Wednesday, 10 June 2009
Maybe this should be titled part 3, but I combined the first two out of three lectures into part 1.
Although billed as a plan to reform finance and redesign the teaching of economics, most of tonight's lecture was an entertaining survey of the last 70 years of economics, and a story about how we got into the "dark age" Krugman says we're in. A few mild digs at freshwater economists, but mainly an explanation of the differences between the two schools and a rubbishing of the idea that the "civil war" is over - in fact, he says, the difference between freshwater and saltwater economists is that saltwater economists know the difference between freshwater and saltwater economists. But he believes the current recession is definitive proof that the real business cycle model is wrong.
There wasn't much specific on finance: increased capital requirements, more transparency (though with the wry comment that everyone wants more of that and nobody knows what it means), and a much reduced amount of financial activity. Which incidentally would have more serious consequences for the UK than the US economy.
At the end he touched on what the future should hold for the economics profession.
His first recommendation is that Keynesian models need to be studied. The teaching of Keynes should be revived, if nothing else so that people can stop believing in Say's Law. And Minsky, after whom tonight's lecture was titled, has some insights too - though with some utter tosh mixed in.
Another suggestion was to do less rigorous model-building (though I guess illustrative toy models are still OK) and more examination of empirical data. He praised Reinhardt and Rogoff's work in analysing business cycles and crises by looking for common patterns in neutral historical data, rather than by building models and trying to find data that fits them.
And he discussed behavioural economics. Can it provide ways of predicting and responding to recessions? Not yet, Krugman feels. It's still a bit too focused on explaining anomalies, and it isn't ready to be used as the basis of macroeconomics.
Here's where I am right on the line between agreement and dissent. What he says is exactly true of most past behavioural research. But the "not yet" that he identifies is not a problem with the field: it's precisely the next step that behavioural theory needs to take.
Now, I would say that, wouldn't I. My own research programme is about finding a model of decision-making which both predicts real choices better than the rational preference model, and is tractable to scaling up. First into an intermediate level of aggregation, the equivalent of demand and supply curves, and then up to macro conclusions. So I have an interest in this being the next big step for the economics world. But it's clear that this work has a long way to go.
So Krugman's "not yet" is literally true - because that model doesn't exist yet - but I do think it will be an important field for economics in the next ten years, whether I or others manage successfully to produce such models. In the meantime, I'm broadly sympathetic to Krugman's thesis, and as a scientist, certainly support empirical work as the basis for developing theoretical models.
A couple of non-technical points.
He is clearly an absolute superstar among economics students (and faculty for that matter). On all three nights there were queues of at least a hundred to get books signed, ask questions and generally hang around near the great man. I should have got a picture of the crowd of 20 people desperately holding the elevator doors open for last-minute autographs, photos and handshakes while he attempted to leave. He was pretty gracious about it and left it to the LSE staff to bundle everyone out and let the doors close.
And the other clear message is the power of good communication, even in a technical field. Like Richard Feynman in physics or Richard Dawkins in biology - or indeed, as Krugman pointed out, Keynes in economics - Krugman will undoubtedly create thousands of followers of his ideas and programme within the economics profession, because he's a great communicator in all the media he works in. Not that his ideas aren't good anyway. But there are undoubtedly many theorists producing equally insightful work who will continue to labour in obscurity, whose ideas may not have the same opportunity to shape the world, and who certainly won't be getting any Nobel prizes, just because they don't step up and train themselves to put ideas across in the way Paul Krugman can. Just like there are no great companies without great marketing, communication is not an optional extra.