By Jonathan B. Wight

John Kay is one of my favorite economists for his clear thinking about complexity. He notes that real businesses rarely hire microeconomists to help, since micro theory is often woefully simplistic, touting the mantra of “profit maximization”—when one often needs to approach this target obliquely.

In this post Kay defends the liberal arts as most likely to help prepare us for our unknown future:

It is a mistake to focus basic education on job-specific skills that a changing world will render redundant in a few years. The objective should be to equip students to enjoy rewarding employment and fulfilling lives in a future environment whose demands we can neither anticipate nor predict. In 20 years, we will probably not be using the Black Scholes model, or referring to the case of Bloggs v Bloggs. But the capacities to think critically, judge numbers, compose prose and observe carefully — the capacities that education can and should develop — will be as useful then as they are today.

And knowing something about ethics will be a key part of thinking critically.

Millionaires Don’t Like Social Security

By Jonathan B. Wight

Seen on a protest poster in Vermont last week:

"Should any political party attempt to abolish social security, unemployment insurance and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes that you can do these things. Among them are a few Texas oil millionaires, and an occasional politician or businessman from other areas. Their number is negligible and they are stupid." 

The Republican who wrote these words was President Dwight D. Eisenhower.

 Anyone who took such a stance today would be declared a non-Republican by the powers that fund the front-runners. The notion that billionaires conspire against social insurance is something Krugman wrote about on Monday.

 Ironically, the only billionaire in the 2016 presidential race (D.T.) has said he supports it.

By Jonathan B. Wight

I did a radio show recently on the Greek debt crisis with Monsignor Kevin Sullivan, Executive Director of Catholic Charities of the Archdiocese of New York.  The radio show is JustLove, broadcast on Sirius XM on July 25, 2015.

 I’m the third guest (minute 38:00), after David R. Cameron, Professor of Political Science and Director of EU Studies at Yale University and one other.  The main points made are that:

 a) Virtually everyone, including the IMF and even Angela Merkel, agree that the current bailout will not be sustainable.  And this means some form of debt relief on the horizon.  Germany, after all, received debt forgiveness in 1952 that cut its foreign debt in half. In today’s dollars, after adjusting for inflation, that amounts to about $32 billion.  And the Europe of 1952 was much poorer and had many fewer people. So on a real per capita, GDP-size adjusted basis, the bailout of Germany was pretty big in today’s money.  Greece will likely need something similar.

 b) Second, as noted here, the Greeks work many longer hours than other Europeans, so their labor productivity problems arise from structural and institutional reasons, having to do with regulations, monopolies, and corruption, not from inherent laziness.

 c)  Finally, the U.S., for all its overhanging debt, does not face Greece’s refinancing problem. We have our own currency and it floats, rather than being pegged to gold. We have Milton Friedman to thank for the nudge toward a saner monetary policy in terms of a market-driven exchange rate, and it never ceases to amaze me how otherwise reasonable, well-educated people claim to want to tie our hands by bringing back the gold standard.  That same kind of wanderlust led the Greeks to link their fates to the Euro, and the outcome has not been pretty.

 To listen, click here: “The Greek Debt Crisis” (minute 38). 

By Jonathan B. Wight

The Republican debate last night was illuminating. Here are some musings about the economics and politics.

 1. Donald Trump is a blowhard and a buffoon, but Chris Wallace, the interviewer who repetitively harassed him about his four business bankruptcies, deserves ridicule for asking a truly inane question. Trump did not handle it well, repeating over and over that in bankruptcy he was simply availing himself of the legal options of a businessman in trouble.  His answer missed the point. Here is how Trump should have answered:

TRUMP: “A market system supports innovation through risk taking. Entrepreneurs discover through trial and error how to push the boundaries of what is possible. This endeavor entails a lot of failure, and it is a testament to the spirit of entrepreneurs that they pick themselves up and go at it again and again. In my career I have been involved with hundreds of successful business deals. Out of these, four have gone south. This is a remarkable run of success. If you took a test with 100 questions and got 96 correct, most people would say that is excellent work. To focus your question on my failures alone – as if failure is an anomaly – displays a remarkable ignorance about the workings of a vigorous market system. It intimates that central planning is somehow superior because

By Jonathan B. Wight

Mathematics in economics is supposed to clarify and crystalize arguments, so that scientists can better understand and decide which models lie closer to the truth. But in the real world, economists with agendas may use math to stray into the unethical territory of deliberate obfuscation to achieve political ends.

We’ve known for a long time that economists decide truth from falsehood based on an intuitive “aha” that the model works and not based on Friedman’s ideal of accurate prediction. For elaboration, see the work of McCloskey, Coase and others, cited here.   

Coase, for example, argues that, “Economists, or at any rate enough of them, do not wait to discover whether a theory’s predictions are accurate before making up their minds. Given that this is so, what part does testing a theory’s predictions play in economics? First of all, it very often plays either no part or a very minor part.”  Rather, there is a competitive market in which economists “sell their wares” using rhetorical skills.

Paul Romer’s recent paper in the American Economic Review accuses some of his colleagues of unethical obfuscation in mathematics to win the rhetorical war of words.  The issue revolves around whether monopolistic competition or perfect competition is a better platform for understanding innovation when ideas are in the public domain but also partly privatized. 

Romer’s complaint is that some growth theorists are making untenable claims for the price system, backing them up with mathematics that do not bear out those assertions. Politics is intruding into what should be scientific arguments:

“The style that I am calling mathiness lets academic politics masquerade as science. Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in natural versus formal language and between statements with theoretical as opposed to empirical content.”

“McGrattan and Prescott (2010) is one of several papers by traditionalists that use mathiness to campaign for price-taking models of growth. The natural inference is that their use of mathiness signals a shift from science to academic politics, presumably because they were losing the scientific debate. If so, the paralysis and polarization in the theory of growth is not sign of a problem with science. It is the expected out-come in politics.”

Romer also claims that a 2009 working paper by Nobel Prize winner Robert Lucas contained a math error that changes the conclusion of his paper. Nevertheless, Lucas went ahead and published it in the Journal of Political Economy without correction or notation. Romer’s conclusion is that, “Neither colleagues who read working papers, nor reviewers, nor journal editors, are paying attention to the math.”  By implication, they are only interested in the pre-determined conclusions, regardless of the science. Ideology rules the roost.

Krugman makes the same complaint about freshwater macroeconomics, in which the rational expectations model makes predictions that are in sharp contrast with the known facts about the world. Nevertheless, freshwater macro continues to flourish within its own in-group of people reading each other’s papers and ignoring the anomalies. (This is probably true of every group that overlooks the flaws of its own tribe in an US against THEM mentality.)

Romer’s claim that the misuse of mathematics may be happening broadly in the discipline is not particularly a shock to those who do social economics; but it is a shock to see this in the AER proceedings.

By Jonathan B. Wight

We know that social scientists (including historians) have points of view that limit what they can see, and ideologies sometimes lead the way in reformulating what is written.

For example, Bishop Shelby Spong of the Episcopal church has long maintained that the gospel writers of the New Testament after apostle Paul began to invent or elaborate Jesus’ background and actions so as to better fit the predictions of the Old Testament and bolster support in the early church.

Yucel Yanikdag, a colleague and professor of history at the University of Richmond, demonstrates how an ideological mindset is changing how Turks today view the historic Battle of Gallipoli, celebrating its 100^th anniversary this year. The implications are wide ranging.

Gallipoli is a spit of land on the northern side of the Dardanelles, a narrow strait separating Europe from Asia (today part of Turkey).  The strategic importance of the strait allowed the Ottomans to control the flow of ships into the Sea of Marmara, and beyond that, to Istanbul and the Black Sea.

During WWI, the Russians were allied with Britain and France, but the Russian fleet was bottled up.  The British and the French attacked Gallipoli first by sea and then by land over several months in 1915. They eventually withdrew in defeat with horrendous casualties on both sides.

The end of WWI led to the collapse of the Ottoman Empire and its lands doled out to the Allied victors.  Mustafa Kemal had been an officer in the Ottoman Army, and pushed for nationhood