All entirely fair enough. For me any discipline that takes anything as self evidently silly as real business cycles in any way seriously certainly doing its best to sabotage it’s chances.

This is a discipline that takes a few weeks out of serious discussion to discuss (apparently seriously) whether surging unemployment in the wake of the largest financial crisis since the great depression is a sudden decision to take a breather by workers? If you spend all your time trying to defend the obvious – and banish questions the astronomical equivalent of which is “how do we know the moon isn’t made of green cheese?” – then you haven’t got a discipline that is going to help much.

Then again there are sane people amongst them – including, IMO Brad Delong to whom you take exception. Well the passage you took exception to was preposterously arrogant. (Delong is like a number of America’s uber-economists – Larry Summers seems to be one and I suspect Martin Feldstein is another but I haven’t got around to posting my – somewhat flimsy – evidence). And your point about Delong’s quoting the IS-LM framework may be fair enough in the circumstances. But generally IMO he’s a guardian of sanity in a lot of respects.

Anyway, where we differ is that it seems to me that you think that cleaning the Augean stables will somehow get things much better sorted. I think economics is more like history. True it’s a practical subject and history is not – and so it’s a bit more like a science or like a practical subject like medicine in the sense that we know some fairly good regularities which enable us to know some things about what to do and not do. Increase interest rates and that slows the economy, introduce rent control (at least in an ill-considered way) and it will destroy cities. That kind of thing. But most of this is pretty obvious and doesn’t need anything very elaborate to understand. (I wonder how far we have got since Smith – though Keynes (and basically the idea of an economy riven with positive feedback) is obviously of great practical importance in managing the macro-economy.

Beyond these things, I think economics is more like history or military strategy (or perhaps even more depressingly, corporate strategy). Formal modelling a la economic theory, or in an empirical context can be worthwhile. But it usually takes us tiny steps forward (and sometimes large steps backward in our understanding).

I wonder what are the kind of questions we ask about in economics. Are they like the question “are planets always spherical, and within what tolerances?” or are they like the question “When is the strategy of encirclement of use in a military battle?”. I think a lot of the questions are like the latter. Should we continue the export market development grants scheme? Should we expand it, rejig it? Buggered if I know. One the one hand this, on the other hand that. The tools of economics, and the corpus of economic science gives one clues, hints, allows one to measure certain things. But that’s pretty much it.

So while I’d like to see us banish self evident nonsense from the corpus of subjects seriously discussed (it seems so little to ask!) I don’t think it would make such a huge difference to our finding out how best to run a given economy. I’d add that while the extraordinary status given to the cleverness of economists’ formal games does help to derange the discipline, part of my application of ‘applied Socratic wisdom’ runs to remembering that it was ever thus. Other disciplines have their moments of monumental triumphant stupidity. I’m thinking in particular of whomever it was’s campaign to establish that stomach ulcers were caused by bacteria. As I understand it, he was able to demonstrate this pretty clearly, and cure stomach ulcers, but it took about twenty years of struggle with the medical establishment before the obvious was finally accepted.

I certainly agree that economic debate has been far too doctrinal rather than empirical. It’s something I try to avoid, as you do too. Even when I criticise Austrian approaches, for example, I try to base my criticism on ways in which empirical data undermines some of their doctrinal beliefs, rather than simply rejecting them out of hand on the basis of their ideology, or their utilitarian theory of value.

And there are also ways in which an approach to economics with which I in general disagree can be correct on major points–as again with the Austrians because of their quite justified emphasis upon entrepreneurship, innovation and disequilibrium.

That said, I think there are methodological issues that pervade most schools of thought in economics that seriously hamper the discipline’s capacity to function as a science, even given the limitations imposed by the nature of economic enquiry. Chief here is the use of the equilibrium abstraction, which occurs not only when neoclassical economists use IS-LM to analyse macroeconomics, but also when Post Keynesian economists use Kalecki’s national accounting identities, and when Marxians apply Marx’s value identities. It then means that we are treating an obviously dynamic and indeed evolutionary system as fundamentally static, and whatever our ideological underpinnings, that “abstraction”–that time can be ignored, for heaven’s sake, when analysing a dynamic system–makes us fundamentally unscientific.

This is what John Hicks himself came to appreciate in the late 70s that led him to disavow the IS-LM tool that he himself had invented–though he never came up with a decent alternative.

It’s also why physicists I know and respect–such as Joe McCauley–have developed the attitude that the entire curriculum of economics should be evicted at universities, because it teaches a mindset that makes economists fundamentally incapable of understanding the economy.

Have you had a read yet of the Dahlem Report that I just posted to this site? I think this throws down the challenge to the economics profession in general. Whether Socratic or old-school Keynesian or staunchly Neoclassical, economics has let society down very badly, and fundamental reform is needed. I frankly doubt the capacity of economists to do this themselves, because as Keynes once put it so well, “The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.” Economists have used equilibrium methods to analyse the economy for so long that they are almost incapable of realising that this is fundamentally wrong, whether your equilibrium identities be Neoclassical, Austrian, Keynesian, or Marxian.

I joked just the other day that my own approach is ‘applied Socratic wisdom’, which is to say that I try to realise how ignorant we all are.

One of my favourite quotes is from Robert Solow (a neoclassical I guess).

There is a long-standing tension in economics between belief in the advantages of the market mechanism and awareness of its imperfections. . . . There is a large element of Rorschach test in the way each of us responds to this tension. Some of us see the Smithian virtues as a needle in a haystack, as an island of measure zero in a sea of imperfections. Others see all the potential sources of market failure as so many fleas on the thick hide of an ox, requiring only an occasional flick of the tail to be brushed away. A hopeless eclectic without any strength of character, like me, has a terrible time of it. If I may invoke the name of two of my most awesome predecessors as President of this [American Economic] Association, I need only listen to Milton Friedman talk for a minute and my mind floods with thoughts of increasing returns to scale, ologopolistic interdependence, consumer ignorance, environmental pollution, intergenerational inequality, and on and on. There is almost no cure for it, except to listen for a minute to John Kenneth Galbraith, in which case all I can think of are the discipline of competition, the large number of substitutes for any commodity, the stupidities of regulation, the Pareto optimality of Walrasian equilibrium, the importance of decentralizing decision making to where the knowledge is, and on and on. Sometimes I think it is only my weakness of character that keeps me from making obvious errors.

A PhD advisor said my framework was ‘middle of the road’. He thought it was a good PhD, but the comment was nevertheless somewhat dismissive. It seemed to smack of a kind of fallacy in which the really important thing is getting the framework right and then the rest is the details of application. Now that’s definitely true of celestial physics as far as the choice between Ptolemaic and Newtonian frameworks are concerned when you’re sending a man to the moon. I think Keynes came up with a better view of what’s going on in a depression than the Treasury view that he challenged. And the IS-LM framework is pretty useful, and superior in many ways to what came before it in appropriate contexts

But my approach is to try to think things through as best I can using what resources I have – which is a suite of imperfect frameworks and some commonsense and experience to try to pay some attention to context (economists are often awful – in the way that you really have to be trained to be that awful – at this). I then to try to both avoid obvious errors and to think of policies that would be helpful sometimes in terms of several frameworks. One of the things I’ve found in my micro-economic work is that there is a hankering to have debates as if they are debates about frameworks, when in fact they need not be. I wrote one of these up recently and you can see it on Troppo.

The debate about the policy called ‘export facilitation’ in the Australian car industry was treated as a doctrinal question of whether you were in favour of protection and selective industry assistance or not, when I argued that it was actually an argument about the form assistance should take (whether it should be porous to intra-industry trade or not) all the participants in the debate accepting that there would be substantial assistance to the industry for a considerable time. Export facilitation ‘made sense’ both to protectionist and to anti-protectionist views of the world, and it seemed to me was so much the better for it. It meant you didn’t have to know what the ‘right’ framework was to figure out that it was a policy worth having.

People love high level ideological battles. It makes them feel they’re on ground that they understand. They can pretty much go to sleep and argue by word association “you would say that wouldn’t you?” yada yada. In fact we are always and everywhere on ground that we understand ever so slightly.

I fear you may see these things as an evasion – they’re certainly not jumping into the nitty gritty of your arguments on macro, but I hope you think they make some sense.

Yes I am well aware that there are practitioners of other schools of economics who disagree with me (and disagreement with me wasn’t the point of that post).

In fact, if you read it carefully Nicholas, you’ll see that my references to neoclassical economists were solely related to Brad DeLong and his references to John Hicks. The next section of the entry began “On a more trivial note, Australia’s market economists are demonstrating their continuing ignorance of the private debt bubble…”.

The way the rest of the entry was phrased could have seemed insulting to you, for which I apologise. When I prefaced it with “Australia’s market economists”, I was thinking specifically of those economists who work for banks as commentators, and the one person who I was criticising directly there was Rory. I included a reference to you there in parentheses, because you were quoted in the same story and with a similar comment to Rory’s.

As an economic consultant, you’re not a “market economist” as the term is normally used; but that was a quickly written blog entry, so I was somewhat hasty with phrasing.

However I am curious as to how you would classify your approach to economics, and what analytic tools you use to guide your arguments about economic policy.

I think you’re being silly.

This may be the first time that anyone has ever called me a neoclassical economist. Not everyone you disagree with is a neoclassical economist you know.

It’s more like this:
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+Dow+5000+Gross+Dec+08.htm

http://www.rayservers.com/images/dow_gold_usd.gif

prudentsaver, you might want to check out the first chart titled “US Inflation-Adjusted Asset Prices” at this link:

http://www.debtdeflation.com/blogs/2008/05/05/defer-the-rba-enhanced-independence-act/

How about there was a debt bubble (caused by cheap labor and consumer confidence to take on more and more debt) that greenspan managed to direct into real gdp, stock prices, and housing prices that led to those 3 being higher than they should be based on income in the USA???

This outfit has some very good work done on leading US indicators. The free data thay have goes back many decades.It is on excel and can be manipulated, graphed etc.

No meaningful recovery from an economic downturn has occurred without these Leading Indicators first identifying it. Until such time as these indicators (at LEAST 2 quarters) in the US look like recovering, I’ll be staying away from shares.

To me , this is a valuable resource.

http://www.fool.com/investing/general/2009/02/19/is-bill-gates-crazy.aspx

Interesting article.

My main losses have been on oil related stocks and american bank shares, while the gains are on fertilizer stocks, they are doing good, about the only thing going up today.

I am really getting more into the view that the dotcom was a P/E bubble, and this is an earnings bubble, and that makes typical value investors forget that the whole economy is in a bubble where the fundamentals don’t count. I don’t know, it’s scary, and getting scarier. Makes you wonder if guys like buffet are for real or if they really have just been riding a bubble after all. But an interesting question is the trust issue, banks that don’t want to lend if they don’t think they will get it back. I think that might apply to nations, such as the US as a whole, as to who will lend them and for how long. They were never a debtor like today before the great depression. That’s really the difference, and I’m really curious to how that might change the story.

The graph here where you see the money supply similarity to the era leading up to the great depression is interesting,http://globaleconomicanalysis.blogspot.com/2009/02/fiat-world-mathematical-model.html

I think the federal reserve could sacrifice the dollar for the sake of the world. But I doubt they will do that willingly. However in that article