Maps and diagrams

My friend Peter gave us Alan Greenspan’s memoir, The Age of Turbulence, as part of our wedding present, and I’ve finally managed to prise it from Raych’s grasp. I’m only a few chapters in, but in the first couple he outlines his development as an economist.

Strikingly, he is an empiricist through and through. He’s at best uninterested and often hostile to theory, especially macroeconomic theory. He developed an early scepticism even about the predictive power of econometrics beyond the short term and the local, though its statistical techniques help to clarify a complex picture. His approach appears to be a brute-force attention to detail. He started with industrial economics, the steel industry in particular (his early work was as a corporate consultant) and built up a picture from there.

In later years I developed some skill in building quite large econometric models, and came to a deeper appreciation of their uses and, especially, their limitations. Modern, dynamic economies do not stay still long enough to allow for an accurate reading of their underlying structures. Early portrait photographers required their subjects to freeze long enough to get a useful picture; if the subject moved, the photo would blur. So too with econometric models. Econometricians use ad hoc adjustments to the formal structure of their models to create reasonable forecasts. In the trade, it’s called add-factoring a model’s equations; the add-factors are often far more important to the forecast than the results of the equations themselves.

If models have so little predictive power, what use are they? The least-heralded advantage of formal models is simply that the exercise of using them ensures that basic rules of national accounting and economic consistency are being applied to a set of assumptions. And models certainly can help maximise the effectiveness of the few parcels of information that can be assumed with certainty. The more specific and data-rich the model, the more effective it will be. I have always argued that an up-to-date set of the most detailed estimates for the latest available quarter is far more useful for forecasting accuracy than a more sophisticated model structure.

At the same time, of course, the structure of a model is quite important to its success. You can’t (or at least I can’t) draw abstract models out of thin air. They have to be inferred from facts. Abstractions do not float around in my mind, untied to real-world observations. They need an anchor. This is why I strive to ferret out every conceivable observation or fact about a happening. The greater the detail, the more representative the abstract model is likely to be of the real world I seek to understand. [p. 36]

This doesn’t surprise me at all. I’ve thought for quite a while that mainstream economics is supported by an exoskeleton of empiricism rather than a backbone of general equilibrium theory. At least the parts that matter. Attacks on a monolithic ‘neoclassical economics’ – conceived as an abstract, ridiculously unrealistic construct – miss the mark, because outside the academy – and even in much of that – this is not how economics is done. Mostly modern economics is about extrapolating data series from past trends, and drawing maps rather than diagrams.

Published in: on 29 March, 2008 at 2:25 pm  Comments (9)  

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  1. For whatever reason the pingback thing hasn’t picked it up, but this post has been involved in a discussion at Robert Vienneau’s Thoughts on Economics: http://robertvienneau.blogspot.com/2008/03/comity.html

  2. The Austrians would tend to agree with this. I haven’t read the book myself, but I would have thought Greenspan was a positivist, a Friedman-ite, with all the theory-talk about “predictive machinery” and what not. By the way, how is he such a good predictor anyway? Does that come later in the book?

  3. Actually I think it’s the opposite of Austrian methodology. Cf. Mises: “What assigns economics its peculiar and unique position in the orbit of pure knowledge is the fact that its particular theorems are not open to any verification or falsification on the ground of experience… the ultimate yardstick of an economic theorem’s correctness or incorrectness is solely reason unaided by experience”. [Quoted in Blaug, “The methodology of economics” p. 80.] The Austrians seem to have a deep antipathy to macroeconomic conceptions. So not really too close to Greenspan.

    It is kind of similar to Friedman’s view although Friedman was defending his right to ridiculous assumptions, whereas Greenspan is more interested in how things actually work. Obviously no real life central banker can take Friedmanite monetarism seriously, and in fact Greenspan really glosses over Friedman and the whole 1970s to a surprising degree.

    Whatever his self-image, Greenspan is basically a pragmatic Keynesian. As for whether he is a good predictor… well I haven’t finished the book yet but he has a rather mixed track record, right? He doesn’t claim economics can predict very far in advance with much certainty, although the last half of the book (as yet unread) is all about his prognostications. Will report.

    There’s another funny anecdote in the book where Treasury Secretary Robert Rubin warns him not to comment too much, not only out of fear about alarming the markets, but because if he was too open about his views on the economy people would realise he didn’t know any more than anyone else. This is certainly true about the ‘new economy’ bullshit Greenspan was swallowing and spouting privately at the time (and later publicly).

  4. I would have thought Greenspan was in favor of more econometrics. And from what I understand Austrians seem to be opposed to heavy econometric analysis.

    “Greenspan is basically a pragmatic Keynesian.”

    This is what I’m confused about. I’m used to thinking about Greenspan as a quasi-objectivist. He was friends with Ayn Rand if I’m not mistaken. He contributed to some of her work like “Capitalism: the Unknown Ideal” and she contributed to his development as well.

    I’m not looking any of this up, so if I’m wrong about this then my memory is failing me terribly.

    Side question – are you an economist yourself in Sydney?

  5. I mean he’s a Keynesian in terms of how he understands macroeconomics. Politically, yes, he is opposed to what he understands to be the Keynesian message, which he presents as essentially revolving around government spending.

    He was part of the inner circle of the Rand cult, to which he was introduced by his first wife. He does talk a little about how Rand convinced him to ditch his logical positivist epistemology. Rand was there beaming when he was first appointed Chairman of the Council of Economic Advisers. But beyond thinking rather highly of ‘markets’, I’m not sure her philosophy is that important to his thinking on economics.

    Another big influence he discusses, at rather more length than he does Rand, is Schumpeter, which is really interesting because it gives a direct link to Marx, since Schumpeter was heavily influenced by him and, as Joan Robinson put it, was “Marx with the adjectives changed”. You could say this was an Austrian influence, but of course Schumpeter was not held in the highest regard by the other Austrians, and vice versa.

    As for the side question, well, I’m doing an economics PhD.

  6. “He does talk a little about how Rand convinced him to ditch his logical positivist epistemology. Rand was there beaming when he was first appointed Chairman of the Council of Economic Advisers. But beyond thinking rather highly of ‘markets’, I’m not sure her philosophy is that important to his thinking on economics.”

    This was my impression as well.

    “as Joan Robinson put it, was “Marx with the adjectives changed”.

    I will have to look further into this. And if you’ve read Paul Samuelson, he says Marx is basically Ricardian. So if Schumpeter is Marx with different adjectives, and Marx is Ricardo with different adjectives, then Schumpeter is really Ricardo’s heir.

    More side questions – what is your thesis on? I’m interested in growth models like the Solow model.

  7. Yes, there’s some truth in it, but Samuelson didn’t really get Marx. Marx is basically Ricardian in his microeconomics, but relative prices are a tiny part of Capital, which is mostly about the dynamics of the reproduction of capital as a social relation. Samuelson said Marx was “a minor post-Ricardian”, – he was reading Marx through modern microeconomic glasses. Ricardo had not much to say about dynamics or the social foundations of capitalism. So Samuelson kind of misses the point.

    There’s a great article in the exchange Samuelson was involved in about this in the 1970s by Baumol. Baumol’s a neoclassical but had a serious understanding of Marx: it’s in the journal of Economic Literature (12:1) in 1974.

    As for Schumpeter, his microeconomics were Walrasian; he rejected Ricardo. What he got from Marx is exactly what Marx had but neither the Ricardians nor the marginalists had: dynamics, a sense of how competition really worked, and a social and historical vision.

    My thesis is on ‘the making of Australian counter-inflation policy, 1945-85’. Historical and empirical, not very theoretical.

    I’m really interested in growth theory as well, but haven’t had a chance yet to go into them in detail. I’m not a big fan of the Solow-Swan version, it seems to me like a classic case of the theory with arbitrary assumptions designed to resolve a contradiction – in this case the ‘knife-edge’ instability of Harrod. Of course the knife-edge suggests Harrod had it wrong as well, since real life growth is not that unstable! Personally I’m drawn to the Joan Robinson post-Keynesian-marxian tradition, which is carried on by people like Garegnani, Kurz and Salvadori etc. Anwar Shaikh has been doing some good stuff on this lately. But I can’t pretend to much expertise here, it’s something I’d like to get into after the thesis.

  8. I’ve read some Baumol before. I’ll check out that article as well the Walrasian methodology and micro theory.

    I’m not a big fan of the Solow-Swan version, it seems to me like a classic case of the theory with arbitrary assumptions designed to resolve a contradiction – in this case the ‘knife-edge’ instability of Harrod.

    Do you know any good books on growth theory?

    Personally I’m drawn to the Joan Robinson post-Keynesian-marxian tradition, which is carried on by people like Garegnani, Kurz and Salvadori etc. Anwar Shaikh has been doing some good stuff on this lately.

    So this tradition is specifically post Keynes & post Marx. Is it anything like Keynesianism or Marxism? Obviously, I need to read your posts more. I wrote a silly little post this morning about Ronald Coase you might be interested in.

  9. Hey Acumensch,

    A great textbook on growth theory is ‘Growth and Distribution’ by Duncan Foley and Thomas Michl [1999]. It goes through a range of theories, from Harrod-Domar and Solow-Swan to classical, Marxian and post-Keynesian. It’s a textbook with exercises and everything, not terribly difficult but a really good intro and with good ‘further reading’ sections too, which would give you references for the major contributions.

    The descriptors of economic schools get pretty ridiculous, huh? A better name for these guys would probably be ‘neo-classical’, in the sense that they are reviving classical (Smith, Ricardo, Marx) views of growth – but of course neo-classical means something completely different.

    ‘Post-Keynesian’ really means a school of thought that goes back to Keynes’ writing, in reaction to so-called ‘bastard Keynesianism’ (Joan Robinson again) as taught in post-war textbooks. So ‘fundamentalist Keynesian’ might be a better term, although it is a broad school and there is much criticism of Keynes as well – though they accept his overall vision.

    The school converges with some of the Marxian tradition, and with the neo-Ricardianism of Sraffa. Obviously both Keynesian and Marxian traditions have developed a lot (and interacted with each other and with neoclassicals) in the 140 and 70 years since Capital and the General Theory, and they’ve gone in many different directions. So the groupings are loose.

    Keynes’ Cambridge department is very influential as a reference point, because it included, among others, Keynes himself, Joan Robinson (who was interested in Marxian, Ricardian and neo-classical theory), Sraffa (_the_ 20th century Ricardian), Maurice Dobb (Marxian), (sometimes) Harrod (who first developed Keynesian growth theories) and so on.


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