December 31, 2014

Understanding? What understanding?

Comment on  'Seven years after: why this recovery is still a turkey'


You say: “Our economic problems are manageable, but they require some serious thought. Unfortunately economic policymaking continues to be dominated by people who were unable to see an $8 trillion housing bubble. There is no reason to believe that these people have a better understanding of the economy today than they did seven years ago.”

This, obviously, is a psychological/political/sociological argument. Understanding, in this context, does not mean scientific understanding. And what you imply is that your understanding is in some unspecified sense better.

Now, there is political economics and theoretical economics. Theoretical economics aims at an understanding about how the market economy works. As you rightly point out this requires 'some serious thought.'

What you say is: (i) I have seriously thought about the unemployment problem, (ii) I have figured out the solution, and (iii) these guys in Washington have no clue.

The pivotal conclusion of your analysis is: “This means that we have to find another source of demand if we want to get back to full employment.”

No problem with this. Your proposal is commonsensical, it is what Keynes said, and it has been said before Keynes.

What has to be rejected is that your proposal is based on a better understanding of how the market economy works. As far as I can see, it has no explicit theoretical foundation.

In my view, this blog is about economics. More precisely: about improving economic theory and not about telling the guys in Washington how to improve their economic policy.

Almost everyone agrees that orthodox economic theory is a failure. Heterodoxy has been quite outspoken about this fact. What does not follow from this overall agreement is that heterodox economics is better according to scientific standards.

So, I can agree with your proposal but not that it is based on an advanced understanding of how the economy works (for the correct employment equation see here).

Let us agree on this: not only our political problems but also our unsolved theoretical problems require 'some serious thought.' The latter should be a manageable task for every economist. How to get incompetent people out of Washington or out of theoretical economics is not a problem this blog can solve.

All in all: There is no reason to believe that these people [economists] have a better understanding of the economy today than they did [seven] seventy years ago.

Egmont Kakarot-Handtke