Argentina, Economic Science and this year's "Nobel"

Trump wanted the Peace one, Milei the one in Economics

A few random thoughts about some recent news. Today, Javier Milei met with Donald Trump at the White House. Trump reportedly warned that the United States “will not be kind” to Argentina if Milei does not win the upcoming elections. That statement seems to suggest that the much-discussed “rescue” of the Argentine peso may be tied to domestic electoral results — something that Treasury Secretary Bessent had already hinted at when he announced the possibility of a US Treasury rescue package for Argentina.

No surprise there. But the situation brings back memories of earlier crises — particularly the 2001–2002 collapse, when Argentina defaulted after a long neoliberal experiment of liberalization, deregulation and privatization under the Menem administration. The current crisis, which began with the 2018 IMF program, is in many ways a continuation of that same process.

Back in 2002, the crisis caught one economist in particular by surprise: Rudi Dornbusch. Writing in the Financial Times, Dornbusch argued that Argentina could not be trusted to govern itself and proposed that its fiscal and monetary policy should be overseen by a foreign board of central bankers — a shockingly neocolonial suggestion, even for that time ["I'm shocked, shocked I tell you"]. I wrote a short letter to the Financial Times in response, which you can find here, mocking this absurd idea.

Two decades later, we are still dealing with the same problems. The “cleanup” of the 2002 mess took place under the so-called populist governments of Néstor and Cristina Kirchner, through two major debt renegotiations in 2005 and 2010. During that period, Argentina’s debt-to-export ratio — a measure of repayment capacity — improved significantly [see my piece on Challenge on that and the Vulture Fund negotiations that Macri ended up finishing in a favorable way to the Vultures; you know on what side he is]. Yet the Macri administration (2015–2019) more than doubled the foreign debt once again, setting the stage for the current crisis [on the doubling of debt see this piece with Matias De Lucchi; whole issue, scroll down].

In short, the same set of economic elites have crashed the economy multiple times. Domingo Cavallo, Menem’s finance minister and architect of the 1990s convertibility plan, reappeared at the end of the De la Rúa government in 2001. Federico Sturzenegger, who was at the central bank during Macri’s failed experiment in 2018, is now serving as Milei’s Minister of Deregulation. This revolving door of orthodox technocrats has brought Argentina back to the IMF, and now possibly to a US Treasury rescue, for the third time in a generation.

What’s frustrating is how the narrative never changes. The mainstream explanation — repeated recently by a well-known economist from the Di Tella University — is that Argentina’s problems are caused by irresponsible “populists.” In his version, written in academic jargon about sunspots and expectations, the blame somehow always falls on Peronists, whether they are in power or not. If the economy collapses, it’s because investors fear a Peronist comeback; if it booms, it’s despite them. Don't worry, it won't.

This kind of argument says a lot about the state of the economics profession, perhaps more than about Argentina’s actual economy. Instead of looking at straightforward indicators — who increased the foreign debt, how exports performed, whether external repayment capacity was sustained — many economists hide behind highly subjective assumptions disconnected from reality.

This is part of a broader problem in Latin American economics: what my colleague Franklin Serrano calls “brain damage” — not “brain drain.” The issue isn’t that talented economists leave the country, but that many return from US PhD programs armed with orthodox models that have repeatedly failed our economies. They bring back the intellectual framework that justifies the very policies that keep generating crises.

This brings me to another bit of recent news: the so-called Nobel Prize in Economics (technically, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel). This year’s award went to Philippe Aghion Peter Howitt, and Joel Mokyr for their contributions to what’s broadly called “Schumpeterian growth theory” — work that connects innovation and technological change to economic growth. Surprising and soul crushing news to Milei, who wanted the prize for stabilizing the economy (a miracle according to Niall Ferguson).

Aghion and Howitt's models attempt to explain long-term growth by endogenizing productivity — the famous Solow residual. They borrow Schumpeter’s language of innovation and creative destruction, though often in a far more formal framework. In that sense, the connection to Schumpeter is more symbolic than substantive. Still, compared to some recent laureates, this year’s selection is a relatively defensible choice. Their models are certainly more in line with Schumpeter that some of the heterodox neo-Schumpeterian models.

Joel Mokyr, a historian, has written extensively on the cultural roots of the Industrial Revolution. His work offers a deeply Eurocentric — also, and more importantly, culturalist and supply-side — interpretation of why growth took off in Europe. While I disagree with much of that perspective, it’s undeniable that the Industrial Revolution did begin in Europe, and any serious account must explain that historical specificity. The problem is less Eurocentrism per se than the exclusive focus on supply factors, ignoring the demand and institutional dimensions that Keynesian and structuralist economists once emphasized. In that sense, I welcome the recognition of a historian among the laureates. But I also lament the profession’s retreat from the richer, more historically grounded analyses of scholars like David Landes, whose The Unbound Prometheus offered a more balanced view of the Industrial Revolution — one attentive to the demand aspects of economic growth.

Perhaps the real lesson — both from Argentina’s crises and from this year’s “Nobel” — is that economics still struggles to learn from its own history.

Gatekeepers and herd behavior: On Tooze and the radicalization of Krugman

"But that one is holding the poop!"

Adam Tooze, the author of the monumental Crashed (who was, incidentally,  student of Wynne Godley, one of my mentors), wrote a piece for the London Review of Books that has received a lot of praise. While it reviews Paul Krugman's latest book, it provides an overview of the radicalization of New Keynesians, or at least some, that dominate both in academia, and in the corridors or power. The gatekeepers of knowledge and academic  and intellectual influence, with a close connection to power, so to speak. He tells us at the outset that Krugman, the economist that was a bulwark of free trade, even when the theories for which he received his Sveriges Riksbank Prize (aka the Nobel) suggested that some degree of intervention might be good, and that remained even after the 2008 crisis a defender of the conventional macroeconomic model, not only has moved to the left, but also that "in Joe Biden’s Washington, Krugmanism rules."

This is, however, a misinterpretation of the current situation. Tooze suggests that Krugman is one of the "high-powered centrists inching their way towards seemingly obvious political conclusions." The group includes "three centrists – Biden, Janet Yellen and Jerome Powell [that are] undertaking an experiment in economic policy of historic proportions." And he, also, argues that: "what sets Krugman apart within this cohort is the way he has, since the 1990s, stopped being a gatekeeper of the status quo and instead become its critic. In this respect his closest analogue is Joseph Stiglitz, also once of MIT, a member of the Clinton administration and chief economist to the World Bank. Both men have indisputable standing as members of the elite club of New Keynesians."

I see Krugman as being closer to what Colander, Holt and Rosser referred to as the cutting edge of the profession. The role of cutting edge of the profession, in my reply to them (see the paper in Fred Lee and Marc Lavoie's book here), is to make more reasonable policy propositions, while maintaining the notion that markets do produce efficient outcomes, in spite of the unsurmountable logical problems brought by the capital debates, and that led to the rise of vulgar economics. Krugman in that sense is the epitome of the cutting edge. Of course, in order to make reasonable points he would discard many of his own ideas. But he is no critic of the mainstream. The problem with Tooze's argument lies in there. Krugmanism cannot rule, if he basically had to discard his ideas in order to remain relevant. And relevant here simply means that he can be seen to be on the right side of history, more skeptical of free markets, free trade, and willing to accept significant expansion of deficits and debt.

The ideas that won the day and rule in Biden's America are heterodox ideas, that in fact, until very recently Krugman dismissed as not serious. The possibility of continuous expansion of the welfare state, and the expansion of fiscal deficits and debt were anathema to him. Not only he was against expansionary fiscal policy, but even 'Medicare for All,' the signature proposal of Senator Bernie Sanders, something that is common in all advanced economies, was dismissed as a political nonstarter. And certainly that idea, which is not that radical, has remained in the background, and is unlikely to be pushed by the 'radicalized' Biden administration. Perhaps even Krugman still thinks is far too lefty to be acceptable in the United States.

Biden might be the president, and he has a lot of power about what elements of the agenda to push, and he has certainly moved to the left. No doubt about that. Not surprisingly Heather Boushey and Jared Bernstein, economists with heterodox and labor connections, are defending the fiscal expansion from the Council of Economic Advisers (CEA), while Larry Summers, the quintessential insider of the Clinton and Obama administrations, is criticizing from outside. But the Democratic Party has moved to the left, and the politicians have followed. It is the party of Bernie and Alexandria Ocasio-Cortez (AOC). And the establishment knows they need to move if they want to remain relevant, and have a fighting chance in 2024, since the working class is radicalized, and many will abandon the party if Biden does not deliver.

They are like the French politician that, seeing the masses pass in protest, tells his friends in the café he must leave and follow them, since he is their leader. This is, it goes without saying, more like herd behavior, than leadership. Krugman is, in that sense, the leader of an intellectual sea change about views on the role of the state in the economy.

Tooze may think that these arguments are just the diatribes of those in the left that are angry,* infuriated he argues, with the slow pace of change in the center. The issue is that, even though Krugman is following the herd, he certainly is a central gatekeeper in the economics profession. A profession that has been attacked for good reasons, for its excessive influence in policy, and the recurrent blunders of its luminaries.

Krugman still argues in terms of the conventional model, that he defends, as having done a good job explaining the 2008 crisis. People like Wynne Godley, that truly foresaw the 2008 crisis, often only received the acknowledgement ex-post, sometimes too late, after passing away.** Krugman dismisses heterodox economists as not serious. A type of red-baiting of heterodox economists with significant impact on the ability of the profession to change. He also validates some of worst within the mainstream and is willing to play by their harsh rules.+ This is, of course, because the prestigious teaching positions he held, and still holds, the 'Nobel', that was created to give respectability to certain ideas, the weekly column in the NYTimes are all powerful platforms. The danger in this, in accepting Krugman's narrative that he has been right all along, is to convince ourselves that the profession has indeed changed. Now the dangers of neoliberalism and their main defenders, mainstream economists, are gone. The profession is rehabilitated. But the retreat of neoliberalism is only temporary. Krugman and other gatekeepers will change their tune when the current Keynesian moment passes. If the Bidenomics experiment ends up being of historic proportions, and I do hope it does, although that is still too soon to tell, it will not be a victory of Krugmanism. It will be a victory in spite of it.

* I am not as angry as Paul Romer, though.

** On Krugman critique of Godley's 'hydraulic' model, and my response go here.

+ He famously said: "By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote." [Italics added] See the quote and a discussion of the role of another gatekeeper in France that also won a 'Nobel' here.

Economic Regularities and "Laws" and the Riksbank Prize too

I've been reading The Nobel Factor: The Prize in Economics, Social Democracy, and the Market Turn by Avner Offer, Gabriel Söderberg, an interesting critique of the use of the Nobel Prize to undermine the Welfare State, essentially by conservative groups in Sweden, that were influential within the Central Bank (Riksbank), that disliked the Social Democratic policies in place in the 1960s. I have been critical of the Riksbank prize before (see, for example, here or here; check also Lars Syll's blog who often discusses the limits to the Nobel in economics), and this book is an interesting discussion of the socio-political forces behind the creation of the prize. I highly recommend it.

Having said that, I should note that the alternative to mainstream marginalist (neoclassical) economics is not Social Democracy. I guess one can actually be Social Democratic (Liberal in the US  New Deal sense of the word) and neoclassical. A good chunk of the Old Keynesians of the Neoclassical Synthesis sort were, and there are a few New Keynesians that are like that (many are simply Neoliberal). The alternative to marginalism, in my view, is a combination of the old surplus approach (classical political economy), particularly regarding value and distribution, and the Keynesian (and Kaleckian) analysis, regarding macro.

Also, I'm somewhat troubled by Offer and Söderberg tendency to read the Kuhnian ideas on the growth of knowledge in a nihilistic way, suggesting that economics cannot be seen as 'scientific' (surely a loaded term with more than one definition), and that there are no regularities in economics. They, for example, say that:

Feynman began by ‘looking for a new law’. But after three centuries, economics has yet to come up with a single non-obvious ‘law’, or universal regularity.

Don't get me wrong, regularities in economics are historically constrained, but there are more than a few. As any regular reader of this blog would know, I'm particularly fond of Okun's Law (and also of its inseparable fraternal twin Verdoorn's Law). I do think there is an important regularity behind the so-called Thirlwall's Law (that developing countries without a reserve currency face a balance of payments constraint more often than not), even if I don't think it is a "law" like the other two. In particular, I think that if one thinks of the persistent forces that operate within a particular mode of production, there are many other regularities that should (and to some extent are) part of economic analysis.

There are many mechanisms that capture the workings of those regularities in the economic system, like the multiplier and the accelerator. Theoretical constructs that are measurable, even if that is difficult and open to criticism. I guess I'm okay with the use of the term economic law, in a certain context. I suppose Marx also thought that capitalism, and other modes of production, were to some extent amenable of analysis on the basis of certain regularities, certain laws of motion, if one prefers (and, yes, that opens a discussion about determinism, but I'll leave that for another post).

Kindleberger (who I was lucky to see giving a talk in honor of Heilbroner years ago) wrote a little book on economic laws. The Iron Law of Wages, that Kindleberger discusses in his book, is very problematic (some discussion of that here), like the law of supply and demand, or the law of diminishing returns (they are not laws in my view, if that needs to be clarified). The other two Kindleberger discusses are much better, namely: Engel's Law and Gresham's Law. At any rate, for what is worth, I do think that there are many regularities that make economics scientific. Yes, sure social sciences are not like the hard sciences, but we do not live in post-modern world in which no regularities exist. But that does not undermine the authors' critique of the Riksbank prize, I might add.

Angus Deaton wins the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel

For his work on "consumption, poverty and welfare" according to the press release. It wasn't Atkinson, for inequality, as I suggested it was possible, but given the other possibilities cited this is quite good. Deaton had received last year the Leontief prize, which usually goes to heterodox economists (the other Nobel to win the Leontief was Sen), together with Jamie Galbraith.

I should say, I recently read his The Great Escape. An interesting book, full of relevant data. But it does maintain the conventional neoclassical view on growth. Supply side constrained, and dependent on investment in education (aka human capital), and the institutions to guarantee investment (e.g. property rights, rule of law). The Douglas North New Institutionalist view. In his words:

“possession of common knowledge does not imply that all countries should have the same living standards. To be able to use rich-country methods of production requires rich-country infrastructure—roads, railways, telecommunications, factories, and machines—not to mention rich-country educational levels, all of which take time and money to achieve. Yet the gaps between rich and poor provide plenty of incentives to make the investment in that infrastructure and equipment, and, as Robert Solow showed in one of the most famous papers in all of economics, average living standards should draw closer over time. Why this has not happened is a central question in economics. Perhaps the best answer is that poor countries lack the institutions—government capacity, a functioning legal and tax system, security of property rights, and traditions of trust—that are a necessary background for growth to take place.”

It does say something about investment in infrastructure, and one can read the need for money as an acknowledgment that the balance of payments is an important restriction (but that might be reading too much). So as most mainstream economists he seems to think that lack of convergence is somewhat of a mystery. He says: “puzzling is the failure of the poor countries to catch up.”

There are interesting things in his book anyway. He does say, for example, that:

“One key to African growth is what happens to commodity prices. Many African countries have long been and are still dependent on exports of 'primary' commodities, mostly unprocessed minerals or agricultural crops. Botswana exports diamonds; South Africa, gold and diamonds; Nigeria and Angola, oil; Niger, uranium; Kenya, coffee; Côte d’Ivoire and Ghana, cocoa; Senegal, groundnuts; and so on. The world prices of primary commodities are notoriously volatile, with huge price increases in response to crop failures or increases in world demand and equally dramatic price collapses, none of which are easily predictable."

The preoccupation with commodity price volatility has a long history in economic development, but probably Raúl Prebisch and the economists at the Economic Commission for Latin America and the Caribbean (ECLAC) have been the pioneers and the most persistent in emphasizing its relevance. That tradition, of course, emphasizes demand as the engine of growth, and the balance of payments as its main constraint in peripheral countries.

More importantly, Deaton seems to take the profession and even the Nobel prize with humor and skepticism. Again from the book: “The great economist and Nobel laureate James Meade used to complain that the three great disasters of the twentieth century were the 'infernal' combustion engine, the population explosion, and the Nobel Prize in economics.”

The Bank of Sweden prize in memory of Alfred Nobel

Prize will be awarded soon (next Monday). Thomson-Reuters prediction, based on citations, below.

ECONOMIC SCIENCES

Sir Richard Blundell, CBE FBA Ricardo Professor of Economics, Department of Economics, University College London and Research Director at Institute for Fiscal Studies, London UK For microeconometric research on labor markets and consumer behavior

John A. List Homer J. Livingston Professor of Economics, University of Chicago, Chicago, IL USA For advancing field experiments in economics

Charles F. Manski Board of Trustees Professor in Economics, Northwestern University, Evanston, IL USA For his description of partial identification and economic analysis of social interactions

Full list of forecasts here. Other people high on the speculation list are Orley Ashenfelter, Robert Barro, David Card, Peter C. B. Phillips and Paul Romer. I've read someone suggesting Anthony Atkinson, for his work on inequality, since Piketty is a no-no.

PS: Given that the econ 'Nobel' is not a real one, and that we give it to people that say opposite things (e.g. Myrdal and Hayek, Fama and Shiller), there should be a shadow Nobel, with a contrarian for each one given out.

On the blogs

Jean Tirole, A Practitioner Of New Industrial Organization -- Robert Vienneau discusses the new IO, based on game theory of the new 'Nobel' winner, and the old IO, which was based on the classical surplus approach and barriers to entry

Crony Capitalism, or Plain Old Capitalism? -- Arthur MacEwan dissects the right wing attack on the Export-Import Bank

These states, Part I and Part II -- Max Sawicky on how labor markets have done in States with gubernatorial elections

Baumol's disease Prize?

So Monday they'll announce the Sveriges Riksbank Prize (aka Nobel). Both The Guardian and Tyler Cowen at Marginal Revolution Blog bet on William J. Baumol, who was nominated for his work on entrepreneurism. Baumol would be a worthy winner for the 'Nobel.' But that's not his best work, in my view, since it relies on the same mainstream flawed supply-side stories to explain economic growth. But Baumol's Disease is an important insight, and one of the few regularities in economics treated like a scientific law and named after the economist that observed it, together with Okun's Law, Thirwall's Law, the Prebisch-Singer Effect, the Balassa-Samuelson Effect, and Kaldor-Verdoorn's Law.

PS: Baumol's contributions are extensive, from money demand, to history of ideas (including this paper on Say's Law, which is named after an economist, but is not a regularity and it's not really a law), to the analysis of productivity, including work with Marxist author Ed Wolff.

A Nobel for the Tea Party? Fama thinks Obama is a Socialist

If you read in Spanish I wrote this little note on the last Bank of Sweden Prize in Memory of Alfred Nobel. Also, you may want to read the interview given by Eugene Fama to John Cassidy from the New Yorker in 2010. He says many things, but I would like to point out just a few.

John Cassidy (JC): So what caused the recession if it wasn’t the financial crisis? 

Eugene Fama (EF): (Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.) We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity. 

... 

JC: There were some people out there saying this was an unsustainable bubble… 

EF: Right. For example, (Robert) Shiller was saying that since 1996. 

JC: Yes, but he also said in 2004 and 2005 that this was a housing bubble. 

EF: O.K., right. Here’s a question to turn it around. Can you have a bubble in all asset markets at the same time? Does that make any sense at all? Maybe it does in somebody’s view of the world, but I have a real problem with that. Maybe you can convince me there can be bubbles in individual securities. It’s a tougher story to tell me there’s a bubble in a whole sector of the market, if there isn’t something artificial going on. When you start telling me there’s a bubble in all markets, I don’t even know what that means. Now we are talking about saving equals investment. You are basically telling me people are saving too much, and I don’t know what to make of that. 

... 

JC: Back to Chicago economics. Is there still anything distinctive about Chicago, or have the rest of the world and Chicago largely converged, which is what Richard Posner thinks? 

EF: The rest of the world got converted to the notion that markets are pretty good at allocating resources. The more extreme of the left-leaning economists got blown away by the collapse of the Eastern bloc. Socialism had its sixty years, and it failed miserably. In that way, Chicago theory prospered. Milton Friedman and George Stigler were fighting that battle pretty much alone in the old days. Now it is pretty general. An experience like we’ve had rehabilitates the remnants of the old socialist gang. (Laughs) Unfortunately, they seem to be in control of the government, at this point [emphasis added].

Financial markets do not cause recessions, and we do not know why recessions happen. Also, Friedman was fighting communism (I guess Keynes was a commie), and Obama is a Socialist. This is a 'Nobel' for the Tea Party. No comments.

The Bank of Sweden gives the prize for the efficient market hypothesis

Lars Syll was right, the Bank of Sweden awarded the Sveriges Riksbank Prize in Memory of Alfred Nobel to Eugene Fama for the Efficient Market Hypothesis (EMH). Lars Peter Hansen and Robert J. Shiller were also recognized for the work on the statistical tests about rational bubbles and for providing evidence that suggests that the EMH might not work, respectively. Even if tempered by Shiller, a New Keynesian that writes with Akerloff, it is still pretty audacious to give Fama and the EMH a 'Nobel' after the last financial crisis. If you had doubts about the state of the profession, and the resilience of the mainstream, this should wipe them out.

Lars Syll on the Sveriges Riksbank Prize

Lars Syll had a nice post recently on the forthcoming (next Monday) Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. He argues that a likely candidate would be Eugene Fama, for exactly all the wrong reasons, which is apparently what guides most of these prizes in economics anyway. And indeed Fama has perennially been in the short list. Reuters (here) has a different list with three teams of possible winners: Angrist, Card and Krueger for labor economics, Hendry, Pesaran and Phillips for time series econometrics, and Peltzman and Posner for economic regulation (deregulation more likely). And Reuters was correct on the Physics prize, but this year Higgs was a shoe-in.

PS: The 'Nobel' might up for grabs, but Janet Yellen will be the next chairperson of the Fed.

Explaining the Sveriges Riksbank Prize and the Post-Modern Mainstream

The so-called Nobels (not original Nobels, and the Nobel family is against them; I tend to dislike the criteria for the winners, which leaves out Harrod, Kahn, Kaldor, Kalecki, Prebisch, Robinson and Sraffa, to mention a few, but not the prize per se, after all Myrdal and Leontief did get it) are out (here for a journalistic account), and it went to Lloyd Shapley and Alan Roth. I won't explain anything about the Gale-Shapley algorithm, which is not my area of research, even though I sat back in the early 1990s in course taught by Marilda Sotomayor who co-authored some papers with both Gale and Roth. My concern is what it means a prize for a matching algorithm and its applications and the current state of economics science.

The algorithm is actually less about matching preferences, even though that is the most common description, than you might think. For example, one of the practical uses is related to matching kidney donors and recipients, andrather than subjective preferences the matching involves sorting out problems related to the compatibility of immune systems. It is more of an engineering problem really. Arindrajit Dube is right that this is a Nobel for planning, if you think about it (h/t Mark Thoma for pointing this out). Also, the stability of the matches (the fact that there is no mutually preferable match) is irrelevant in this context, since who would 'divorce' a kidney that is perfectly compatible from an immunologically point of view (what, you didn't like the kidney's political views?), or which kidney for that matter wouldn't be satisfied with its match?*

It is particularly important that this prize has little to do with the core of neoclassical economics. Yes, the algorithm is about exchanges, and individual decisions, and hence about allocation, and surely has little if anything to say about production (let alone the social relations of production). However, note that it is an idiosyncratic rule, not a general proposition based on the principle of substitution, according to which relative scarcities determine relative prices and individual choices.

This has been a general trend in neoclassical economics since their defeat in the capital debates demonstrated that the latter proposition does not hold water. The use of the disaggregated General Equilibrium model (as I argued here with Kirsten Ford and Nate Cline) has not been able to change the problems from a logical point of view, and that's why they still use the aggregative model to give policy advice (i.e. structural reforms in Europe to cope with unemployment, meaning lower wages so firms hire the cheap 'factor of production').

It is also why prizes for game theory based research are popular with the Swedish bankers that make decisions about who is an authority in this profession. Game theory is an instrument that fits well the post-modern version of the mainstream, in which everything is possible (but the 'free' markets are still the mantra). So beyond the question of what practical use this particular algorithm might have, there is a deeper question of the bankruptcy of the mainstream, that pretends to be more general and flexible, when is exactly the opposite. It is internally illogical and incoherent, but increasingly attached to the dogmatism of 'free' markets, which has become just a way to defend the interests of the wealthy and corportaions (any similarity to the Conservative movement, and the current GOP in the US, is NOT a coincidence).**

* I'm not suggesting that the algorithm works perfectly in the real world. In fact, in Brazil the National Association of Graduate Economic Centers (ANPEC, in Portuguese), following Marilda's lead, adopted the system in 1997 to match students with centers to produce a stable matching, that is, there would be no mutually preferable matches. Note that before good students were sometimes left without a graduate center, since they were not chosen by anyone (even though some students that had lower grades did), and a few centers were left with empty vacancies. However, as noted in this dissertation supervised by Marilda (in Portuguese), the algorithm did NOT work, and a stable matching was not achieved, with the same problems taking place as before. The algorithm was abandoned the following year.

** Supply-side economics, New Classical and Real Business Cycles authors (as I claimed in another post) are the equivalent in economics to Intelligent Design in Biology, and the GOP has adopted all of these views as part of their world view.

Sims is not Sargent

Below Steve's comment on Sims. Worth a whole post.

Chris Sims' classic 1980 paper "Macroeconomics and Reality" still echoes, or should, among macro model builders and macro econometricians. He could not possibly be clearer about the "incredible" restrictions that models often impose, and proposed a way forward, the VAR in its many forms.

That method has evolved to the point where, for example, good econometricians can recast a DSGE model in VAR form and see if it survives the data. Often they don't, a recent example being Peter Ireland's DSGE so soundly rejected by Katarina Juselius.

The rub is in the qualifier good. This is not easy stuff to do correctly. But its power is worth the sweat. Sims has been homaged over his prize by Mark Thoma here, and by Jim Hamilton, the time series bible author here.

A very favorite story is when Sims, Robert Litterman, and Thomas Doan, all either at the Minneapolis Fed or U of Minnesota in the 80's, "took on" their big models with a small VAR and outforecast them by a bunch. They soon left, maybe excommunicated? But Sims and Litterman at least landed on their feet...Litterman just retired as head statistician at Goldman Sachs. So the Sims triumph validates a reality first approach, meaning data before theory, and with the tools we now have and careful work, this method will become ever more influential in applied macro. Sims has also contributed to Bayesian approaches to macro modeling.

I totally miss the logic of the pairing with Sargent, but such is academic politics.

I agree.

PS: Links are there in the two here in Steve's post, and in the title of Sim's paper and Juselius name.

Esther-Mirjam Sent on Sargent and more

As Kevin Gallagher noted, the contributions of Sargent and Sims are quite different and should be analyzed separately. Ester Mirjam-Sent is certainly the most qualified and discerning critic of Sargent's work, and anybody interested in understanding his (Sargent's) contributions to economics should read her extensive research on his ideas. A good start is her paper in the Cambridge Journal of 1997 (here).

Her concerns are more with the evolution of his thinking about rationality, from rational to bounded, which is a central pillar of neoclassical economics. She notes that Sargent's preoccupation with rationality (which should be contrasted with Simon's views) was to strengthen the theoretical foundations of neoclassical economics. I tend to be more concerned with the critique of those foundations, rather than with the question of how rational behavior leads (or not) to efficient market results.

One important area, in which I have done some research, is hyperinflation theory. Sargent basically is responsible for extending the Cagan model (his classic paper is here) and suggesting that beyond a monetary reform, a credible fiscal adjustment was essential for stabilization. In that sense, while Sargent maintained the fiscal fundamentals of hyperinflation, he suggested that expectations did have a role to play. As Carlos Bastos reminded me recently, here is a critique of Sargent's contribution published in the Economic Journal (subscription needed; portuguese version here). For an alternative discussion of inflation/hyperinflation go here, and for a survey of the literature here.

PS: Sent was one of the faculty members that left Notre Dame after the administration dismantled the heterodox program there. For more on that read here.

Re-writing history

By the way, in the middle of the several comments praising the winners of the Sveriges Riksbank Prize in Economics there will be a lot of misplaced acclaim. Here is one example from the Huffington Post:

"Sargent famously weighed in on the fight against inflation in the early 1980s. Many economists believed it would take years of high interest rates to bring inflation down. But Sargent believed that inflation could be tamed much faster if the Federal Reserve acted enough to break the public's expectations that prices would continue to rise rapidly. That is basically what happened: Then-Fed Chairman Paul Volcker raised interest rates so quickly and so much that inflation expectations were shattered."

So now, if you believe this report, Sargent and Lucas were right about the costless disinflation of the 1980s. Forget that disinflation had to do with falling commodity prices, caused by the hike in interest rates, and with the weakening of the labor force, which faced what was, in the US up to that point, the worse recession since the Great Depression. Unemployment in the US reached 11%, but it was inflationary expectations that mattered. And the Huff Post is a progressive site, isn't it?!

A beautiful blind

Sylvia Nasar wrote a new book (the old and famous was the one on Nash's mind and life) on the history of economic ideas. Robert Solow is not too happy, since he thinks the book is superficial, and spends too much time on the economists lives and on what he thinks are second rate minds (e.g. Beatrice Webb, and I suspect for him Joan Robinson too). I did not finish reading the book, and hence will not review it here now, but I can comment on Solow's review, which is quite misguided.

In fact, the preoccupation with policy issues and the general context in which theories are developed is one of the good aspects of this book. In this sense, Nasar's book is in the direct line of descent of those, like Robert Heilbroner, that think that economics is (and should be) about the great questions (accumulation and the wealth of Nations, the quintessential themes of classical political economy) and that the economist's vision is as essential as, if not more so, than the analytical tools utilized.

For example, Solow complains that the book does not spend enough time discussing the theoretical achievements of Alfred Marshall. The fact, that somebody, with Solow's credentials, can write that after Piero Sraffa's devastating critique of Marshallian partial equilibrium (still in all textbooks, by the way), as if his technical achievement was not simply incoherent and irredeemably incorrect is a testimony about the poor state of our discipline.

Solow's complaints about Nasar discussion of Keynes are more puzzling, since he should be as neoclassical synthesis Keynesian be very comfortable with the 'developments' of Keynesian theory within the mainstream, which are after all the dominant model (the New Keynesian model with an IS, a monetary rule and a Phillips curve). He was instrumental in the creation of the current macroeconomic consensus, and his growth model (for which he won the Sveriges Riksbank Prize, also known as the Nobel in economics, although it's not one of the original Nobels) is the dominant view on growth. If the profession has failed, Solow is certainly responsible for it to a great extent.

If anything the problem with the book is that it shares with the mainstream (including Solow) a certain view of economics, and progress in the discipline, that has been established since the rise of marginalism in the latter part of the 19th century. In this view, there is a direct line of descent from Smith and Ricardo to Marshall (via Stuart Mill) to modern economics. According to this approach, the critical authors are, not the true heirs to classical political economy (that is from Smith/Ricardo to Keynes/Kalecki, via Marx), but critics of some aspects of capitalism that seem to have more heart than brains.

In all fairness, however, it's not surprising that a journalist/writer that is not an specialist economist buys the conventional wisdom on the history of ideas. The conventional history of ideas texts are fundamentally, like the parable in Bruegel's painting, written by blind professors to guide their blind students.

PS: The Sveriges Riksbank has been awarded to two professors (Sargent and Sims) that most likely believe that government intervention in the middle of the crisis is worse than some version of laissez faire. This is the reason, not the predictions about the end of times, why this is a dismal science.