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Anti-modernism
Earlier this year, Bloomberg News had an article on the large number of graduates of the MIT economics department in charge of central banks or holding other important posts in Europe and elsewhere. The article delved into the outlook that MIT economists tend to share on the relationship between theory and policy. The article quotes from an essay by Paul Krugman.
The “MIT style,” according to Nobel laureate Paul Krugman, who received a doctorate from the university in 1977 and who is now a New York Times newspaper columnist, is the “use of small models applied to real problems, blending real-world observation and a little mathematics to cut through to the core of the issue.”
The article also describes the seminal role played by Paul Samuelson in the MIT economics department. Samuelson steered the department, and indeed the whole economics profession, toward using modes of analysis and discourse laden with mathematics, making it appear to resemble physics. Indeed, Samuelson was often accused of suffering from “physics envy.”
As with physics, the goal of many macroeconomists has been to predict and control economic phenomena on the basis of a minimal set of equations, the “small models” referred to by Krugman above. What I call the “modernist” view in economics is the view that small models give economists and policymakers the tools with which to explain, predict, and control economic growth and employment. I call it “modernist” because it is patterned after the development of physical sciences in the 17th, 18th, and 19th centuries, which permitted this sort of explanation, prediction, and control in chemistry, physics, and, to a lesser extent, biology.
Like the economy, the modernist economic project goes through cycles. When the economy has undergone a long period of low unemployment, macroeconomists become increasingly confident that their models and policy prescriptions are working. Like the rooster believing that his crowing brings the sunrise, they take credit for the good times. Thus, in the 1960s, it was fashionable to boast about “fine-tuning” the economy. The boom that began in the late 1980s and took off in the 1990s was proclaimed “The Great Moderation,” and Federal Reserve Board Chairman Alan Greenspan was viewed as “the maestro” by macroeconomists of all political persuasions.
When something goes wrong, the macroeconomic profession enters a period of brooding introspection, with patches applied to the previous models. For example, in the 1970s, the fine-tuners were beset by a combination of high inflation and high unemployment that was inexplicable within the models that had worked so well in the 1960s. The 1970s and 1980s were spent arguing and patching. Many of the patches introduced a role for the “supply side” of the economy, including “oil shocks” and “inflation expectations.” When the patching was complete, the consensus emphasized both the ability and desirability of managing “inflation expectations.”
Now that we are experiencing another major downturn in the economy, the mainstream modernists will be doing another round of patching. (Note, however, that in part two of this series I described the “stubborn Keynesians” and “stubborn monetarists,” who would instead revert to the views they held prior to the round of patching that took place after the 1970s fiasco.) As I suggested above, I expect to see a lot of patching in the realm of the interaction between financial phenomena and real macroeconomic performance.
Once the economy recovers, I predict that the patching exercise will settle down. At some point, economic strength will have persisted long enough that macroeconomists will believe that they have overcome their previous shortcomings and arrived at models that are robust. A consensus will form, and leading macroeconomists will write once again that “the state of macroeconomics is good.”
Then, something unexpected will happen, and the economy will turn down again. And the whole cycle of brooding, patching, and eventual complacency and hubris will be repeated.
This darker view is what I mean by anti-modernism. Those of us who hold this view do not believe that small models can be used to explain and control a complex economy. Instead, we believe that the complexity is irreducible. The economy is too intricate to be understood by any one individual. As Leonard Read famously wrote, nobody knows how to make a pencil.3 By the same token, nobody knows how to create a job.
I have tried to sketch the ways in which a complex economy can suffer unemployment in a couple of papers on what I call Patterns of Sustainable Specialization and Trade (PSST).4 The implication of these ideas is that job creation requires local knowledge of entrepreneurs, and this must be acquired through time-consuming trial and error. It is not clear what fiscal or monetary policy can do, if anything, to speed this process.
The PSST explanations for unemployment cannot attain the modernist standards of mathematical precision. By those standards, it is another exercise in hand-waving or pulling explanations out of the air. However, I think this may be the best that anyone, modernist or otherwise, can do.
I conclude this three-part survey of some of the major contemporary points of view in macroeconomics on an anti-modernist note. If I am correct, then the “million mutinies” we are experiencing are the normal cyclical response of the economic profession to adverse events that are beyond our ability to control. The economy presumably will recover, and professional self-confidence will rise along with it. But the modernist project of technocratic tuning of a complex economy is, as Hayek warned, beyond our ability to undertake successfully.
Arnold Kling is a member of the Financial Markets Working Group at the Mercatus Center of George Mason University. He writes for EconLog.
FURTHER READING: Kling also writes “ Economics: A Million Mutinies Now,” “ Economics: A Million Mutinies Now, Part Two,” and “ The Political Implications of Ignoring Our Own Ignorance.” Alex J. Pollock explains “ Default and the Nature of the Government.” Nick Schulz asks “ How Effective was the 2009 Stimulus Program?”
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