10/24/10 1:39 PMJean-Claude Trichet Rejects the Counsels of History - Grasping Reality with Both Hands

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Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 7080467; delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchJuly 23, 2010

Jean-Claude Trichet Rejects the Counsels of History

We are, once again, live at theFinancial Times with a critique ofJean-Claude Trichet.

They removed my first twoparagraphs--the ones in which Iattempted to delegitimize everybodywho is not an economic historian.Here they are:

One of the embarrassing dirty littlesecrets of economics is that there isno such thing as economic theoryproperly so-called. There is simplyno set of foundational bedrock principles on which one can base calculations thatilluminate situations in the real world. Biologists know that every cell runs offinstructions for protein synthesis encoded in its DNA. Chemists start with what theHeisenberg and Pauli principles plus the three-dimensionality of space tell us aboutstable electron configurations. Physicists start with the four fundamental forces ofnature. Economists have none of that. The "economic principles" underpinning theirtheories are a fraud--not bedrock truths but mere knobs twiddled and tunes so that thright conclusions come out of the analysis.

What are the "right" conclusions? It depends on what type of economist you are, forthree are two types. One type chooses, for non-economic and non-scientific reasons, apolitical stance and a political set of allies, and twiddles and tunes their assumptionsuntil they come out with conclusions that please their allies and their stance. The other

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type takes the carcass of history, throws it into the pot, turns up the heat, and boils itdown, hoping that the bones and the skeleton that emerge will teach lessons andsuggest principles that will be useful to voters, bureaucrats, and politicians as they tryto guide our civilization as it slouches toward utopia. (You will not be surprised tolearn that I think that only this second kind of economist has any use at all.)

And here is the rest of my critique:

What lessons does history have to teach us about Jean-Claude Trichet’s call forimmediate, rapid, and substantial fiscal and monetary retrenchment and austerity--about his full-throated endorsement of the agenda of the Pain Caucus?

Well, history tells us that there are times and circumstances when countries’ refusal tolisten to calls for retrenchment and austerity has led to economic disaster. Times whena country’s supply of savings is inelastic and more government borrowing leads tosharp rises in and high real interest rates are times in which government budgetdeficits have drained the pool of savings, reduced private investment, and slowedgrowth--as they did in the U.S. in the second Reagan and the first Bushadministration. Times when monetary and fiscal laxity leads to an expectation thatgovernment debt will be monetized and to rapid rises in inflation expectations aretimes in which policy has made a deep recession to restore price stability inevitable--ashappened in the U.S. in the Nixon, Ford, and Carter administrations. And times whenirrational exuberance on the part of foreign investors leads a country’s public or privatesector to borrow heavily in foreign currency, it needs to pre-emptively retrench beforeforeign investor exuberance wears off, or else--as happened to East Asia in 1997-8, toMexico in 1994-5, or to Argentina innumerable times since 1890.

The first key to the current situation, I believe, is that none of the core economies ofthe Global North--not France and Germany which are the heart of Eurozone, notBritain, not the United States, and not Japan--are in any of these three positions rightnow. All of the mechanisms and channels that have in the past made countries regrettheir failure to pursue policies of retrenchment and austerity are inactive. There are noclear and present dangers that would be fended off by retrenchment and austerity rightnow.

What else does history tell us? It tells us that in 1925 Chancellor of the ExchequerWinston Churchill was ill-served when he rejected the arguments of John MaynardKeynes and accepted the arguments of his Treasury staff that Britain requiredretrenchment and austerity: Churchill thus gave Britain a three-year head start onsuffering from the Great Depression. It tells us that from 1930-1936 the belief ofgovernment after government of France’s Third Republic that if only they retrenched alittle longer that the confidence of world capital markets in France would be so greatthat it could escape the Great Depression unscathed: the length of the GreatDepression and the class war thus engendered in France weakened it enormously inthe late 1930s--it is hard to stand up for freedom when the graffiti on the banks of theSeine reads “better Hitler than Leon Blum.” It teaches us that Weimar German SPDleader Rudolf Hilferding was extremely ill-advised to commit the SPD to policies ofretrenchment and austerity when his labour economist Wladimir Woytinsky wascalling for the SPD to develop a plan for a New Deal for Germany. And it teaches usthat in his memoirs U.S. President Herbert Hoover, who was bitter about many things,was bitterest that he had let Treasury Secretary Andrew Mellon hamstring Hoover’sprogressive impulses and lead the Hoover administration to policies of retrenchmentand austerity.

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History teaches us that when none of the three clear and present dangers that justifyretrenchment and austerity--interest-rate crowding-out, rising inflationary pressureson consumer prices, national overleverage via borrowing in foreign currencies--arepresent, you should not retrench and austerity: don’t call the fire truck when there isno smoke. And history teaches us that when economies suffer from highunemployment, enormous excess capacity, incipient deflation, businesses terrified of alack of customers, and an enormous excess demand for high quality assets, then is thetime for expansion and stimulus: when the deck is awash, start bailing.

Yet Jean-Claude Trichet rejects these counsels of history. He seems to me to placehimself in the position of, as British interwar bureaucrat R.G. Hawtrey described hisprecedessors at the start of the Great Depression, somebody: “crying ‘Fire! Fire!’ inNoah’s flood.”

Brad DeLong on July 23, 2010 at 08:15 AM in Economics, Economics: FederalReserve, Economics: Finance, Economics: Fiscal Policy, Economics: History, ObamaAdministration | Permalink

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Roland Buck said...Hopefully Obama's 3 new appointees to the BOB are full employment hawks. One ofthe main things the Fed has to do is to prevent the job killing policies of the EuropeanCentral Bank and the European governments from slowing down the growth of theU.S. economy. Measures to bring down interest rates other than the very short run aredesperately needed. Since these interest rates are significantly above zero and can bebrought down, the economy is not in a liquidity trap.

Reply July 23, 2010 at 08:29 AMTaylor said...Trichet's an extremely well-trained engineer apparently.

Reply July 23, 2010 at 08:34 AMRoland Buck said...

10/24/10 1:39 PMJean-Claude Trichet Rejects the Counsels of History - Grasping Reality with Both Hands

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"it is hard to stand up for freedom when the graffiti on the banks of the Seine reads“better Hitler than Leon Blum.”

On purely economic issues, Hitler's economic policies were a lot more effective thanthose of the French Government. By 1936 Germany was back at full employment,which shows that macroeconomic policies were capable of ending the GreatDepression. These policies were primarily due to the work of Hjalemar Horace GreelySchact. Clearly economic historians could learn a lot from these successfulmacroeconomic policies. But this episode of successful macroeconomic policycontinues to be ignored.

None of this, of course, in any way exonerates Hitler from responsiblity of being one ofthe great evildoers of history.

Reply July 23, 2010 at 08:44 AMJoe Smith said..."Economists have none of that. The "economic principles" underpinning their theoriesare a fraud--not bedrock truths but mere knobs twiddled and tunes so that the rightconclusions come out of the analysis."

John Von Neumann said: "With four parameters I can fit an elephant, and with five Ican make him wiggle his trunk."

Any theory that requires fiddling with the parameters to make it work is no theory atall.

Reply July 23, 2010 at 09:28 AMnilso said...There was a good piece on NPR's Morning Edition today saying just that aboutGermany's retrenchment policies. It was a surprisingly good report on how they werein an unsustainable situation themselves, and were attempting to impose on the rest ofthe EU a policy that could only work for Germany (dependence on exports) becauseyou can't have everyone taking in each other's laundry. Good to hear a critique going tothe heart of the problem, at least in the Eurozone.

Reply July 23, 2010 at 10:46 AMmike said...Oh, the sacrilege! To say economists have NO theory!

Why, people OPTIMIZE! We have EQUILIBRIUM, general and Nash!

Bedrock, no. Close enough? I don't know, but probably not.

I like your first two paragraphs and would like to share them. Somewhere I would liketo see the word "evidence," as in "evidence in history." In any case, fix the typos please!

Reply July 23, 2010 at 11:20 AMmike said in reply to Richard...How can one (a) be interested in history and (b) not be a Keynesian?

Hypocrisy in a single sentence, I say.

Reply July 23, 2010 at 12:17 PMNico S said...I think the real issue here is, why are we subordinating millions of people's lives intothe depths of utter hopelessness and poverty to satisfy hedge funds and otherinstitutional investors? We may reify the "market" into this abstract principle devoid ofpeople, devoid of any irrationality; but the market is ultimately about people, interests,and institutions. The problem, clearly, is that we HAVE given up on the class war, we

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can no longer see behind the mystification's of conservative rhetoric. We have blindlyaccepted the logic of the commodity fetish, by totally ignoring the reality of people'sneeds for the profit-motive. We are putting the profit of finance capital in front ofemployment for tens of millions of people, we are systemically destroying human andcapital resources due to under-utilization of existing resources, which is not onlyinhumane and politically irrational--from the perspective of capital--, but it is alsoeconomically irrational by sapping from the economy whatever demand was left!Capitalism, on its own, with its own logic, is a self-destructive system. Since theKeynesians are losing this battle, the solution is not going to be pretty: fascism.

Reply July 23, 2010 at 12:20 PMSteve Bannister said...The second suppressed paragraph is an eloquent version of a philosophical approach toeconomics overall that I first heard, from Katarina Juselius, in the context ofeconometrics.

Very simply, there are two approaches she describes: data-first or theory-first.

She explicitly prefers data-first. This is an extension of the works of Doan, Litterman,and Sims in the early 1980's before they were, at least virtually, excommunicated fromthe University of Minnesota and the Minneapolis Fed. The U of M of course is thecradle of DSGE style models.

Many of the first type of economists Brad describes are, not coincidentally, also theory-first (or theory-only). Data, after all, can be inconvenient to theory.

Reply July 23, 2010 at 12:45 PMSomeCallMeTim said in reply to Nico S...Paraphrased from a lefty radio broadcast this morning:

/// Banks are getting zero or near zero interest loans and able to relend the money tomake a profit (or keep zombies walking...I'm unsure of which metaphor fits here).

Why not instead refinance mortgages at 1% and put money into the hands of thosebuying homes on the extended installment plan?///

This is likely a simplistic suggestion, and certainly politically naïve, but for me at leastput another fine point on the upward political refraction of U.S. economic policy.

[kindly excuse the Laurel & Hardy reference]

Reply July 23, 2010 at 01:11 PMMaynard Handley said..."They removed my first two paragraphs--the ones in which I attempted to delegitimizeeverybody who is not an economic historian."

This is truly astonishing behavior, especially given the background that theseparagraphs provide. What were their justifications? It is hard to look at this behavior and not conclude that, regardless of what peoplemight say about the value of the FT, at the end of the day their ONLY concern is withthe maintenance of the current plutocracy and the intellectual edifice that sustains it.

Which makes one wonder why we should bother reading "Pravda for rich Englishmen".How can we be sure that the essential point in any other editorial or story has not beenomitted because it portrayed an inconvenient truth?

Reply July 23, 2010 at 01:18 PMMaynard Handley said...

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"On purely economic issues, Hitler's economic policies were a lot more effective thanthose of the French Government. By 1936 Germany was back at full employment,which shows that macroeconomic policies were capable of ending the GreatDepression. These policies were primarily due to the work of Hjalemar Horace GreelySchact. Clearly economic historians could learn a lot from these successfulmacroeconomic policies. But this episode of successful macroeconomic policycontinues to be ignored.

None of this, of course, in any way exonerates Hitler from responsiblity of being one ofthe great evildoers of history."

This assumes that there is something called "economics" and "economic policies" thatlives apart from culture, politics, and all the rest of social interaction. Claiming this isso does not make it so. Or, to put it differently, could you have run Hitler's economic policies in a society thatwasn't already juiced up to listen to and do whatever authority told them? That wasn'twilling to compromise in various ways and give up various freedoms because theyknew they were put of a glorious greater whole? That wasn't willing to work harder forless pay because they were preparing for a war that would purify the earth?

Reply July 23, 2010 at 01:25 PMpurple said...I think their thinking is simpler.

Europe (i.e Germany) thinks they will export to 'fat' Americans (while making fun ofthem), and to middle-class China (never mind that China has no intention of openingits markets), and recover in this manner.

Therefore austerity in Europe is OK, because Germany, and to a lesser extent France,will export its way to prosperity.

Reply July 23, 2010 at 02:43 PMBob Athay said...The proper term for the kind of economics where the "right" outcome depends on apreferred political stance is, as George H. W. Bush put it, Voodoo Economics.

I really like this piece, Brad; especially the first two paragraphs. Nicely done!

Reply July 23, 2010 at 02:47 PMMeasure for Measure said...That's a heck of a broadside in 2 short paragraphs. I say FT did the right thing inexcising them. That said, I would like to read the 7-10+ paragraph version of the goodProfessor's initial argument. It applies mostly to macro rather than micro, right? I'dsay that the micro paradigm is pretty well developed.

Reply July 23, 2010 at 03:50 PMGrebmorts said in reply to Ola Dunk..."The German thinking is simple: Live within your means."

Living within your means is a terrible idea when you urgently need medical care. Saveyour life first, then you can work to pay for it. A corpse without debts is just a corpse.

Reply July 23, 2010 at 04:58 PMSteve Bannister said in reply to Measure for Measure...Consider that the micro paradigm is overdeveloped. And, as the "micro-foundations" ofNew Keynesian DSGE macro, is the root of the problem.

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Reply July 23, 2010 at 04:59 PMJoe Smith said in reply to Roland Buck..."On purely economic issues, Hitler's economic policies were a lot more effective thanthose of the French Government. By 1936 Germany was back at full employment,which shows that macroeconomic policies were capable of ending the GreatDepression."

Hitler controlled prices and wages and forced large parts of the population into lowincome jobs. There may have been full employment but it appears the averagestandard of living fell. The adverse impact on the economy may well have contributedto Hitler's decision to go to war.

The United States could adopt Hitler's policies and achieve full employment bypressuring women and Jews to leave the work force, breaking the unions, borrowingextensively from the rich and forcing the unemployed to work for low wages buildingroads and weapons.

Reply July 23, 2010 at 05:09 PMBrad DeLong said in reply to Maynard Handley...Their justification? That comments should not be more than half as long as the piecesthey are commenting upon.

Sounds fair to me...

Yours,

Brad DeLong

Reply July 23, 2010 at 05:46 PMRobert Waldmann said...three is a typo in your second paragraph.

"three are two types" should be "there are two types." A very troublesome typo as threeis a number like two.

Reply July 23, 2010 at 05:56 PMAlex said...Brad, this is off topic, but you have been accused of being part of a conspiracy tofabricate global warming on the world!

Ctrl+f on your name here:

http://www.realclimate.org/index.php/archives/2010/07/the-montford-delusion/

Hilarious!

Reply July 23, 2010 at 07:43 PMmistah charley, ph.d. said...Speaking of economic data and models and adjusting parameters etc., Isuggest a lookat Scott Page's congressional testimony from earlier this week:

http://tinyurl.com/267yfe5

Page says what we need are MANY complex adaptive system models - run them all andcompare the results. Although he does not say so in his testimony, this is what themeteorologists are doing these days for predicting paths for hurricanes.

See also: Miller, J. and S. Page (2008) Complex Adaptive Systems: An Introduction toComputational Models of Social Life, Princeton University Press.

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Reply July 23, 2010 at 08:21 PMRoland Buck said..."Hitler controlled prices and wages and forced large parts of the population into lowincome jobs."

Schacht's economic policies were based on the principle of running deficits by printingmoney. This stimulated aggregate demand. The success in ending the highunemployment and making the economy prosper again was one of the main factorsthat made him very popular in the pre-war period. Clearly the working people did notthink they had been made worse off.

When my father returned from the United States to Germany in 1935 to marry mymother, jobs were already plentiful.

Somebody needs to make a thorough study of how restoring the economy to fullemployment was achieved.

Reply July 23, 2010 at 09:11 PMCiprian Tudor Florescu said in reply to Brad DeLong...First you acknowledge that there is no bedrock basis for economics and then teachTrichet a lesson based on ...history.

Let me just say you don't understand anything from this situation. And this is preciselywhy you're looking at history to get an insight, because you lack a "bedrock". If I askedyou or an economist to create something that has value, you wouldn't know what valueis in any given epoch. You would have to "look at the culture" and sociological data tounderstand what could constitute a value. But still you think that economics can judgepast economic operations based on your present deductions on what constitutes avalue. You, and others like yourself from this profession, continue to talk aboutliquidity, savings, growth and other vacuous terms that don't name anything other thanoperations that took place in a particular epoch context. But still, you equateoperations that took place some 80 years ago with operations taking place during thelast few years as if we are living the same day everyday.This is to the point on economics.

On Trichet's politics: Please give me an example of a similar attack by hedge funds onGreece's sovereign debt situation during the 1930's. I sometimes think that the Anglo-Saxon world promotes this view on Europe austerity measures for disingenuousreasons... The problem of debt is no longer economic, professor, it is a matter ofnational and regional security. Make no mistake that we Europeans understood theright lesson from these events, but you can continue to lobby for other solutions.

Best,

Ciprian Florescu

Reply July 23, 2010 at 09:17 PMCaptain Button said..."Well, history tells us that there are times and circumstances when countries’ refusal tolisten to calls for retrenchment and austerity has led to economic disaster."

The geek in me wants to see this section summarized as a parody of Aragon's "But it isnot this day!" speech in The Return of the King.

Reply July 23, 2010 at 11:40 PMUncle Billy Cunctator said...Someone might enjoy this:

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http://tinyurl.com/NaziWinnipeg

Reply July 24, 2010 at 12:34 AMvtcodger said...The point of the first two paragraphs -- that economic theory is pretty much useless ata practical level -- seems valid. But I have some reservations about the way youdevelop them. What distinguishes the hard sciences from economics is not necessarilybetter models. The hard sciences have generally been data driven even when themodels were really, really wrong. We tend to view Ptolemy's solar system with itsrotating crystal spheres as being primitive, laughable, and wrong. But you couldnavigate by its answers and end up where you wanted to go.

And therein, I think, lies the problem with economics. You can navigate by its answers,but the odds are that you will end up someplace a long way from where you want to go.I would view historical analysis as an attempt to bypass defective modeling and at leastoccasionally get answers that are somewhat correct.

Reply July 24, 2010 at 01:13 AMTax Lawyer said...Selfishness, and out-of-State governotorial candidates. Okay, I was reading about TomTancredo's Colorado threats to enter the race and derail the Republican race forgovernor, and I began to think of a bizarre and very selfish worldview idea.

If I am a resident of State X, and a liberal Democrat is elected as governor, then onewould expect that State X would adopt an adequate safety net, and provide services forthe needy.

But as a resident of State X, why shouldn't I hope that State Y elects a conservativeRepublican, who will cut social services, given an entirely selfish perspective thatdoesn't care about suffering in other States?

It would seem to me that the more progressive my State representatives are ascompared to neighboring States, the better off our State's populace would be. As aresident of MD (supposedly progressive until one examines the abysmal mass-transitoperation), I see the VA population pursuing harmful economic policies, and MDbenefiting from VA's stupidity. Even the corporate giveaways from VA don't make upfor the denigration in life-quality from their policies. Does this help MD? Or does thecumulative effect of poor governance in neighboring States damage MD's prospects?

I don't know the answer. From a humanitarian perspective, where residents of everyState deserve adequate progressive representation, it is obvious that VA's approach isharmful to many of its residents. But are VA's woes a benefit to MD.

If I had the power to re-order our government, I would simply eliminate the wholeconcepts of States altogether (and cede TX to Mexico, and probably AZ as well).

Imagine a country such as the U.S. with no States, just a federal government, withoversight in law enforcement, public assistance, professional licensing (which wouldbenefit me immensely by being able to practice my profession anywhere--and wouldincrease economic mobility for many). I don't know if this would be a much bettersystem, or a much worse one.

I would guess that our country would swing from one extreme to another, until wereached a consensus (see Denmark, Sweden, the Netherlands, Belgium). I suspect thatthis type of system would be superior to having a Texan president, followed by aChicago president, etc.

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Any ideas?

Second question, and I am getting tired of asking this with no response. What happensto net public and private debtor countries in a trade war? Do they come out on top, orsuffer more than the rest of the world? Can SOMEONE provide some data on this?

Reply July 24, 2010 at 01:36 AMHopefully Anonymous said...Fellow commenters,Please don't attempt to push Prof. Delong into positions.Roland Buck, I feel like you're trying to push Prof. Delong into a pro-full employmentposition.I'd prefer he have epistemological slack.

Brilliant first 2 paragraphs, IMO.I remember the kids who thought they were extra-smart reading FT in college whilelesser minds read WSJ and the Times.

I thought it was generally inferior to the Times, but I didn't imagine that in the futureit would all be 2nd tier options for me to expert blogs like this one.

Reply July 24, 2010 at 05:23 AMHopefully Anonymous said in reply to vtcodger...Tax Lawyer,Since you're wont to big picture thinking, what would an optimization of the federaltax code look like? Has any great mind (on the order of Mankiw or Delong) made agood faith, comprehensive attempt?

I've taken a few tax classes in my time, and the best professors have pointed out thewasteful insanity in the tax code. But it's always been examples here and there. Ihaven't seen a smart comprehensive reform treatment yet (in contrast to smartcomprehensive proposals regarding Health Care and national security).

Reply July 24, 2010 at 05:29 AMBob Athay said in reply to vtcodger...First, let's be fair to the Ancients! Ptolemy's model of the universe was wrong, but itwasn't primitive or laughable. It was based on a great deal of careful observation andsophisticated enough that it could be adapted to include new data. More importantly, itwas accurate enough to predict the seasonal cycles that governed people's lives: whento plant, and harvest, more your herds to summer pasture or winter ranges, etc., ornavigate over the known trade routes. People had very practical reasons to gaze at thestars in those days.

Economics doesn't need to be like physics or chemistry in order to be useful inpractical applications. Rather, it needs empirical models (Brad's Boiled-Down History),heuristics and methods. Not unlike some kinds of engineering.

By the way, if you want to understand why a steel ball bearing bounces when you dropin on a thick, steel plate, appealing to first principles of modern physics won't help atall. Instead, we need some principles from Newtonian physics and some empiricalmodels with more than one or two parameters. And the more carefully we want to fitour model to observations, the more parameters we need, too. It gets complicated in ahurry, believe me -- or I'll prove it. But what physics has and economics lacks is theability to devise repeatable experiments against which we can validate or falsify ourmodels.

Reply July 24, 2010 at 06:57 AM

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Roland (full employment hawk) Buck said..."Roland Buck, I feel like you're trying to push Prof. Delong into a pro-full employmentposition."

I'm trying to push everybody I can into a pro full-employment position. There are tworeasons:

1. If unemployment is high, not only does this impose a lot of unneccesary hardship onworking people and the poor, but billions and multi-billions of output and income arelost. This lost output is not stored somewhere so that it can be drawn on and put to useonce the economy has recovered. It is lost forever.

2. I grew up in a blue collar household that actually experienced cyclicalunemployment. I have seen at first hand what it is like to have the family breadwinnerlose his job and live in fear of losing one's home due to not being able to make themortgage payments. I know from personal observation that the New ClassicalEconomists, who think unemployed workers are choosing leisure are idiot savants.They are very techically skilled at drawing up abstract, but irrelevant, theoreticalmodels, but they do not have a clue about the situation that workers face duringperiods of high unemployment.

I AM AN UNAPOLOGETIC FULL EMPLOYMENT HAWK!

With the economy in the kind of hole it is currently in we need BOTH expansionarymonetary AND fiscal policy.

Reply July 24, 2010 at 07:05 AMRoland (full employment hawk) Buck said..."But what physics has and economics lacks is the ability to devise repeatableexperiments against which we can validate or falsify our models."

But, with only few execeptions Astronomy does not have this ability either.

Reply July 24, 2010 at 07:09 AMRoland (full employment hawk) Buck said in reply to Taylor..."Trichet's an extremely well-trained engineer apparently."

So was Herbert Hoover.

Reply July 24, 2010 at 07:11 AMJ said in reply to Taylor..."Trichet's an extremely well-trained engineer apparently"

Neither l'Institut d'études politiques de Paris nor l'École nationale d'administrationteach engineering.

Reply July 24, 2010 at 11:37 AMBob Athay said...You're in exceptionally good form on this topic, Roland. Congrats on being "HoistedFrom The Comments", too!

On being a full employment hawk: I was among the long-term unemployed after theCold War went away and the "peace dividend" dried up my line of work. I was over 40with a family to support, so I know first-hand how hard it can be. Yet many peoplewere (and are) worse off than I was.

On experiment and theory: In my ball bearing example, it would be a straightforwardmatter for you to replicate my experiment as precisely as we're capable of measuring.Astronomy isn't amenable to that kind of experimental control, but even so, if I

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formulate a theory based on a set of astronomical observations, it should be possiblefor you to make another set of observations that you could test my theory against.Comparing the data sets is harder, because there are variables that we can't controland have to account for. But a good theory should still be falsifiable.

Reply July 24, 2010 at 01:20 PMTJS said...Does anyone else think that Trichet is still wrestling with the ghost of the ERM crisis?

Reply July 24, 2010 at 02:17 PMFull Employment Hawk (Roland Buck) said..." But a good theory should still be falsifiable." Unless it is actually falsified, in whichcase it is a discredited theory.

I think the new classical economics has been well falsified by the empirical evidence.

Lucas's monetary version of the new classical economics is falsified by the fact thatbusiness cycles have continued to occur after contemporeanous data on the moneysupply became available.

As far as Real Business Cycles are concerned, adverse supply shocks that cause a dropin productivity, reducing real wages are supposed to cause workers to choose leisureand work less. But in the current recession, productivity has grown. Thereforeaccording to the theory real wages are supposed to be high, so that workers choose towork now and choose leisure later. So unemployment should be very low.

But the advocates of the New Classical Economics behave like ideologues and notscientists and are not willing to give up their discredited dogmas.

Reply July 24, 2010 at 06:47 PMAlex said in reply to Roland (full employment hawk) Buck...And Bin Laden. And others:

http://crookedtimber.org/2007/11/10/engineers-of-jihad/

Reply July 24, 2010 at 07:27 PMBob Athay said in reply to Full Employment Hawk (Roland Buck)...That, my friend, is precisely the point! The Great Lesson of modern physics is this: Ourbest understanding is still only a model. We cannot assume that it is reality. We stilldon't know what we don't know.

That's also why I'd like to round up that crowd from U Chicago, the Hoover Institute,etc. and put them through a couple semesters of thermodynamics.

Reply July 24, 2010 at 09:39 PMAlexei McDonald said in reply to J...Trichet knew this, so cunningly went to study at the École nationale supérieure desmines de Nancy first.

Reply July 25, 2010 at 06:40 AMTroy Camplin said in reply to Ciprian Tudor Florescu...More than that, I detected a use of theory in the analysis. One cannot interpret datawithout a theory, after all. Another theory might come up with a differentinterpretation of the data. How might, say, Austrian theory interpret it? Or Marxiantheory? Or monetarist theory?

Reply July 27, 2010 at 01:29 PMTroy Camplin said in reply to Bob Athay...

10/24/10 1:39 PMJean-Claude Trichet Rejects the Counsels of History - Grasping Reality with Both Hands

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Me: Economists:

PaulKrugmanMark ThomaCowen andTabarrokChinn andHamiltonBrad Setser

Juicebox

Mafia:

Ezra KleinMatthewYglesiasSpencerAckermanDanaGoldsteinDanFroomkin

Moral

Philosophers:

Hilzoy andFriendsCrookedTimber ofHumanityMarkKleiman andFriendsEricRauchwayand FriendsJohn Holboand Friends

Physics and more traditional forms of math are utterly useless in understanding theeconomy. Those approaches -- especially including Newtonian physics -- have gottenus into the ridiculous situation economics is in today. They need to be rejected utterlybefore economics can become a real science. Here are a few things that can actuallywork to help us understand the economy, as they model things more like economies:complex adaptive systems theory, network theory, game theory, chaos theory, biostheory, information theory, evolution, and catastrophe theory. Combined, they are ableto tell us much about economies, which are after all agent-based complex, evolvingsystems.

Reply July 27, 2010 at 01:34 PMComments on this post are closed.

I Want the Facts: Ray Griggs' I Want Your Money reviewedMedia Matters for America - Oct 19, 2010In a November 17 post on his personal blog, University of California-Berkeleyeconomics professor Brad DeLong wrote, "Private investment recovered in a very ...Related Articles » « Previous Next »

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10/24/10 1:39 PMJean-Claude Trichet Rejects the Counsels of History - Grasping Reality with Both Hands

Page 14 of 15http://delong.typepad.com/sdj/2010/07/jean-claude-trichet-rejects-the-counsels-of-history.html

10/24/10 1:39 PMJean-Claude Trichet Rejects the Counsels of History - Grasping Reality with Both Hands

Page 15 of 15http://delong.typepad.com/sdj/2010/07/jean-claude-trichet-rejects-the-counsels-of-history.html