Economics Is Way Too Complicated

Simplified Economics

I am sitting here at my desk reading this talk by Paul Klugman, published today in his blog at the New York Times.      http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the-crisis/

It is a LONG and complex analysis of the failure of economists to predict and help solve our current financial crisis – which started back in 2008.  I would love to understand this – but the article is way too long, way too complex.  The thought occurred to me, if I find this too complex, how the heck do our policy makers and decision makers ever deal with this stuff at all?  Obviously they do not, thus the mess we are in!  Is there any way to help them?  They typically will lay their hands on one economist that they like and trust, and do whatever that person espouses.  Or, even more likely, they just do what FEELS right.  I don’t need no bleeping economist!  It’s like going to the doctor.  I know what ails me – that highly trained physician is just postulating theories any way.

What FEELS right comes from their gut, their FAST BRAIN, and as I have learned recently from Daniel Kahneman, author of Thinking, Fast and Slow, that is dangerous at best.  Our gut, our instant reaction works pretty well for dodging the spear, or sizing up a potential adversary on the path, but it is lousy at complex things.  And our SLOW brain, the one where we actually think and process stuff, is really slow, and gets tired.

Laying your hands on ONE economist is fraught with problems as well.  What if he is an Austrian, and espouses that the benign good will of human kind, totally unfettered by any controls, will eventually produce all the wealth we can imagine!  Or, worse, if he espouses a highly controlled, centralized approach that does what our intelligent leaders think is best, and totally ignores the ignorant rabble who are actually making decisions on the ground– what do they know?!  Those are the two extremes, by the way, Libertarianism and Communism. Most folks fall down somewhere in the middle – but they rarely all agree.

I understand a lot of Kruggman’s article, but it is a long piece, and damned complicated.  To simplify it GREATLY, it seems that one school of thought on the two coasts (salt water people) split apart from mid-America economists (fresh water people).  The folks in the middle of the country, the “freshwater” school, so derided the coastal folks for so many years, that the fresh water ones actually stopped teaching the “other” approach to economics – Keynesian, etc.  Instead of a review of the various schools, they just taught the right one – theirs.  So, when a crisis appeared that a Keynesian prepared, model in hand person might understand, the middle of the country folk and their heirs – their students – had never even seen that model.  He calls it the IS-LM model.  It has something to do with high deficits not necessarily leading to high interest rates, because of some boundaries of low interest rates, a lack of full employment, and a liquidity trap.  See – that makes a lot of sense, doesn’t it?

I tried to explain this a bit to my lovely wife, and she says, I don’t really have time to listen to all of that, especially since I have very little influence on it.  My guess is that our fearless political leaders are likely to respond in the same way.

I think Kruggman is saying something very important, but the audience who should actually hear it, are never going to read it, and if they do, they won’t get it.

A Better Way?
There has to be a better way!  In some realms, really complex ideas can be explained by a popularist.  Think George Gamow and One, Two Three, Infinity.   If you are unfamiliar with the book, look it up at Amazon.  George had a way with words, and he basically explained Einstein’s General Theory of Relativity so that a high school kid could grasp it.  Thanks, George.

But the problems of Economics are more complex than physics and relativity.  It involves dynamic human beings and institutions that are constantly changing.  Faced with a crisis, we need to understand  something right now in order to make a concrete decision about how to respond to an economic crisis.  We can’t really expect our law makers to drop everything and go sit in a room and read a book to figure out how to get our economy running again.

Well, how about this, an “instant poll” of economists.  We have this wonderful engine at our finger tips – the internet.  What if we had a worldwide forum of noted economists, and our fearless leaders could pose questions to them?.  Like, say, “Does lowering taxes on the wealthy generate more wealth and lower deficits” – answer, yes, no, maybe, or “I dunno”.  Give the experts a day, and send a report to the requester, showing the percentage of economists that choose which answer.  Heck, publish the report so that the world can learn what is being asked and what our best experts are actually thinking!

We need a couple of things to make this work:

1. A respected institution willing to host it.  University of Chicago?
2. A way of vetting the economists who can take part.  All Nobel Prize candidates, noted authors, peer reviewed, etc.  I can see a board chaired by Martin Wolf of the FT!
3. A genius at posing questions properly for multiple choice answers that economists can grasp.  The problem is that every economist has at least 3 hands:  on the one hand you can say x, on the other hand it is y, and then again it could be z.

What say you?  Can you see this applied to other realms?  How about a standing poll of what voters actually think about issues.  What issue is more important:  contraception, gay marriage or unemployment – choose only one, thank you very much.

Klugman's Results
If you are still with me, there are a couple of quotes from the end of the article which are actually quite understandable, and interesting:

“What happened, in fact, was that to a large extent policy makers ended up going for economic doctrines that made them feel comfortable, that corresponded to the prejudices of men not versed in economics.  Thus, it’s normal to think of the economy as a whole as being like a family, which must tighten its belt in hard times; it’s also completely wrong. But lacking any clear message from the economists about how and why this is wrong, it became the common standard of discussion in America, where both Republicans and, alas, President Obama became very fond of the statement that the government should tighten its belt because families were tightening theirs.

It’s also normal to think of economics as a morality play, a tale of sin and redemption, in which countries must suffer for their past excesses. Again, this normal reaction is wrong, or at least mostly wrong – mass unemployment does nothing to help pay off debt. But absent clear guidance from the people who are supposed to explain that economics is not, in fact, a morality play, moralizing became the core of economic policy thinking in Germany, and hence played a huge role in European policy more generally.

Finally, government officials who hang out with businessmen – and almost all of them do – naturally tend to be attracted to views that put business confidence at the heart of the economic problem. Sure enough, belief that one should slash spending even in a depressed economy, and that this would actually promote growth because it would have positive effects on confidence, spread like wildfire in 2010. There were some economic studies used to justify the doctrine of expansionary austerity – studies that quickly collapsed under scrutiny. But really, the studies became popular because they suited the prejudices of politicians, prejudices that would have been totally familiar to Herbert Hoover or Heinrich Brüning.”

I hear Fast and Slow at work again.