Monday, April 11, 2011

Summers on the policy irrelevance of modern economics

When it comes to some parts of modern economics I’ve often wondered whether anyone (economists or not) actually sees this work as potentially relevant, applicable, empirical knowledge. Larry Summers, who (based on unsystematic and non-random sample of second-hand impressions such as these) is both highly intelligent, overly enamored of unregulated financial markets, and a bit of an arrogant a**hole, offered this heuristic for separating the nonsense from the useful:

[…] read virtually all the ones that used the words leverage, liquidity, and deflation, he said, and virtually none that used the words optimising, choice-theoretic or neoclassical (presumably in the titles or abstracts).

This comes from the Free Exchange blog on The Economist, which also provides further descriptions of modern economics from Lawrence “Ex-President-of-Harvard-ex-treasury-secretary-under-Clinton-ex-chief-economist-at-the-world-bank-and-ex-chief-economic-advisor-to-Obama” Summers:

[H]e talked about all the research papers that he got sent while he was in Washington. He had a fairly clear categorisation for which ones were likely to be useful: read virtually all the ones that used the words leverage, liquidity, and deflation, he said, and virtually none that used the words optimising, choice-theoretic or neoclassical (presumably in the titles or abstracts). His broader point—reinforced by his mentions of the knowledge contained in the writings of Bagehot, Minsky, Kindleberger, and Eichengreen—was, I think, that while it would be wrong to say economics or economists had nothing useful to say about the crisis, much of what was the most useful was not necessarily the most recent, or even the most mainstream. Economists knew a great deal, he said, but they had also forgotten a great deal and been distracted by a lot.

Even more scathing, perhaps, was his comment that as a policymaker he had found essentially no use for the vast literature devoted to providing sound micro-foundations to macroeconomics. (So that would be most macroeconomics since the original Keynesian revolution?) On the other hand, he pointed out that while there was clearly a need to be prudent while applying research to the real world, it would also be unwise to attack it wholesale. He surmised that it might be possible that some things that seem useless or of limited applicability now would turn out to be useful in years to come (microfoundations for macroeconomics, perhaps?).