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Maximum understanding, minimum average total cost.

Economists and crises: my take on Krugman’s take on economists’ take on The Big One.

Krugman gave a speech on receiving an honorary degree in Lisbon; he reprints the full text here: http://nyti.ms/z30HDM

Krugman’s general story: the field of macroeconomics was better, descriptively and predictively, back in the 1970s, but at the cost of being coherent and complete. In the intervening years, a number of economists sacrificed completeness and consistency for external validity, and that blinded us (well, them; I’m not a macroeconomist) to the causes and cures of the recent financial crisis. He pitches it as a saltwater v. freshwater battle, which maybe it is.

Then again, maybe it’s a matter of getting high off your own supply. It’s the challenge of intellectual rigor for the high-performing haves; it’s the sin of pride. (I miss David Foster Wallace. He was a smart guy who knew how much that was worth.) Krugman argues that divisiveness within the field led to a lack of a coherent response, and there’s something to be said for that, but the evidence suggests (to me) that the issue was unity among the people who were wrong in the first place. And that unity comes from intellectual laziness.

This is ultimately the problem with theory–it’s deductively proven, and thus unassailable without appeal to the veracity of its premises. If your theory paper is good enough to be published, it has to be A. consistent and B. not transparently absurd. It helps if you’re famous. It helps even more if it says something that powerful people want to hear. That doesn’t mean that anyone should actually use it to, you know, make policy or anything.

The problem with empirical work, though, is that it’s so contextual and specific, and it relies so heavily on the causal interpretation of partial correlations, and it is itself such an insular (and vast) set of ever-more-insular communities each picking apart a favorite dataset for very low p-values, that you end up with not much in the way of useful information.

Keynes, despite having invented macroeconomics, gets little love these days (How many other individuals are single-handedly responsible for two entire undergraduate courses? Even Shakespeare only got one course in my undergraduate English B.A.). Still, most economists agree with him in principle that economics is “An easy subject, at which very few excel!” The problem has been that economists have sought to differentiate themselves in the past 40 years by substituting standards of mathematical rigor for standards of intellectual rigor.

The two are not the same; economics makes use of mathematics. Much like free-market fundamentalists make the mistake of substituting the teleology of the market for the teleology of society, many theoretical economists (and thus those who get the most publications and citations), and particularly young theoretical economists, mistake the standards of mathematics for the standards of economics.

Math is wonderful. As a once-middling-to-decent mathlete, I would even say I love it. But economists answer to a higher standard than completeness and consistency. There is stuff that happens that we are morally bound to explain and predict. And casting fixed-point theorems and metric spaces at the problems that plague our society may work in the fairy-tales we tell our children to help them sleep at night, but it is sadly at the peril of those less fortunate that we take our theories too seriously.

Who am I? I’m just a guy. For now, I’m a family man who does economics when I’m not hanging out with my wife and kids. But the things I hold dear–they’re the reason I trust the numbers more than I trust the alphas and the betas in the world. They’re the reason I get skeptical when things tie themselves up nicely. If you don’t leave a theory with a big healthy does of uncertainty then you’re likely to rest easier than you should.

The beautiful thing? If we don’t trust ourselves too much, then we can become trustworthy for others.

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