Years ago I read about the Scottish economist John Law who, around 1700, introduced some revolutionary new aspects about paper money in France. This now came to my mind. I found this in Wikipedia and that in The Economist. For whatever reason, my gut tells me that Prof. Paul Krugman is saying today what John Law said about 300 years ago. Maybe he is right; maybe not. The only way to find out is to make Prof. Krugman Secretary of the Treasury (of the US; not of Greece...).
The first essay of Charles Mackay's "Memoirs
ReplyDeleteof Extraordinary Popular Delusions and The Madness of Crowds" addresses itself to Mr. Law and his Miss. Bubble. Its available from Project Gutenberg, worth a read even if only as a reminder of how English was once written.
Today we talk about the Wisdom of Crowds - Hmmmm.
Krugman got his PhD from MIT in 1977. Central bankers Ben Bernanke, Mervyn King, Mario Draghi, and Lucas Papademos were also at MIT as students and/or teachers in the 1970's. I don't claim that list is exhaustive.
The Theorists from the MIT have been in charge of the printing presses for long enough. Its time to hand over to another lot. Maybe the Men and Women of Berkeley can channel up Galbraith. Anything but more of the same.
Why Galbraith - for one thing, Krugman wrote him off with the following observations
"Galbraith is an economist who writes solely for the public, as opposed to one who writes for other academics, and who therefore makes unwarranted diagnoses and offers over-simplistic answers to complex economic problems. Galbraith was never taken seriously by fellow academics, who viewed him as more of a media personality. Galbraith's work The New Industrial State is not considered to be 'real economic theory'."
It would seem that Krugman wouldn't understand me if I said to him "Pot meet Kettle." What a pompous ass the man is. If like me you think that what's needed are less theorists and more pragmatists, then Krugman's criticism is more than enough to recommend Galbraith as an alternative - pity he's dead.
CK
I had Galbraith as my economics professor at Harvard. I can see why Krugman doesn't like him. Where Krugman comes across as a person who is actually not overly comfortable with himself, Galbraith seemed convinced that he was god's gift to the world. If you have a hang-up with that, you dislike such people with a passion. If you don't have this hang-up, you kind of get a charge out of how they handle themselves. I got a charge out of how Galbraith handled himself. And how sensitive he was to young female students' expressing admiration for him. That didn't hurt him at all... (BTW: I understand that it was Galbraith's intervention which saved the life of Papandreou-senior. At least his son told me that).
DeleteThe trouble with "writing things for others of equal mind and background" is that it can generate incest of thought (and exclusion of other thoughts). Given that economics is so much a function of psychology, I question the self-confidence of economists that they can prefict what will happen, if.
The best book I have ever read was Paul Samuelson's ouvre on Economics101. Practically anyone can understand that and practically everything about how an economy works is in that book.
Actually, I also thought a lot about Ross Perot when, during a campaign, he had a TV series where he explained with charts and boards to 'common people' what the economy is all about. And then there is this famous Milton-Friedman-TV-series on "Free to choose" about which I once wrote a post. One recommendation I would make in the midst of this unbelievable - and seemingly insolvable - economic crisis in the Eurozone is that such shows should be put on TV in all EZ-countries. Yes, one needs to be quite professional to understand how a Central Bank, or Target2, works but every layman can easily understand how an economy works overall. When I started my own small business in the US back in 1988, I was given one priceless advice from a friend. He said:
"What you have to figure out in your business is what you need to do so that your customer reaches into his pocket and passes his money over to you voluntarily. And the answer to that is: you have to give him something which he considers to be of the same value as the money he passes over to you". Enough said.
Healthy economies are not rocket science, I totally agree.
ReplyDeleteWhat we have instead of strong, productive, private sectors is arcane magic at central bank level, and a huge shadow banking sector & worse....
What happens at that level is incomprehensible to most people, which doesn't mean that people are stupid! It DOES mean that the MIT crowd has lost sight of the most basic fundamentals of healthy economies and refuse to see the forest for the trees.
Since globalisation (ie offshoring production) was basically a politically driven agenda, leading to our present Western 'service' sector economies with poor quality jobs and high unemployment on one hand, and the resulting macro-economic agonies on the other, my question is why the MIT crowd doesn't open up discussion on the causes and insist that this is a political question too?
My selection of Galbraith was deliberate (and cheeky), to demonstrate what a hypocrite Krugman is, barely a day passes when he doesn't commit exactly the same 'crimes and misdemeanours' of which he accuses Galbraith. Any way enough of Krugman - he's getting far too much oxygen.
DeleteBut I do find it a curious coincidence that so many of the current crop of major central bankers were at the same university around the same time - anyone have an theories at why what should be so.
It will be interesting to see what, if anything, Carney can/will do at the BoE after the years of Merv's Zirp and Battleship QEkin :)
Offshoring has been happening 'forever'. The decline of the English Cotton Industry began in the 19th Century, it revived a little after WW2, but by 1970 it was more or less kaput, a lot of it was offshored to the US and South Asia, i.e. closer to raw material source and customer base. The 19th century also saw the off-shoring of China's tea industry to South Asia when it was discovered the tea grown there could be made palatable by adding milk and sugar - which was a boon to the Sugar plantations in the Caribbean.
Not all service industry jobs are 'poor quality'. Child care, health care, education are three service sectors that can provide very satisfying and lucrative work.
In the case of education there's a export market serving the education needs of the 'developing' world. Where are those jobs, offshore from 'developing' world in the so called 'first world'.
I was surprised to read just yesterday from a very reliable source that there are 15,000 Brazilians studying in Australia, mainly in schools and vocational training. Brazil is also the fastest growing source of foreign students in the USA.
Rather than investing in a factory to replace imports of Brazilian toothpaste, Greece could invest in its education system and import middle class fee paying Brazilian students to attend its schools and universities - if only, if only.
CK
Tsigantes - this got lost (by me) from my previous post
DeleteRe your closing question "MIT crowd admitting its a political problem too",
Draghi sort of did that when he did NOT make Jorg Asmussen his Chief Economist, but instead decided to use Asmussen's political skills - something at which Draghi himself is pretty hopeless, and I suspect knows it. I thought that was a shrewd appointment.
Who appoints the Men from the MIT as central bankers etc, the people we elect to be in charge. or those who slink in the shadows and wont show their faces.
Larry Summers was also at the MIT in the 70's but as an undergrad, so we won't blame him... today ;)
CK
This is a bit late to comment but I think is important. Economics is far worse and for more difficult than rocket science. The reason for this has to do with something called ergodicity. For a phenomenon to be studied in a mathematically tractable way, the phenomenon must be assumed to be ergodic. The same applies to economics.See for example:SAMUELSON, PAUL A., Classical and Neoclassical Theory. In: Monetary Theory. 1969. ed. Robert W. Clower. London: Penguin. a little known Samuelson paper that explicitly states that the ergodicity assumption must hold for all neoclassical economics to be a rigorous science. The article does not seem to be on the Internet and I have only found in specialized libraries. A good, simple if a bit biased, view of the problem is in http://www.eoearth.org/article/Neoclassical_economic_theory
ReplyDeleteHowever it is easy to disprove the hypothesis. Ergodicity requires stationarity (ie stable statistical properties over time). The steady, on average, increase in say stock market prices over time is better matched with exponential increases, meaning an average price increasing with time:no stationarity, no ergodicity. This is a mathematical proof in outline, but it is easy to make rigorous. It must pointed put that without ergodicity the mathematics needed to handle economic theory become intractable and this is the best excuse behind the modern mathematical economics. Even worse, often both common sense and measurement accuracy breaks down in non ergodic systems. The end result is the well known jibe:10 economists 10 opinions, 11 if MR Keynes is among them.
I will not go into what ergodicity means. It is a very subtle and deep concept that touches many facets of human knowledge, necessary in matching physical observation or experimental measurement to mathematics or logic. If I see interest I will do a comment entry about it.