Thursday, August 26, 2010

Common Sense Economics(?)

Peter Boettke has a post up about certain economic issues that he declares "isn't rocket science". One of the things he highlights is the ill-advised nature of expansionary monetary policy. One starts to wonder about these claims when other people warn against the ill-advised nature of contractionary monetary policy and declare of that that it isn't rocket science.

It's funny how these "it's not rocket science" sort of arguments develop. You would think the two sides would hesitate more when the other side is so confident. If one side was surprised by what happened in the economy and caught off guard, then perhaps the other side of the issue could say "well duh - it's not rocket science", but when both sides of a debate feel like they've been vindicated by the data, should we exercise these claims with a little more caution?

I was a little surprised to see Boettke make such a confident statement on this issue, because of all points I would have thought that there is more agreement on expansionary monetary policy than on most other things. Maybe not on quantitative easing or some of these messier liquidity trap issues - but certainly on the low interest rates. But no - Boettke insists that his (minority) point is common sense.

Evan brought Quiggin's long-awaited book on "Zombie Economics" to my attention recently, and this has much the same approach: that there are fundamental common sense conclusions of economics, but that bad ideas don't die. Adam Posen had much the same thesis with respect to fiscal policy in a recent lecture on Japan's economy too. It's not just the Keynesians who make these arguments against non-Keynesians. In addition to Boettke's post above, it's absolutely astounding how unseriously Austrians take Keynesian economics (of any variety).

I have trouble knowing what to think when people make these appeals to common sense vs. "dead ideas". I think it's safest to err on the side of assuming that the economy is extremely complex and that you don't know as much about it as you think you do. But there are perhaps a few things I would put into the category of "everyone really needs to agree on this". I was surprised that Posen put fiscal policy in that category. I'm fairly convinced about what to do with fiscal policy under certain circumstances - convinced enough to have an opinion at least - but as far as scientific knowledge go that one still seems somewhat slippery to me. But I would have thought monetary policy could be put in this "common sense" category. Apparently not.

As Kartik Athreya reminded us a couple weeks back, economics is hard. I disagreed with some of the conclusions that Ahtreya drew from that insight, but I think the insight itself is still solid. I think a lot of people would do well to recognize that and approach the discipline with humility, especially when all sides of a question think their view is so common-sensical. At some point we have to make a judgement call and we're allowed to make judgement calls. Inaccurate fanatics will continue to cling to their ideas long after we've discovered the Earth is not flat, and we should feel free to leave them behind. But that doesn't mean we shouldn't be circumspect on most of these questions. It's always useful to see if your opponent is as confident as you are on a questions, and to think about whether that should augment your confidence.

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