Economists Do It With Models

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Things I Wish I Had Thought Of, Rally Video Edition…

November 3rd, 2010 · 18 Comments
Just For Fun · Macroeconomics

Since the Stewart/Colbert rally (see picture at left) was supposed to be a parody of the Glenn Beck rally, and the Glenn Beck rally was supposed to be a parody of 1963′s March on Washington for Jobs and Freedom (what, is that not how it goes?), I figured I would continue the trend. Martin Luther King said that he dreamt of a world where his children would be judged not by the color of their skin but by the content of their character. My dream, in contrast, is much more modest- I just want people to know the @#$! difference between the two. Case in point*, in case you haven’t seen it yet:

This reminds me of the time in school that I had an assignment to go to the mall and ask people to describe what a quadrilateral is. People were shockingly bad at the task, but I just chalked it up to the fact that I grew up in Florida. (You know your state is pretty ridiculous when it has its own category on fark.com.)

In this case, however, I’m not quite sure who or what to blame for the lack of knowledge- in our society, Keynes is not exactly, well, a quadrilateral. (I would make a joke about him being a square, but I hear that he was quite the ladies’ man. And a man’s man. Whatever.) Economics is part of required high-school curricula in fewer than half of U.S. states, and even when it is required it often consists of things that don’t really count as a sufficient introductory treatment of the subject. (Raise your hand if you learned how to balance a checkbook or talked about personal finance in your high-school “economics” class.) Furthermore, not everyone takes economics in college (or even goes to college for that matter), and it’s not like Keynes is a popular topic in the newspaper, on television, or in Harry Potter books (though that would be awesome, in my opinion). Therefore, while I find it a little embarrassing that people made a bad assumption and automatically answered the wrong question, I can perfectly well understand how they wouldn’t know how to answer the right question.

Given the current nature of political discourse, I can’t help but think that it might be helpful for people to know about the works of people like Keynes…and Hayek, and whoever else may be relevant, for that matter. I’ll start with Keynes, just in case you’ve forgotten:

First, the basics. From Wikipedia:

John Maynard Keynes, 1st Baron Keynes, CB (pronounced /ˈkeɪnz/; 5 June 1883 – 21 April 1946) was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments. He greatly refined earlier work on the causes of business cycles, and advocated the use of fiscal and monetary measures to mitigate the adverse effects of economic recessions and depressions. His ideas are the basis for the school of thought known as Keynesian economics, as well as its various offshoots.

Now at least we’ve established that Keynes is not a country in Africa. Keynes believed that many economic downturns were the result of inadequate aggregate demand- i.e. not enough people buying stuff and not enough firms investing to grow or improve their businesses. Whereas classical economists believed that prices (both of goods and of wages) would adjust downwards and get employment and output back to their normal levels, Keynes realized that people and organizations were often stubborn about these price changes. (I don’t know about you, but I would throw a bit of a fit if my employer told me that it was cutting my salary, even if I thought that the prices of stuff I buy was going to decrease also.) Therefore, an economy can end up with a bit of a chicken and egg problem: people don’t want to buy and invest when they are uncertain about their financial situations or employment outlooks, but if people aren’t buying stuff then companies can’t employ people to make said stuff, which means that people were right in being uncertain about employment. Keynes decided that the government could step in and make up for the buying and employing that the private sector wasn’t doing, either directly through government projects or indirectly through lowering interest rates (which makes it more appealing to buy and invest) or reducing taxes (since that gives people and/or corporations more money to buy stuff). Keynes thought that this government action would serve to jump start the economy and start a virtuous cycle where the initial recipients of money would spend more, which would give other people more money, who would spend some of it, and so on.

It’s important to note that not all economists agree that Keynes was right, and it’s really hard to analyze macroeconomic data in order to support or disprove Keynes’ theory. (Luckily, we don’t have many Great Depressions to look back to for guidance.) This partially explains why there is so much yelling going on right now- Keynesian policies are currently being put in place, and some people think that the policies are misguided and unproductive. (The arguments about the policies being unproductive usually center around concerns about stimulus programs crowding out private sector business activity, distorting the long-term allocation of resources, causing inflation and/or leaving an unmanageable debt for the future.) That said, the question that we *can* answer is “Is Obama a Keynesian?,” and that answer appears to be yes.

Can you imagine how much more productive political discourse would be if more people debated whether Obama is a Keynesian and fewer debated whether Obama is a Kenyan?

* Yes, yes, I know, the video was edited to highlight ignorant people, yada yada. I get it. But that doesn’t change the fact that I think the world would be a better place if no one was this ignorant.

Tags: Just For Fun · Macroeconomics

18 responses so far ↓

  • 1 Rev. Pfloyd // Nov 3, 2010 at 11:56 am

    Heck, Keynes was hardly mentioned in my elementary economics class in college (other than a brief name-drop while discussing the multiplier effect of stimulating aggregate demand) and Hayek most certainly wasn’t mentioned unless *I* brought him up.

    We learned the very basics of supply and demand in my high school social studies course, but that was about it.

    As much as colleges like to hammer on the idea that students should come out of school being well-rounded and knowledgeable, almost no one comes out of college knowing anything about economics unless they are majoring in it or in business or another peripheral major.

    I had to learn and critique the various virtues of African literature (and, I’ll fully admit, “Things Fall Apart” was a great book), but no one seems to have to come out of there knowing a single thing about economics, and (though biased) I think the latter is far more important to being well-rounded.

  • 2 Dan L // Nov 3, 2010 at 2:32 pm

    If economists can’t even agree on whether Keynesian economics is correct, please explain why it’s critically important that everyone in America knows what it is.

  • 3 David Welker // Nov 3, 2010 at 2:54 pm

    Rev. Pfloyd:

    I am sorry, most people who actually know who Keynes is are not well-rounded. =) So I disagree with you about that.

    BUT, I do agree that more knowledge of economics would be nice. But ONLY if students study behavioral economics in addition to traditional neoclassical economics. I think that a lot of people who just take Econ 101 know enough to come to naive policy conclusions without really realizing that economics really is more about a way of thinking than a set of answers to policy questions.

    What is really remarkable is how little is actually definitely agreed upon by economists about what is the single most important topic in economics, namely, what to do about a depression. Sure, depressions do not happen very often, but they can contribute to events that lead to the collapse of entire societies. (Example: WWII). So, I can’t think of anything more important that economists could actually do than come to correct and agreed upon conclusions on depressions, their causes, and possible remedies. Why has economics failed so badly at the most important mission it could possible be given??

    It would be nice if economists could agree on worthwhile policy responses. But, one gets the impressions that “freshwater” economists and “saltwater” economists don’t really like each other. As a non-economist who likes to read Paul Krugman, Brad DeLong, and Mark Thoma as well as Tyler Cowen, Andrew Samwick, and Greg Mankiw (despite my skepticism that it would really be such a bad thing if he worked less), I guess I am suspicious of freshwater economists. It seems that they may be, like Hayek, letting their politics (suspicion and dislike of government) get in the way of their analysis. Also, there are assertions that freshwater economists are not even taught about Keynesian thought in graduate school. But, I guess I would need a little more education myself to say to what extent disagreement in economics is ideological and to what extent it has more respectable and has professional origins.

    One thing I do know is that economists cannot even agree on policy responses to our current recession or depression (whatever it is) and that if certain prominent saltwater economists are right, we are going to be in a recession for a long time to come as a result.

    So, would more economics education help us? Or would it just screw us up even more? I think it would be helpful; at least people would understand the argument that, just maybe, the government engaging in belt-tightening at the SAME TIME as the private sector might be counterproductive.

    BUT, I sort of suspect that economists know a lot less than even they think they do. And I think most economists would readily admit that there is a lot they do not know. I mean really; why did it take so long for behavioral economics to catch on?? Isn’t it just obvious that neoclassical economics was missing a whole heck of a lot by assuming that humans followed an arbitrary definition of “rationality” when they clearly do not? Why does it take economics so long to address the obvious? It seems to me that maybe economics has historically been characterized by a lot of methodological rigidity that may have functioned to hold it back from being more relevant in explaining reality. That is, economists must have known that their models were incomplete but were either (1) in denial about the significance of that incompleteness or (2) did not feel comfortable from a perspective of methodological rigidity trying to address the implications of that incompleteness.

    So, I guess I think economics should be taught. Especially as a way of thinking. But at the same time, probably with a lot of skepticism towards economists and economics. I say that, but it is not really meant to bash economics or economists. I am philosophical pragmatist, so I am at least somewhat skeptical of everyone. It should not be surprising that I would apply that same perspective to economists and what they think they know.

  • 4 econgirl // Nov 3, 2010 at 3:23 pm

    @ Dan L: You mean besides the fact that it informs substantial policy decisions on a regular basis? If Kaynes’ theories were mainly academic intellectual exercises, I would likely feel differently, but instead they’re put into practice on a regular basis.

  • 5 Monstar // Nov 3, 2010 at 4:14 pm

    “It’s important to note that not all economsts agree that Keynes was right, and it’s really hard to analyze macroeconomc…”

    You missed a couple of “i’s” there, in what should be “economists” and “macroeconomic,” respectively. Just thought you should know.

  • 6 Thermopylae // Nov 3, 2010 at 6:31 pm

    Given that backdrop, I don’t know whether one should laugh or cry.

    It seems a lost cause to suggest Joseph Schumpeter surpassed John Keynes, not only with economic thought, but also with the ladies:

    “…he had set himself three goals in life: (1) to be the greatest economist in the world, (2) to be the best horseman in all of Austria, and (3) to be the greatest lover in all of Vienna.”

    It is said he only achieved two of his goals, since there were so many fine horsemen in Austria.

    http://en.wikipedia.org/wiki/Joseph_Schumpeter

  • 7 Robbie // Nov 4, 2010 at 1:07 am

    “I would make a joke about [Keynes] being a square, but I hear that he was quite the ladies’ man.”

    … and a mens’ man (not that there is anything wrong with that!).

  • 8 econgirl // Nov 4, 2010 at 1:46 am

    Ooooh, I do remember that too. Man, the guy really got around- maybe that’s where the “Economists Do It With Models” phrase originated? :)

  • 9 Amarsir // Nov 4, 2010 at 8:33 am

    For what it’s worth, I’ve tried to start educating people on the Paradox of Thrift. Regardless of the prevailing opinion on high-level government actions, understanding that (and with it the concept of velocity) seems like a good starting point.

    Amusing video. If nothing else it’s an amusing reminder on the virtue of hedging your opinion. And those guys do some decent sketch comedy, too.

  • 10 Dan L // Nov 4, 2010 at 12:44 pm

    @econgirl, so you are saying that the populace as a whole *should* weigh in on issues that are apparently so complicated that Nobel Laureates who have dedicated their whole lives to economics cannot agree on them? Are you implying that the uninformed masses could somehow resolve this disagreement (via wisdom of crowds perhaps) if only they were properly schooled on Keynesian economics?

    I myself am a Keynesian because what little I understand of it makes sense to me, while the opposing arguments do not. And I think it would be great if more people knew something about it. But I still don’t believe that economic policy should be dictated by the masses (or even me for that matter).

    There’s also the issue of priorities. Sure, it would be nice if more people understood economics. But it would also be nice if everyone knew more psychology, current events, biology, history, philosophy, etc… all of which still have relevance to “policy” decisions. In a world in which so much is known and yet people learn so little, isn’t it better to fill their heads with things that we know are true? And to even understand economics at all, one has to at least be modestly numerate. The typical high school student barely understand *interest* so how can that student learn monetary policy?

  • 11 Rev. Pfloyd // Nov 4, 2010 at 6:26 pm

    I’m not saying knowing Keynes makes some people well-rounded (in fact, I probably wouldn’t shed many tears if he disappeared from economics courses), just the principles of economics in general.

    Heck, just familiarizing citizens with the first four chapters of an elementary economics textbook would work wonders on people’s perception about the otherwise seemingly arcane discipline.

    And I agree with Hayek on the whole Nobel Prize in economics thing:

    “[T]he Nobel Prize confers on an individual an authority which in economics no man ought to possess. . . This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally.”

  • 12 Amarsir // Nov 4, 2010 at 10:36 pm

    @Dan L: “I still don’t believe that economic policy should be dictated by the masses.”
    Points for consistency. That’s a Keynesian if there ever was one. :)

  • 13 BradyDale // Nov 12, 2010 at 3:21 pm

    Just an important point to start with. Keynes was not a ladies man, tho he was quite the player. He was gay. He was also, famously, a member of the Bloomsbury group, which was mostly artsy types. He was the sole social scientist, but his taste in Cambridge boys got him in, I guess.

    Anyway. Definitely not a ladies man. He liked romance, but with dudes.

    Anyway, I just want to say that I’m actually reading THE GENERAL THEORY right now because I’m getting ready to launch a web-comic in which Keynes is one of the recurring characters. I’ve already drawn a bunch of comics featuring him. I’m 42% of the way thru (thank you amazon kindle) and I just have to say that we tend to treat his thinking in this really broad, general way, when it’s so much more subtle and fluid than he’s given credit for in the textbooks, on planet money or in debates about how Keynes someone can be.

  • 14 Moudi // Nov 22, 2010 at 2:43 pm

    My only issue with this post:

    Keynes was a homo, and let’s keep it that way. We need gay economists on our side.

    Maybe you should make a shirt of a male model? I feel alienated.

  • 15 econgirl // Nov 22, 2010 at 5:52 pm

    I tried to make a shirt with a male model, and it was just awkward looking. Not sure why. That said, I am a straight female and can live with the female-model shirts, so everyone else can too. =P

    Also, let’s not forget that Keynes married a Russian ballerina, so the issue is not as cut and dry as you claim. That said, I would argue that this is all irrelevant, and if you really want a homo-economicus poster boy (you like how I did that?), Matt Rabin would be more than happy to fill those shoes, and he’s totally cooler than Keynes.

  • 16 BradyDale // Nov 22, 2010 at 5:56 pm

    It’s not moot insofar as you referred to him as a “ladies’ man.”

  • 17 econgirl // Nov 22, 2010 at 6:34 pm

    It’s certainly irrelevant to his theories. Besides, I meant that more to mean that girls liked him, not necessarily the other way around.

  • 18 Walt // Dec 11, 2010 at 6:30 pm

    For what it’s worth, as a former statistician, I often wish that “the public” was better informed about basic statistics and math – simply because then it would be harder for smooth-talking heels and/or politicians to sell them economic or social policy snake oil. You don’t have to have a strong understanding of the details of macroeconomics to understand the basic arguments of Keynes and Hayek (and others), and if you’ve got that basic understanding, your BS detector will (hopefully) go off when someone tries to tell you how their policy is the only possible answer to whatever problem.

    Critical thinking is impossible without some basic background knowledge. The fact that there isn’t a consensus among economists on whether Keynes was right does not make knowing about his theories (and competing ones) worthless.

    That last sentence was pretty confusing. But I’m too lazy to rewrite it. I think the bottom line is that if people had some understanding of the theories, they might actually demand evidence-based economic policies, rather than partisan talking point based ones.

    Then again, all the evidence says that people who are confident of something just use contradictory information to solidify their existing beliefs, so maybe I’m crazy.

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