Eichengreen on how economists went astray

Michael Giberson

When Paul Krugman wrote about “how economists got it wrong” in the New York Times Magazine, after a few preliminary remarks the story became all about Keynes, Keynesians, and New Keynesians.  By my count the name “Keynes” or some variant of it shows up over 50 times in the essay. He talks a lot about “saltwater” economists and “freshwater” economists as well, with “saltwater” in essence another name for Keynesian-style economics.  His concluding section is titled “Re-embracing Keynes,” and he said, “Keynesian economics remains the best framework we have for making sense of recessions and depressions.”  Keynes is the foundation in Krugman’s view.

Greg Mankiw points out on his blog an essay by Barry Eichengreen that addresses the same question – how did economists get it so wrong. I couldn’t help but notice as I read that essay, Eichengreen manages to mention “Keynes” or some variant name exactly zero times.  Lest you think Eichengreen is some anti-Keynesian “freshwater” economist that Krugman warns about, note that Eichengreen is firmly planted at the “saltwater” bastion of the University of California-Berkeley.

Part of the difference is explained by Krugman’s focus on macroeconomic theorizing and Eichengreen’s stronger attention to financial economics and its applications.  Krugman attends more to the academic theorist to public policy maker connection, while Eichengreen looks more at links between academia and business.  To some degree they are telling different parts of the story, so different characters feature in the narrative.

But the Eichengreen story provides richer institutional details, discussing frankly the role that financial incentives and a kind of peer pressure within economics played in diverting attention away from the growing financial problems. All in all, I felt better informed about what went wrong, and maybe what should be done, after reading it.

And in a way, Eichengreen’s essay reminded me of Jane Smiley’s execrable scribblings in the Huffington Post. Discussed here. Smiley, too, believes corporate money biases economists. But now that I’ve said that, I should clarify that Eichengreen has obviously observed carefully and thought deeply and to good effect, with the result that Eichengreen’s essay is very much worth reading.  In each of these ways his essay is very nearly the exact opposite of Smiley’s.

But Keynes name-dropping aside, Krugman and Eichengreen share much: both urge more attention to behavioral economics and particularly behavioral finance; both urge more attention to the real economy at the expense of elegant mathematical models.  As Eichengreen points out, both efforts are already well on there way.

The shifts do not guarantee that economists won’t get it wrong again someday, but at least we can hope not to repeat the same mistakes.

Jonah Lehrer, autism, and surfing

Lynne Kiesling

I’ve been reading a lot of neuroscience-related books this summer (more on that later …), and I’ve really been enjoying Jonah Lehrer’s blog The Frontal Cortex. If you are interested in the connections between the brain and human action and human decision-making, you will get a lot out of it. I will have more to say in a few days on Lehrer’s books …

One of Lehrer’s recent posts struck me, because it combines three things that I love: economics, economics-related neuroscience, and water sports. It’s a post about an article he’s got in the current issue of Outside profiling Clay Marzo, a young surfing phenom who can read waves brilliantly, can focus narrowly and wait patiently for hours for the right waves, and can bend his body with his board in the water in ways that would strike fear into pretty much all other surfers.

Clay Marzo has autism; in particular, he’s got Asperger’s syndrome. Lehrer’s post and article focus on how his Asperger’s is a crucial factor in his success as a surfer, although it predictably makes him awkward and uncomfortable with the associated media interaction. Among other things discussed in the article, his Asperger’s enables him to focus on the waves at a very deep and narrow level that enables him to learn their physics and to remember specific details about them.

I really, really recommend reading Lehrer’s blog and this Outside article, especially if you have read or are planning to read Tyler Cowen’s new book, which also discusses autism and how it affects human action and human decision-making. They will all make you think differently about the relationship between our cognitive processes and living together in civil society.