Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 31 July 2014

What are academics good for?

A survey of US academic economists, which found that 36 thought the Obama fiscal stimulus reduced unemployment and only one thought otherwise, led to this cri de coeur from Paul Krugman. What is the point in having academic research if it is ignored, he asked? At the same time I was involved in a conversation on twitter, where the person I was tweeting with asked

“What I have never understood is what is so great about academic economists? Certainly not more objective.”

They also wrote

“Surely, rather a dangerous assumption to think that an academic whose subject is X > a non academic whose subject is X”

In other words, why should we take any more notice of what academic economists say about economics than, well, City economists or economic journalists?

Here is a very good example of why. The statement that the 2013 recovery vindicates 2010 austerity has a superficial plausibility because of the dates (one is before the other) and both involve macroeconomics. However just a little knowledge, or reflection, shows that the statement is nonsense. It is like saying taking regular cold showers is good for curing colds, because everyone who takes them eventually gets better. But the thing is George Osborne says the statement is true, so this is a test of objectivity as well as expertise.

In the Christmas 2013 FT survey of various economists, one question was “Has George Osborne’s “plan A” been vindicated by the recovery?”. Among the academic economists asked, ten said No, and two said Yes. So two gave the wrong answer, but if you knew who they were you would not be surprised. Among City economists surveyed, the split was about 50/50, with at least a dozen giving the wrong answer. Worth remembering that the next time someone says these guys must know what they are talking about because people pay for their advice. (Some do, some do not.)

And journalists? Well, there are some very good ones, particularly those working for newspapers like the Financial Times. Which is why I found the FT leader with the headline “Osborne wins the battle on austerity” so outrageous. If I also tell you the tweets above came from a well known economic journalist, you can see why I found them revealing.

This goes back to the question Paul asked. If we don’t think that academic economists’ opinions about economics are worth anymore than other peoples’ opinions, why do we bother to have academics in the first place? Now of course for some questions an academic economist’s opinions are indeed worth little more than those of anyone else: questions like what will economic growth be in two years time, for example. In fact academic research using models tells us that answering questions like that is almost all guesswork. (Some people find that puzzling, but can a doctor tell you the date on which you will have a heart attack? But if you have a heart attack, you would want a doctor nearby.) And if you want to know what is wrong with your car, you ask a car mechanic not an economist.

And yes of course academic economists cannot all be trusted, and we do make mistakes. (Not all car mechanics can be trusted, and they also make mistakes. But would anyone tweet what is so great about car mechanics when it comes to cars?) But as Paul Krugman quite rightly keeps reminding us, academic macroeconomists have also got some important things right recently: inflation did not take off following Quantitative Easing, interest rates have stayed low despite bigger deficits, and our models said that Eurozone austerity could cause a second recession.

This post so far has seemed far too self serving, but I think this devaluing of academic expertise is not just confined to economics. The obvious comparison is the science of climate change, where the media often appears to give as much weight to paid up apologists for the carbon extraction industry as they do to scientists. When a UK MP and a member of the House of Commons Health Committee and the Science and Technology Committee has “spent 20 years studying astrology and healthcare and was convinced it could work”, it is maybe time to get seriously worried. What is so great about doctors anyway? 


  1. I would be much more impressed with academic economists if their forecasts of the future were better than, say, those employed by banks (or indeed by a small child taking the present data and adjusting +/-0.5% towards trend.)

    If you look at the same FT survey and the previous year and the year before that, the track record of the academics in forecasting (as opposed to the journalistic one of stating past facts and fitting them to a preferred narrative) is very poor, worse than those employed by the evil banksters.

    I am all in favour of expertise, but there are good reasons that academic economists should be able to grasp why they are relatively poorly paid.

    1. If you are going to comment, read the post! I specifically talk about forecasting.

    2. I did. You cherry picked. The FT asks academic and non academic economists to make forecasts every year. That seems to me to be a nice data set for those of us with no dog in the fight to compare their relative performance. They are being asked the same questions at the same time.

      You would have to be very generous to think the academics performed relatively well.

    3. No you didn't, and your reply shows you didn't.

    4. I am afraid I did.

      If you want those of us who are not academic economists to be impressed by the prediction that ez austerity would lead to a recession you have set a very low bar for yourself.

    5. Pity EZ policymakers couldn't get over that bar.

    6. "If you look at the same FT survey and the previous year and the year before that, the track record of the academics in forecasting... is very poor, worse than those employed by the evil banksters."
      Can you provide a web-link to evidence this claim please?

    7. I am sure they did. It is worse than you seem to think here. This was the price they were prepared to pay to save the euro (other better economic options not being politically possible.)

      The euro itself makes no sense in economic terms, but again its central purpose is not economic (political rhetoric notwithstanding).

    8. simon you'll have to google it. am on holiday.

    9. I did already...and checked the FT articles relating to those surveys but no breakdown of city economists v academic economists was published anywhere that I could find.
      However, I did find the Treasury's own 'Comparisons of independent forecast for the UK economy' which breaks down into 'city' and 'non-city' forecasters and in the periods you mention the data clearly shows that 'non-city' - the 'academics' - forecasting is definitely not "very poor, worse than those employed by the evil banksters".

      When you get a moment I'd be grateful if you could provide the link for your claim.

    10. Of course given that you made the claim, it ought to really be you who should 'google it' and then provide the link. If only to deter (slightly?) people from making false claims to fit their prejudices...or even from making false accusations of 'cherry-picking'?

  2. All goes to confirm Jean Paul Sartre's point that "Man is condemned to freedom". I.e. you can't trust anyone: you are condemned to taking the views of everyone else with a pinch of salt, including the views of academic economists, and ultimately deciding everything for yourself. My J.P.Sartre "existential" view is that I pay plenty of attention to people who have spent years studying a subject (i.e. academics) while not being overawed by them.

    1. Not sure about Sartre, but your view seems sensible to me!

  3. Don't want to sound like a broken record, but I dislike the doctor/mechanic/generic other scientist comparison for the following reason: like economists, these people cannot possibly predict the day things will go wrong or exactly what will happen. However, they can tell you that if you eat too many fatty foods/do not get your brakes fixed, then you are likely to have a heart attack/break down, and possibly give you a loose time frame. This is because they have an intricate understanding of how the human body/cars work. Therefore, the reason economists did not provide this kind of the prediction prior to the crisis is because they don't have this kind of comprehensive understanding of the macroeconomy, which is why everybody is disappointed with them. Will DSGE + financial frictions turn out to be 'the' comprehensive understanding that we were looking for? There's always a chance, but DSGE models also sacrifice so much relevance to the alter of formalism that I'm not holding my breath.

    1. I like the doctor analogy, although I'm happy to agree that medical science is much more advanced. There are a great many things medical science does not know, but may know with time. There are things where macroeconomists are able to provide just the kind of advice you talk about. Don't raise interest rates in a recession. If rates are already low, do not embark on austerity. You cannot have stable inflation and unemployment below 3% at the same time. We can now add don't allow large increases in financial leverage - you do not need a DSGE model to tell you that.

      So it seems to me that going on about a failure to foresee the financial crisis sells macro far too short, and just invites others to dismiss the knowledge we do have, which in turn allows things like Eurozone austerity.

    2. DSGE models with whichever frictions you like, are about how to respond to shocks. They are not going to give you the warnings you are looking for, because they assume exogenous shocks. You want models with endogenous crises. Such things exist within mainstream econ (are Geanakoplos leverage cycles such a thing? Sounds like it, but I haven't read it - the survey Financial Crises: Theory and Evidence by Franklin Allen and co-authors may be a good place to look)

      But perhaps more importantly, you have never going to get a comprehensive understanding of the economy from any one modelling approach (DSGE, or other) because such models are only ever going to pick off a few aspects of reality at time and be unsuitable for studying others. For example, I don't think you'd study the distributional impact of international trade in a DSGE model (I hope that example makes sense, I just plucked it from my behind), so if you want a comprehensive understanding of the economy you face the daunting task of understanding huge swathes of specialised economic fields. And as we all know, only one man in the universe is capable of that:

    3. You are conflating "you cannot model every aspect of the economy perfectly" and "DSGE does not model the economy as a whole adequately". The idea you need Acemoglu-like knowledge of each sub field to understand hat's going on at a macro level is just a relic of economics' obsession with reductionism.

      But anyway, you both seem to agree about DSGE to a degree, so I won't argue too much. Simon, it's all well and good to say macroeconomists know a few key observations and stylised facts about the economy, but my question then becomes why exactly the more complex models are needed and indeed used by central banks. Why not just stick with a few principles, evidence, ethics and intuition?

    4. Its a good question, but I have a good answer. Sometimes intuition can be wrong, and you need to do the maths to check it out. DSGE is just maths with parameters. An example. My intuition was that fiscal policy would dominate unconventional monetary policy of the Woodford forward commitment type, because the latter involved promising higher future output and inflation. The analysis I discussed here
      showed I might be wrong.

      So I would turn the question around. What exactly is so objectionable about using a DSGE model?

    5. I agree that models should help us discard naive intuition. The question for me is whether DSGE - a sophisticated, non-intuitive modelling framework - gets over intuition in a way that is empirically reliable, or if it can simply be used to churn out almost any counterintuitive result with the right assumptions. If it's the former, this should be easy to demonstrate with evidence; if it's the latter, then all we've got is our intuitions in another form, since they go in with the choice of assumptions.

      The recent EM paper we argued about had this in droves, and reading the one above I'd argue that the conclusions about the efficiency of government spending are driven by the assumptions about public goods, while the assumptions about inflation are driven by the degree of price stickiness. This isn't to dismiss the latter: I haven't looked at it fully enough. But I'm just suggesting that enough of DSGE can be found in the assumptions that I don't think it helps us beyond historical experience, a few 'principles' and our priors.

    6. "You are conflating "you cannot model every aspect of the economy perfectly" and "DSGE does not model the economy as a whole adequately". The idea you need Acemoglu-like knowledge of each sub field to understand hat's going on at a macro level is just a relic of economics' obsession with reductionism."

      I don't understand any of that. You were asking if DSGE was going to provide us with a "comprehensive understanding of the economy" and I answered: no. I interpreted "comprehensive" to mean not just where financial crises come from, or the impact of austerity, but also labour supply questions, questions around international trade, strategic behaviour by firms, the causes of economic growth, and so on and so forth. Which does require digging into sub fields. What has that got to do with reductionism? If you meant something different by "comprehensive understanding" then fine.

  4. The real world is full of examples of good products/services/ideas which lost out to inferior equivalents. That’s part of the fascination of markets. Academic economists are suppliers of ideas to the economic ideas market.

    Start with Steve Jobs.

    Invent the iPhone but carry out no sales or marketing.

    Blame the resultant lack of sales on the fact that your potential customers are stupid. Publicise this view on your blog.

    When challenged on your claim about the stupidity of potential customers, ‘prove’ your assertion on the basis that you are very smart as you know how to design an iPhone from scratch, while your potential customers don’t have a clue about how to design an iPhone. In fact, they don’t even know what an iPhone is!

    Change the subject from an iPhone to economic advice and you are now an academic economist.

    A wise man once told me that you can’t sell an idea. You have to make your potential customer want to buy the idea.

    According to Wikipedia,

    "Supply creates its own demand" is the formulation of Say's law. The rejection of this doctrine is a central component of The General Theory of Employment, Interest and Money (1936) and a central tenet of Keynesian economics.

    Keynes was pretty smart IMHO. Modern economists don’t seem to understand that the market for economic ideas is no different from any other market. Creating demand for an idea is often much more difficult than creating the idea in the first place.

    1. For the record, Apple didn't invent any of the technology in their products. They packaged the stuff brilliantly, however.

  5. How does the policymaker know that one policy idea is better than another? Suppose idea X is favoured by academics, and idea Y by city economists. Should they, or a journalist writing about them, just choose the one they fancy?

    1. That’s a very good question. As a non-economist who reads blogs by economists of different stripes, my most common question to myself is whom should I believe and on what basis should I make up my mind? Policy makers will have the same problem although my answer dictates only my vote in elections rather than the implementation of specific policies.

      For policy makers, there are some bad answers to this question. For example, ignore economists and do what is best for you personally; ignore economists and do what you think the electorate will like; or listen to economists but only the ones who tell you what you want to hear. However, let’s ignore these options.

      What policy makers really need is an equivalent of Which magazine to itemise options, assess their pros and cons, and provide a balanced recommendation.

      Based on that analogy, most economists want to present themselves both as a supplier of specific ideas and also as the independent advisor. The problem here is that the more passionately you put forward one specific set of ideas, the less suitable you are for the independent advisor role.

      If I were a policy maker, I would look for an economist who could explain the basic options and why different economists come to different conclusions. That would be someone who understood, say, New Keynesian, Post Keynesian, Market Monetarist and Austrian thinking sufficiently to explain how these economists arrive at different conclusions. There are pros and cons to ANY policy decision, so I’d want someone who would explain pros AND cons of all options.

      One of the things I note in my blog reading is that Keynesian economists will sometimes say, for example, that they don’t understand Market Monetarism. Meanwhile, Market Monetarists will often say that they don’t understand Keynesianism. I think there is a need to separate UNDERSTAND and RECOMMEND in economics. These things are muddled together at the moment. Economists need a better understanding of competing schools of thought in order to provide a more balanced analysis.

      “My analysis is great and everyone else is crazy” makes you sound crazy even if your analysis is correct.

      I always look out for evidence that economists are making an effort to understand competing schools of thought (even if, at worst, it’s just to make better arguments against these schools of thought). Here is an example of this at a very basic level. Even at this level, this type of presentation is very rare.

      A separate point relates to the fact that different people use different mental models. For example, my political views are probably not too far from yours so I’m happy with recommendations for stimulus. However, my mental models are very different from yours so I often think that the case you make is not convincing. Hence, if I were sceptical and you wanted to persuade me you would have to first understand MY mental models and then use MY models to explain your point. I don’t think that most economists have any understanding of this at all.

      For example, I am convinced that some people (type 1) think about economics as something like ‘the study of the decisions of economic actors’ where others (type 2) think about economics as something like ‘the study of exchanges between economic actors’. I am type 2 while I suspect you are type 1. Hence, as soon as you mention a ‘representative agent’ I ask with whom does the representative agent trade; does he borrow or lend and who is the counterparty etc?

      A profit oriented firm does not set up a marketing department for fun. It’s not an optional extra. Marketing translates the firm’s message into language which will be understood more widely and which will persuade potential customers to change their purchasing behaviour. Marketing also listens to the market and focuses the rest of the organisation on what the market wants as opposed to what the technicians in the firm want to deliver.

  6. Hi Simon,

    I don't entirely agree with you. Simple reason is I think you have framed the issue too narrowly. I think you make a convincing case that there has been lots of ignoring going on about the impact of fiscal stimulus on growth, but I don't think it follows from this that academic economists are being ignored full stop (which is how your post reads to me).

    Noah Smith has blogged in the recent past about the increasing use of PhD economists at tech companies (Hal Varian being the most prominent example) and I recall that academic economists were heavily involved in designing the UK 3G spectrum auction of several years ago. You can also cite other examples such as the UK commitment to open trade (however imperfect) as being heavily influenced by academic research. And indeed the famous "5 tests" for whether or not the UK should enter the Euro included huge numbers of submissions by academic economists.

    And let us not forget that the whole of modern central banking is built upon the edifice of academic research. (Recent example of academic influencing central banking - Mike Woodford's Jackson Hole paper).

    So I am not as despairing as you about this - but maybe I am just a glass is half full sort of person.

    Best regards,


  7. BBC search for the poll gives you "Sorry, there are no results for IGM forum".

    Stephanie Flanders on her blog 1 February 2011:

    “If you heard my interview on the Today programme this morning (0840) you'll know that Larry Summers declined to make any strong predictions about the UK…but Summers allowed more content to slip into his assessment of the government's case for rapid budget cuts…in his view, we are in - or close to - what J M Keynes called a ‘liquidity trap’, in which there is a near infinite demand for liquid assets, and monetary policy is largely ineffective, because interest rates cannot fall any lower, and businesses and consumers want to save, not spend. In these extra-ordinary circumstances, he thinks that the usual rules do not apply, and fiscal policy has to step up to the plate to support demand. The implication is that the coalition is indeed taking a risk with the recovery, and putting their deficit targets at risk as well. Because, if Summers is right, the private sector may well not come to the economy's rescue: growth will be lower than forecast - and borrowing is likely to be higher.”

    Flanders works in the City, the BBC is silent, and everything is fine in hacklandia.

  8. Why do you think academic economists largely gave better answers than economic journalists or bank employed economists? I'm not doubting your conclusion, just wondering about the mechanism, as Chris Dillow wold say.

    Is is simply because they are cleverer?
    Or are they less subject to some subtle (or unsubtle) bias?

    Without wishing to make personal remarks, one would expect at least some very clever economists to be tempted out of academia into the private sector or financial journalism by the cash. So one can't just assume the first, or at least not in all cases. And private sector/journalists have an incentive to be right, so I can't see the obvious bias. I could suggest, but I'd be guessing.

    Also, the issues you're talking about don't seem (to me) to be the most complex/mathematical issues in economics. So would being cleverer necessarily help?

  9. Let's be honest. Does a PHD in economics really teach you anything about how the economy works?

    Or does it teach applied mathematics, from which you can can make up something and attach any "economic" meaning (including any nonsense) you like (provided it is expressed and restricted to an applied mathematical model).

    In terms of jobs, macro is a winner. In terms of social value, macro theory has been behind some terrible policy decisions, on both the right and left, industrialised and developing countries (the latter in Africa and the Middle East in particular have paid a terrible price).

    What theory, for example, was behind the IMF's policy during the Asian financial crisis? Or behind Thatcher/Blair's financial deregulation - arguably linked to 2008?

    Now if those economists had studied history rather than economics, we may not have made those kind of mistakes.

  10. What theory, for example, was behind the IMF's policy during the Asian financial crisis?

    Which was of course to (further) deregulate financial markets, sell of nationally owned industries to foreign financiers and introduce austerity measures aimed at restoring currencies. Most of the people advising this were (historically, socially, politically and Asia illiterate) MIT economics PHDs. The only reason why they do not ask the US to do the same thing is that it is too big too.

    Macroeconomists have a lot to answer for.

  11. A survey of US academic economists, which found that 36 thought the Obama fiscal stimulus reduced unemployment and only one thought otherwise'

    That is a really silly question. Totally meaningless. If I gave a homeless person some food, would he able to eat for the day? How will most people, economists or otherwise answer?

    The real question will it lead to a significant and sustainable rise in employment. Or will it make no headway in reducing long term unemployment and lead to permanent distortions and lower productivity and higher unemployment in the long run?

    Now a good selection of careful case studies rather than modern economic theory will give you better material to answer this question.

  12. Basically agree with Wren-Lewis and Krugman. The blog post mentions climate science and the problem there as with economics is that the science is facing resistance from money and ideology (anti-government, anti- democratic ideology.)

    Another analogous case in the U.S. is immunizations. Immunizations have been so successful at preventing outbreaks, that people have begun to forget about the dangers of outbreaks and doubt the efficacy or science of immunizations. So these diseases are making a comeback. Same with depressions and economics.

    The issue of UK austerity could be a matter of degrees. See this Beckworth post for the analogous US situation:

    The UK economy would be doing even better if not for fiscal austerity. Same with the U.S. economy. Policymakers wouldn't have had to lean so much on monetary policy and QE, the danger now being that the next recession or financial crisis will hit with rates already near the ZLB. Journalists should be able to understand that. But then again many are paid not to.

    At the Financial Times, I like Gillian Tett, Gavyn Davies, Martin Wolf and FT Alphaville. Chris Giles not so much. His hatchet job on Piketty was a joke.

    And the FT had this interesting story where the Bundesbank is finally listening to the consensus of economists:

    "The Bundesbank has backed the push by Germany’s trade unions for inflation-busting wage settlements, in a remarkable shift in stance from a central bank famed for its tough approach to keeping prices in check.

    Jens Ulbrich, the Bundesbank’s chief economist, told Spiegel, a German weekly, that recently agreed pay rises of more than 3 per cent were welcome, despite being above the European Central Bank’s inflation target of below but close to 2 per cent."

    9 times out of 10, "Anonymous" has the worst comments.

  13. This post is disturbing. We are starting to see a return to the hubris we saw before 2008. No doubt this comfortable and congenial clique thinks that macroeconomics is "in pretty good shape".

    1. What's disturbing is that conservatives haven't learned anything. Policymakers listened to macro when they wanted to stop the crisis and turn things around. Then they stopped listening and turned to austerity. The problem isn't macro, it's the policymakers.

    2. When economists say there is a consensus. Like they did here in Nov 2007.

      It is time to run for cover. That monetary policy consensus was like the 1990s Washington Consensus. A lot of the problems really came down to mathematical rigour trumping widely and deeply informed analysis.

      Right now pluralism, not consensus, is what is needed in macroeconomics.

    3. Understand the difference between consensus on monetary policy, and consensus on financial regulation. The former, which the paper you refer to describes, still holds.

    4. The consensus I talk about here is that fiscal stimulus reduces unemployment. So calls for pluralism in this context is that we should instead listen to Austrians who say it has no effect?

    5. The answer Simon is yes, in addition to what other schools of thought have to say on the matter. I think what Jamie and others on here dislike is group think which leads to a fad-prone subject. (My guess is that Jamie is a humanities guy rather than an applied mathematician - they seem more likely to be able to accept that the truth is often what you make of it.) It is the job of academics to discuss all the explanations and options. After critical analysis of all of them, sure they can recommend. It is then the job of the policy maker to decide which one to run with after they know all the arguments.

      Back to Marvin Goodfriend's smug Monetary Policy consensus in the link above. He attributes far to much credit for containing inflation to Volker's MP and is very dismissive of other factors - including the pyschological such as the general malaise of the 1970s ending with Reagan Morning in America which started almost immediately with the return of the hostages and, after scaring everyone in the very late 1970s with the invasion of Afghanistan and the re-escalation of the Cold War, the weakening of the Soviet Union. To an historian these are absolutely key facts in understanding a lot of the economic and political changes taking place during that time to which inflation was also connected. Inflation is heavily linked to government (political) credibility and its ability to exert authority. This is a big lesson from Interwar history. It was not so much that Volker's MP contained inflation, it was more that the US government after a lot of humiliation could be seen as a government with the authority to carry out what it says it will. These things need to be considered, even if they do not fit into the neo-classical synthesis which seems to be more important than the facts themselves.

      Goodfriend says " leading Keynesian economist James Tobin (1980, p. 64) thought that “the price- and wage-setting institutions of the economy have an inflationary bias. Consequently, demand management cannot stabilize the price trend without chronic sacrifice of output and employment unless assisted, occasionally or permanently, by direct incomes policies of some kind.”

      But I think these arguments deserve more attention than simple dismissal. Given structural unemployment problems. active government intervention is likely to have serious need of consideration, and perhaps also direct prices and incomes policies to deal with deflation. But ouch! That means government planning!

      Goodfriend sums up the consensus as

      "The consensus model of monetary policy reinforces four main advances in monetary policy arrived at in practice: the priority for price stability; the targeting of core rather than headline inflation; the importance of credibility for low inflation; and preemptive interest rate policy supported by transparent objectives and procedures"

      All of things should be considered very controversial. In fact, despite all these so-called advances, these are classic arguments for the Gold Standard.

      The only way you can really judge them on their merits is seeing what Post Keynesians and other have to say about this.

    6. I think you and Jamie are really missing the point here, and the real danger. Let me go back to the question 'does the 2013 recovery vindicate 2010 austerity'. The answer to that question is no, whatever your school of thought. Yet because the question became political, half of city economists gave the wrong answer, and perhaps the best financial newspaper in the world wrote a leader endorsing the wrong answer.

      We are in danger of entering an Orwellian world, where for some the truth is whatever they want it to be. Devaluing academic knowledge is part of that process.

    7. "We are in danger of entering an Orwellian world, where for some the truth is whatever they want it to be. Devaluing academic knowledge is part of that process."

      The only way you can counter that Simon is being open to other ideas and knowledge. At the very least you can more effectively defend your own ideas. There has not been linear progress in economics - what Goodfriend calls "advances". There has been swings in conventional wisdom: fads. Not teaching history - or teaching a selective of view of it like Goodfriend does, or other views of the world, is when people start taking opinion (dressed up as science or not) as fact.

      To directly answer the question. There are people who say that the 1920s bust was important in removing distortions that arose from the boom. You could make the case that productivity gains and industrialisation during this time in many countries was particularly rapid. When the economy recovered (with the help of Keynesian policy or not), it was then a more healthy one. Perhaps the downturn in the cycle was needed to purge the economy of distortions that could lead to a distorted recovery? We need to ask a Schumpetarian or Austrian. But where are they??? I do not think they do not exist because their intellectual frameworks are bad ones.

      And in any case I can see how Goodfriend's conclusion set up the case for austerity:
      "The consensus model of monetary policy reinforces four main advances in monetary policy arrived at in practice: the priority for price stability .... the importance of credibility for low inflation..."

      The priority of monetary policy is to assist in the execution of the democratically elected government's macro-economic programme.

    8. If you had read other stuff I have written you would know I have some sympathy with what you say. But how far do you want to take this? Are you really saying that someone like Krugman does not effectively defend his own ideas? Are you saying that we know less now than we did fifty years ago? Are you saying that financial journalists should treat the views of academics about their subject as of no more interest than the opinions of anyone else?

    9. "We know less than 50 years ago."

      Reading that Goodfriend article, you would really have to wonder. In fact it was classic Minsky being played out - the development of groupthink at the tip of the crisis. Where for example was the knowledge we acquired from Kindleberger or Harrod (and many, many others) about the dangers of deregulation combined with easy monetary policy before the crisis? And the Washington Consensus was a good reason why the linking of academic economists and the policy making bureaucracy stifles diversity and debate and becomes dangerous.

      A simple 101 course in Keynesian, Marxian and Neo-liberal theory I think is enough for people to see that all these SOT have merit and there is not necessarily a single right answer. The truth is on a case-by-case basis that can only be determined with (preferably unmanipulated or obfuscated) evidence.

      I have a lot of respect for what Paul Krugman is doing. I know that he has not taken the easy option if it was to be lauded as an elder statesman in the profession. Like John Kenneth Galbraith before him he feels he has a public responsibility outside the comfortable confines of his profession.

      However, if he said something like that in a period of inadequate demand, unemployed labour is hurting the economic potential of the country and has harmful and unnecessary social effects, and presents evidence, people will listen.

      If, however, he says that we should do this because gimmick like an ISLM model with two diagonal lines, or a representative agent model - says so, people will rightly not be interested.

      Academic economists and non-economist academics, academic and non-academic economists, business people, social workers and others out on the field with first hand knowledge of actual conditions - the views of all these people are important.

    10. "However, if he [Krugman] said something like that in a period of inadequate demand, unemployed labour is hurting the economic potential of the country and has harmful and unnecessary social effects, and presents evidence, people will listen.
      If, however, he says that we should do this because gimmick like an ISLM model with two diagonal lines, or a representative agent model - says so, people will rightly not be interested"

      He actually says both! The underemployed factors of production argument appeals to me and some others. but for someone of a Thatcherite persuasion ("Government is like a household, it should live within its means") the argument holds no water at all. So you try an ISLM approach showing that it doesn't only work in practice, it can work in theory too - and they still don't listen! Ultimately they don't listen because (as Krugman is saying more and more loudly) the political imperative of shrinking the state is more important than the actual results of any given approach.

      But you do need a theory to explain what you want to do: otherwise you are guilty of what my teachers used to call 'casual empiricism' - picking facts to suit your argument.

  14. "A survey of US academic economists, which found that 36 thought the Obama fiscal stimulus reduced unemployment and only one thought otherwise, led to this cri de coeur from Paul Krugman. What is the point in having academic research if it is ignored, he asked? At the same time I was involved in a conversation on twitter, where the person I was tweeting with asked

    “What I have never understood is what is so great about academic economists? Certainly not more objective.”"

    If I remembering correctly, Krugman said banks can't create checks out of thin air. Let's assume he means demand deposits. Is that correct or not?

  15. SWL: “The consensus I talk about here is that fiscal stimulus reduces unemployment. So calls for pluralism in this context is that we should instead listen to Austrians who say it has no effect?”

    I think you are misunderstanding what people mean by pluralism. In an earlier comment I said that I thought that economists needed to separate out UNDERSTANDING something from RECOMMENDING it. You are confusing the two precisely because you don’t separate them. It is perfectly possible to discuss Austrian economics sufficiently to understand it without recommending that a policy maker follows its advice.

    Pluralists would point out that Austrian economics is an observable phenomenon which exists and has a following. Much of Thatcherism appeared to come from similar roots e.g. Hayek. Pluralists would also argue that the prime role of the economist is to describe that phenomenon and to understand it including pointing out its limitations. Economists seem to think that their role is to judge Austrian economics and then to exclude it from further discussion if they personally don’t approve of it.

    In my earlier post I mentioned four schools of thought: New Keynesian, Post Keynesian, Market Monetarist and Austrian. If you did even a basic analysis of these you would see that three of these recommend stimulus and one does not. Already the Austrians are an outlier. The other three split by the types of stimulus they recommend. The two Keynesian schools also split by the way they describe the world and the importance they place on a realistic description.

    The problem here is that most economists have misunderstood what the rest of us require of them.

    Policy makers want economists to provide them with sufficient advice to help the policy maker make a decision. ‘Advisers advise ministers decide’ is pretty much the only thing that all politicians would agree on. Many of your arguments suggest that you think that economists should decide and politicians should simply act as spokespeople for the decisions of the economists.

    Non-economists want economists to educate us about different economic schools of thought, including the ones that don’t work. Imagine if historians decided to exclude Soviet Communism from their syllabus because it didn’t work. Including things that don’t work is essential even if it’s just to ensure that they don’t happen again.

    Students want a pluralist education for the same reasons that non-economists want one. The main differences are that students want a more advanced education than non-economists and that students now expect their quality expectations to be met as they are paying directly for their education.

    The question “What are academics good for” is a good one. It’s not just you who is asking the question though. The purpose of academic economists is to educate the rest of us, not to tell us what to do. If the rest of us don’t understand economics sufficiently then who fault is it if not the educators?

    1. First, why blame the teacher for the student's grasp of the subject matter, especially when the student hasn't taken the class?

      Second, economists debate the nature of their science: Is it positive or normative? In the former case, economics is similar to physics, chemistry and the other "exact" sciences in that it is "value free". By "value free", I mean that practitioners seek or invent qualitative narratives of of existing events (as described/captured by numerical data) that can be restated in mathematical term that satisfy necessary and sufficient conditions for such statements to be true as this concept is generally accepted by the particular scientific community; theory follows data, which follows hypothesis, which, in turn follows theory in a virtuous cycle. In the latter case, values (including whether one's science is positive or normative) precede theory. We identify such values by examining the language the scientist uses to explicate his theories. So-called "heterodox economists" offer the theories of marginal productivity, marginal utility (indeed utility theory as a viable concept in any circumstances, likening it to a mathematical theory with a null set as its domain) as descriptions of actual behavior and data and Pareto optimality as a desirable outcome (using "optimality" as the descriptor is a value judgment).

      Referring to "The purpose of academic economists" exemplifies the practice of structuring language to limit discussion. This phrase limits the discussion to which single purpose academic economists serve. Academic economists and academic economics serve several purposes, among which are: 1) to educate and inform themselves and others about economic events and data or the economic consequences of "non-economic" events or data, 2) to advise individuals and organizations as to the consequences of decision options and the behavior that such decisions are likely or unlikely to drive, and 3) to predict the outcomes of such behaviors.

      A fourth possibility is that economists should actually tell us which outcomes to achieve, i. e., "tell us what to do". The economists at the IMF regard this as their mission, for example. But, this observation raises the question as to what is or who are "academic economists" and what separates "non-academic" from "academic" economists? This question then leads us to this question, viz., "Should non-academic economists (IMF, Wall Street, City, Wall Street, trade or industry association, government-agency, or unemployed economists among them) tell us what to do, then?" Or, given their ticket to the club of economists (the Ph. D. from an accredited program), are these economists special cases of "academic economist"? Further, if they are not academic economists, should they be allowed, asked or required to tell us what to do?

    2. This comment has been removed by the author.

    3. Thoughtful07 said: “Economists debate the nature of their science: Is it positive or normative?”

      A large part of the problem with economics is that economists present their subject as though it is like physics, and that is not credible. Three points.

      First, physics is concerned with the simplest, most fundamental and non-changing aspects of nature. Economics is concerned with a complex, evolving man-made system which is buffeted with unpredictable shocks all the time including political changes, technology discoveries and natural disasters. There are right and wrong answers to questions in physics, and many things can be predicated accurately, but it’s not clear whether there are similar answers in economics.

      Second, economists are openly partisan in presenting their views. Even if there were a right and wrong answer in economics, it is lost beneath the political posturing and name calling BETWEEN economists. If economists want to be treated as value-neutral scientists then they can’t also express strong political views as this will alienate the very people they are trying to persuade with their arguments. Similar constraints apply in other professions. A lawyer may have to defend someone he believes to be guilty. In that case, he has to compartmentalise his professional role and his personal opinion. It may be that it is impossible to present economic advice without appearing partisan, but that just means that non-economists will see any such advice as partisan and ignore it when it conflicts with their own political priors.

      Third, for better or worse, we live in democracies where politicians seeking re-election will follow policies that will attract voters. Economists have to adapt to that system. If we want better economic policies then the most effective way of achieving it is to educate sufficient people in the electorate to demand these policies. Economists appear to have no interest in this.

      When I refer to the purpose of academic economists I mean the services they provide to others: advisory and educational. Over and above these roles, economists can develop whatever research programmes they can find funding for. I have no desire to limit their imaginations.

      I don’t believe that any economist should tell the rest of us what to do. Advisory services provide advice while leaving the final decision to the client. That’s true whether the client is a political policy maker or a Wall Street executive. If economists want to be political decision makers then they should stand for election.

      Non-economists have real problems in working out what to make of economic advice. A couple of examples.

      If Scott Sumner & Nick Rowe recommend one type of stimulus and Paul Krugman & SWL recommend another type of stimulus then how should non-economists decide which advice to follow, or vote for, without resorting to political priors? If economists can’t even agree with each other on what levers should be used to stimulate the economy, never mind the degree to which these levers should be used, then how do they expect non-economists to adjudicate these disputes?

      If the blogosphere contains representatives of at least two types of Keynesian economics then how should non-economists decide which to believe? If Post Keynesians accuse New Keynesians of selling out the legacy of Keynes, and New Keynesians reply by pretending that Post-Keynesians don’t exist then what should non-economists make of this behaviour?

      If economists are either unwilling or unable to help non-economists with these problems then what will happen is that non-economists will simply revert to their own political priors and ignore the economists. I think that is what is happening and it's why SWL et al get so frustrated. That's why they write posts on 'what are academics good for' and that's why no-one, including other economists, comes up with a convincing answer to their question.

      Finally, in case of doubt, I support stimulus policies. This debate is not about a specific policy. It's about economists.

  16. I just wrote a book about using data to govern instead of ideology. Empiricism is ignored at our perile. My book is called "Three Handed Economist" and is available in paperback and kindle at

  17. "So two gave the wrong answer, but if you knew who they were you would not be surprised." Well I guessed one out of two (Minford). His passionately hacktackular loyalty to the Tories is world famous.


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