Friday, April 10, 2015

The Economist on the end of economic history


The Economist has noticed Peter Temin's paper on the death of economic history (on which I had posted before) and suggests that "since the financial crisis there has been something of a minor revival." There isn't much of an explanation of why there is a revival, or much evidence for the revival, I might add. The reason alluded for the supposed revival is that "three big questions in economics over the past few years have become battles over economic history, rather than theory in its own right." These three questions would be the effect of public debt on growth, the causes of inequality, and the effects of inflation and deflation.

The economic history content in the debates related to the three questions, in all fairness, is thin at best. And the problems with the debates actually do arise from a common acceptance of neoclassical economics, and are, thus, rooted in theory. Reinhart and Rogoff are not economic historians, and their discussion of debt, for example when compared to John Brewer's discussion of the role of debt in the rise of the British Military-Fiscal State, is poor at best. There is some discussion of the correlation with growth, inflation and currency movements, with limited understanding of causality. Which, as it turns, was botched by the misuse of data. The same can be said about Piketty (and now this Rognlie twist; he had vanished; my previous issue with him here), that uses mainstream theory that does not fit his data (which is better and shows the rise of inequality in the last three decades), but lacks any sense of history. There is no understanding of the social forces behind the rise of inequality in Piketty's work. And the idea that those that are afraid of inflation now have some basis on the history of "the risk hyperinflation has posed to democracy" is beyond preposterous. Not just because there is no risk of hyperinflation in any advanced economy at the moment (and that shows lack of theoretical understanding of what causes this phenomenon), but worse, it tends to obscure that the Great Depression, not the 1923 hyperinflation, brought down the Weimar Republic. Seriously, unemployment, the collapse of the economy creates the conditions for the rise of fascists (go check Greece now)

Note that marginalism always had a complicated relation with economic history. The German Historical School can be seen, or at least some authors within the school like Roscher and Schmoller, as noted by Bill McColloch (see second essay here), as part of the marginalist school. And Max Weber's views, which put Marx's relation between the economic base and the superstructure upside down, might be seen as the basis for a neoclassical theory of history. But the fact is that Weberian analysis was never embraced or even well understood in mainstream circles, even if it would be the kind of theory of history that would fit their analysis. The same applies to Douglas North's New Institutionalism.

My impression is that the decline of economic history, and history of economics I would add, within the mainstream of the profession, a subject that as noted by Temin had peaked in the 1970s, is essentially tied to the result of the capital debates, the rise of what I referred to as the return of vulgar economics, and the segregation of heterodox economists. It's a particular problem of the broader crisis of economics. And the revival is overstated. As much as the mainstream did not, and will not be abandoned in spite of its evident failures during the last (current) crisis, do not expect economic history courses (or history of thought ones) to be reinstated or created in the departments at the 'top' universities. The average mainstream economist will remain ignorant of history and the history of its own field. The Economist writers are a good example of the consequences of that.

7 comments:

  1. "Not just because there is no risk of hyperinflation in any advanced economy at the moment (and that shows lack of theoretical understanding of what causes this phenomenon),..."

    I collect explanations for hyperinflation. Can you give me your own theoretical explanation for hyperinflation?

    http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html

    ReplyDelete
    Replies
    1. I don't have a personal theory. There is a well established heterodox view of hyperinflations. I wrote a few papers in which it is described. See here https://www.academia.edu/2634094/Money_and_Inflation

      Delete
    2. Thanks. On pages 475, 476 and 482 he is trying to figure out what the path of causality is. He has different people proposing different orders. It seems clear to me that the core problem in hyperinflation is a positive feedback loop. The causality goes in a circle (several actually). It feeds on itself. It spirals out of control. All my favorite explanations have some sort of feedback loop.

      Delete
    3. By the way, I am very convinced that the advanced economy of Japan really is at risk. It fits the setup requirements for most of my explanations.

      Delete
    4. The idea of of a shock and a propagation mechanism for inflation (for the cycle is Frisch) is due to Latin American Structuralists. Noyola Vazquez, in particular. Didn't get what you mean, who is trying to get the causality? And we disagree on Japan. No reason why the exchange rate will get out of control, which is at the heart of all hypers.

      Delete
    5. Sorry, in your paper that you link to you talk about a path of causality. I think the most important thing to understand about hyperinflation is that there are feedback loops of causality. The path of causality is a loop.

      Let us look at Japan. They have a huge amount of bonds and their currency has not done well the last couple years as they are printing a lot of money. A feedback loop may develop (I think so). The more people get out of bonds, the more the central bank will print money to buy bonds to keep interest rates under control (otherwise the government can't handle the interest on the huge debt). But the more the central bank prints money and buys bonds, the more people will want to get out of bonds. This makes a positive feedback loop. It is a death spiral or panic type thing. Positive feedback is the key to explaining hyperinflation. The reason the exchange rate will get out of control is that people will rush to get away from the Yen.

      Here is more on positive feedback stuff:
      http://howfiatdies.blogspot.com/2014/08/positive-feedback-theory-of.html

      Delete
    6. The positive feedback must include something that pushes prices up. Depreciation and wage spirals, which are behind every hyper I know, increase the price of imported goods, and labor. The depreciation in Japan, which is not worse than in any other country (there is a global appreciation of the dollar going on) is not caused by any significant external problem in Japan, which is a surplus country. So there is zero risk of a hyper in Japan. Deflation is more likely.

      Delete