Category Archives: Smackdown

Resist the Noah Smith Brain Worm

The more confident the seller, the more confident you should be that it's B.S.

In a recent Bloomberg View piece, Noah Smith ridicules “Austrian economics” for a number of silly or wrong things certain professors and investors, but mostly young high school and college students, have said between 2007 and the present: (a) high inflation/hyperinflation, (b) a non-useful definition of inflation, (c) math is used to obfuscate,…, and so on. It’s basically a poor literature review of what hundreds of bloggers have already said.

Noah is technically not wrong on any of the individual points he makes. The problem is not with the evidence, but with the overall tone of the argument. He’s telling his audience to ignore “Austrian economics” on the basis of what a minority of actual Austrian economists believe in. Someone who really knew what he was talking about would take you through a deeper exploration of the literature and show you what academic Austrians really think. In fact, since Noah apparently couldn’t be bothered with doing actual research, I’ll give you some brief examples.

The Federal Reserve — Take three of the most well-known economists who oppose the Fed: George Selgin, Larry White, and Roger Garrison. Do you think their argument in favor of their position is that the Fed prints money to benefit big banks? It isn’t. Selgin and White developed a theory of free banking, and make a further theoretical argument that in a comparative analysis central banks do not pass the cost–benefit analysis. This line of reasoning isn’t obscure. There is a big literature on competitive currencies and competitive monetary institutions, much of which was written by clearly “mainstream” economists. Unfortunately, Noah doesn’t show you that side of the story.

Inflation — Yes, many Austrians, some professors, many rich old guys, and many more exuberant youths made predictions of hyperinflation or very high inflation. In 2009–10 I was eaten by the brain worm, I must confess, and I was one of those youths. But, fortunately, there were many level-headed Austrian economists, such as Steven Horwitz, who were making a different prediction: that the demand for money had significantly increased and that the best response is an increase in the supply of money. Another example is Selgin, who is well known as a proponent of the “productivity norm,” differentiating between “good” deflation (productivity increases) and “bad” deflation (rightward shifts of money demand).

By the way, do Austrians really use such an idiosyncratic definition of inflation? It’s true, some do. Most Austrians, nevertheless, might use a technical definition, such as: an excess supply of money. But, that’s basically the definition that most mainstream economists ascribe to the term. So, no, Noah is not characterizing the Austrian School well in this case (points 2–4), either.

Mathematical Mumbo-Jumbo — Again, Noah Smith is absolutely right. The real mumbo-jumbo is the nonsense argument that economists use math to support government policies, or to confuse readers, or to mesmerize their peers. Math was introduced into economics to help make a theory explicit. When an argument is advanced in pure prose, the written word can be vague. In a formula, though, all the factors you have in mind are explicit and it forces you to be more careful about where you take your reasoning. One, however, might make the argument that the use of math in econ can be suboptimal, especially if the models are intractable or, frankly, not very interesting. By the way, no serious Austrian economist argues that the use of math in mainstream econ has malicious motivations. Again, Noah is doing his readers a disservice.

Noah is a professor. He knows how to teach. It’s my view, at least, that the professor is supposed to open the student’s mind, so that the latter knows how to compare, analyze, and verify different arguments. That’s the exact opposite of what he does in his Bloomberg article. He prefers to hard sell his audience a very poorly researched article on Austrian economics that essentially tells them to ignore the Austrians. That is anti-science. Science progresses via a dialectic, where people weigh different theories against each other. The market for ideas is like governance, you want pluralism and competition. Excluding an entire group of economists from the debate hurts economic science, and I’m disappointed Noah took his trolling to such a low level. He’s better than that. Although, yes, that Noah’s argument is as shallow as it is turns a very bad article into one of the worst I’ve read in a long time.

Frank Hollenbeck’s Parallel Universe

I have a hard time believing that “The Sad State of the Economics Profession” was written by a professional economist. It is entirely wrong, including in its assessment of the profession, and it’s narrow, idealized history of thought. Frank Hollenbeck, the author, makes a number of claims, which are extremely unorganized, making it difficult to write a general comment. I want to address certain specific arguments,

  1. Hollenbeck’s attempt to contrast between economists who specialize in disproving “popular misconceptions” and those who “have sold themselves to the enemy” (government — maybe Hollenbeck should quit the University of Geneva, since it’s a public research school).
  2. The claim that mathematical models are not useful in economics, because “the parameters are not constant, most of the variables are interrelated with constantly changing interrelationships and omitted variables, like expectations, some of which being immeasurable, are conveniently assumed away as unimportant.”
  3. That empiricism is useless, because “it is difficult to distinguish between association and causation or correctly determining the direction of causation.” (Economists must be idiots for missing such a simple fact!)

If there is any element of truth in those three statements, Hollenbeck has done them a great disservice, because his defense of those claims is very weak.

I

The irony in Hollenbeck’s piece is that he accuses his peers of corruption, and supports his theory by building a mythology. All theory — except, I assume, that put forth by economists friendly to Mises — since 1930 is retrogressive, because it was all developed to legitimize false truths. Yes, Hollenbeck makes this argument explicitly,

The profession is always moving forward, right? In economics, we wrongly take the same attitude. Macroeconomics as a profession has not advanced but has regressed. We had a better understanding of macroeconomics 80 years ago. Politicians put Keynes on a pedestal because he gave them the theoretical foundation to justify policies that had been justifiably ridiculed in the past by the classical economists.

Nevermind that the academic popularity of Keynes’ ideas was a result of how well they persuaded his peers, not because of their congruency with public policy of the time. Although, I suppose all of Keynes’ peers were also corrupt, except (conveniently) whichever one of them might have advanced a theory that Hollenbeck actually agrees with (but may just be unaware of, because his history of thought is so poor). But, my intention is not to defend Keynes, just to point out that Hollenbeck mistakes reasonable disagreement for corruption and malice.

Economics is tough, because society is complex. Because of reality’s complexity, economists must build theories, or ideal types, that help us explain what we observe. But, this implies a certain disconnect between theory and the real world, because ultimately the former is only an interpretation. This interpretation was made by someone who only knows only some fraction (0 < x < 1) of the facts. Because we are cognitively limited, which is the reason why complex systems are difficult to understand, the ideal types we build will be similarly limited. And, because we all have asymmetric sets of priors, our posteriors are unlikely to be exactly the same. In English: economics is exactly the kind of subject over which there will be a lot of disagreement.

Hollenbeck’s approach to this disagreement is to dismiss it as corruption. I suppose this option is attractive to someone who does not know much about, or sees no merit, in post-interwar economics. The lack of merit position is hard to square, however, with the undeniably insightful theoretical advancements since 1930: the transaction cost theory of the firm (I forgot, Coase is a socialist), New Trade Theory, asymmetric information, et cetera. Those are three examples of hundreds more. Our understanding of the economy is incomparable to that of the 19th century — it is superior. J.B. Say did not benefit from the same degree of understanding of institutions, for example, or international trade, or price theory. Although, J.B. Say was smart enough to know better than Hollenbeck on monetary theory — so, I guess that some economists’ understanding has indeed retrogressed.

What about disagreement before 1930, was it also caused by intellectual corruption within the profession? Was Adam Smith a pawn of the state for preferring a dynamic, private supply of money? I am assuming that David Hume was the economists’ equivalent of a Jedi, because he advocated for a fixed money supply. Dark forces must have been behind the disagreements between Carl Menger and W.S. Jevons. J.S. Mill’s utilitarianism must have been developed to justify public policy of the mid- and late 19th century. It’s easy to play Hollenbeck’s game, but it’s obvious that the game is bunk.

What makes Hollenbeck’s approach so unfortunate, and so disheartening (as an Austrian sympathizer), is it runs contrary to the other common claim that the mainstream simply ignores what heterodox economists have to offer (and, by heterodox, I mean “Austrian” specifically). The truth is that the ignoring works the other way: heterodox economists like to ignore the mainstream, or dismiss it is as all wrong — which is essentially the same thing. But, how could a serious economist ever take a critique like Hollenbeck’s seriously? I am sure he has good ideas, but he does them an injustice by instead accusing his peers of intellectual corruption. This being an accusation that only someone terribly ignorant of the state of economics could make.

II

Forget, for a second, about mathematics and formal economics. Take any theory, such as Ricardo’s theory of comparative advantage. This theory says that exchange will be organized in such a way to minimize opportunity cost, because people will specialize where they have a comparative advantage. You have a comparative advantage in specializations where your opportunity cost is lower relative to others’. This can be generalized, and we can say that countries will specialize where they have a comparative advantage. Ricardo missed, however, — or at least it was not explicit in his model — that factor endowments help determine comparative advantages, and so initial endowments can go some way in explaining international trade. As it turned out, Ricardo’s model of trade was missing out an entire independent cause! Economies of scale can also explain trade, and it might even do a better job at it! These were factors which Ricardo had omitted from his model.

It’s strange that Hollenbeck does not level the same criticism against all economic theory. If we have to build ideal types, abstractions, to understand the real world, and these ideal types will suffer from incompleteness (because of the incompleteness of our knowledge), then they all are burdened by the same probability of omitted factors. The truth is that all economists, including Hollenbeck, are aware of this and they embrace it. That is why there is an academic process of scientific advancement. We know that our theories are not good enough, so we continue to develop them. Hollenbeck’s critique of mathematical models on account of “omitted factors” is simply nonsense.

The claim that mathematical models are useless, because their parameters are non-constant, is weak, and is equally applicable to theory in general. Theory is about positing, and rationalizing, certain relationships between variables. It’s no different whether you present a theory in words, or whether you present it in math. If you read a good theoretical economics paper, what you find is a model that is largely qualitative, in the way that I think most people understand that word. The model does not say that an increase in price by five percent will lead to a decrease in demand by one. It abstracts from those kind of specifics, focusing instead on the relationships. This is true whether the model is presented in words or in math.

Why use math at all? The problem with the written word is that it’s easy to be vague. An economist might advance a theory, their critiques would respond, and that economist might claim that his critiques completely misunderstood him. Math helps make the model more explicit. This also helps the economist to present a stronger, more complete theory, since he has to figure out the explicit model before he can present it. In other words, math helps the economist think about what he is omitting. In other words, Hollenbeck’s critique is actually stronger against the form of communication he prefers, than it is against math.

While Hollenbeck does not bring this up, one other objection to math might be that the type of assumptions that have to be made are typically much more strict, and less plausible. I think there is merit to this criticism, but it’s also something that most economists are aware of when they are drawing conclusions from their model. Mathematical models have to worry about being tractable, so that they can be worked with. Good models are always very careful about their assumptions, however, and if the simplification is too strong the model is not very useful. Economists often put work into defending their assumptions. And, when it comes to drawing conclusions, economists consider their assumptions when generalizing the results of the model.

If you think there is an “obvious case” against the use of math in economics, you are wrong.

III

This needs to be made clear: all economists know that correlation is not causation.

This is something students are told in the first or second week of an introductory econometrics class. Your model must be informed by theory. There has to be a reason that you assume a relationship between two variables. I mean, duh. It doesn’t make sense to use econometric techniques to test a theory if you aren’t actually basing your model on any theory. But, if your theory says that any increase in the money supply will cause a general rise in prices, then we have good reason to expect correlation between those two variables. We use econometrics to get an idea of what the direction of joint variation is, if there is direction at all. The theorist imputes causation, and the empiricists tests whether there is association at all.

Why would we want to test theory? People can make mistakes in their reason. In fact, they can make mistakes they are unaware of. We all do it all the time. We all have had that experience where we’ve thought something to be true for the longest time, we suddenly see it from another angle, and what was once true is now false. The false belief, at the time, seemed very reasonable. We even looked down on those who disagreed with us, because we thought they were missing something obvious (obvious to us, at any rate). But, it was only we who were missing something! Empiricism cannot definitely disprove or prove theory, but it can help to update our priors. It helps us to see which correlations in the data there actually are, to weed out theories that are irrelevant. And, if we posit a causal relationship between A and B, but we observe that B doesn’t occur, despite A, it might lead us to revise our assumptions. It might cause us to see the world a different way, and to discover something that we previously hadn’t considered.

All in all, Hollenbeck’s article is very confused. His readers deserve better, because they are being misled. That his arguments are very weak, however, doesn’t mean that my beliefs are right. That’s alright. Disagreement is a part of business, and we have to communicate to resolve them. But, accusing me of intellectual dishonesty is not a way to go about that. Neither is leveling a barrage of “obvious” problems at the profession, “obvious” problems that on second look are not problems with the profession at all.

“Fundamental Logical Mistake”

I thought Kevin Wildes critique of Walter Block was funny, because none of it seems to be true. Now, I don’t think Block’s piece is very good, either — but, that’s an old story.

Particularly entertaining is Wildes’ second paragraph,

His second claim is an example of a fundamental logical mistake. In peaking of discriminatory lunch counters, Dr. Block makes the mistake of assuming that because of the Civil Rights legislation people would be compelled to associate with others against their will. The Civil Rights legislation did no such thing. What the Civil Rights legislation did was prevent places like Woolworth’s from excluding people because of their race. No one was forced to sit at the lunch counter. The law simply made clear that people could not be excluded from the lunch counter because of their race.

The mistake made has already received wide coverage; see David Henderson here, or Steve Landsburg here.

I think he does realize he’s wrong, but he doesn’t want to admit the real reason he disagrees with Block. Or, maybe the focus on the right to disassociation distracts Wildes. Those who support the Civil Rights legislation believe that people, especially those who provide products and services, shouldn’t be allowed to disassociate with others based on race. I don’t know why he doesn’t make this point instead, since it’s a reasonable — not certainly right, but not certainly wrong, either — position to hold.

Robert Wenzel is Not an Economist…

…so it’s best not to take him seriously on these matters.

Responding to a part of a Steven Horwitz post that talks about aggregate demand shortages, Wenzel writes,

This is as far from Austrian theory as you can get.  Austrian school economists see central bank monetary expansion as distorting the economy.

This shows the extent of Wenzel’s understanding. He can’t separate the concept of an aggregate demand shortage from that of an oversupply of money by the Federal Reserve. This means he can’t realize that aggregate demand shortages are relevant even in a world where there is no central bank. And aggregate demand shortages need to be resolved through an equilibration of the supply and demand for money, whether through a falling price level or an increase in the supply of money. Any disequilibrium means there’s room for entrepreneurship, and that’s just what private banks (or clearing houses) with foresight do: increase the supply of money.

This type of behavior is just what I try to explain in an older post, “Epistemology of Rejection.” I use the exact same topic to illustrate what I mean. (Of course, some “Austrians” took it personally — I was much more polite there than I am here. I’m taking a cue from Krugman: snark is necessary in an environment where credentials don’t matter.)

Undisciplined Obamacare

I haven’t been following the issue closely, but the Obamacare website has been experiencing significant technical problems. Some people want to argue that this proves Obamacare is a huge failure. I’d argue that the real test of success (or failure) is whether healthcare costs are eventually kept down and, more generally, whether it actually achieves its objectives (net of costs). But, because I don’t know much about Obamacare to begin with, it’s better for me to not pass judgment on on the debate at all.

But, I feel compelled to comment on Steve Landsburg’s “Six Observations.” Specifically,

It seems pretty likely that a big part of the reason why Amazon’s website works so well and Obamacare’s website works so poorly is that Obamacare, unlike Amazon, is not subject to the discipline of the market (and therefore, for example, employs coders with no equity in the enterprise).

This is a strange framing of the problem. Socialist countries are typically known for being very technically proficient. But, technical efficiency is not economic efficiency. The case against socialism is that without a pricing process, we don’t have a proxy that informs us on the relative scarcity of the factors of production. So, for all the technical efficiency of central planning, it all nonetheless represents an incalculable welfare loss, because the inputs were not pitted towards the highest valued ends.

There is a competitive aspect to the technical problems suffered in the early stages of Obamacare. If this were a competitive, private market, the second I suffered difficulties in signing up for one program or another, I would have an added incentive to simply opt for a competitor. Obamacare doesn’t give me that option. This is a cost to the system, but it’s a cost that must be weighed against the benefits, and to know the benefits we have to wait until they appear. (Just to clear: there are theoretical arguments for/against Obamacare, but I’m strictly talking about empirical falsification — pointing out the technical difficulties is an attempt at empirical falsification.)

My general point is that if you want to make an empirical case against Obamacare, these early glitches are probably not the best evidence. They, in my opinion, don’t get to the root of the problem with central planning. Rather, they’re errors that are just as likely to show up in private provision — technical ignorance has never been a strong argument against central planning. In fact, those who advocate socialism often point to historical evidence of great technical efficiency; e.g. the mass production of war material during the Second World War. The task of the economist is to show, as aforementioned, why technical efficiency is not economic efficiency.

By the way, I’m pretty sure that people hired by the government to code a website earn a wage, with some relation to market prices, and face some risk of being fired if they don’t preform their job well. So, I don’t think there is any basis for Landsburg’s suggestion that there may be an incentive problem behind Obamacare’s website’s technical issues.

Folly of One-ism

Lance Roberts has a guest post published on Zero Hedge today, showing the United States’ decline in several rankings: education, income inequality, human development, et cetera. Roberts blames “dependency” and debt, or, in other words, the welfare state. He calls for “better leadership” — ambiguous much?

Some discussion points,

  1. We’re in desperate need of a good, convincing, comprehensive “free market” explanation of the United States’ growth path in these areas. I think explanations today are either weak or too specific, therefore not directly applied to the broad picture;
  2. Many countries that boast better figures in the area Roberts highlights have larger welfare states than the United States. How does fit within the naïve conservative take?
  3. Why should we care about being #1? Take education and suppose that the United States is ranked below country ‘X.’ Assume country ‘X’ achieved its rank by spending vast sums of money on education and, although not true to the real world, the United States has a completely private market. How should we interpret the statistic? Does it consider misallocation of human capital, and of resources more generally? It could be that being #1 is actually making society worse off. There are other ways this could be true — imagine an economy with a comparative advantage in industry that doesn’t require education in the sense of higher education in the humanities and sciences. This country, when ranked by education, might be at a “disadvantage” as compared to another with a comparative advantage in intelligentsia-related products. Why should we care?

I don’t think it helps to tackle these issues by means of non-nuanced methods. Unfortunately, the internet — through both the media and the blogosphere — make it seem as if these are the only explanations non-liberals can come up with. It’s these arguments that lend credence to pundits, such as Paul Krugman, who go on to claim that “conservatives” have lost touch with reason.

Stretching the Truth

As usual, I’m late in watching the presidential debates. On the topic, I followed a link on a recent Paul Krugman post to a piece by Sarah Kliff for the Washington Post. Kliff argues that Mitt Romney is essentially lying when he claims that his (or Paul Ryan’s) healthcare plan is not necessarily opposed to pushing health insurance firms to cover pre-existing conditions.

Kliff explains,

It started with the Republican presidential candidate saying during an appearance on “Meet the Press” that he liked the Affordable Care Act’s provision that requires insurers to cover preexisting conditions, and would support something similar. Hours later, his campaign clarified he did not, however, support a federal ban against denying coverage for preexisting conditions. Around 10 p.m., the Romney camp had circled back to the same position it held back in March: that the governor supports coverage for preexisting conditions for people who have had continuous coverage.

I wrote a bit yesterday about why this is different than ending preexisting conditions altogether. In short, it means that those who go a month or two without coverage could later be denied insurance for a medical condition. If, however, you have had a gap in coverage — perhaps because you lost your job and couldn’t afford it — an insurer could not deny your application due to a preexisting condition.

To support her claim, she cites a study which argues that,

Last month, the nonprofit organization released its annual look at gaps in health insurance. It found that, between 2004 and 2007, 89 million Americans had at least a single one-month gap in insurance coverage. They were not, in other words, continually insured.

Am I alone in thinking that that statistic isn’t directly relevant?

89 million Americans doesn’t reflect on: (a) the number of Americans with pre-existing conditions; (b) the number who fall in category (a), but remain uninsured; or (c) the number of Americans who experienced discontinued coverage due to unemployment (since these, as Kliff explicitly states, would still be covered in the event of a pre-existing condition). Neither does it reflect on (d), the number of Americans who can afford health insurance and prefer not to procure it.

I’m sure that liberals can still make a strong case against Romney’s healthcare plan — whether or not someone likes me holds the same specific moral positions (edit: I’m not implying I’m voting for Romney) —, but loose numbers don’t help their case.

Edit:

David Henderson discusses healthcare and last night’s debate. He suggest’s Avik Roy’s piece on the same subject.