Levitt’s Honesty About Economics

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2 Responses

  1. Frank says:

    We also need to start questioning the policies of no-holds-barred globalization that led to the hollowing out of the US manufacturing base. As both David Cay Johnston and Louis Uchitelle have shown, massive lay-offs have not merely been permitted by our public policy, but encouraged by it. As economist Alan Blinder has predicted, tens of millions of jobs could be lost:

    http://economistsview.typepad.com/economistsview/2007/05/alan_blinder_fr.html

    And before we just blithely accept that eventuality, we might want to think about the social disorder it could unleash.

  2. A.J. Sutter says:

    Greetings from Tokyo. Compared to you folks in the US, we are doing just fine, thank you. We don’t have any major industries collapsing here. The local financial institutions, other than the subs of US companies like Lehman, didn’t get heavily into sub-prime instruments. In fact, they are buying American institutions on the cheap. The nation is aghast at the notion that 30,000 jobs are expected to be lost by next March, whereas US companies axe that many people without batting an eyelash. (The statistics may be understated, but the country will probably lose fewer jobs this fiscal year than Citibank alone is cutting.) Sure, the yen is up compared to the dollar and euro, which hits exporters. But Japan’s dependence on exports is less than that of the UK, France, Australia, Russia and Germany, to say nothing of China, Korea and Singapore. (Moreover, it’s nice for me, since I get paid in yen and and pay some expenses in dollars and euro.) And there’s some feeling in the air that this crisis is an opportunity for Japan to re-orient itself toward a new way of thinking, less dependent on the US. In other words, you should be so lucky as to be here right now.

    I don’t see what’s so revelatory about Levitt’s remark. It shouldn’t be surprising that economics isn’t so predictive. If you delve into the history of ideas of mainstream economics, you’ll discover that its scientific trappings don’t have any empirical foundation whatsoever. At the micro level, this has ben documented in, among other places, Philip Mirowski’s More Heat than Light and Machine Dreams, and even, though this is only a very qualified recommendation, the first few chapters of Eric Beinhofer’s The Origins of Wealth (please see my 3-star review on Amazon for an explanation of the qualifications). In finance, most of Taleb is derivative from 1960s Benoit Mandelbrot and, for that matter, from many elementary probability theory textbooks. For the notion that you can’t derive macroeconomics from the usual mainstream micro foundations, see the 1970s-vintage Sonnenschein-Mantel-Debreu theorem, and D. Saari’s extension of it from 1995. At the macro level, Hyman Minsky’s critiques date from the 1980s and 1990s. All these critiques have been around for years, unheeded. At best, Levitt is just catching up. More people should do the same.

    One shouldn’t even need the history of economics to make one wonder about the validity of economists’ predictions. Even assuming that there may be certain “laws,” it’s difficult to know whether the conditions precedent for their applicability obtain in any particular situation. History doesn’t take place in controlled lab conditions. In the 1990s, the yen wasn’t the world’s reserve currency, China wasn’t such a major economic power, and America’s powers of moral and political suasion had not yet been weakened to the point we find today. All of those factors distinguish the current American predicament from Japan’s back then and from any other situation in the past, and there may be other factors we can’t know are pertinent but with hindsight.

    The challenge for policy-makers is that they have to do something. Prescriptions or guidelines is all they’ve ever been able to act on. But recently those guidelines are all too often based on theories whose authority falls somewhere between that of astrology and the medical theory of humours. Acknowledging that we know less than we think we do is a good first step. (And the biggest challenge will be when new environmental disasters start popping up on the nightly news as often as financial ones have done this autumn; that will make our musings about economics seem very trivial indeed.)