Paul Krugman: Nobel Prize or Academy Award? When economic theory is a tower of babel

Posted on July 14, 2018 by Nicholas Gruen

Below is my response to Krugman’s comments in defence of new trade theory. It’s not generated any discussion on the Mandarin or Evonomics, but perhaps it will here. Apologies for the delay in getting it onto Troppo – I’ve been travelling.

I recently criticised contemporary economics in a speech launching Max Corden’s memoirs. Economic theory threatens to become a Tower of Babel, preoccupied with the world within its models and irrelevant to policy. This has crowded out an older style of which Corden was an exemplar, in which economics aspired to be the supremely useful social science, policy-relevant as clarified commonsense.

I cited Paul Krugman’s claim that macroeconomics had actually regressed as a result, but I also pointed out that Krugman had himself been the architect of the same kind of regression. He won a Nobel Memorial Prize for his trouble.

In Krugman’s characteristically vigorous and clear-headed response to my speech, he suggests that this is the ‘money quote’ from my speech.

Krugman [is] about the most brilliant and useful economist we have. But his most brilliant work wasn’t useful, and his most useful work isn’t brilliant”

We’ll get to what I think was the money quote, but first … Krugman and I are in violent agreement about the subject of his response – the differences between the Macro and the Trade Towers of Babel.

In macro, the grand prize was ‘micro-foundations’ in which micro and macroeconomics would be unified into a crystalline structure, not unlike Euclid’s Elements, as macro was rebuilt from an aggregation of perfectly rational optimising agents. As I mentioned, “this mindset gave additional licence to the motivated reasoning of the libertarian right”.

For many, that was the idea all along. Like the misdirection of a master magician, new classical models assumed away all the ‘imperfections’ that stare us in the face and make the macroeconomy such an ornery beast, both to live in and to understand; its frictions in transmitting information and incentives, its ‘animal spirits’ and tendency to self-fulfilling prophecies of gloom and euphoria, its ‘sticky’ prices and wages.

And voila! Unemployment disappears! The great depression was really millions of workers taking a spontaneous holiday. And forget government action to fight the business cycle. It’s misguided, and futile if not actively destabilising. And no, I’m not kidding.[1]

By my lights, new classical macro is the most egregious example, but the pattern recurs in field after field.[2] Including Krugman’s new trade theory. The new models produced a Tower of Babel in which strong, robust predictions or policy conclusions were hard to come by. But, as Krugman replies, here the motive wasn’t to banish aspects of reality that were inconvenient for the modelling (or one’s ideology), but rather to invite them in.

What could possibly be wrong with that? Continue reading →

Posted in Economics and public policy | 1 Comment

Is Trump getting Funnier? On Brexit and May.

Posted on July 13, 2018 by Paul Frijters

The Donald is visiting the UK and has had me in stitches a whole day. He’s clearly been having a chat with Nigel Farage about how to handle the Conservatives and has shown them up in spectacular fashion.

Theresa May, bless her, was of course in an impossible position. She undoubtedly loathes the Donald and yet had to try and woo him into that mythical trade deal that the Brexiteers have been promising the UK would get with the US if only they left the EU. So she put on a dress and ‘did her duty’ by raising the issue of a favourable trade deal with the guy who just launched a trade war against her.

The Donald must have been wearing a big grin at this clumsy attempt to suck up to him. He was only in the UK to add to his collection of photos with royalty. He probably likes the idea of ruling by divine right. And now the host is begging him for a special favor! If not a ‘yes’ to a deal, then could he at least give her a ‘Maybe’ when talking to the press?

The response was hilarious. He announced that Boris Johnson would make a great prime minister instead of Theresa, and he told the UK press that there was no point talking to Britain whilst it still had any other friends in Europe. No, only if Britain gave up all its allies and was completely at the mercy of the US, would he entertain the idea of a trade deal.

What a slap-down! It is like telling someone who invites you to dinner that someone else should own the house and they’ll only deal with you if you’re in the gutter on your own. If you believe that you’ll be taken more seriously if you have no friends left, you’ll believe anything, so it’s not even an attempt at being serious. It is purely dismissive, which is very funny in the midst of pomp and ceremony.

In some sense, of course, May and her government had it coming. The whole sycophantic ‘special relationship with the US’ story that the UK politicians have been running for decades shows such a lack of self-respect that it deserves this kind of slap down. When you behave like a slave, don’t be surprised if you’re kicked like a dog.

Poor Theresa though. The Germans and French in that regard are showing her how to deal with the Donald: you ridicule him and meanwhile ignore whatever he wants from you because you know that in the end, the US needs its allies at least as much as they need the US (and with Trump, the US is not going to find other allies, is it?). There is thus, for instance, no way that the Europeans will increase their defense budgets anytime soon, and they simply laugh at his claims. Have a look at how the German press reacts to the Donald:

Posted in bubble, Bullshit, Geeky Musings, Humour, Politics - international, Politics - national, Uncategorized | 7 Comments

Social context reveals gender differences in cooperative behavior

Posted on July 9, 2018 by Nicholas Gruen

A number of previous researches indicate that men prefer competition over cooperation, and it is sometimes suggested that women show the opposite behavioral preference. In the current study the effects of social context on gender differences in cooperation are investigated. For the purpose, we compared men and women behavior under two social conditions: in groups of strangers and in groups with long-term socialization—groups of friends. The differences were found in changes in the level of cooperation, taking into account the effects of mixing social and gender variables. Social interaction and communication made cooperation of group members strength and sustainable. However, men’s and women’s cooperative behavior in groups differed. Women were initially more inclined to cooperate in interaction with strangers. Men showed greater sensitivity to sociality effects. They tended to make cooperative decisions more often if there were friends in the group. Furthermore, men cooperated with previously unknown people after socialization with them significantly more than women

Available here.

Posted in Uncategorized | Leave a comment

PATRICIA EDGAR. Going Round the Twist with Telstra and the NBN Co

Posted on July 6, 2018 by Nicholas Gruen

Cross posted from John Menadue’s Pearls and Irritations

NBN Co claims their ‘focus remains strongly on improving customer experience on the network including a smooth connection to the network.’ In fact the experience is a fiasco.  

Bill Shorten says the dysfunctional NBN needs to lift its game, and under a Labor Government, the company will have to pay compensation to businesses and families who have been seriously inconvenienced by their incompetence. Appropriate standards and financial penalties would be determined in consultation with the ACCC, NBN, and other stakeholders.

We are told NBN installers missed more than 80,000 appointments in 2017and a report by the ombudsman in April this year found that complaints about the NBN increased 200% in the second half of 2017 to 22,827, most of which concerned service quality and delayed connections.

The installation partnership between NBN with Telstra as service provider requires the talents of Shaun Micallef and Charlie Pickering to make sense. It is impossible to work out who is responsible for the mess. The frustrations caused – when appointments are cancelled, missed and the ongoing harassment from Telstra callers who can’t understand Australian English, who cannot deviate from the script in front of them, and it seems, can’t keep accurate records from one call to the next – are enough to send someone round the twist. And of course you can never speak to the same person twice, if you can reach anyone at all.

My nightmare began November, 2017. Continue reading →

Posted in Economics and public policy, Innovation, IT and Internet | 36 Comments

PATRICIA EDGAR. The ABC, Facebook and the Meaning of Trust

Posted on July 6, 2018 by Nicholas Gruen
Image result for abc trust

Google images selected this image as the most relevant to “ABC Trust” for obvious reasons.

Cross-posted from John Menadue’s Pearls and Irritations.

Trust is an interesting concept. It takes time to develop trust which results from a broad experience of something (or someone) which demonstrates consistent, reliable behaviour with integrity, ability, and surety; it involves confident expectation. But trust can be lost irretrievably, quite quickly. Trust allows for mistakes if they are dealt with openly and honestly. It does not forgive manipulation, dishonesty and betrayal.

This brings me to the recent Roy Morgan Media Net Trust Survey that found in 3 surveys of 4000 Australians, that the public gives a negative trust value to the banks of minus 18, while media companies score minus 7. Morgan subtracted distrust from trust to achieve a Net Trust Score (NTS). While the banks are seen as the most toxic brands, media companies are still in negative territory.  When 1,111 people were asked which media they trust and distrust most, the results show half of all Australians (47%) distrust social media compared to only 9% who distrust the ABC.

The only three media organizations that get a positive score are the ABC, SBS and Fairfax, in that order. The commercial networks score between – 6 and -10. The drivers for negative views are false news, bias, sensationalised stories, pushing a political agenda and too much advertising.

It has become a cliché to say the ABC is biased. The claim is repeated endlessly in the commercial media and by the Coalition MPs, who run campaigns on the basis of slogans, and who complain regularly about the treatment of the government on ABC news and current affairs. They work on the assumption that if you say it often enough people will believe it. But trust is not born from slogans.

It really doesn’t matter what the commentariat – conservatives like Gerard Henderson and Andrew Bolt or ‘liberals’ like Paul Barry or Chas Licciardello –assert as opinion, for trust is not formed by opinion pieces. It is built up over time.

The ABC has been there since 1932; television since 1956, and there is a history to review and a record to examine. The public has had a lifetime to evaluate the ABC. The public broadcaster openly examines the accusations of bias made against it on its own channels and invites detractors on air to express critiques. It publishes complaints against it, along with its editorial policy. Continue reading →

Posted in Films and TV, Media | 10 Comments

Centrist strategic voting

Posted on July 5, 2018 by Nicholas Gruen

This image was picked from a bunch of images on Google Image. This post is not about Canada. If you’re interested in Canada, it’s unlikely you’ll get ANYTHING out of this post. Canada is just incidental to this post. It is very cold there a lot of the time though, so it’s odd more people live there than live here. But that’s just the kind of provincial small mindedness that Troppo readers hate, but in which Troppo’s leadership collective CONSTANTLY INDULGE. SHAME.

This is my response to Peter Dempster’s proposals.

I can see one important merit of them. Electoral politics is inherently polarising because electoral politics involves politicians beating other politicians to qualify to be politicians in the first place – by getting into parliament – and then joining the team that helped them get to parliament in beating the other team. So it’s good to have stabilising influences such as what’s been proposed.

But while I like this intention, it seems to me that the idea has some difficulties intellectually and has no chance practically. The results of the survey that Peter quotes are interesting and informative, but I don’t think they should be read naïvely.1 For instance 45 percent of people say they’d consider voting for a new centrist party, but we know how many people do vote that way when people try to establish such parties.

This leaves aside the question of where the ‘centre’ is. For me the ALP are a thoroughly centrist party. The concrete policy decisions the Government is making so far are relatively centrist also, but the right now has the problem the left had from the 1960s to the around the mid 1980s, which is that they have an unreasonable faction. 2 In the same vein, I’m not sure how easy it is to pick a single dimension of ‘centrism’. For instance on military matters there’s nothing centrist about me. I’m in favour of doing almost anything to avoid getting into a war. Not anything – I’m not a pacifist – but almost anything. There’s nothing centrist about that. Continue reading →

  1. I hope you like that little gizmo over the “i” in ‘naïve’. I do! But I digress. ↩
  2.  I was going to say it’s an ideological faction and to some extent it is, but that’s dignifying it somewhat. Opposition to greenhouse gas abatement isn’t really ideological, it’s part tactical and part a reaction to another ideology which one might call ‘political correctness’ – anyway, that’s just a quibble – not very interesting. . ↩
Posted in Democracy, Political theory, Politics - international, Politics - national | 27 Comments

The Rise of China and dealing with American grief.

Posted on July 5, 2018 by Paul Frijters

Like the world today, Europe in the 19th century witnessed major shifts in the balance of power, with new technologies changing how life was lived. Otto von Bismarck, a Prussian, saw opportunities in that chaos. He unified the warring German principalities in 1870 via an unexpected war on France. He modernised Germany so that it was the industrial powerhouse of Europe at the start of the 20th century.

He achieved his aims by lying, cajoling, threatening, invading, persuading, networking, and analysing. He modestly said of his own achievements:

“The statesman’s task is to hear God’s footsteps marching through history, and to try and catch on to His coattails as He marches past.”

How would someone like Bismarck have viewed God’s major strides in our time, the rise of China?

The rise of China will inevitably lead to the emergence of two competing power blocks in world politics. On the one hand there will be China and its allies, on the other the West and its allies. Some countries will initially try to stay neutral or play the two major blocks off each other, but the smaller ones will be easy prey for the two power blocks to force into a choice, so they either unite in a third alliance or pick a side.

The rise of China raises obvious questions about alliances and less obvious ones about emotions.

The alliance questions are obvious: India would naturally fall in the camp of the West, so how would we prevent it slipping away? Korea and Russia could go either way, so what would sway them and what role could they be offered in the West? Should we try to delay countries who naturally belong into the China block, like Vietnam, from switching? Would three blocks be more stable than two? Can we keep the conflict relatively cordial or is some kind of low-level proxy-war inevitable? This is the obvious power-play stuff and the relevant scenarios will occupy thousands of analysts in both the West and China right this moment.

Bismarck excelled in power-play but thought deeper and considered the dynamics of group emotions.  The one I think we should watch out for is the grief that the Americans have to go through in order to come to terms with their smaller role. The West has not considered this issue yet, but I think it will dictate much of geopolitical life this century.

Consider the many ways in which the Americans will feel pain. Their military bases will be closed in the countries that switch to China, and their culture will be humiliated. Their cherished truths, pushed by their media, will no longer be the truths that others buy into as their grandeur fades. Their banks will be challenged such that the world financial system will not be dominated by them. Their internet companies will be taxed by allies and their technological inventions copied shamelessly without payment. Their corporate and political leaders will feel their power and influence reduce.

Americans as individuals will notice this when they travel abroad and taken less seriously. Their culture will be less admired and copied, which will mean the rest of the world will feel stranger to them, less welcoming. American tourists will have to watch their step more, and the brain drain to the US will reduce as American education will be downgraded in status.

The Americans are a very proud people, who have enjoyed a 100 years of being at the top of the world political tree, and 200 years of bossing around other countries in their own backyard. That is a long period of dominance to lose. They will feel intense pain and, after that, intense anger.

Britain and France have shown us that grief over a lost position of pre-eminence can last longer than 100 years and can motivate elites to do really stupid things.

France was pre-eminent around 1800 and since then has been in continuous relative decline. Its wounded pride motivated it to seed the second world war by inflicting the humiliating treaty of Versailles on the Germans, one of the worst political mistakes ever made. The grief of the French enabled the rise of Hitler and cost the world 60 million lives.

Britain resented its loss of influence enough to bottle up Germany in the early 20th century, a major factor in the outbreak of WWI. Its reluctance to accept historical shifts gave us unnecessary disasters like the Suez crisis. Even now, a century after it lost its pre-eminence, many Brits delude themselves that Britain will regain some of its former stature if it breaks with the European Union.

So if we owe devastating wars and disruptions to the British and French elites pining for lost glory, what can we expect the grief of the Americans to cost?

We face a century of American grieving over its lost position. We have only just entered the denial stage. What is yet to come is pain, followed by anger. Only after that anger can there be acceptance and bargaining.

What can we do to minimise the cost of American grief?

Posted in Cultural Critique, Democracy, Economics and public policy, Geeky Musings, History, Life, Political theory, Politics - international, Social Policy, Society | 25 Comments