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Source link: http://archive.mises.org/9022/paul-krugman-im-a-fourth-rate-mathematician/

Paul Krugman: “I’m A Fourth Rate Mathematician”

November 26, 2008 by

Paul Krugman received his Nobel Prize for putting into mathematical form insights which older economists say already exited in economics in non-mathematized presentations.  I’m not a historian of geographical economics, so I can’t evaluate the claims of these older economists.  But I am a student of status games in the profession of economics, and no status game is more important to the economists than the status game of mathematics.  All accounts of the profession agree that economists are obsessed by the “who is smartest” game, a game that is mostly adjudicated by the game of who is best and brightest at cranking out the latest and most difficult mathematics.  In other words, the “math jocks” and “rocket scientsts” are routinely judged the “smartest guys in the faculty room” or among the graduate students on the job market.

But the dirty little secret of economics is that the “rocket scientists” of the economics profession are comparative math dullards next to the mathematicians and physical scientists in the hard sciences.  Paul Krugman recently confirmed this assessment in his own case on his blog:

This caught my eye: Kyoshi Ito, a mathematician, has died. Ito studied random motion, and his work has played a key role in finance theory — and even in some of my own work. I’m not much of a mathematician, tending to pick up no more technique than I need — Avinash Dixit liked to make fun of the way I’d write down the basic Wiener process, then say “whatever that means” — but this was really useful stuff.

In large measure, economists and their profession itself depend for their status on their perceived skill at aping the technical skills of the empirical sciences, most particularly the skill of doing mathematics.  But the public needs to know that this skill level is as tinker toy building next to the construction of a rocket ship.  And while rocket ships make it to the moon, economist are more apt to produce mathematical constructions serving as justification for policies capable of leading to massive financial crises –meet Ben Bernanke, smartest man in the room.

{ 45 comments }

Ryan November 26, 2008 at 1:44 pm

I always thought the “basic Wiener process” was a euphemism for Krugman’s fallacious logic.

lukas November 26, 2008 at 1:50 pm

Fellatious logic?

Dennis November 26, 2008 at 1:58 pm

I would add that in uncritically adopting the mathematical methods successfully utilized in the physical sciences, economists are utilizing a methodology that is inappropriate and sterile for the theoretical study of economic phenomena. As many Austrian School economists have shown, the use of mathematical and statistical analysis in theoretical economics is a dead-end due to the lack of constants in the economic world and the distinction between class and case probability.

Justin November 26, 2008 at 1:58 pm

LOL! Thanks lukas, I needed a good laugh.

Michael November 26, 2008 at 2:03 pm

I love Krugman’s confession. I wonder if that’s going to haunt him for awhile.

Lukas, that’s a good one! I guess we ought to tread carefully considering they’re might be children lurking on Mises.org.

Brian November 26, 2008 at 2:48 pm

I went to the linke New Yorker article –
“he [Bernake] faithfully upheld the policies of his immediate predecessor, the charismatic free-market conservative Alan Greenspan, and he adhered to the central bank’s formal mandates: controlling inflation and maintaining employment.”

I’ve just lost my lunch

Jim November 26, 2008 at 2:50 pm

The November issue of Scientific American has an editorial about the bankruptcy (literally) of quantitative modeling in finance, though they draw the wrong conclusion. (HT2 Robert Wenzel).

Ned Netterville November 26, 2008 at 3:54 pm

Urging Obama to stimulate even harder than FDR, Krugman wrote this in his Nov. 10th op-ed entitled “Franklin Delano Obama” ( http://www.nytimes.com/2008/11/10/opinion/10krugman.html?_r=1):

“What saved the economy, and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.”

The fact that Mr. Krugman believes that war is a fiscal stimulus and good for the economy speaks volumes about the man’s economics and his morality.

fundamentalist November 26, 2008 at 3:57 pm

I think focusing the criticism on math is misplaced. Math is just another language in which we express ourselves. As Mises said, putting economics into math doesn’t add anything to our understanding of economics because it’s just a translation of the English into math symbols. Nothing mysterious going on. I would add that if the English is faithfully translated into math symbols, then the math models will be accurate models. The problem with modern economics is not the math, but the theory it translates into math. Several people have translated parts of Austrian theory into math models and they work very well.

As for the game to be the smartest guy in the room, Hayek wrote in “Fatal Conceit” that intelligence is highly overrated. Most really smart people, of whom Bernanke is obviously one of the smartes, are socialists. What many smart people lack is wisdom. People of average intelligence can have wisdom and make better decisions than smart people who lack it. Of course, when you add wisdom to very high intelligence, you get people like Mises and Hayek.

Brian Gladish November 26, 2008 at 5:00 pm

If WWII got us out of the depression, how come the War on Iraq didn’t keep us out of one. Maybe it’s just too little, too late (or run by incompetent Republicans)?

William H Stoddard November 26, 2008 at 5:12 pm

On this subject, I quite enjoyed Mirowski’s book “More Heat than Light,” a wittily titled history of the 19th century origins of mathematical economics—and of the ways the pioneers got the math and physics wrong in the process.

Stanley Pinchak November 26, 2008 at 6:04 pm

I’m not much of a mathematician

Apparently, you are not much of an economist either!

Bruce Koerber November 26, 2008 at 6:19 pm

Ben Bernanke never understood the economy even though he worked his way up the academic ladder.

A thousand hours of work on meaningless fancies has no value to anyone.

The fact that this kind of work brings with it the possibility of being selected as the Fed Chairman is not much different than ‘earning’ the distinction (like another economic charlatan – Paul Krugman) of winning the Nobel Prize for Wackonomics.

Can there be any more glaring evidence that we are in the dark ages of economic science?

It is not that the knowledge does not exist, of course, but that the corruption is so severe because of the intermingling of politics with economics that the age of ignorance overshadows most of mankind.

Let’s not confuse the meaning of intelligence. Bernanke is not intelligent since that implies a higher understanding which is not even a possibility in the darkness of his idle fancies and vain imaginings.

newson November 26, 2008 at 7:03 pm

i think that the mathematization of economics deliberately serves to distance the general public (and commonsense) from the debate. i think this has two positive effects for the profession. it restricts scrutiny of policy to the small minority who speak the language. and it is a pretext for economists demanding extremely good salaries. (nonsense, if unintelligible, seems well tolerated by joe six-pack. nonsense, expressed in simple terms, is promptly returned to sender).

Greg Ransom November 26, 2008 at 8:12 pm

“I think focusing the criticism on math is misplaced. Math is just another language in which we express ourselves.”

Note well that I am _not_ focusing criticism on mathematics, I’m focusing criticism on economists with a 4th rate mathematical ability and a 5th rate understanding of economics — as well as upon an economics profession that has used marginal facility with mathematical constructs as a substitute criterion for _scientific_ understanding and achievement. I can quote you page after page of leading post-war economists who have done this.

N. Joseph Potts November 26, 2008 at 9:59 pm

The capacity of mathematics to conduct meaningful analysis in economics was exhausted LONG ago. What it conducts at this point is largely charlatanry and bamboozlement (in economics and the political selling thereof). The improvement of mathematical ability of economists would likewise for the most part enhance their abilities as charlatans and bamboozlers.
It could not materially advance their abilities as economists.

William Rader November 26, 2008 at 10:09 pm

I just completed Mises’ Profit and Loss, a short paper written in 1951, in which Mises states, “…one of the main shortcomings of the mathematical economists is that they deal with this evenly rotating economy…as if it were something really existing. Prepossessed by the fallacy that economics is to be treated with mathematical methods, they concentrate their efforts upon the analysis of static states which…allow a description of simultaneous differential equations. But this mathematical treatment virtually avoids any reference to the real problems of economics. It indulges in quite useless mathematical play without adding anything to the comprehension of the problems of human acting and producing…It confuses a merely ancillary tool of thinking with reality.”

Ludwig von Mises, Profit and Loss, Ludwig von Mises Institute, Auburn, Georgia, 2008, p. 36.

Wiliam Rader November 26, 2008 at 10:14 pm

Sorry, the page cited should be p. 52, not p. 36.

Rad November 26, 2008 at 11:40 pm

I agree fully with this post. Greenspan and Bernanke are alike in that they followed computer models too closely. Economics is not only a hard science but it is also a social science. There is the math side involved but also the pyscological aspect that help us understand human behavior patterns. It is important to have a good understanding of math in general for life, but most of our big problems like federal spending and personal spending are simple arithmetic problems. Just the numbers are larger. Complex mathematic solutions lead to complex issues like we are facing today. All of these creative accounting methods used to make companies seem richer than they are. Most of these large companies hire master physicists to come up with unique payroll methodsto do such things. Basic economic principles do not need these complex math equations to understand.

Daniel M. Ryan November 27, 2008 at 6:30 am

When it comes down to it, “mainstream” economics is a guild. Working in as much mathematics as possible, regardless of appropriateness for studying human beings, is a mark of status in the guild. Like all guilds, there is a mutuality of self-interest that seeks to elbow out technique that’s accessible to the general public; doing so reinforces prestige needs.

And finally, like all guilds, they are reaching the unintended-consequent goal of social isolation from the mainstream in the general public. They need the State because government officials don’t mind humoring those who push the general public into taking various coercions and liking them.

It’s sad, in a way, but it’s what we got. This ain’t like the nineteenth century, after all.

Current November 27, 2008 at 7:02 am

I think it’s important not to discount the role that maths can play. Surely what can be stated in mathematical terms can be put in english, but it is often more complex in that form.

There is some very good use of maths in Joe Salerno’s paper on the theory of money prices.
http://mises.org/journals/qjae/pdf/qjae9_4_5.pdf

C (The Forgotten Man) November 27, 2008 at 3:51 pm

Fellatious Logic?

That’s perfect, describing the man who will bring us the NuNu Deal!

C (The Forgotten Man) November 27, 2008 at 4:24 pm

Jim

Scientific American has lost all credibility as a source of honest science since Rennie took over as editor. It is now more politically correct than scientifically correct.

It is a shame. I grew up reading it, and loved it for decades. But over the past dozen years or so it often makes me sad to see what it has become.

They blame software for the market crash, rather than examine the truth about the Fed and Congress.

It is now nothing more than a political rag sheet, trying to tell us how to be socially responsible, masquerading as science reporting. New Scientist is not much better. I place more faith in Popular Mechanics and Popular Science to try to be somewhat neutral in reporting, despite the dumbing down.

Maturin November 27, 2008 at 5:13 pm

“Meet Ben Bernanke…”

That New Yorker article is full of the typical mainstream hogwash: “…he faithfully upheld the policies of his immediate predecessor, the charismatic free-market conservative Alan Greenspan, and he adhered to the central bank’s formal mandates: controlling inflation and maintaining employment…. growing financial crisis has forced Bernanke to intervene on Wall Street in ways never before contemplated by the Fed…. Paulson agreed. A bailout ran counter to the Bush Administration’s free-market principles and to his own belief that reckless behavior should not be rewarded….[emphasis mine]…..” and on and on, including praise from Krugman.

Kurmudjin November 27, 2008 at 5:21 pm

Bob Murphy had some thoughtful comments on this issue of mathematics versus praxeological approaches in “Mises’s Non-Trivial Insight”.

K Ackermann November 28, 2008 at 1:42 am

So what is an acceptable level of mathematics for an economist?

Please tell me it is a solid understanding of calculus and linear algebra since dynamic systems are what they are dealing with.

Failure in this area can result in things like risk being misplaced.

That’s bad.

Jean ArMalvinez November 28, 2008 at 6:39 am

To Fundamentalist: Maths are a useful tool to schematize the expression of a process. it is in no way a form of doing economics. All the math-based economic models are useless per se as proved by the so many crisis. Economics are beyond strict rationality. Decision making processes are also emotional. Economics are more a cognitive, imperfect science aided by mathematical tools among other than a real, purely objective science.

marxbites November 28, 2008 at 9:07 am

“The fact that Mr. Krugman believes that war is a fiscal stimulus and good for the economy speaks volumes about the man’s economics and his morality.”

100% correct – he has none, the beady eyed little shill for the NWO/CFR cabal.

Wars ARE great – just as plagues are – for undertakers.

Where are the public debates between Austrians and statist shills like despicable Herr Krugman?

I want to see the Krugmans of the world rightly intellectually bloodied!

marxbites November 28, 2008 at 9:08 am

“The fact that Mr. Krugman believes that war is a fiscal stimulus and good for the economy speaks volumes about the man’s economics and his morality.”

100% correct – he has none, the beady eyed little shill for the NWO/CFR cabal.

Wars ARE great – just as plagues are – for undertakers.

Where are the public debates between Austrians and statist shills like despicable Herr Krugman?

I want to see the Krugmans of the world rightly intellectually bloodied!

fundamentalist November 28, 2008 at 10:04 am

Jean: “Maths are a useful tool to schematize the expression of a process. it is in no way a form of doing economics.”

I agree completely. All I’m saying is that math is a language, like English and Arabic. Translating economic ideas into math language is harmless if the ideas in English are correct. The problem with mainstream math models is that their economics in English is wrong, not their math. Austrian economics translated into math would not advance our understanding of economics at all, but it might allow for a little better forecasting.

K Ackermann November 28, 2008 at 9:18 pm

Maybe there is some confusion about math as a skill vs. math as the answer.

Humans succumb to statistics quite well, and I imagine it is an economist whom I would ask as to the change in unemployment if X policy is carried out.

Walt D. November 28, 2008 at 9:39 pm

Too bad he’s a 10th rate economist to boot.

Peter van Haaren November 29, 2008 at 2:15 am

Note however that Krugman is not saying that real finance specialists are fourth-rate mathematicians…
I guess some of them must be really good at math…
But I very much liked the quote from Krugman…
Well done…

Geoffrey Transom November 29, 2008 at 5:02 am

I think all this silly dismissiveness regarding the usefulness of mathematics (at whatever level) is misplaced.

As someone who was ‘raised’ in an economic modelling workshop, there are a couple of things that I took away with me:

(1) modellers do not assume that the model ‘is’ the economy – simply that the model will help retain theoretical consistency.

If you are forced to ‘codify’ your theoretical pronouncements (by writing them down in a model) then you can’t change your mind halfway through your analysis. THAT is the discipline that is insisted on within the modelling paradigm, and is sadly lacking among the ‘hand-wavers’ and ‘essay writers’, who are free to change their tune halfway through an explanation (i.e., to write sentences that are contradictory).

(2) No decent economic modeller assumes that the childish math toys (like the OLG macro models taught from the ‘core’ macro texts) are sensible. We do not assume that preferences are constant, for example; we assume that they may evolve, or that they can be subject to exogenous shifts. We also do not assume that ‘output’ is one amorphous blob of goo… we model different industries with different input profiles and different labour types and so on.

At bottom, the core things that a good economic modeller will insist on are actually quite ‘Misesian”: long-run money neutrality; G crowds out I (i.e., a permanent increase in G/GDP will reduce GDP); T/GDP cannot violate a long term intertemporal constraint; L in the government sector is less productive than the private sector… and so on.

But the CORE is very basic: agents optimise (given their preferences, and their information set), relative prices matter, and everything happens subject to technological constraints.

And no hand-waving (until it’s time to explain the results).

Cheerio

GT
http://marketrant.blogspot.com

PS Krugman, Bernanke (and above all) Greenspan are NOT modellers. They are NOT even quants. They are essay-writers who used the occasional bit of basic ‘technique’ in order to get their work in the AER. (I doubt the Greenspan’s output ever reached those hallowed pages, since he was so incompetent that his consulting company went bust)

newson November 29, 2008 at 5:03 am

kay ackerman: “Please tell me it is a solid understanding of calculus and linear algebra since dynamic systems are what they are dealing with.
Failure in this area can result in things like risk being misplaced.”

much of modern finance is built on probability distributions that only approximate real life. check out taleb’s “black swans”, and “fat tails”. recent market moves have exceeded model predictions by orders of magnitude. the models fail fairly rarely, but when it occurs, the failure is breathtakingly bad. ltcm shows the limits of financial modelling of risk.

dynamic hedging relies on constant ability to enter/exit the market, and assumes prices tend to move continuously, not gap. anyway, future volatility is just guesswork.

understanding models’ premises is important only to recognize flaws. the black-box approach in finance always ends up at the receivers, given enough time.

Geoffrey Transom November 29, 2008 at 5:16 am

All this talk of Taleb and black swans indicates to me that people are conflating economic modelling with financial modelling.

Some of the applied finance stuff (as I used to call it: “Garchy-Starchy-Flarchy-Mariachi”) is glorified curve-fitting, using what my Mentor (Dicko) called ‘an electronic ruler’.

As Dicko once quipped: reduced form modelling only breaks down when you try and forecast the FUTURE.

The conditionally-heteroscedastic stuff makes no effort to try and explain WHY volatility might change… just that it DID in-sample.

So if by modelling you mean “sticky-taping a GARCH error onto a linear regression”, then we agree. But THAT stuff is not economic modelling – there is no structure, no underlying optimisation or objective functionals… it’s just curve-fitting (usually with ‘t’ – for time – as the only independent variable).

And the other thing is the ‘FAH’ problem (“F#ckwit At Helm”); if the model designer has no training in economics, they will include variables with no economic justification… but if they have no decent training in econometrics, they will combine variables of different orders of integration.

So you need both: you can’t be a physics-maths kind of guy, and you can’t be an essay-writer. Dare I say it, you have to be good at both (as Dicko says, there is about 6 weeks of actual theory in economics – the rest is embroidery).

Cheerio again

GT
http://marketrant.blogspot.com

newson November 29, 2008 at 5:49 am

to geoffrey transom:
yep, my comments are on financial modeling, as that seemed to what k. ackerman was talking about.

fundamentalist November 29, 2008 at 9:47 am

Geoffrey: “If you are forced to ‘codify’ your theoretical pronouncements (by writing them down in a model) then you can’t change your mind halfway through your analysis. THAT is the discipline that is insisted on within the modelling paradigm, and is sadly lacking among the ‘hand-wavers’ and ‘essay writers’, who are free to change their tune halfway through an explanation (i.e., to write sentences that are contradictory).”

I don’t think you’ll find that trait among Austrian economists, most of whom avoid math. I have read a lot of accusations of contradictions in Hayek and Mises, but on further investigation it appears more likely that the accuser misunderstood what the author was trying to say.

Geoffrey: “At bottom, the core things that a good economic modeller will insist on are actually quite ‘Misesian”: long-run money neutrality;”

I’m not sure what you meant by “long-run money neutrality” but I’m pretty sure that Mises didn’t accept that money is neutral even in the long run. He wrote that monetary manipulation was self reversing, but he meant by it that credit expansion would act as a stimulus during the boom and a retardant during the bust. He also wrote that the reversal didn’t leave the economy in the same position as before, but reallocated wealth to different individuals and destroyed a great deal of wealth. As we have seen, a long series of booms/busts will weaken the manufacturing sector and benefit the financial sector.

Besides money neutrality, what have modellers done with heterogenous capital structure that is the heart of Austrian economics? I realize that you model separate industries, but does that type of modelling get incorporated into macro models, or do you still use capital as a homogenous variable?

If you could incorporate the effects of changing money on the relative prices of capital goods versus consumer goods, and the effects on employment in those sectors you could have a fairly good macro model.

fundamentalist November 29, 2008 at 9:57 am

Geoffrey: Some of the applied finance stuff (as I used to call it: “Garchy-Starchy-Flarchy-Mariachi”) is glorified curve-fitting, using what my Mentor (Dicko) called ‘an electronic ruler’.”

Actually, I think there is some economic theory behind the time-series analyses that you describe. Garch might be lumped together with EWMA and ARIMA which try to find patterns in financial data. The theory is related to the efficient market theory. The modellers believe that all of the relevant information already exists in the prices, so there is nothing to add. In a lot of situations they forecast better than econometrics techniques. That could be because the data simply doesn’t exist to make a good econometrics model. I have used them all and find very few techniques that are great forecasters in every situation. I have even tried neural networks, and hybrids like boosted trees. The future is very hard to predict.

Geoffrey Transom November 29, 2008 at 6:39 pm

Hi there fundamentalist,

When I had a moan about ‘essay writers’ I was certainly not referring to Mises/Hayek or Austrian schools – if only because their theory appeals to my prejudices (I like Rothbard, Mencken and Nock).

If you read Marx or Keynes (and to a lesser extent, Rand and Friedman) you’ll get a flavour for the types of ‘economist’ that I was blathering about. I particularly despise Friedman, in fact – like Greenspan he enjoyed proximity to political power and so spent the last half of his career shilling for the Fed (did he EVER advocate its complete abandonment? That’s the test).

By ‘money neutrality’ in models, we mean that a doubling of the money supply will have no long-run real effects; in the short run there will be some ‘fooling’ and people might behave as if their wealth has increased, and investment decisions are skewed… but eventually those decisions are shown to be erroneous, there is divestment (and overshooting, usually) in those sectors, and the long-run expansion path of the economy is unchanged; relative prices depend on factor productivity, and that hasn’t changed: real growth rates depend on technology and fertility.

As to capital, the good multi-industry models have both sector specific capital (where capital is not infinitely-mobile between industries), and ‘putty-clay’ capital (where new capital may be technologically superior to the existing stock… thus investment in new capital may raise output per worker even at the same K/L ratio).

In the model that we used at CoPS (the Centre of Policy Studies), capital was not sector-mobile, and nor was labour. That makes sense to me – some labour is only weakly-substitutable: you couldn’t reconfigure GM’s plants to make computer chips.

When you get weakly-substitutable, differently-productive capital, it takes a real effort to ensure money neutrality. That’s why often they plump for one amorphous glob of K in the ‘smarty-pants PDE’ macro models. (Although almost always, government capital is modelled as less productive than private).

As to the STARCH crowd, they have precisely the shortcoming I mentioned – all the maths in the world won’t help if the assumption underlying it is stupid.

The idea that securities prices reflect all available information is what I would refer to as the ‘Taliban Version’ of the Rational Expectations Hypothesis. True Believers Only, with no regard for the distribution of expectations and information sets.

In fact, the weaker the form of the REH that is used, the better I like it. Otherwise, it would be impossible to explain why the first move after a new piece of information is almost almost always in the wrong direction (watch intraday market moves immediately after a Fed cut or an inflation number… invariably there is a counter-intuitive first move in both bonds and the stock indices, which is then reversed – that is not consistent with the REH).

I would make the case that all month-old information is embedded in prices, but from observation I believe that financial markets do not behave as if they are forward looking. (What was the Nasdaq forecasting when it was 5500? It presented any decent analyst with a profit opportunity – the opportunity to bet against the combined expectations of allegedly-forward-looking US stock investors).

I have done loads of stuff on expectations, and although the boys in nice suits hate to think of themselves as backward-looking, it is always ADAPTIVE expectations-formation mechanisms that have higher explanatory power.

For me, fat tails (and more to the point, SKEWNESS) are an absolute given – but they proceed FROM THE THEORY. In theory, you can’t lose or gain ‘infinity percent’ (no returns, pass it on); at the very least prices are bounded from below by zero. Thus the distribution of returns is – a fortiori – truncated. Thus the tails are – again, a fortiori – fatter than ‘normal’ tails.

Again we get back to the idea that something that had appealing math tractability (Black Scholes with normally-distributed returns) was taken as gospel by the very next generation of undergrads… with no regard for its nonsense (continuous markets? Nope. try selling an off-the-run bond on a weekend. Guaranteed liquidity? Nope. Try buying a CDS over debt issued by Fannie Mae).

Cheerio

GT
http://marketrant.blogspot.com

Geoffrey Transom November 29, 2008 at 9:34 pm

I should make a correction – truncating a symmetric distribution does not ‘a fortiori’ increase the area under the tails; that was sloppy writing of the sort that permeates the interwebs.

Once the distribution is asymmetric, and the skewness becomes significant (e.g., most income distributions) any discussion of tails is highly problematic.

Lastly – I don’t dismiss ANY analytical technique; I recall feeling ever-so-superior as a grad student, belittling the people who used wiggly lines to trade securities.

Fast forward 15 years, and my last big market-wide call (short everything, hedge all portfolios – with the Dow above 12000) was made based on a thing called a ‘CCI divergence’.

The Dow was ‘overbought and divergent’. I used to think that such a thing was utter hooblah-hoo, but coupled with proper economic analysis (to try and divine the long-term “attractor”) it helps refine entries.

Like everything in the world, it works right up until the time it doesn’t – until the data-generating process changes.

So I am slightly heterodox… an anarcho-libertarian free-market analyst who is also a ‘chartist’. (And an atheist Freemason, since we’re here).

Cheerio

GT
http://marketrant.blogspot.com

P.M.Lawrence November 30, 2008 at 1:06 am

GT wrote “By ‘money neutrality’ in models, we mean that a doubling of the money supply will have no long-run real effects; in the short run there will be some ‘fooling’ and people might behave as if their wealth has increased, and investment decisions are skewed… but eventually those decisions are shown to be erroneous, there is divestment (and overshooting, usually) in those sectors, and the long-run expansion path of the economy is unchanged; relative prices depend on factor productivity, and that hasn’t changed: real growth rates depend on technology and fertility”.

Well… sort of, of course. But after I first heard this I went and looked at historical cases. First the French ripped themselves off (twice in the 18th century – with different Frenchmen as gainers and losers), then they adapted it as a trick for ripping off occupied areas in the Wars of Revolution (the French gained current resources at local expense, with local compradores acquiring longer term resources like land etc. in the process), and finally the French and Dutch applied the trick in colonial North Africa and the East Indies respectively, using a partly token, partly backed coinage set at favourable rates of exchange to acquire and develop local resources, along with local taxes. That gave a one off wealth transfer but the depreciation was self limited; there were real investments too; and local compradores shared the gains with the colonial power (depreciated coinage had been used by princes to acquire land during the Thirty Years War, too).

So, other things were going on as well, investment was made as well as wealth transfer, and the wealth transfer to colonialists simply doesn’t show up in simplistic models (the who/whom question).

Oh, and of course, the Nazis used a similar fiddle to extract resources from places they occupied – just as the Americans tried to, when they liberated France, only De Gaulle repudiated their funny money in advance.

Stanley Pinchak November 30, 2008 at 2:45 pm

Geoffrey Transom,
I hope you don’t mind if I take issue with a minor point that you make.

real growth rates depend on technology and fertility.

Rothbard notes in America’s Great Depression in his analysis of alternative theories of the cause of the depression, that the Walrasian emphasis on population growth and technological advancement as the cause of real growth is fundamentally flawed. He can express himself better than I, so please read his words here.

newson November 30, 2008 at 10:40 pm

re: geoffrey transom and money neutrality.
this view that the long-run course is not affected by money-supply change seems way too panglossian, as fundamentalist noted. the reversal of the boom may well see many technological innovations stillborn. inventors can and do die whilst waiting for the next boom to commercialize their ideas. and there’s no necessary continuity in scientific progress. innovation is about people with limited energy and time, not some automatic process.

gt seems a smart guy, so maybe i’m just reading him wrong, notwithstanding my distrust of mathematical models in things economics.

Don February 28, 2009 at 3:24 pm

Your statement that economists are not first rate mathematicians is absolutely correct. It is also pretty silly, and worse, off point. Most first rate mathematicians would also make pretty poor economists. It is the *blend* of skills — of mathematics, history, and policy — that makes for a first rate economist. If it were so easy to be a first rate economist, there would be a very large number of dollars sitting on the floor to be picked up.

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