Neoliberalism: Are We Sure That's the Right Word?: Talking to Noah Smith —Brad DeLong

Defining "neoliberalism" as social democracy lite. This not The Onion.

Grasping Reality
Neoliberalism: Are We Sure That's the Right Word?: Talking to Noah Smith
Brad DeLong | Professor of Economics, UCAL Berkeley

Jason Smith — What to theorize when your theory's rejected

I was part of an epic Twitter thread yesterday, initially drawn in to a conversation about whether the word "mainstream" (vs "heterodox") was used in natural sciences (to which I said: not really, but the concept exists). There was one sub-thread that asked a question that is really more a history of science question (I am not a historian of science, so this is my own distillation of others' work as well a couple of my undergrad research papers).

Useful relative to philosophy of science and history of science, as well as foundations of economics. Philosophy of science makes use of the history of science.

It is also relevant to the orthodox and heterodox debate in economics.

Information Transfer Economics
What to theorize when your theory's rejected
Jason Smith

Michael Roberts — Neoliberalism works for the world?

[Noah] Smith is keen to refute the ‘mixed economy’, anti free trade ideas that have been sneaking into mainstream economics since the Great Recession, namely that ‘neo-liberalism’ and free markets are bad for living standards. Instead, a little dose of protectionism on trade (Rodrik) and state intervention and regulation (Kwak) helps capitalism to work better.

But no, says Smith. Neoliberalism works better. He cites China’s growth phenomenon as his main example! In China, “the shift from a rigid command-and-control economy to one that blended state and market approaches — and the liberalization of trade — was undoubtedly a neoliberal reform. Though Deng’s changes were mostly done in an ad-hoc, common sense manner, he did invite famed neoliberal economist Milton Friedman to give him advice.”

He then adds India to this argument: “A decade after China began its experiment, India followed suit. In 1991, after a sharp recession, Prime Minister Narasimha Rao and Finance Minister Manmohan Singh scrapped a cumbersome system of business licensing, eased curbs on foreign investment, ended many state-sanctioned monopolies, lowered tariffs and did a bunch of other neoliberal things.”

Boy, does this take the biscuit. China’s economy is an example of successful neoliberal economic policy!? In several posts I have shown that China is not a free market economy by any stretch of the evidence and may not even be described as capitalist. It is state-owned and controlled with investment and production state-directed, with profit secondary to growth as the objective. Indeed, the IMF data on the size of public investment and stock globally put China in a different league compared to any other economy in the world.

As for India, the state sector also remains significant, something which continually upsets the World Bank and neoliberal economists. The policy measures of the 1990s can hardly be used as the explanation of the pick-up in economic growth in India. During the 1990s, productivity growth in all the major ‘emerging economies’ picked up – only to fall back again after the Great Recession. Globalisation and foreign capital were drivers then everywhere.

Anyway it is not really true that Indian government policy is ‘neo-liberal’ – on the contrary. In contrast, the clear shock switch to neoliberal capitalism by Russia’s post-Soviet governments and its oligarchs was a total disaster (Smith calls it a ‘mixed success’!). Growth, living standards and life expectancy collapsed. Indeed, the conclusion that might be drawn is not that ‘neo-liberal reforms’ have driven the relative economic success of China and India in the last 30 years but their resistance to such policies....

Michael Roberts Blog

Neoliberalism works for the world?
Michael Roberts

Brian Romanchuk — How Not To Defend DSGE Macro

As an outsider, one can only revise down one's opinion of the academic standards of mainstream economists. We have an intellectual debate in which one side refuses to admit the existence of the debate in the first place. I am not an expert on the scientific method, but it seems to me that is not how it is supposed to work.

Bond Economics 

How Not To Defend DSGE Macro

Brian Romanchuk

Jason Smith — In the right frame, economies radically simplify

More thoughts on economic methodology. First a framework is needed and then theories can be constructed and tested in that framework. The simplest frame and most economical theory that explains the data sufficiently to be useful is preferred.

A framework involving complexity is not necessarily better than one that doesn't as long as it gets the job done.

Smith observes that theories constructed within the conventional framework that conventional economists presume is not getting the job of explanation and prediction done very well.

He cautions that this doesn't necessarily mean that a more complex framework is better at explanation (formal theoretical model) and prediction (empirical testing of the model against adequate data).

The dynamic equilibrium frame [of Smith's information transfer economics] not only radically simplifies the description of the data, but radically reduces the information content of the data.... 

This is all to say the dynamic equilibrium model bounds the relevant complexity of macroeconomic models. I've discussed this before here, but that was in the context of a particular effect. The dynamic equilibrium frame bounds the relevant complexity of all possible macroeconomic models. If a model is more complex than the dynamic equilibrium model, then it has to perform better empirically (with a smaller error, or encompass more variables with roughly the same error). More complex models should also reduce to the dynamic equilibrium model in some limit if only because the dynamic equilibrium model describes the data.

This would suggest that the methodological debate in economics is not over, as conventional economists claim.

Information Transfer Economics
In the right frame, economies radically simplify
Jason Smith

Jason Smith — Lazy econ critique critiques

I agree that "unrealistic assumptions" has to be just about the laziest econ critique in existence. I wrote a post I was particularly proud of about how a lot of econ criticism is starting to look like vacuous art criticism.

Information Transfer Economics
Lazy econ critique critiques
Jason Smith

Brad DeLong — Must-Read: Noah Smith: The Ways That Pop Economics Hurt America

I could have linked to Noah Smith directly, but Brad DeLong makes some worthwhile observations, too.

The heterodox have been saying this forever, but now the mainstream is picking it up and it is starting to stick, not only owing to the correctness of the analysis but the need of the times. It's obvious to all but the true believers that the story being peddled is not only bogus and is resulting in disaster that has spilled out of economics and finance into the social and political spheres. 

Mainstream economists are increasingly beginning to realize that this can't be ignored any longer without incurring reputational risk personally and damaged credibility to the profession as a whole, including themselves if they don't speak out.

WCEG — The Equitablog
Must-Read: Noah Smith: The Ways That Pop Economics Hurt America
Brad DeLong

Noah Smith — Do economists have physics envy? (Part 2)

The making of another interesting argument that is interesting from my perspective as involving the philosophy of science.

One thing that seldom gets mentioned in this argument, outside of Post Keynesian circles, is Paul Samuelson's MIT approach to economics in which he realized that to write the kind of formal models that he wanted, he needed to assume ergodicity. Paul Davidson criticized this assumption.

Noahpinion
Do economists have physics envy? (Part 2)
Noah Smith | Bloomberg View columnist

Jason Smith — What should we expect from an economic theory?

I got into a back and forth with Srinivas T on Twitter after my comment on an Evonomics tweet. As an aside, Noah Smith has a good piece on frequent contributor at Evonomics David Sloan Wilson (my own takes are here, here, here). I'll come back to this later. Anyway, Evonomics put up a tweet quoting an economist saying "we need to behave like scientists" and abandon neoclassical economics.

My comment was that this isn't how scientists actually behave. Newton's laws are wrong, but we don't abandon them. They remain a valid approximation when the system isn't quantum or relativistic. Srinivas took exception, saying surely I don't believe neoclassical economics is wrong in the same way Newton is wrong.

I think this gets at an important issue: what should we expect of an economic theory?….

Information Transfer Economics
What should we expect from an economic theory?
Jason Smith

David Sloan Wilson — My Opinion of Noahpinion: A Response to Noah Smith’s Critique About the Future of Economics

It’s a pleasure to be critiqued by Noah Smith in his widely read blog Noahpinion. I have no cause to complain, since his critique is good natured and he agrees with at least some of my points. Still, I feel misunderstood in a way that is consequential for the future of economics.…

What stands out in Noah’s critique of my piece is its complacency. It’s like he’s discussing the arrangement of deck chairs aboard the Titanic. There is no sense of urgency about the failure of orthodox economics theory and the need to place it on a new foundation.…

Evonomics
My Opinion of Noahpinion: A Response to Noah Smith’s Critique About the Future of Economics
David S. Wilson | SUNY Distinguished Professor of Biology and Anthropology at Binghamton University and Arne Næss Chair in Global Justice and the Environment at the University of Oslo

Jason Smith — Keen, chaos, and equilibrium

Physicist Jason Smith critiques a debate among Steve Keen, Roger Farmer, Noah Smith, and David Andolfatto over Steve' recent Forbes post asserting that the economy is best modeled as a complex non-linear system instead of using the conventional linear stochastic models (DSGE) based on assuming general equilibrium.

Actually, as a physicist, I would say that even if the economy was a complex nonlinear chaotic system, linear stochastic models would still be its effective theory description. Regardless of what the quantum theory of gravity is, general relativity -- and even Newton's universal law of gravitation -- is still its long-distance effective theory.

Anyway, this prompted me to write something about Steve Keen's article in Forbes. Keen suffers from a problem that all public economists seem to suffer: asserting matters of opinion as matters of fact, and ongoing research programs as well-established frameworks. This will be made clear as we progress. Let's begin, shall we?

Information Transfer Economics
Keen, chaos, and equilibrium
Jason Smith

Jason Smith — Macro is not like string theory

Another bad analogy. Jason Smith explains why.

Information Transfer Economics
Macro is not like string theory
Jason Smith

Ari Andricopoulos — On Maths and Models

Every now and then a debate seems to flare up about economic models. A recent one started with Noah Smith arguing (in reply to Frances Coppola), that heterodox economics does not have the tools to replace mainstream economics. Steve Keen gave an excellent point by point reply about the mathematical quality of heterodox work. Then Frances also wrote a reply and then another, which  I agree with, pointing out that an understanding of the economy does not require maths. Where maths can be used to formalise this understanding, it is very useful. But economics is not a mathematical equation.

I say this from the point of view of someone with a PhD in mathematics, but whose job is to predict the behaviour of systems, specifically financial systems. And I know that in describing a system, parsimony is king. One should use as much maths as is necessary and not a bit more. The more complex the maths, generally the worse the predictive power.

The economy is a very complex system. It is non-linear with a huge number of unknowns. For this reason prediction is difficult. This seems to have meant that any degree of poor prediction is excused on the grounds that no-one can predict the future. I recommend everyone read this excellent Noah Smith blog post from 2013 which was only let down by the somewhat cowardly conclusion.  It shows DSGE models are not useful as predictions - he points to this paper showing that DSGE models are no better than simple univariate autoregression (AR) models at predicting inflation and GDP growth. Bearing in mind AR models are just simple mean reversion models this is a pretty categorical failure. He then argues that they are neither good for policy advice nor even for communication of ideas, before concluding that we should continue with them as the are the 'only game in town'.

Saying that the economy can't be predicted because it is too complex and no-one knows the future is a big cop out for me. No-one could have predicted with any degree of certainty that the global financial crisis would happen in 2008. This is because it is impossible to predict the timing of events of this nature that depend on triggers and positive feedback loops. It also depends on policy reaction. For example, a possible crash in China early this year was averted by a large government spending programme. But what heteredox economics has done is give keys to understanding the nature of the economy.…

Notes on the Next Bust
On Maths and Models
Ari Andricopoulos | ‎Partner at Dacharan Advisory, Zurich, and PhD in Mathematics

Lars P. Syll — Steve Keen, Noah Smith and heterodox ‘anti-math’ economics

Responding to the critique of his Bloomberg View post on heterodox economics and its alleged anti-math position, Noah Smith approvingly cites Steve Keen telling us there is

a wing of heterodox economics that is anti-mathematical. Known as “Critical Realism” and centred on the work of Tony Lawson at Cambridge UK, it attributes the failings of economics to the use of mathematics itself…

Although yours truly appreciate much of Steve Keen’s debunking of mainstream economics, on this issue he is, however, just plain wrong! For a more truthful characterization of Tony Lawson’s position, here’s what Axel Leijonhufvud has to say:

Lars P. Syll’s Blog
Steve Keen, Noah Smith and heterodox ‘anti-math’ economics
Lars P. Syll | Professor, Malmo University

Matias Vernengo — Noah Smith on heterodox models

Matias deftly takes down Noah contra heterodoxy as not knowing what he is talking about. To cut to the chase, read this. It's short and has some good references, too.

Naked Keynesianism
Noah Smith on heterodox models
Matias Vernengo | Associate Professor of Economics, Bucknell University

Lars P. Syll and Ramanan reply to Noah Smith on the use of math in econ

Noah Smith — like so many other mainstream economists — obviously has the unfounded and ridiculous idea that because heterodox people like yours truly, Hyman Minsky, Steve Keen, or Tony Lawson, often criticize the application of mathematics in mainstream economics, we are critical of math per se.

I don’t know how many times I’ve been asked to answer this straw-man objection to heterodox economics– but here we go again.

Lars P. Syll’s Blog
Noah Smith — confusing mathematical masturbation with intercourse between research and reality
Lars P. Syll | Professor, Malmo University

So it is not that neoclassical economists have great mathematical tools. It’s that by failing to incorporate the framework of flow of funds, they are showing their incompetence in mathematical reasoning.

Math is a tool box filled with various tools fit for different purposes. The art of using tools involves not only knowing how to use each tool properly but also how to choose the right tool for the job.

The Case for Concerted Action
Economics Without Mathematics?
V. Ramanan

Note: Noah Smith is a troll.

Andrew Linton — On Loose definitions of Stock Flow Consistency

No DGSE models cannot be called Stock-Flow Consistent.

A correctly specified closed mathematical model will only have a ‘netting’ of flows to zero in one case – equilibrium. In that case you have all stocks no flows – but it cannot handle any out of equilibrium case of its time path – the real world. Because orthodox Neoclassical models are not defined in strict accounting terms – as a balance sheet of assets and liabilities that are unable to model consistency of relations that are defined as assets and liabilities, simple things like assets, debt and money. Crude attempts to overcome this – such as measuring in flows and outflows to a blobby body such as K the stock of capital have irresolvable issues of dimensionality through over over-aggregation.…

Decisions, Decisions, Decisions

On Loose definitions of Stock Flow Consistency

Andrew Linton

Cameron K. Murray — Stock-flow confusion (wonkish)

In his latest article, Noah Smith repeats a claim that has long bothered me: that mainstream economic models are “stock-flow consistent”. Which is to imply that the very popular research agenda in monetary economics using stock-flow consistent (SFC) methods has little new to add to the mainstream. Because. You know. We got that.

I want to respond with two points. First, a theory is a concept. An idea. Theories can therefore be modelled mathematically in many ways. Second, the stocks and flows of the mainstream are different, theoretically, to those of the monetary economists.…

Fresh Economic Thinking
Stock-flow confusion (wonkish)
Cameron K. Murray

Brian Romanchuk — Macro Theory Strands

Another view of the debate begun by Noah Smith and given a push by Brad DeLong on types of macro theory.

Bond Economics
Macro Theory Strands

Brian Romanchuk

JW also comment in this post.

J. W. Mason's Blog
Links for June 15, 2016JW Mason | Assistant Professor of Economics, John Jay College, City University of New York

Merijn Knibbe — The empirics of Noah-macro

The debate is on.

Real-World Economics Review Blog
The empirics of Noah-macro
Merijn Knibbe

See also

Noahpinion
Econ theory as signaling?
Noah Smith | Assistant Professor of Finance, Stony Brook University