Economists with Pseudo-Knowledge

The other day, Arnold King complained about economists with pseudo-knowledge. The following is a series of excerpts from his post on macroeconomic theory vs. reality:

I am shocked at the behavior of my fellow economists during this crisis. They are claiming to know much more than they do about causes and solutions. Rather than trying to understand and explain what is going on, they are engaged in a fierce battle over narrative. . . .

Some commenters below cite instances of startups having trouble with funding. I would expect that, based on the crash in the stock market. If you invest in startups, your exit comes either from going public or being acquired, neither of which looks very likely with stock prices in the toilet. . . .

Where are the stories of businesses canceling projects because of lack of funding? Yes, I am sure that there are homebuilders who want to do their part to contribute to the excess of housing stock and are being told to get lost by banks, but are there economically sensible projects being canceled? . . . .

Speaking of dogs that are not barking, where are the stories of struggling homeowners? The struggling homeowner is the staple of political speeches (“we have to help struggling homeowners”) but the media are not exactly filled with stories of people who lost a lot of money on their homes. Maybe because they didn’t put any money down to begin with, so they have not lost anything. I suspect that news organizations are trying to find struggling homeowners to profile, but instead they are finding mostly struggling speculators. . . .

My main beef with economists is that standard macroeconomics does such a poor job of describing what is going on. The textbooks models are pretty much useless. Where in the textbooks is “liquidity preference” a demand for Treasury securities? Where in the textbooks does it say that injecting capital into banks is a policy tool?

Graduate macro is even worse. Have the courses that use representative-agent models solving Euler equations been abolished? Have the professors teaching those courses been fired? Why not?

I have always thought that the issue of the relationship between financial markets and the “real economy” was really deep. I thought that it was a critical part of macroeconomic theory that was poorly developed . . .

Economists ought to admit that we do not know much about what is going on today. Neither do the Fed Chairman and the Treasury Secretary. Of course, the market demand is for “strong” leaders and for “strong” economists, who can fool the public into believing that they have great knowledge. The ones who do this best are those who have fooled themselves.¹

Sources:

1. King, Arnold. “Economists with Pseudo-Knowledge“. Econ Lib. 24 October 2008.↩