On Monday, I was on Leonard Lopate’s WNYC radio show talking about my recent article on John Maynard Keynes. (The piece is no longer behind a firewall. You can read it here, and listen to the interview here.) At the end of the show, Leonard asked me an interesting question: Has the financial crisis and Great Recession produced any big new economic ideas? My immediate response was that it hasn’t, or, if it has, I wasn’t aware of them. After the show, I thought about the question a bit more.
I still think the answer is no. There is nothing to compare with Keynesianism or Monetarism or even the so-called Washington Consensus of the nineteen-eighties and nineteen-nineties. Certainly, there is no new Keynes. But I do think that some important ideas have been discovered—or, rather, rediscovered. Here are six of them, together with some tips for further reading, one of which is rather self-serving:
1. Finance matters. This lesson might seem obvious to the man in the street, but many economists somehow managed to forget it. Two who didn’t were Hyman Minsky and Wynne Godley, both of who were associated with the Levy Institute for Economics at Bard College. Minksy’s now-famous “Financial Instability Hypothesis” can be found here, and one of Godley’s warnings about excessive household debt can be found here. (It is from 1999!)
2. Credit busts are different from ordinary recessions. On this, the most widely quoted work is Carmen Reinhart and Ken Rogoff’s historical survey, “This Time is Different: Eight Centuries of Financial Folly,” which details how debt overhang in the public and private sectors tends to produce “lost decades.” For an old but still very readable account of how debt overhang can create deep recessions, I would recommend Irving Fisher’s famous essay from 1933. For something more recent, I recommend this essay by Ray Dalio, the head of Bridgewater Associates, the world’s biggest hedge fund.
3. Positive feedback and multiple equilibria have to be taken seriously. With the rise of rational expectations theory, the idea that financial markets and entire economies can spiral into bad outcomes—and for no very good reason—was relegated to a mathematical curiosity: so called “sunspots.” Now, the notion is back, and for good reason. It appears to describe the world pretty well.
The role positive feedback played in amplifying the credit crisis of 2008 has been studied extensively, and this article by Princeton’s Markus Brunnermeier provides a good survey. Turning to what is happening in Europe, Paul De Grauwe, of the Brussels-based Center for European Policy Studies, and <a href=”http://krugman.blogs.nytimes.com/2011/08/08/wonking-out-about-the-euro-crisis-very-wonkish/ Read the rest of this entry »
From Dr. Ernie:
I am “done” with philosophy.
I’ve moved on to something I call “zoasophy”. Zoasophy is related to Philosophy the way Engineering is related to Science — the goal is to actually build systems that work, not just think about them.
The word “zoasophy” means “liver of wisdom”, in contrast to philosophy which means “lover of wisdom.” It comes from the greek word “Zoa” meaning life, as in zoology and Zoe Girl. Not “liver” as in the bodily organ — that would be hepatosophy. 🙂
The foundational principle of Zoasophy is:
The Truth is What Works
What Works is not the Truth
That is, the ultimate test of truth is whether it actually works. At the same time, just because something works does not mean it is true. Truth emerges from repeated examination of results and competing hypotheses, as encapsulated in my Radical Centrist Manifesto.
As such, zoasophy shares much in common with pragmatism, in that we care about the “cash value” of ideas. But where pragmatism is traditionally analytic — trying to uncover truth — zoasophy is primarily synthetic, trying to construct useful (if imperfect) truths. It is similar to what little I understand of Frank Ramsay‘s approach to truth. [Update: and, as pointed out by several people, the activism of philosophers John Stuart Mill and John Dewey, whom I need to learn more about].
Zoasophy is closed related to “prefuturism”, another neologism I toss around. The pre-future is — obviously! — what comes after the post-modern. 🙂
More specifically, a prefuturist believes we are continually creating a future with a deeper understanding of truth and reality, but we aren’t there yet — and never will be. Everything we make is flawed and imperfect, and usually in some ways worse than what went before, but overall we can move things incrementally forward.
Thus, zoasophers believe in the improvability but not perfectibility of human constructs — including perhaps our selves. In particular, we believe that rational arguments can approximate but not quite capture the real world. That is, our mathematical and conceptual models can become extremely good at capturing many aspects of the real world, but are only partial approximations, and must continually be tested against reality — especially in new contexts.
Ultimately, the real test of a zoasopher is not what they say, but how they live. Or rather, their ability to actually live as they say they will, and achieve the results they claim for the reasons they provide.
Which is why, as a good zoasopher, I should probably stop talking about it and go back to practicing it…