Tyler’s Nyt Article — Important and Well Worth Reading

Lynne Kiesling

Mike already anticipated me and beat me to it with his great post surveying the Cochrane and Critical Review reactions to what Alex Tabarrok today calls “Krugman’s theya culpa” in the New York Times magazine. I think all of the commentaries that Mike linked to are well worth reading and considering; not surprisingly, Vernon Smith’s and Mario Rizzo’s come the closest to my take on the methodological missteps in macroeconomic theory, and indeed in economic theory more generally.

I think Krugman’s “too much math” and Cochrane’s “not enough math” claims both have some validity, but they miss the core point. The core point is an epistemological one: the mathematical models that have formed the core of the methodological hegemony in economics for the past 25 years assume away really important cognitive heterogeneities among humans as decision-makers. Those heterogeneities encompass Hayekian knowledge problem considerations, neuroeconomic realities about what really drives our decision-making, and behavioral characteristics that we have been analyzing systematically since Herb Simon’s pioneering work. Ignoring those makes our models worse at explaining individual actions and, at a macro level, the aggregate outcomes of those individual decisions and actions.

Another aspect of real-world decision-making is the increasing politicization of economic activity, and Tyler Cowen’s New York Times article from Sunday really nails it:

FOR years now, many businesses and individuals in the United States have been relying on the power of government, rather than competition in the marketplace, to increase their wealth. This is politicization of the economy. It made the financial crisis much worse, and the trend is accelerating. …

In short, we should return both the financial and medical sectors and, indeed, our entire economy to greater market discipline. We should move away from the general attitude of “too big to take a pay cut,” especially when the taxpayer is on the hook for the bill. If such changes sound daunting, it is a sign of how deep we have dug ourselves in. We haven’t yet learned from the banking crisis, and we’re still moving in the wrong direction pretty much across the board.

Yes. Yes, yes, yes!