believer in free trade. But if you think about global competition, if you’re going to enter a competition you want to win. If you want to win, you prepare.

Actually, bud, you are not a “big believer” in free trade.  You do not accept the standard premise that trade is mutually beneficial. You confuse the economics and standard-English conceptions of “competition” and think trade is a contest.

That is fine. I guess in some cases it might be the way to go.  But to the extent you emphasize examples where trade is not mutually beneficial, you reject the central premise of the case for free trade. You can do that or be a “big believer”, but not both. It is a simple matter of non-contradiction, a principle that still holds even though Hillary lost Michigan. (I am not into big believing, but that is separate.)

Paul Krugman wrote about this a couple decades ago, back when he was being attacked from left and right, just as he is again today. He conceded that strategic trade theory, some of which he developed, can imply that protection may in some cases be welfare enhancing for the country applying it. But he also pointed out that most of the criticism of free trade then circulating was not being offered by super-sophisticates who had mastered strategic trade theory.  It was simply a case of not understanding (or ignoring) comparative advantage. At least in the vast majority of cases.

Maybe I am wrong to assume, as I certainly do, that this remains the case today.  But the validity — or not — of my take has nothing to do with the election.

Economics is underdeveloped and imperfect. And, yeah, its practitioners could do with some more humility.  But it is not supposed to be just about what fibs you tell to win Michigan.

This season, let’s keep the Christ out of Saturnalia

I don’t really know what Delong is up to here. He is pulling a Mankiw and linking highlighting without comment.

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Based on some quick Googling, it looks like the Christians weren’t the first to try to sneak a silly god into a perfectly good celebration of the shortest day of the year. Saturnalia works fine. There is no need to mess with it.

Separately, there was no “war on Christmas” until maybe this year.  People were happy to go along with the harmless ritual just because it is fun. But if the religious kooks can’t leave their good enough alone and insist on turning this into a Republican holiday, then fine, you will lose.

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Because people will eventually associate religious fanaticism with being a raging asshole.

Update: Apparently, ADL says they did not actually flee the county.

Bull case for equities

I mentioned this before, and — to repeat — I am not good at contrarianism, so I am not going to shift from almost no view to negative just because of this. But this is now in video form, which makes it even better.  Sorry that the link is to Bloomberg’s front page. Obviously, that will only work for today.

The bull case is actually hilarious, at least in the US.  Here, the share of national income taken by corporations is falling, in response to a late cycle slowdown of productivity and quickening wage growth.  Bullish.  And yet corporations are about to lift their capex, which will reduce their pricing power relative to wages, while increasing deprecation charges. Bullish.  At the same time, central banks are shifting to a less stimulative posture, which is obviously hugely bullish. And there is a good chance that fiscal stimulus delivered at full employment will give a big lift to interest rates. Meanwhile, optimism — sorry, “animal spirits” * — are much “improved.”

Well, obviously, these are the conditions you would want to see in place before shifting to a bullish view on equities.  It is like the guy named five random things and then just concluded that they mean bullish. Except the things were not really random, but more like bearish,  if they happen or intensify as the case may be.

* Animal spirits are anything that make rich people feel good about being rich people. Under Reagan, we had “trickle down economics”, which did not work, but at least was based on a tangible mechanism, specifically the idea that lowering tax rates would increase the incentive to work, save and take financial risk.  Animal spirits are based on no such tangible and replicable mechanism. Rather, if you can somehow trick rich people into feeling good about being rich, then that alone will be bullish for some reason, although we don’t want a bubble. No certainly not.  Animal spirits share with trickle down economics a desire to stroke the plutocrats. I would guess that is their main feature,  the possibility of multiple equilibria aside. (It strikes me I don’t know if animal spirits are meant to be more ephemeral or a cause of enduring multiple equilibria. I don’t really know if they are go with or fade, and am probably not alone on that.  Gotta reread Akerlof and Shiller, so at least I know what they imply.) 

Word

Apparently, the new tough guy approach to dealing with radial islamic terrorism is to take pride in using the term radical islamic terrorism.  That wimp  Obama did not want  to use the expression because he stupidly thought it pointless to piss off a billion people by implying their religion equals terrorism.  But now every time the radical islamic terrorists do some radical islamic terrorism, we are going to hit em and hit em hard, with this expression. I feel righteously safer already.