Here is a comment I posted on the following: newappsblog/2013/08/economics-asand-science-wisdom-and-mathematics.html The NYTimes essay is poorly informed. Apparently RC are unaware of the emergence of experimental economics since mid-twentieth century, thanks to the pioneering work of Sidney Siegel who had a large influence on me although my first work was undertaken independently. There were three independent sources for this mid-century turn to the creation of an experimental economic science: 1. Siegel’s work is associated with Penn State where he located (from the Stanford PhD program) in psychology in 1954. (S. Messick and A. Brayfield, Decision and Choice Contributions of Sidney Siegel, New York: McGraw-Hill, 1964) 2. Reinhard Selten in Germany (H. Sauermann and R. Selten, “An Experiment in Oligopoly,” General Systems. Ann Arbor: Society for General Systems Research, 1960) 3. My own work at Purdue, starting in 1955 and culminating in my first experimental paper in 1962. (V. Smith, “An Experimental Study of Competitive Market Behavior” Journal of Political Economy 70, 111-137, 1962. Each of us had initiated our own research programs without knowledge of the other two. I met Sid in early September of 1961 at Stanford. Sid died suddenly two months later on November 29, 1961 at the age of 45. I have written in some detail on all of this in my memoir: V. Smith, Discovery. Bloomington, IN: Authorhouse, 2008. There are now major centers in experimental economics at most of the major universities. Methodologies, perspectives and specialties vary, but hypothesis testing derived from formal and informal models of economic action, are a regular feature of daily life in laboratories dedicated to economic science. You can find rankings based on citations at ideas.repec.org/top/top.exp.html I am not sure why the NYTimes is so poorly informed on the field of economics. I first encountered the issue in their coverage of the 2002 Nobel awards in economics. It was pretty superficial. I wrote a letter expanding on the issues they got wrong, but they declined to publish a piece that I thought would have reinforced their motto: “All the news that is fit to print.” I guess I was wrong. They reinforce themselves. The connection between prediction and effective policy is not straight forward. Bernanke, in his four lectures last year at GWU noted in his discussion of the Depression that the “[P]olicy errors included - tightening of monetary policy in 1928 and 1929 to stem stock market speculation.” (Bernanke, 2012, March 20 federalreserve.gov/newsevents/lectures/about.htm) But surely this was an attempt, however misguided in the light of subsequent history, to forestall perceived excesses that could be a source of trouble for the economy. In retrospect, good faith policy actions “designed” to forestall excesses intended to avoid a worse outcome are here seen as a “policy error.” In entirely parallel comparison, suppose that in 2005, the Fed had anticipated and forecast the consequences of the unraveling of the Housing bubble, 1997-2006. If Bernanke’s Fed had acted as in 1928-1929, and housing prices had turned down in 2005 instead of 2007, surely Ben Bernake would have been blamed and perhaps fired. The craft/art is really to be ready to change course, and fight whatever has happened after it has happened. He did that on August 10, 2007, and in solid Friedman and Schwartz style followed 14 months of “liquidity enhancement.” But Ben did not have a liquidity problem. He had a solvency problem. He tested the F-S hypothesis and it failed miserably. But Ben turned again on a dime, and lifted about $1.2 trillion in shaky assets off the balance sheets of financial institutions. We are living out the consequences in real time. The observational evidence so far is that the Great Recession appears to have been less immediately devastating than the Depression. But note that 2012 measured in Depression clock time is 1934 when GNP grew 7.7 percent! In the immortal words of Yogi , “It ain’t over ‘til it’s over.” See our (Gjerstad-Smith) take on this by The Economist economist/blogs/freeexchange/2012/11/monetary-policy-1 We call Bernanke’s conundrum: The counter factual policy paradox: preventive action or blame for error? Incidentally, the Fed did see the housing problem in 2005. The FOMC sponsored a conference reported at federalreserve.gov/monetarypolicy/files/FOMC20050630meeting.pdf The conference was devoted to five presentations on the special topic “housing valuations and monetary policy” by senior Fed research personnel. This research established the proposition that home prices had risen unsustainably relative to home rentals and constituted a price bubble. John Williams, a Senior Vice President at the time, used the impact of the 2001-2 stock market crash to estimate the fallout from a potential 20 percent drop in housing prices based on how changes in wealth impact household spending: “There is considerable uncertainty regarding the magnitude of the effects of changes in stock market and housing wealth on household spending; nonetheless, it seems clear the magnitude of the current potential problem is much smaller than, and perhaps only half as large as, that of the stock market bubble.” (Williams, 2005, pp 17-18) Williams is referring to the dotcom bubble and crash. But none of the conference participants—none of these experts—were sensitive to the fact that stock market crashes do not impact the banks and the economy like housing mortgage-market crashes. Stock market credit moves up and also down—margin calls reset liabilities to asset values—in step with market prices. Few balance sheets accumulate negative equity in a crash. But when housing prices crash against fixed long term mortgage debt, large numbers of households are plunged into negative equity. The banks hold the mortgages and are simultaneously plunged into negative equity. This was clearly what brought on the Great Recession. A powerful case can be made (see Gjersad-Smith) that this was also what precipitated the Depression. Vernon L. Smith, Chapman University
Posted on: Wed, 28 Aug 2013 19:01:27 +0000
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