Dani Rodrik enters the "Is economics a science?" debate.
Where we frequently go wrong as economists is to look for the “one right model” – the single story that provides the best universal explanation. Yet, the strength of economics is that it provides a panoply of context-specific models. The right explanation depends on the situation we find ourselves in. Sometimes the Keynesians are right, sometimes the classicals. Markets work sometimes along the lines of competitive models and sometimes along monopolistic models.The craft of economics consists on being able to diagnose which of the models apply best in a given historical and geographical context.Dani Rodrik's Weblog
Economics as craft
Dani Rodrick | Albert O. Hirschman Professor of Social Science at the Institute for Advanced Study
7 comments:
"Markets work sometimes along the lines of competitive models and sometimes along monopolistic models...."
No, they don't, this guy is full of shit.
Markets work along the right model...the mathematical flow-of-funds that closely resembles that of a simple checkbook.
The other "models" are a bunch of wild-ass guesses based on a subset of transactions that are supposed to give us "insights" into what the bigger picture should look like.
A fog of bullshit.
These guys are way overpaid.
Here is a very good video
How Hitler Tackled Unemployment and Revived Germany's Economy
http://www.youtube.com/watch?v=O99fWf_UIWs&feature=player_detailpage
Of course It is overwhelmed by propaganda that Hitler could do no good, not even full employment. This is somewhat unerstandable because they traumatized the world.
This is something that always struck me: how could Nazies be so popular if they were so bad at everything?
Author of the video has worked in Germany after WW2 and he has seen how workers respected the Nazi socio economic system.
John Kenneth Galbraith: "The Nazi economic policy, it should be noted, was an ad hoc response to what seemed over-riding circumstance. The unemployment position was desperate. So money was borrowed and people put to work. When rising wages and prices threatened stability, a price ceiling was imposed. Although there had been much discussion of such policy in pre-Hitler Germany, it seems doubtful if it was highly influential. Hitler and his cohorts were not a bookish log. Nevertheless the elimination of unemployment in Germany during the Great Depression without inflation - and with initial reliance on essentially civilian activities - was a signal accomplishment. It has rarely been praised and not much remarked. The notion that Hitler could do no good extends to his economics as it does, more plausibly, to all else."
"Superficially, at least." - Ryan
You're saying that the Sectoral Balances identity is superficial? Interesting.
"What we measure and how we measure it makes assumptions"
In engineering, if we make the right assumptions a solution becomes possible. It's called defining the problem properly.
Most of these economic clowns don't even seem aware that national income is a function of public spending...they call it debt instead, and work to convince us we should cut our own income.
My assumption is that the flow of funds that matters most (by far) is public investment, without which capitalism itself could not succeed. Capitalism doesn't create it's own capital. Not in any of the systems you referred to.
" How can I compare flow of funds 'market' data from countries with diverse banking systems, for example"
That doesn't seem very complicated...the first thing to look at is if credit is expanding...if it isn't then stop looking.
but you have to have the data to begin with...for countries like China not so easy so good luck to that. Here's a simple cheat sheet for the US:
Deposits:
1. public spending (G)
2. credit expansion (net)
3. exports (X)
Withdrawals:
1. Taxes (T)
2. principal payments (net)
3. imports (M)
For foreign countries the list might differ slightly but the principle is the same.
The previous history of growth in spending provides benchmarks wrt how much spending we need going forward.
" Results for 'private credit', from Fannie Mae, JP Morgan, China Construction Bank, Barclays, and LG Financial and Sumitomo look similar on the spread sheet, but are they?"
FRED, TCMDO tells us what we need to know in the aggregate for the US, which is that credit is not expanding and hasn't for 5 years.
If credit is not expanding it can for all intents and purposes be safely ignored wrt the flow of funds. Basically if you are looking at banks for FoF info you are wasting your time.
It's all about the nets. They are the most important flows to examine.
If I had to single out one thing I took away from engineering school and problem solving it is that we can always ignore variables that are small compared to the numbers we are working with.
As far as the flow-of-funds is concerned, the only flow of importance is new spending, by the government and by private investment in response to/anticipation of it,...and credit expansion, which is basically non-existent currently.
That's where virtually all of the spending that results in GDP comes from, leading to the conclusion that the $60T in existing dollar assets don't do much of anything except collect interest and grow.
What Rodrik is saying is that we should be looking at a lot of different models instead of just orthodox ones.
Models are assumption-based, which can be looked at analytically and empirically, and models can be tested against data. Other aspects of methodology also come into play. There is still a lot of subjectivity involved in model building, as well as lack of clarity concerning the data, too.
Analysis of the same problem using different approaches is possible, and different approaches should be examined to determine the strengths and weaknesses of each. It's not a matter of a zero-sum game of who has the best model, but rather an optimization process using all relevant means.
The article is thoughtful and the publication it came is very interesting. The publication focuses heavily on deep areas of science (and mathematics) but also on art.
Economics seems a subject more suited to art rather than science. Its tools appear to be those of science, but it uses those tools in an artful way to develop results it wants to achieve. Its focus seems to be zero dimensional where you use a single point to draw a one dimensional line of any desired slope. The slope figuratively represents your preferred economic narrative. It externalizes everything that doesn't fit the narrative's result, e.g. labor, environment, cronyism, monopoly, imperfect markets, etc. etc.
Science uses one, two, three, and more dimensions to describe nature. Science does externalize some variables to discover new areas of knowledge about nature but always tries to unify its findings in the end. Economics never unifies. It always seems to keep elemental findings separate to form artistic interpretations suited for the eye of its beholder.
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