Tim Harford’s excellent adaptation of Monty Python in the face of generalized attacks on the economics discipline rather overshadows the other contributions, including mine, to the FT pieces published as a response to the Tom Clark / Chris Giles debate.
The piece by me was a crop of what I am reposting below, reproduced because the FT version does not contain the hyperlinks to other work, which were there to make a point about what is actually out there in econ that you can read. And also because it chopped a paragraph on money, something Tom Clark seemed to suggest was ‘rarely discussed’. [I don’t resent the edit: I was given a word limit and singularly failed to hit it.]
“Tom Clark might be right [FT 24 April] to point out that the economics profession is ‘in a defensive mood’. If it were, it would not be that surprising, confronted repeatedly with critiques that misconstrue it and betray an isolation from what is actually happening in economics.
For example, in his lament in about economics Tom writes that “The strange status of money — a socially-created promise to pay, not an ordinary good — is rarely discussed.”
Apart from ‘is rarely discussed’ that phrase is apposite. Money is a socially created promise to pay, and not an ordinary good. (At least not usually, not now). But monetary economists spend their time discussing exactly that – just how that promise is created and sustained. There are hundreds of them, filling journals like the ‘Journal of Monetary Economics’ and ‘Journal of Money, Credit and Banking’. One feature of money being a socially constructed promise to pay, and not a normal asset, is that it pays no interest. And that means that central bank interest rates cannot fall much below zero. One can glimpse just how ‘rarely discussed’ this topic has been in the 20 years or more since Japan hit the zero bound by googling ‘money zero bound central banks’.
A theme in Tom’s piece is that what little ‘economic reasoning’ is deployed to good effect is ‘obvious’. He uses the example of adverse selection. I have to confess that my limited talents left me not finding it ‘obvious’ that hidden information about pre-existing health conditions can cause markets to disappear entirely, and to be the foundation on which state provision rests. Or how adverse selection conditions how central banks should devise reverse auctions to buy risky private securities to stimulate the economy. I did not find it ‘obvious’ what policymakers should do about model uncertainty: something Tom think economists don’t contemplate but leading economists in most central banks talk about routinely, explored laboriously by Nobel laureates Hansen and Sargent and others [even myself]. Neither was it initially obvious why the zero bound disrupts the normal rule that more money means higher prices. (Something the ‘permahawks’, as Paul Krugman refers to them, refused to grasp in their opposition to quantitative easing.) Nor was it self-evident at first that one could use a change of the unit of account to escape the zero bound. I didn’t find the implications of debt, demographics and inequality for the natural real interest rate ‘obvious’ either; nor the analysis explaining when persistent trade and finance ‘imbalances’ are healthy and when they are a threat. It wasn’t initially ‘obvious’ why it should be that immigration does not lower native wages; or why minimum wage legislation should not reduce employment. It still is not obvious what the relative contributions of low real interest rates and housing supply are to real house prices. It doesn’t seem ‘obvious’ to others how to find an economic and ethically consistent way to fund social care. It wasn’t ‘obvious’ to me at first pass how and why the argument about the ‘costs’ of nationalisation were fallacious.
Rather than taking pre-emptive aim at economics, critics should read more. However well intended, generalized attacks on a discipline that are not based on familiarity serve the same end as Michael Gove’s comments about having had enough of ‘experts’. If we sound defensive in the face of these attacks, it’s because there is something worth defending: a lot of work society can draw on to improve the way it runs itself.”