Arrogance & Ignorance throughout Economic History
In the book, ‘This Time is Different,’ arrogance and ignorance has been the driving themes leading up to severe financial and economic crises over 800 years of availalble data, according to its authors. I haven’t read this book yet, but it is on my Summer reading list. Still the basis of my recommendation for this tome, is the underlying premise of the two authors, Kenneth Rogoff, a Harvard economist; and Carmen Reinhart of the University of Maryland. Namely, these two economists argue that the mainstream of modern economic thought has become form before substance, and overly politicized. And for proof consider the ‘spin’ of popular public economists as divergent as CNBC’s Larry Kudlow and Princeton’s Paul Krugman. As I examine the various data points in my own retrospective leading up to the current financial crisis – empirical as well as anecdotal evidence – I find that narrative compelling, and the best explanation of why soooo many economists missed calling this near global meltdown, despite all the evidence that was readily available.
There are a few exceptions, to be sure. Regular readers of my blog, for example, know that I’ve been a fan of Nouriel Roubini when he was still being cynically marginalized and mischaracterized as a contrarian ‘naysayer,’ or worse, ‘Dr. Doom’ by Market shrills like Erin Burnett, Jim Cramer and Rick Santelli – in fact, even before he was a regular commentator on the financial entertainment shows. The simple truth of the matter is that economists like Rogoff, Reinhart and Roubini, actually still follow the data rather than the spin – and therein lies the secret of their status as economic magi.
Interactive Media: PBS Newshour Video Interview
Much of that form-driven work in modern economic circles is built on disassembled and reassembled sets of data points — generally from just the last 25 years or so and from the same handful of rich countries — that quants have whisked into ever more dazzling and complicated mathematical formations. But in the wake of the recent crisis, a few economists — like Professors Reinhart and Rogoff, and other like-minded colleagues like Barry Eichengreen and Alan Taylor — have been encouraging others in their field to look beyond hermetically sealed theoretical models and into the historical record. There is so much inbredness in this profession, says Ms. Reinhart. They all read the same sources. They all use the same data sets. They all talk to the same people. There is endless extrapolation on extrapolation on extrapolation, and for years that is what has been rewarded.
One of Ken Rogoff’s favorite economists jokes — yes, there are economists jokes — is the one about the economist and the lamppost: A drunk economist on his way home from a bar one night realizes that he has dropped his keys on the walk home. So he gets down on his hands and knees and starts groping around under a lamppost looking for his keys. A policeman on patrol stops and asks what he’s doing. “I lost my keys walking through the park,” says the drunken economist. “Then why are you looking for them under the lamppost?” asks the puzzled cop. “Because,” says the drunk economist, “this is where the light is; I can see what I’m looking for.” Read more from the NYTs here.
Sources: PBS Newshour, NYTs, CNBC
