An article in the New York Times yesterday reminded me of a related essay that I found fascinating last September in America magazine. In that essay, I was shocked or slightly amazed to have a professor of economics confess that economics's claim to be a science (there is a Nobel Prize given out for it) might be more bluff than reality nowadays, and that his description of economics today sounded more like ancient number magic or numerology than a discipline that had anything to do with the actual economy. That essay can be found in a May entry in my journal. This new article from the Times talks of a pair of senior economists doing historical work on earlier crises in economics, and noting the same love in contemporary economics for theoretical constructs that have nothing to do with the actual economy. As the economist in the earlier essay more-or-less dared to ask, "If economics is really a science, why didn't it foresee our own impending crisis?"
They Did Their Homework (800 Years of It)
By CATHERINE RAMPELL for The New York Times
Published: July 2, 2010
THE advertisement warns of speculative financial bubbles. It mocks a group of gullible Frenchmen seduced into a silly, 18th-century investment scheme, noting that the modern shareholder, armed with superior information, can avoid the pitfalls of the past. “How different the position of the investor today!” the ad enthuses.
It ran in The Saturday Evening Post on Sept. 14, 1929. A month later, the stock market crashed.
“Everyone wants to think they’re smarter than the poor souls in developing countries, and smarter than their predecessors,” says Carmen M. Reinhart, an economist at the University of Maryland. “They’re wrong. And we can prove it.”
Like a pair of financial sleuths, Ms. Reinhart and her collaborator from Harvard, Kenneth S. Rogoff, have spent years investigating wreckage scattered across documents from nearly a millennium of economic crises and collapses. They have wandered the basements of rare-book libraries, riffled through monks’ yellowed journals and begged central banks worldwide for centuries-old debt records. And they have manually entered their findings, digit by digit, into one of the biggest spreadsheets you’ve ever seen.
Their handiwork is contained in their recent best seller, “This Time Is Different,” a quantitative reconstruction of hundreds of historical episodes in which perfectly smart people made perfectly disastrous decisions. It is a panoramic opus, both geographically and temporally, covering crises from 66 countries over the last 800 years.
The book, and Ms. Reinhart’s and Mr. Rogoff’s own professional journeys as economists, zero in on some of the broader shortcomings of their trade — thrown into harsh relief by economists’ widespread failure to anticipate or address the financial crisis that began in 2007.
“The mainstream of academic research in macroeconomics puts theoretical coherence and elegance first, and investigating the data second,” says Mr. Rogoff. For that reason, he says, much of the profession’s celebrated work “was not terribly useful in either predicting the financial crisis, or in assessing how it would it play out once it happened.”
“People almost pride themselves on not paying attention to current events,” he says.
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