Home > Economics - General > The Importance of Being Earnest: How Superfreakonomics killed contrarianism

The Importance of Being Earnest: How Superfreakonomics killed contrarianism

October 19th, 2009

I missed out on the Crooked Timber book title contest (combine a classic title with a “How C did Y” subtitle in the modern manner) a while back, so here’s my entry. As regards earnestness, i’m riffing off Andrew Gelman, via Kieran Healy at CT, who observes “”pissing off conservatives” is boring and earnest?”

The main point, though, is that the fuss over the global cooling chapter in Levitt and Dubner’s new book is the first occasion, I think, where the refutation of specific errors has taken a back seat (partly because, in this case, it’s so easy) to an attack on contrarianism, as such. The general point is that contrarianism is a cheap way of allowing ideological hacks to think of themselves as fearless, independent thinkers, while never challenging (in fact reinforcing) the status quo. Here’s Krugman and Joe Romm, for example

I can certainly remember that I was once positively disposed to contrarianism. Trawling through the blog records, I can find

* A mixed review of Christopher Hitchens (on our side then), Letters to a Young Contrarian. If memory serves, I had a more favorable view of contrarianism, and Hitchens, before reading the book than after.

* A reference to “The worst kind of contrarian: That is, one who makes great play with contradictions in the conventional wisdom, does not put forward a coherent alternative, but nonetheless makes authoritative-sounding pronouncements on public policy.”

* A diagnosis of Richard Lindzen as someone who is “just an irresponsible contrarian as a matter of temperament. ”

To sum up my current view in a contra-contrarian style: “contrarianism” is mostly contrary to reality, the “conventional wisdom” is probably wiser than the typical unconventional alternative, and “politically incorrect” views are almost always incorrect in every way: literally, scientifically and morally.

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  1. Donald Oats
    October 19th, 2009 at 07:39 | #1

    Wasn’t “conventional wisdom” originally an expression of irony?

  2. October 19th, 2009 at 08:12 | #2

    Pr Q says*:

    “politically incorrect” views are almost always incorrect in every way: literally, scientifically and morally.

    The problem with Pr Q’s formulation of “contrarian” (opposed to conventional wisdom) is that what is contrarian amongst cultural elites is common sense amongst the cultural populus. His above comment is a perfect illustration of this attitude.

    In recent years “political incorrect” views, or at least those skeptical of the generation old conventional wisdom about promoting and “celebrating diversity”, have received a major boost in credibility on the back new research by mainstream social & natural social scientists. To take one significant example, Robert Putnam, Harvard Academic and paid-up Left-liberal, produced a major study showing “the down-side of diversity”.

    The import of this study was that “liberal” cultural diversity eroded “corporal” communitarian bonds. It sees the latter are the foundation on which libertarian and egalitarian aspects of the Enlightenment rests.

    This conclusion was certainly “politically incorrect” enough for Putnam to withhold publication of his own paper. And contrarian with regard to cultural elite conventional wisdom, who either treated the report as if it was emitting toxic fumes or stonily ignored it.

    But of course cultural elites can congratulate themselves that they have taken the high moral ground, even as it shifts beneath their feet.

    *this comment addresses a posting related to the science culture wars, initiated by the blog owner. So I believe that I am not violating current comments policy responding to it.

  3. jquiggin
    October 19th, 2009 at 08:30 | #3

    @Donald Oats
    “Wasn’t “conventional wisdom” originally an expression of irony?”

    Indeed it was, due to JK Galbraith IIRC. I’m attempting a double irony by suggesting the CW is more likely to be wise than the contrarian alternative.

    Jack, the relationship between national/ethnic diversity and social solidarity has been debated by liberals and nationalists ever since these ideas came to prominence in the 19th century, with none other than JS Mill on the side of mono-ethnicity. See here. Presenting these arguments as if they are new brave and transgressive is truly sorry stuff.

  4. gerard
    October 19th, 2009 at 08:32 | #4

    The ideas that you are attacking in your zombie economics book were all “conventional wisdom” to some extent.

    Conventional wisdom when it comes to hard science is one thing, but outside the hard sciences, conventional wisdom is often wrong.

    Remember Saddam’s WMD?

  5. October 19th, 2009 at 08:34 | #5

    Pr Q says:

    I can certainly remember that I was once positively disposed to contrarianism…
    To sum up my current view: “contrarianism” is mostly contrary to reality, the “conventional wisdom” is probably wiser than the typical unconventional alternative,

    I cant find much in the way of heteredoxy in Pr Q’s world-view, at least as far as his traditional peers in the liberal academy are concerned. My impression is that Pr Q has always been an exponent of traditional orthodoxy in his economics. This is, BTW, a major reason why I trust his economic views more than exponents of the more crankish extremes to the Right (Austrian) and Left (Marxian).

    He is a self-confessed neo-classical-Keynsian mixed-economy economist. This was the conventional wisdom in the economics academy (and most of the polity) from 1945-1975, which is roughly about the time he began his professional education. It only started to change (towards new classical-Monetarism free-market view) around 1985, by which time I presume his professional education was just about completed.

    So his education sort of straddled a major sea change in the conventional wisdom in the economics academy. He has my sympathies for somehow dealing with the uncomfortable straddle.

    He represents the boring orthodox view on strategy, that most inter-state and some intra-state conflicts are best settled according to international law, preferably by some legitimate global institution. More or less the old Powell Doctrine, pre-Gulf War.

    He is also an exponent of orthodoxy on climate science, which is eminently sensible.

    My observation is that Pr Q also adheres fairly strictly to liberal orthodoxy on cultural matters, where there are obviously sharp differences with other sectors of society.

    The main reason why Pr Q sometimes appeared in a contrarian position is that large numbers of academics and commentators have often noisily fallen for the latest ideological craze, whether it be DOW 36000, pre-emptive war, climate skepticism etc. Its clear that the latter are the true contrarians, but are just more adept at appearing to have authority owing to their skill at media management.

  6. Alice
    October 19th, 2009 at 09:19 | #6

    @Jack Strocchi
    Jack – we have not had traditional orthodoxy for the past 30 years. That is precisely what is wrong. The traditional orthoxy was chucked out in favour of monetarism, chicago booth pretty models that bore no relationship to the real world, rational expectations theory, and an increasingly free hand over removing important regulations (particularly in the financial sector) in the name of free markets. In fact “fad economics” and “fad religions” became the traditional orthodoxy and any who held sensible views over policy, like prof Q (but there were plenty others) got accused of being some sort of “enemy within”, branded left when they were in fact centre or centre right compared to the ever further extreme hard rightward travelling amongst those in positions of power.

    It pays to know who leaned so far on the see saw Jack that they upended themselves and Im sorry to say that the conservatives in this country and the US (republicans) long ago lost the right to the meaning of that word. The conservatives have become dominated by an increasingly lunatic fringe.

    I think the electorate voted clearly on that in the last election (here and there).
    Im sorry you feel left out because your tribe didnt get home but they need to adjust their ideologies to better suit reality (either that or go find a God to make human sacrifices to which is pretty much what most on your side of the political divide think should be done with the gross surplus and underpaid labour they engineered).

    Unemployment? Underemployment? They werent even watching it.

    Now the liberals in this country are trying to attract the young by offering $15 associate memberships. What they hope to do is get them and brainwash them before they develop their own views because no young person in this country gets jack from the liberal party.

    The only contrarian position is the economic, social and political policy agendas that the conservatives have run for 30 years. Contrary to everyone’s best interests except the greedy few who have profited handsomely and obscenely (and the endless bla bla markets rhetoric). Sorry to pop your bubble Jack Strocchi but your faith is like a mushroom.

    The conservatives adopted laissez faire – the same idiot approach that caused the great depression and there were plenty screaming then that “the government shouldnt spend money” and the “markets will work it out.”

    BULL Jack and plenty in this country dont see much that appeals in the liberal party. Menzies was better than the lot of them put together since. They have lost it completely.

    No one thinks they are conservative party now.

  7. Joseph Clark
    October 19th, 2009 at 12:15 | #7
  8. jquiggin
    October 19th, 2009 at 12:46 | #8

    @Joseph Clark
    Interesting, but thoroughly unconvincing, as the comments make clear. Even more than the criticism from advocates of mainstream science, what’s really damning is the enthusiastic support Levitt and Dubner are getting from the delusional anti-science rightwingers (redundant phrasing, I know, but I try to avoid “deniers”) they are trying to disown.

  9. Alphonse
    October 19th, 2009 at 13:04 | #9

    Anti-contrarianism is the new group think. Just wait til Michael Duffy gets onto this. Be very afraid.

  10. October 19th, 2009 at 13:06 | #10

    Pr Q says:

    The main point, though, is that the fuss over the global cooling chapter in Levitt and Dubner’s new book is the first occasion, I think, where the refutation of specific errors has taken a back seat (partly because, in this case, it’s so easy)

    I dont know why it took Leavitt’s “global cooling” chapter for people to see that this New Emperors New Clothes were a little threadbare. This chapter suffers from the same defect that afflicts much of Leavitt’s – and indeed many contrarians – other work: he is to trying to be interesting and novel at the same time. Unfortunately Leavitt’s interesting bits are not all that true and his true bits are not all that interesting.

    This is the psychology of the contrarian and nine times out of ten it is wrong. As Stove observes in “The Columbus Argument” the vast majority of new ideas and gadget are wrong or monstrous. This is the profound truth behind “c”onservatism.

    Novelty, at least in the regulation of human affairs, is mostly wrong or irrelevant. Thats why the human genome spends so much time trying to constrain or delete mutations or copying errors. Most contrarians are cranks or crooks rather than cool creatives.

    The academic fuss over Leavitt looks, in retrospect, so early noughties. That was the period of the Great Moderation when everybody (but PrQ and a number of others prepared to take a contrarian stance on the great economic liberal consensus) thought that all the great macro-eco problems had been licked. Goldilocks Central Banking and all that.

    This prompted intellectuals to turn to micro-eco for the solution of intellectual problems (and salvation of ideological conflicts), with Leavitt’s silly-cleverness about “abortion and crime” being a paradigmatic example. But it turned out that Leavitt’s headline theory was just another example of late nineties-early noughties razzle-dazzle, to take in along with “Sex and the City” episodes.

    The Crooked Timbers did not distinguish themselves by giving Leavitt the rock-star treatment, a fact which is already beginning to haunt them. Pr Q abstained from the general tongue bath being lavished on Leavitt on the abortion-crime topic. No doubt Leavitt deserves some credit for his committment to data-driven science in the “freaky”, rather than “economics”, parts of his social studies.

    There were a few skeptics who saw through Leavitt’s silliness on his headline theory right from the get-go. Steve Sailer stands head and shoulders above the rest. Many critics followed and now I dont think anyone takes it all that seriously anymore. I was in New York at the time of the last phase of the Crack Wars (early nineties) and believe you me there was precious little evidence that the “young ‘uns” were properly socialised.

    Contrarians are not always wrong, there would be no progress if they were. But mostly it pays to go with the Conventional Wisdom of the older experts and the Collective Wisdom of crowds. That is the strength of conservative populism.

  11. Jim Birch
    October 19th, 2009 at 13:09 | #11

    Aren’t contrarians just driven by the need to be sexy? It’s conventional wisdom that humans are Rational Animals, and while there’s a bit of it about, the evidence for rationality as the core of virtually any human activity is weak. Large chunks of human behaviour arise from the designed-in imperative to attract the best sexual partners. And in sexual selection the fundamental requirement is to stand out from competitors. In the absence of a great physique, or the capacity to provide a reliable high level material support, a bunch of unusual sexy ideas isn’t a bad approach, provided you can make them sound plausible. It’s even better if you can deliver them with a bit of wit, though this is obviously not an absolute requirement. Rationality is ok for making stuff work, but in the arena of sexual competition it’s empirically demonstrable that the reasoned thesis runs a distant second to the juicy narrative, especially when backed up with a bit of bravado. The urge to reliable science, truth and rationality is just a weird Holocene aesthetic of the few, biologically.

    Contrarians are just grabbing for flashy narratives because they don’t have bodies capable of break dancing, and they’ve got too old for doing doughnuts in the supermarket car park. It’s desperate stuff, really.

  12. Joseph Clark
    October 19th, 2009 at 13:52 | #12

    I thought they responded very well to the claim that they misrepresented Caldeira. At minimum Romm overstated Caldeira’s objections to the chapter. Not sure about the rest.

  13. October 19th, 2009 at 15:32 | #13

    Romm didn’t overstate Caldeira’s objections — he just quoted them.

  14. Joseph Clark
    October 19th, 2009 at 16:11 | #14

    @Tim Lambert
    Romm did try to feed Caldeira a quote and when he didn’t get it he represented that Caledia objected to the villian comment and Levitt and Dubner ignored him because they “wanted to keep it very badly”. Romm’s wording is slippery and he avoids an outright lie but the implication is crystal clear.

  15. fred
    October 19th, 2009 at 16:27 | #15

    Alice at #6
    That heavy applause you hear from the gallery is [partly] coming from me.

  16. gerard
    October 19th, 2009 at 16:30 | #16


    When future generations ask the economics profession ‘What were you doing while the great bubble built up ahead of the Second Great Depression?’, and we have to reply ‘Lots and lots of quirky little working papers about sumo wrestling and speed-dating’, it is going to be really, really, f***ing embarrassing”

    We stopped doing economics and started doing awful amateur-hour sociology, basically, because we believed that all the major problems had been solved, that some form of dynamic general equilibrium was all that there was to be said about the economy considered as a system, and that the only interesting things to do were growth theory and finance. It is no coincidence that Freakonomics began in Chicago; for a guy like Levitt who doesn’t possess the engineering-maths to be a finance theorist or the empirical skills to do endogenous growth, there was literally nothing to do.

  17. Ernestine Gross
    October 19th, 2009 at 19:42 | #17

    gerard, there is a lot of hot air being blown at the moment about the failure of economics. It is hot air in the sense that sweeping generalisations are being spread. For example, you mention ‘dynamic general equilibrium’. Which type do you have in mind? Macro-economic models? If so, then I would agree with you. The entire ‘micro-economic foundation of macroeconomics’ is a methodological mess and it gets even more messy if ‘micro-economics’ is confused with axiomatic general equilibrium theory (more than 1 model). To make this point clear. The distinction between micro- and macroeconomic is totally meaningless in axiomatic general equilibrium theory of which the Arrow-Debreu model is the first of its kind.

    I cannot agree that Finance theory can be blamed for the mess. It depends on which literature – Duffie or Fama? However, I would agree if someone were to tell me that they believe that the teaching of reduced form equations from some Finance theory models by accountants in management or business schools is a problem.

    I would also agree that ‘Freakonomics’ thrives on the US model of academia, which has been adopted in Australia to some extent during the past 10 to 20 years. About 20 years ago a former colleague from Syd Uni returned from the US where he had obtained a professorship at a respectable university. This academic had a PhD in pure math and a PhD in economics. He did not publish anything for about 8 years – he was thinking, he was digesting. Then he published. He said in the US he would not have survived these 8 years without publications. In the US people are given incentives (performance schemes) which they follow, whether or not it makes sense to them. I did not understand his comment as the result of a complete survey but rather as a comment on how things work in general; exceptions are possible.

  18. gerard
    October 19th, 2009 at 19:53 | #18

    well Ernestine it was a quote, not my own comment. I think the point being made, similar to what Jack Strocchi was saying above, is that until very recently there was an assumption that macroeconomic theory had been taken care of and that the Leverett’s work represented the future of the profession. In today’s climate though, he just looks like a redundant joke, and a smug, self-promoting blow-hard (which is pretty much all he ever was – half his original book was about how brilliant he was).

  19. October 19th, 2009 at 23:48 | #19

    gerard@#16 October 19th, 2009 at 16:30

    It is no coincidence that Freakonomics began in Chicago; for a guy like Levitt who doesn’t possess the engineering-maths to be a finance theorist or the empirical skills to do endogenous growth, there was literally nothing to do.

    I am pleased, for once, to agree with gerard. Leavitt’s biggest problems were both moral and intellectual: his vaulting ambition was never matched by merely clever talent. It is an index of the poverty of economic theory during the noughties that this guy was thought worthy of a Bates medal. I, for one, am richly enjoying the schadenfreude at his timely fall from grace.

    He always seemed to me to be in an unseely haste to “make it” by hook or by crook. Without in any serious way doing the hard yards of lengthy public service or making a grand breakthrough.

    My guess he wanted a number by the age of 40, (probably 10 very large, like most of the MotU). And wanted it fast enough to afford the park-side or lake-side abode, plus enough “f*uck you” money left over to resign his academic and work on best-sellers for the rest of his life. Maybe go skiing in the off-season. JK Galbraith would be a good role model in this respect.

    No way was he going to get there by extraordinary skill at economic science or financial technology. Chicago must have been daunting place for Leavittto be to be educated, being in the shadow of the towering giants of empirical economics such as Simons, Stiglitz, Posner and Becker. Not to mention equally towering giants of theoretical economics such as Knight, Coase, Lucas & Hayek. And last but not least the theoretical and empirical master of them all: Milton Friedman. Leavitt could never hold an intellectual candle to anyone on this list.

    Nor could he have the grey matter to make it as a hedge-fund boffin for some outfit working out of Connecticut. They tend to hire physics profs, chess masters or ex-Soviet rocket scientists to do their bidding. He just ain’t in that IQ league.

    That leaves becoming a celebrity academic with a string of best-sellers a regular gig on the NYT. Well on track so far. But for once he ventured out of his comfort zone into the deeper waters of natural science. And, guess what, he immediately started to flounder.

    Now wait for him to beat an increasingly complex and sophisticated back-track from his original outlandish position, following the path well-trodden by his equally ridiculous, but not equally well ridiculed, essay into criminology.

    I am just going to sit back and enjoy the show.

  20. Michael of Summer Hill
    October 20th, 2009 at 05:38 | #20

    Jack Strocchi, which economists were responsible for the lastest global financial credit crisis? And please don’t stretch the truth.

  21. Alice
    October 20th, 2009 at 05:45 | #21

    @Jack Strocchi
    You are wrong on JK being the role model Jack – JK had something to offer – you do JK a great disservice Jack (But would I expect otherwise from you, the original contrarian?). I couldnt even finish the trite and empty first freakonomics before I caste it aside. The Barbara Cartland of economics – now there is a better role model for Levitt.

  22. Kevin Cox
    October 20th, 2009 at 05:52 | #22

    Hang on a minute folks. These guys are just applying “economics” as it is taught. If you base your discipline on looking for relationships between emergent properties of a system then this is what happens. Emergent properties are interesting and are pointers to what is going on but they are not the appropriate way to model the system.

    The physical sciences got over this approach 100 years ago. They model the underlying system and check the model from the emergent properties. Economic modelling models the emergent properties and tries to deduce the underlying mechanisms. While this is interesting and can lead to insights it is fatally flawed and enables contrarians to find evidence for whatever underlying mechanism they think up this week.

  23. Joseph Clark
    October 20th, 2009 at 15:06 | #23

    Kevin — That’s all very reasonable but what are you suggesting exactly?

  24. October 20th, 2009 at 15:13 | #24

    How about starting with Krugman for suggesting the overall strategy?

  25. gerard
    October 20th, 2009 at 15:41 | #25

    @Andrew Reynolds
    What are you talking about Andrew?

  26. Alice
    October 20th, 2009 at 16:17 | #26

    Gerard – Ill second that (????Andy..??) What strategy?

  27. October 20th, 2009 at 16:18 | #27

    This (in)famous column, where he endorses a suggestion to engineer a housing bubble.

  28. gerard
    October 20th, 2009 at 16:48 | #28

    come on Andrew! you can do better than that.

    As Krugman has explained: “It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.”


    Krugman was explaining what Greenspan’s aims were. He was critical of those aims, has been criticizing Bush’s tax-cutting mega-deficit policy from the outset, and foresaw, at least better than Greenspan did, what the results would look like. Here is his critique from 2005 of Greenspan’s bubble:


    And beyond that, it wasn’t the housing bubble so much as the hundreds of billions of unregulated derivatives built on top of securitized mortgages that cause this crisis – are you going to blame him for the Gramm-Leach-Bliley Act as well? Probably.

    You’re on to a really deliberate, dishonest and desperate distortion, I think. Krugman’s not infallible, but trying to blame him for the GFC is about as honest as blaming Al Gore for the invasion of Iraq.

  29. gerard
    October 20th, 2009 at 16:55 | #29

    Just in case anyone wants to know what we’re talking about here – detective Andrew has actually found traced the source of the global financial crisis to the following paragraphs written in a 2002 NYT article.

    I present, the smoking gun:

    The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

    Judging by Mr. Greenspan’s remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman’s crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging.

    Wow, caught red handed!

  30. October 20th, 2009 at 17:08 | #30

    I expect many economists would like to be able to explain their policy advocacy in that way. If you read the piece he was unequivocal in his support of that line. I do not see how it can be read in any other way.
    Krugman, along with many other economists at the time, were supporting the common wisdom.
    As for it not being the drop in housing prices – that is a ridiculous statement. What, in your opinion, was the reason why those instruments went bad? Unseasonable weather? Animal spirits?
    In any case, I was not suggesting that Krugman can, or should be, blamed for all of the current crisis. He is not that influential. I was clearly saying we could start with him for suggesting it (although I was wrong, he was clearly just supporting another’s suggestion).

  31. Michael of Summer Hill
    October 20th, 2009 at 17:10 | #31

    Andrew Reynolds, you will find that there is a difference between paraphrasing and citing someone rather than social engineering, and Krugman was actually quoting Paul McCulley of Pimco when he said ‘Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble’. And in 2006 Krugman again reiterated that ‘As Paul McCulley of PIMCO remarked when the tech boom crashed, Greenspan needed to create a housing bubble to replace the technology bubble. So within limits he may have done the right thing. But by late 2004 he should have seen the danger signs and warned against what was happening; such a warning could have taken the place of rising interest rates. He didn’t, and he left a terrible mess for Ben Bernanke’. Try again Andrew.

  32. October 20th, 2009 at 17:46 | #32

    No need to try again, MoSH. I suggested the search could start with Prof. Krugman – a suggestion that seems to have offended gerard. In no way did I suggest it should end with him, as gerard (in a poor attempt to argue by extension) seems to think I do.
    Just out of interest, where would you start your search? I presume St. Paul is out of bounds.

  33. Michael of Summer Hill
    October 20th, 2009 at 17:48 | #33

    Andrew Reynolds, the monetarists.

  34. October 20th, 2009 at 17:50 | #34

    Which monetarists were in any position to run anything? There are no central banks (AFAIK) still trying to run things on a quantity theory of money any more. If they were they would have ben hitting the brakes a long time ago as M3 started to skyrocket.

  35. Michael of Summer Hill
    October 20th, 2009 at 18:07 | #35

    Andrew Reynolds, read what you have written and think. No more freebies.

  36. October 20th, 2009 at 18:17 | #36

    LOL MoSH.
    Thinking about it, the scary thing there is that you may have been serious. Seriously, though, which “monetarists” do you blame?

  37. Michael of Summer Hill
    October 20th, 2009 at 18:29 | #37

    Andrew Reynolds, I will give you a hint, read what Krugman said @31 about Greenspan and then use what is between your ears to come up with the answer.

  38. gerard
    October 20th, 2009 at 18:32 | #38

    “starting” with Krugman, of all people, pretending he is responsible for “suggesting the overall strategy” that led to the GFC, is pure revisionist history and ideological hackery.

    Why not start with Greenspan, who was at least present at the scene of the crime, and has admitted responsibility? instead you want to blame one of the only people who had (partially) diagnosed what was wrong, by pretending that his calling out of Greenspan’s “strategy” (and then immediately going on to say why it wouldn’t work) somehow means that he was responsible for it! Totally upside-down and back-to-front.

    As for it not being the drop in housing prices – that is a ridiculous statement. What, in your opinion, was the reason why those instruments went bad? Unseasonable weather? Animal spirits?

    A fall in housing prices, by itself, does not have the power to crash a multi-trillion dollar global financial system. It’s only once you create a massive bubble of derivatives on top of these housing prices that their fall can be amplified by orders of magnitude into such a catastrophe.

    And it was only due to the expansion of a derivatives industry that there was ever a market for subprime mortgages in the first place. Once banks knew that they could securitize their mortgages and sell them on they didn’t care how junk they were.

  39. jquiggin
    October 20th, 2009 at 18:49 | #39

    AR, I’m disappointed. This is one of those silly talking points that have made the political right a laughing stock. I thought of doing a list, but the examples on climate change alone account for several large websites. And there have been dozens on the GFC, most recently blaming Obama for the Bush-Paulson bailout.

    I thought you would have been above this kind of thing (as its been amply refuted in comments, I won’t bother restating).

  40. gerard
    October 20th, 2009 at 19:28 | #40

    the subject of this thread is conventional wisdom… does anyone remember when Greenspan was The Smartest Person On Earth?

  41. Kevin Cox
    October 21st, 2009 at 02:14 | #41

    #23 Joseph

    I am not suggesting – I am imploring economists to look at other ways of modelling. The current methods do not handle dynamic systems very well and we have much better tools. So I am suggesting people look at the work on “agent” systems and computational complexity and use similar techniques as those used to model the physical world. For an economic system we replicate the system in a computer so that inside the machine you have representations of economic agents interacting with each other.

    This is easy to do because we can measure the actual system without destroying it and use it to check our model. It is easy to do because we KNOW the rules of economic activity.

    While it was computationally difficult and technically difficult to do this even five years ago the technology – both software and hardware – has advanced to make it practical today. After all how many economic agents would we have in Australia today? 40 million. How many economic transactions would we have per day 400 million? How many “types” of economic agents would we have maybe 10. How many rules would we need to devise to describe most economic activity maybe 1,000. In the world of computational complexity these are small numbers.

    The nice thing about building these systems is that we can start with a system to model say 100 people and all their economic activities, measure it to see it works and then scale it up – and if done well it will scale.

    How much would it cost? About 10 people working for one year to get the first results for the whole Australian Economy.

  42. Michael of Summer Hill
    October 21st, 2009 at 06:07 | #42

    John, would Richard Siegmund Lindzen fit the description of a contrarian.

  43. Alice
    October 21st, 2009 at 10:13 | #43

    Where is Greenspan now? Writing all about the crash he helped cause!. Apart from the book sitting on the new release shelf, the media appear to be hiding him.

  44. Alice
    October 21st, 2009 at 10:14 | #44

    Andy never gives up his robot idealogies (most stubborn libertarian Ive ever met).!

  45. Alice
    October 21st, 2009 at 10:25 | #45

    @Andrew Reynolds
    Andy – the monetarists of Friedman’s ilk and their (?mutant) off spring have been micro managers of economy intervention via central banks for decades….decades!! Then they have the nerve to critcise fiscal intervention. Yet wars seem to always be OK in their opinion but you cant spend a dollar on health or education. As FDR noted, the US budget deficits between 1920 and 1930 was due solely to expenses for past, present and future wars. What about the deficits that went mad after Iraq and the Vietnam expenditure when the economy was at full employment???

    So conservatives dont like budget deficits, but they happily cause them. The US budget deficit ballooned after Reagan and Bush. They dont like government intervention in markets, but its OK for the central bank to intervene every few months. They dont like inflation or high interest rates and say the market is the best manager, except apparently when it comes to the price of money.

    As for unemployment, they couldnt give a damn.

    Their idealogy is just a grab bag of blatantly hypocritical lies.

  46. Alice
    October 21st, 2009 at 10:27 | #46

    Between 1920 and 1939 – I meant.

  47. jquiggin
  48. October 21st, 2009 at 10:58 | #48

    Michael of Summer Hill#20 October 20th, 2009 at 05:38

    Jack Strocchi, which economists were responsible for the lastest global financial credit crisis? And please don’t stretch the truth.

    Strictly speaking no “economists were responsible for the latest global financial credit crisis”. Economists dont do things, they say things and then not always in forms that ordinary mortals can understand. Really, economists kid themselves if they think their scribblings make a great deal of difference to major societal outcomes.

    The responsibility for the crisis lies with those householders, executives and officials who took on financial contracts which they were unwilling or unable to honour. The buck stops with various home-owners, mortgage touts, non-bank financial institutions, investment banks and Central Banks who participated in this charade in the hope that they would have sold out by the time the money-go-round stopped.

    None of these people needed an economic theory to tell them what to do. All they needed was regulatory authorities to not forbid them from doing what they wanted to do. And a permissive banking system to validate their claims.

    But, to specifically address MoSH’s point, if I had to point the finger at any theoretical economists who should take the fall for this crisis then it would be Merton-Scholes (and Black’s) capital asset pricing model. This model more or less created the intellectual framework for derivatives trading, an “industry” which generates nothing but transaction churn, obscene profits and mountains of debt. Taleb, writing for the Financial Times, points the finger squarely at Merton-Scholes:

    Almost everyone would accept that the failure in 1998 of Long Term Capital Management discredited the quantitative methods of the Nobel economists involved with it (Robert Merton and Myron Scholes) and their school of thought called “modern finance”. Yet a method heavily grounded on those same quantitative and theoretical principles, called Value at Risk, continued to be widely used. It was this that was to blame for the crisis.

    Indeed, the same Nobel economists who helped blow up the system at least once, Professors Scholes and Merton, could be seen lecturing us on risk management, to the ire of one of the authors of this article.

    …The regulators were using the same arguments. They, too, were responsible.

    The practical economist who should take most of the blame is, of course, Alan Greenspan, who who headed up the Federal Reserve Board whilst most of the hanky-panky went on. His legacy is the almost complete destruction of the public credibility of the industry he so long defended and promoted.

    The Fed more or less relinquished its regulatory and prudential management roles during the noughties (after a brief shining moment of “irrational exuberance” skepticism in 1996). And acted to validate the increasingly outrageous claims made by financial institutions on the governments money supply, irrespective of societal risk (“Greenspan Put”).

    If any policy economist should take the blame then it is probably Larry Summers who is certainly sits at the top of the pecking order of economists in government. In 1999, whilst in his role as Treasury Secretary, he signed the repeal of the Glass-Seagall Act which unleashed investment bank hyenas on an unsuspecting commercial banking population.

    And lets not forget Robert Rubin who, although not an economist, appears to have been one step ahead of this whole fiasco from the get-go. His career reads like a modern day Robert McNamara. He was head honcho to Goldman Sachs for about 900 years during the seventies and eighties. Then in the early nineties he moved to the Clinton White House where he managed to kill Born’s proposal to regulate derivatives. In 1999 he finally got to be the top of the tree, head of Citigroup. Wall Street wiped more than $200 billion off Citigroup’s market capitalisation whilst on his watch. It is now in the hands of the federal receivers.

    Moving away from economics and towards politics, the real culprit for the blowing up an unsustainable bubble in the US home mortgage market is GW Bush and his political officers. They took the leash off Wall Street in a deliberate attempt to engineer a boom in Hispanic home-ownership rates (“the ownership society”).

    Thus, from about 2002 onwards, GW Bush gave official encouragement to financial industry to lend uncreditworthy people money hand over foot. The GOP political strategy was to turn more Hispanics into residential property “investor capitalists”, thereby shifting their votes into the Republican column.

    The financial industry traditionally perceived that most people who lived in poor neighbourhoods (the lower half of minorities and so-called white “trailer trash”) were poor credit risks (“red-lining”). To turn this around the govt had to give a green light to mortgage providers and securitizers to trade in risky mortgages, specifically lending to those without Incomes, Assets or Jobs (NINJA loans). The govt justified this by assuring the financial industry that it would guarantee all loans with the full faith and credit of the US Treasury.

    It turned out that these people really were poor credit risks, mainly due to their low stocks of human capital which generated low income flows to service debt. This is what queered the securitization play and sank the big investment banks.

    However it is extremely unlikely that any established economist wants to investigate the ideological source of this colossal failure. Too many people on both Left and Right signed onto this policy and so its best if that sleeping dog is left to lie.

  49. derrida derider
    October 21st, 2009 at 11:14 | #49

    Agent-based modelling is intellectually fascinating, and in various forms has kept many academic economists employed for the last couple of decades. Kevin’s comment is one in the long line of physics and engineering types who keep tellin economists “it’s all nonlinear dyamics and recursion, you know”, as though that never occurred to anyone before.

    But ABM will always have limited uses because of methodological problems. It’s good at finding possible emergent properties, but really poor at predicting which of those possibilities will be realised. So its good at telling us that a financial crisis is possible – but then so are many conventional models. Just like conventional models, though, it’s poor at telling us just when the next financial crisis will actually come. 2020 hindsight is of very limited use.

  50. Alice
    October 21st, 2009 at 11:48 | #50

    @Jack Strocchi
    Im inclined to agree with Jack on his summary here except for the last sentence….. the policies and the market ideologies that lay behind the black holes model arose from Chicago school conservatism ultimately, so the right, to my mind has responsibility for resuscitating and re wrapping and rewriting what was esstentially laissez faire economics. Keynes was no market denier and nor could he ever be called left but he recognised the need to manage the market Jack.

  51. jquiggin
    October 21st, 2009 at 11:51 | #51

    I just noticed that, when there are exactly 50 comments, I can’t read the old ones :-(

  52. boconnor
    October 21st, 2009 at 12:44 | #52

    OK, does this one help you get to the previous comments?

  53. October 21st, 2009 at 13:17 | #53

    I would not have called what Greenspan did as being the actions of a “monetarist”. As I said earlier, a monetarist would not have allowed the money supply (as measured by M3, their favourite indicator) to soar in the way it did. I am not a monetarist (properly so called) but to call (as you implicitly do) Greenspan a monetarist is to misunderstand either or both of monetarism or Greenspan’s actions, IMHO.
    Krugman was plainly one of those (many) that advocated the sort of demand “management” and regulatory strategies that ultimately led to the current problems. Additionally IIRC he supports such measures as the CRA and Fannie and Freddie to effectively subsidise loans to those who could not afford them, even making basic errors on whether Fannie and Freddie were allowed to subsidise these loans by purchasing the securities based on them (they were). He is frequently on the record as calling for more regulation and more activist fiscal and monetary policy.
    IMHO the contrast between Australia and the US is fairly illustrative – in Australia the government steadily paid down debt to virtually zero levels through the boom times and also made financial regulation reasonably transparent and somewhat more efficient (although it is far from perfect). There are also no federally mandated lending levels and there was no FDIC equivalent to effectively socialise losses.
    In the US debt was increased and financial regulation was made less simple and there were far more attempts to get the banks to lend to bad risks, subsidised or forced to do so by the government. The FDIC also effectively removed the incentive for borrowers to find safe institutions.
    The difference in the results are plain.
    For a long time the US has been a bad parody of financial over-regulation combined with fiscal irresponsibility, lots of borrowing and monetary expansion. To me to blame these on “capitalism” or “the market”, as many here do, is just to be wrong.

  54. Alice
    October 21st, 2009 at 13:44 | #54

    @Andrew Reynolds
    Oh puhleeeeeeese Andy

    “Krugman was plainly one of those (many) that advocated the sort of demand “management” and regulatory strategies that ultimately led to the current problems.”

    That is utterly ridiculous. Ive heard of twisting things but this comment is so twisted its bordering on certifiably insane.

  55. October 21st, 2009 at 13:57 | #55

    In what way have I twisted anything? He is clearly on the record as supporting the sorts of regulation they have in the US and he is also clearly on the record in supporting demand management. I do not see that I have twisted anything.

  56. Alice
    October 21st, 2009 at 16:05 | #56

    Two words Andy – defficient regulation.

  57. Michael of Summer Hill
    October 21st, 2009 at 16:46 | #57

    Andrew Reynolds, Alan Greenspan conceded before a House committee that his free market ideology may be flawed and that the banking and housing crisis is a “once-in-a-century credit tsunami”. And what people forget is that he was aware of predatory pricing in the sub-prime mortgage lending as far back as 2000 and had the authority to correct the problem but failed to do so. And to say he was partially wrong in not moving to regulate trading of some derivatives that are among the root causes of the credit crisis is an understatement.

  58. sdfc
    October 21st, 2009 at 17:16 | #58

    That this financial crisis echos earlier crises that pre-date deposit insurance, fiscal irresponsibility and so-called over regulation suggests that easy money is the real culprit.

    I’m assuming by saying, deposit insurance removed the incentive for “borrowers” to find safe institutions you actually mean depositors. This however assumes some sort of perfect foresight on the part of depositors that does not actually exist in the real world. Such removal of funds by depositors is likely only to occur once the financial system has gone into crisis mode. In short, the removal of deposit insurance is unlikely to add to system stability.

  59. sdfc
    October 21st, 2009 at 17:18 | #59

    Sorry Andrew the above comment was directed to you.

  60. Alice
    October 21st, 2009 at 17:20 | #60

    @Andrew Reynolds

    Here is something you need to think about – FDR noted the language of free marketers (laissez faire back then) was an anthema in the 1930s and it has become an anathema again.

    “Here and now I want to make myself clear about those who disparage their fellow citizens on the relief rolls. They say that those on relief are not merely jobless‹that they are worthless. Their solution for the relief problem is to end relief‹to purge the rolls by starvation. To use the language of the stock broker, our needy unemployed would be cared for when, as, and if some fairy godmother should happen on the scene.”

    Isnt this an apt desciption of how the “free markets minimum regulation tiny government/ minimum govt spending” (oh except for spending on unnecessary wars) tribe thinks Andy?

    Some things are perennial.

  61. October 21st, 2009 at 17:59 | #61

    I would agree. Regulation is, by its nature, deficient.
    You said “monetarists” were responsible. Greenspan’s actions were not those of a monetarist – ergo either you are wrong about Greenspan or monetarists. Which was it?
    Past crises before regulation and fiscal games were typically of short duration and not deep. They have got deeper and longer as government has become more activist. I do not see this as a co-incidence.
    I am not surprised Roosevelt thought it an anathema. Both he and the Presidents immediately preceding him were very active indeed. Oddly, this coincides with severe depression. Again – I do not see this as purely coincidence.

  62. sdfc
    October 21st, 2009 at 18:05 | #62

    So the 1930′s crisis in the US was not deep. That is certainly an interesting point of view.

  63. October 21st, 2009 at 18:22 | #63

    No – clearly not.
    It was made an awful lot deeper and longer by the regulation and spending that was put in place before and during it.

  64. sdfc
    October 21st, 2009 at 18:29 | #64

    Andrew – Now you are just getting silly. Where is the evidence that Hoover was activist? He was obsessed with balancing the budget and actually tightened policy at the height of the Depression.
    What specific regulation during the 1929-33 period, or prior do you say deepened the crisis?

  65. October 21st, 2009 at 18:38 | #65

    The height of the depression (in the US at least) was after Hoover was no longer President. He was not, therefore, in a position to tighten policy at all.
    On the regulation question, can we start with the founding of the Fed in 1913 and roll forward from there? There is plenty else. Smoot-Hawley was a disaster, following on from the steady tariff increases over the 1920s. Forced bank holidays destroyed confidence further. The first new deal. NIRA.
    There is lots, lots more. Shall I go on?

  66. Sea-bass
    October 21st, 2009 at 18:54 | #66

    Like I told you before, he tried to balance the budget by raising taxes (he put the top tax bracket up from 24% to 63% – the largest tax hike in US history). That’s bad policy, even from a Keynesian point of view.

  67. Michael of Summer Hill
    October 21st, 2009 at 19:01 | #67

    No Andrew Reynolds, the Federal Reserve Act of 1913 gave the Federal Reserve authority to formulate U.S. monetary policy and the means by which the central bank influences the demand, supply and, hence, price of money and credit. From 1987-2006 Greenspan was responsible for pulling the levers and directing the central bank’s monetary policy.

  68. sdfc
    October 21st, 2009 at 19:15 | #68

    I don’t actually remember you telling me that before Seb, probably because this is the first time I’ve been on since our last discussion. The aside however, I don’t see how that makes Hoover’s fiscal policy expansionist. Couple this with the fact spending was also cut back and I’m not really sure what argument you are trying to make.

  69. gerard
    October 21st, 2009 at 20:26 | #69

    This is some impressive teabagging Andrew. First Krugman is responsible for the GFC, now its the 1977 Community Reinvestment Act. What else can you scrape from the bottom of the right-wing blogosphere’s barrel? Next you’ll be blaming everything on ACORN and trotting out Obama’s Kenyan birth-certificate.

    It was made an awful lot deeper and longer by the regulation and spending that was put in place before and during it.

    And as we all know, the Depression ended with World War Two, when the United States government drastically cut public spending, slashed taxes, deregulated markets and finally stopped intervening in the economy.

  70. Alice
    October 21st, 2009 at 22:27 | #70

    Sea Bass – yes Roosevelt did put the taxes up on the wealthy but you understated the tax rise. It went to 79%.

    Yes it was the biggest tax rise. It was also long overdue. This needs to happen again now. Taxes on the top income bracket were even higher in the 1950s when approx 65-70% of all income tax was paid by the top decile.

    There were no major economic crises for quite some decades after the great depression and the US economy grew fivefold.

    It is quite plain taxes need to be raised on the rich now once more. The US government risks losing control of its budget entirely and its role to govern. The wealthy financial institutions have been propped up at great cost to ordinary people and there has been reckless wasteful military engagement and reckless speculative risk taking in financial markets.

    Its time to correct the reckless behaviour and balance the books.

  71. Sea-bass
    October 21st, 2009 at 22:40 | #71

    You mean after WWII.

    Yes, that’s right, during the war everyone was prosperous and there was an abundance of consumer goods, and everyone always talks about how life during war time was just hunky-dory…

    This sounds like the Parable of the Broken Window. Seriously, it absolutely does my head in when people say that wars are good for the economy.

    You are actually correct in that FDR adopted a more business friendly approach during the war, realising that he couldn’t wage his usual war on business if he wanted to wage war elsewhere.

    Given that there was a general shortage of consumer goods and rationing, there was also very high levels of real savings during the war years, which provided the needed boost to capital markets that was absent during the depression years.

    Also, drafting 40% of the labour force into the army tends to help get rid of that pesky unemployment problem.

  72. Alice
    October 21st, 2009 at 22:41 | #72

    @Andrew Reynolds
    Once more you twist what was said Andrew. A deficiency of regulation does not mean “any regulation at all is by its nature deicient.”

    My meaning perhaps should have been more clearly stated as deficient regulation due to the laxness, the insufficiency, the failure to police it, inadequate resources and staff devoted to regulation of the financial markets in the US, allowing them to self regulate with more than one hoof and a few claws in the oval office.

    If I have to say it plainly I will. There was not enough regulation (insufficient deficient and inadeqately staffed and resourced regulation) and that was a major contributing factor (I wont say sole cause) of the GFC. Not enough taxes on the rich and force feeding financial markets super flows for twenty years and Greenspans “problem? what problem? denial and foot off the brakes” and a too close relationship of Government with powerful private sector vested interests also helped blow it sky high.

    Every damn major authority from the World Bank to the IMF is saying it (not enough regulation!!!!!) Andrew but if you want to subscribe to lunatic right wing libo blogs there is nothing I can do to stop you diving head first into a bog and getting sucked in.

  73. Alice
    October 21st, 2009 at 22:47 | #73

    Dont twist what Gerard said either Sea Bass in your quote..

    “Yes, that’s right, during the war everyone was prosperous and there was an abundance of consumer goods, and everyone always talks about how life during war time was just hunky-dory…”

    Jeez these Libertarians take some liberties dont they??? Even in arguments they can barely stick to an argument, let alone the facts or reality.

    Chuck Sea Bass back in the clink JQ for misleading and false blogging!

  74. Sea-bass
    October 21st, 2009 at 22:59 | #74

    No, Hoover put the tax rate from 25% (I said 24% earlier, which was incorrect) to 63%. Subsequently FDR set it at 79% and then 90%.

    Regarding your attitude towards taxation, I think this sums up how fair higher taxes on the rich are (and this is from Wikipedia, which, to my knowledge, is not part of the right-wing/libertarian blogosphere):

    “In 2007, the top 5% of income earners paid over half of the federal income tax revenue. The top 1% of income earners paid 25% of the total income tax revenue. Forty percent of Americans pay no federal income tax.”

    The least you could do is say “thank you” and stop demonising them so vociferously.

    The rich already pay more than their share – in fact it’s time for governments to drastically cut the spending and the bail-outs. Also, the proportion of GDP devoted to government spending in the USA is actually higher today than it was during the Keynesian heyday of the 50s and 60s. It is also substantially higher in Australia – in fact, Howard spent like a drunken sailor. You’re just mad that he didn’t spend on you!

  75. Sea-bass
    October 21st, 2009 at 23:09 | #75

    Don’t worry, I’m aware that Gerard didn’t say that – although I actually know some people who think that wars have that effect. I said that so that we all remember that it was supposed to be a time of great sacrifice, hardship and abstinence – and it also underlines my point about the high level of saving getting capital markets back into equilibrium. Much like South Korea during its development phase – lots of production, little consumption and lots of saving/capital accumulation.

    And that’s not justification for throwing me in the clink, since I didn’t make any trickle-down jokes… So there.

  76. gerard
    October 21st, 2009 at 23:36 | #76

    My point, maybe not as obvious as I thought it would have been, was that it took the closest thing to a full-scale command economy to effectively end the depression.

  77. Kevin Cox
    October 22nd, 2009 at 05:56 | #77


    I am not doubting that economists have known about dynamic modelling and understood positive feedback (which is different from recursion) for quite some time. What puzzles me is that economists, as you say, keep trying to “predict” the unpredictable and keep using obviously flawed models. Economic systems as they currently operate cannot be predicted in detail anymore than the time we will see the next sun flare.

    Agent based modelling can give a probability that an event will occur which conventional models cannot. I look forward to the day when we have the commentators saying there is a 90% probability that the Australian dollar will reach parity with the USA within one month.

    Agent based models enable us to try out variations in the way agents interact and see the effect. In particular they make obvious the interactions that are causing instabilities. If we can change the interactions so that positive feedback does not occur then we will be able to predict using conventional modelling (which I find ironic).

    Even if you do not do the detailed modelling simply by thinking of the interactions and how they might change gives ideas on how to “fix” the instabilities and create economic systems that will have fewer instabilities.

    The instability in the money system is mainly caused by the rule that allows money creation (new loans) to be backed by money itself. This is a positive feedback mechanism and so we have all these other rules such as fractional reserves, capital adequacy, reserve bank interest changes etc to try to mitigate the effect of the positive feedback – but it would become easier to control if we could change the underlying mechanism or the agent interaction so that the positive feedback was unlikely to occur.

    In the case of money creation the system is biased towards the creation of money backed by existing assets. That is we normally only give loans (create bank money) if we can recover the loan money by seizing an existing asset. As money itself is treated as an existing asset this means the positive feedback of loans built on loans is likely to occur and in fact most loans – I think it is well over 90% are backed by other loans.

    However, what if we changed the agent interaction rule that made loan creation to build new assets cheaper than loan creation for existing assets? At the moment banks generally do not lend against future assets and so the builder of assets has to obtain money from savings and the mechanism is called equity. Equity returns have to be much higher than loan interest otherwise investors will not invest so we have this bias against investment in new assets.

    What if we changed this? What if we made it possible to get loans at lower interest if you promised to create a new asset?

    Agent based modelling would enable you to try this out. Conventional economic modelling would have difficulty because there would be other effects and we would have to change other interactions and other rules.

    For example we would change the way we control the money supply from using interest rates to the issuer of the currency deciding how much money to allow as new asset loans. Again the effect of all these new rule changes would be difficult to model using conventional methods.

    However, changing the rule for a particular asset class would stop asset bubbles in their tracks and we would make it less attractive for people to lend money backed by other money.

    To see one effect of such an approach come to my workshop this Saturday where I will outline how we can get to zero net emissions by 2020 with no increase in the price of energy simply by making loans for renewables or ways of saving energy cheaper than getting a loan backed by an existing asset such as a coal fired power station.


  78. Alice
    October 22nd, 2009 at 07:55 | #78

    LOL Sea Bass…dont worry Ill keep a rational eye on any future opportunities for incarceration for you…!

  79. Kevin Cox
    October 22nd, 2009 at 08:12 | #79

    Just received notification that the department of innovation… is possibly going to use non recourse, zero interest loans repayable from earnings to commercialise innovation instead of handing out grants.


    This is a very important innovation in policy that, if extended, to other government programs and if tuned to stop abuse, will result in beneficial changes to the way governments intervene in the economy. The government can issue as many non recourse loans as it sees fit without impacting its budget. It does not have to go out and borrow money to give grants and it does not have to raise taxes to pay for such programs.

    The impact of this approach on the ghg policy will be worked through at the Sat seminar mentioned at #27. I will also describe mechanisms to help prevent abuse of the system and outline how the system can be self regulating through market mechanisms.

  80. October 22nd, 2009 at 12:01 | #80

    Are you seriously trying to maintain that, particularly in terms of consumer welfare, the depression ended in the US in 1941? Production in the US did return to pre-depression levels around then, but this was directed at blowing things up and serious quantities of destruction. It is (IMHO) to draw a very, very long bow to try to paint that as being, in some way, productive expenditure that advanced welfare.
    Individual welfare in the US did not return to pre-depression levels until the 1950s, when much of the wartime command-style economy had been abandoned.
    The Depression was not ended by the war – the war continued it.
    In fact there is plenty of evidence that the policies pursued by Roosevelt made the depression deeper and longer than it otherwise needed to be.
    A really good point is made by comparing the extent and depth of the Depression in Australia (which pursued then orthodox monetary and fiscal policy after it happened) to the US, which indulged in pump-priming and restrictive regulation. Perhaps you can help by checking which came out of the Depression (particularly in terms of consumer welfare) first.

  81. sdfc
    October 22nd, 2009 at 13:17 | #81

    Sorry Andrew I have only just noticed your comment #15.
    Firstly, let’s deal with your claim that the economy troughed after 1933? As this goes against what the historical data is telling us, namely that US GDP bottomed in 1933, you are going to have to offer up some evidence to support this claim.
    Your comment that the trouble started with the founding of the Fed is a surprise, I wasn’t aware you were a policy crack-pot.
    Smoot-Hawley – Not financial regulation as far as I know. The March 1933 bank holiday is widely cited as a turning point in the crisis, you are going to have to offer up some evidence that not only was this not the case, but that it actually worsened the crisis.
    Before moving onto the New Deal, which was instigated after the economy had already troughed let’s deal with the topic in question. What were the specific financial regulations prior to 1933 which brought about the financial crisis? If you do insist on blaming the Fed, be clear as to the reasoning so we at least have something to discuss other than vague assertion

  82. sdfc
    October 22nd, 2009 at 13:31 | #82

    Just to follow up your last comment as well Andrew, a major reason for the rapid recovery in Aussie growth in the 1930’s was the fact there was no financial collapse and much lower private debt levels.

  83. gerard
    October 22nd, 2009 at 14:59 | #83

    The common view among economic historians is that the Great Depression ended with the advent of World War II, not that it was prolonged by it. I assume the “great deal of evidence” you mention is as strong as your evidence that the CRA and Krugman caused the global financial crisis. You’re doing a good job of making JQ’s point about “contrarianism”.

  84. October 22nd, 2009 at 15:15 | #84

    Correct me if I am wrong, but Roosevelt became President in Janusry 1933, did he not? Therefore, even with the “height of the depression” being in 1933 (with subsequent double dip as Roosevelt’s policies bit) Hoover was in no position to tighten anything.
    On the contrary, though, the deficit under Hoover increased markedly.
    I would suggest that you look at Robert Higgs work (although I in no way endorse everything he says) on the recovery – it really happened after 1946 (not 1941) and only after many or most of Roosevelt’s measures had been rolled back.

  85. Alice
    October 22nd, 2009 at 15:59 | #85

    @Andrew Reynolds
    Andy – which of Roosevelts measures exactly had been rolled back in 1946 (seeing as you made the comment)?????? Id be interested to know.

  86. sdfc
    October 22nd, 2009 at 16:36 | #86

    Andrew, this is becoming tedious however just for the exercise let’s go through things one last time. US real GDP shrank in each year from 1930 to 1933 before growing again in 1934. While we don’t have quarterly GDP numbers for the 1930’s we certainly have industrial production numbers and these suggest the economy began growing again sometime around mid-1933. As you acknowledge Roosevelt was not inaugurated until January 1933, I’ll leave it up to others to decide whether Roosevelt can be held accountable for the worst of the slump.

    As for Hoover tightening policy, once again this is a matter for history. I think you are becoming a little confused with the difference between cyclical and structural deficits. Let’s not forget nominal GDP fell about 50% between 1929 and 1933.

    The double-dip recession of 1937-38 came on the back of tighter fiscal and monetary policy. If you want to dish out some of the blame for the double dip recession on a premature fiscal tightening then I don’t actually have a problem with that.

  87. Alice
    October 22nd, 2009 at 17:38 | #87

    sdfc – Roosevelt can no sooner be blamed for the slump than Rudd in Australia but the ALS make up their own history dont they????

  88. Kevin Cox
    October 23rd, 2009 at 06:28 | #88

    This looks an interesting book. However, most of the work it references is not tackling the problem the way I suggest. Most modellers think how agents interact then build their model.

    What I am suggesting and what I wish to be involved in (when I get the time and some spare change) is to start with the real world and model the interactions of a small group of economic agents. This modelling is done at the individual level. Of course most of their interactions will be with agents that are “virtual”.

    We would build the model so that it could be run until it was able to emulate actual activity over a period of time.

    That is, we would build the model from the real world and much like a taxonomists we would classify agents according to their characteristics. This classification will lead to species of economic agents which we can then use for our modelling.

    We would start with a few simple types. Individuals, groups of individuals, governments.

    The model would build up and would be continually tested against the actions of a few real economic agents. The model would be populated by mainly virtual agents.

    While we have a lot of economic transactions and there are a lot of individual economic agents the number does not matter once we have identified the types and how they behave given a set of input conditions and a set of characteristics. Economic agents while they might have a large number of transactions (say a bank) behave in the same way for all the transactions and we as individuals are the same. We are creatures of habit. This means that this approach to modelling is practical and it is my guess that we can get good results with a few simple models of economic behaviour and with few economic types.

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