Institutions For Learning From Economists' Mistakes

"...the functioning of even the best institutions will always depend, to a considerable degree, on its personnel... Democracy provides the institutional framework for the reform of political institutions (other than the framework). It makes possible the reform of institutions without using violence, and thereby the use of reason in the designing of new institutions and the adjusting of old ones..." -- Karl Popper (1945). The Open Society and Its Enemies, V. I, p. 110-111.

People who make a career advocating some set of ideas often find it difficult to change their minds, even when events demonstrate that consequences of those ideas are mistaken. In a democracy, various parties contend for power based on different ideas about what policies are preferable in the current situation. Turning one party out and installing another is a means to alter what ideas guide society, while allowing for the difficulties prominent advocates have in switching sides. (I think I take this idealization of the possibilities of democracy from Karl Popper. But I could not find a more appropriate quote than the above offhand.)

I take it that the global financial crisis demonstrates certain ideas about economics to be mistaken. Many seem to agree, including, notoriously, the Queen of England. I've recently read Murray Milgate noting such mistakes:

"These instances of the [International Monetary] Fund's responses to crises of various kinds reveal a seemingly unalterable instinct of Fund staff to do the nearly the exact opposite of what is required. Faced with crisis, the Fund blames the patient for the malaise and seeks solutions in terms of monetary and fiscal austerity. That the problem might reside in the nature (and regulatory framework) of international monetary and financial arrangements seems never to pass through the minds of the Fund's staff." -- John Eatwell and Murray Milgate (2012). The Fall and Rise of Keynesian Economics, Oxford University Press. Chapter 15, p. 322.

Maybe a large turnover of personnel, as Dean Baker has called for, at such organizations as the IMF and the World Bank would be desirable. And maybe a movement for new international regulatory institutions should be gaining influence.

In academia, we should perhaps be seeing a change in the relative rankings of economics departments and journals. Maybe, say, Harvard should be thought less well of, and places like the New School, the University of Massachusetts at Amherst, and the University of Utah should be gaining prominence. If this were happening, one could see the signs in citation patterns, in what experts were being quoted in the press, and in trends in the hiring patterns for recent graduates from different economic departments.

I realize Karl Popper's views on how science and democracy work often seem not to be historically accurate descriptions of incidents universally considered progress. To me, though, they provide heuristics practitioners might adopt. Are we seeing the changes we perhaps should have expected in the last few years?

What I Am Reading

Books on my pile include:

• Katherine Tait, My Father Bertrand Russell (Harcourt, Brace, Jovanovich, 1975).
• Chris Mooney, The Republican Brain: The Science of Why They Deny Science - and Reality (John Wiley & Sons, 2012)

Tait describes how Russell's vision of how children should be raised erected barriers between her father, herself, and other family members. (Tait and her older brother John were by Russell's second wife, Dora Winifred Black.) If only men and women were raised rationally and to live by reason, life would be much improved. But this belief did not work out all that well for her in many ways.

And that humans do not follow reason is a theme of Mooney's. The science of motivated reasoning, behavioral economics, etc., shows that humans cannot be made to follow reasoning. I've previously noted some of the studies on which Mooney draws.

So these two books share a common anti-utopian theme.

A Chaotic Business Cycle

Figure 1: A Chaotic Attractor in Kaldor's Model of the Business Cycle

I might as well post another interim result from my analyses of formalizations of Kaldor's business cycle model. (Today, Noah Smith also posts about chaotic dynamics.) Figure 1 is based on Figure 3 in a 2006 paper from Orlando Gomes. Table 1 shows the parameter values for the model used to generate this figure. For these parameters, Kaldor's model has one attractor, and that attractor is chaotic. The figure shows 1,000,000 (presumably non-transient) points on a single orbit. Although maybe not apparent from the figure, the orbit rotates around the origin in a clockwise direction.

Table 1: Values of Model Parameters

Parameter	Value
Speed of adjustment (α)	12
Depreciation rate (δ)	0.2
Propensity to Save (σ)	0.13
Expected level of output (μ)	200
Cost to adjust capital stock (γ)	0.6

In this model, for these parameters, every business cycle looks somewhat different from the previous one. Yet the model is deterministic. Variations among business cycles, in this model, are not coming from a source of random shocks. Furthermore, the figure shows a fractal structure across business cycles that may not be apparent to agents in the model living through five or ten cycles.

In Figure 1, I've also shown the model's fixed points and indicated their stability. The stability of fixed points in a dynamical system can be analyzed by looking at the eigenvalues of a linear approximation to the system at each fixed point (Figure 2). Methods exist to determine the stability of a fixed point without actually calculating eigenvalues. But the calculation of eigenvalues and eigenvectors is needed to numerically determine the location of the stable and unstable sets at interesting fixed points (albeit I do not show such sets in Figure 1).

Figure 2: Eigenvalues and Stability

References

• Andronov, A. A., E. A. Leontovich, I. I. Gordon, and A. G. Maier (1971). Theory of Bifurcations of Dynamic Systems On a Plane (Translated from Russian), National Aeronautics and Space Administration.
• Gomes, Orlando (2006). "Routes to Chaos in Macroeconomic Theory", Journal of Economic Studies, V. 33, N. 6: 437-468.
• Kuznetsov, Y. A. (1998). Elements of Applied Bifurcation Theory, Second edition. Springer-Verlag.

When Did Scientific Political Economy Start?

Johnathan Schlefer writes, "There is no invisible hand". He bases his claim on empirical observation and the Sonnenschein-Mantel-Debreu results and other investigations into the stability of general equilibrium. Some find amusing the ignorance and stupidity in the comments.

He also brings up Adam Smith's failure to support propertarian dogma. Gavin Kennedy mostly endorses Schlefer's view of Smith.

Which brings me to my question. Suppose you accept the distinction between scientific political economy and vulgar political economy. Some see both types of political economy in Adam Smith. He contains both esoteric and exoteric elements. But who would you say was the first writer on scientific political economy? I think you can find scientific elements in Quesnay. After all the study of schemes of expanded reproduction builds on Quesnay's Tableau. Maybe William Petty is the answer to my question. Or maybe one should go back all the way to Aristotle.

Speculation On Why Monetary Cranks Exist

I think many people, without too much thought, naturally intuit:

• The system under which they live works fairly well.
• Somehow, they are being exploited.

The first idea might come partly from modifying your ideas to fit your constraints. You aren't likely to drastically change the world, so you might as well accept it as it is. Another source of the first idea is the ruling ideas of society, which as the man said, are the ideas of the ruling class. Maybe the second idea comes partly from how your success isn't as much as that of others around you.

I suggest a third element, other than the above two contradictory ideas, contributes to the formation of monetary cranks. That is a surprising revelation about some details about how some institution that you interact with every day actually works. What do you mean that banks don't have money for my deposit immediately on hand? Doesn't this paper, accepted as money, represent a quantity of gold that the government is obligated to pay out? People naturally look for a concrete foundation for their practices and are left in the air when it isn't to be found.

I suggest some combine some such mishmash of ideas to conclude that the system can be set right if one particular thing is changed. And something about money is often taken to be the thing to be changed. Others might look at rent on land. I find it suggestive that Henry George's popularity is almost contemporary with closing of the American frontier.

For purposes of this discussion, I deliberately do not identify which ideas are crankish, whether it be advocacy for stamped money, social credit, or a belief that interest rates reflect the interaction of supply and demand for loanable funds. Nor, of course, does labeling an idea with an insult show why it is wrong, if it is.