Matt Nolan

Data and prediction

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Via Scott Sumner we saw the following article that mentions economic data and economic predictions.  The statements that stood out to me were:

(Economic) predictions are, of course, the bread and butter of economic institutions. But can we believe them?

In recent years, some economists have begun to express doubts over predictions made from huge volumes of data, but they are in the minority. Most embrace the idea that more measurements mean better predictive abilities.

Hold up.

For one, as we have mentioned prediction is not the central element of what economists do – and even when they do predict the goal of such prediction is to give some view regarding risks and movements, not direct figures (it is more ordinal than cardinal in some sense).

Secondly, ever since the Lucas critique economists have been very nervous about predictions from large amounts of data without theory – I would say that the majority of economists doubt the usefulness of econometric models relying solely on huge amounts of data.

Economists would like data with less measurement error, that is closer to representing the true economic variables we discuss in theory – we aren’t looking for an infinite number of measures we can stick together to find a result.  An economist that doesn’t use theory to inform their discussions of the economic outlook, but uses lots of data, isn’t an economist – that is all.

Matt Nolan

Technology: Dystopia or utopia?

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Nick Rowe has a great post on technology and labour.  Fundamentally, it states that, one day, increases technology and improving capital will replace labour, destroying demand for labour.  I was discussing a similar issue with Linuxlover on Twitter (and who blogs here).

Both men seemed to imply that such a situation could be a bad thing.  Linux lover told me of the “legion of unemployed”, while Nick mentioned a book that states:

It describes life in the near-future when technology and machines have destroyed the demand for nearly all human labour, except for the labour of a small, highly-educated minority. The vast majority of the population would be unemployed, but for government make-work projects

However, I am not afraid of such an occurrence per see – in fact I am excited.  Why?  What is wrong with me?

Read more

goonix

Quote of the day: F.A. Hayek on economists

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The economist is the last to claim that he has the knowledge which the co-ordinator would need [for planning].

F.A. Hayek in The Road to Serfdom, 1944

Matt Nolan

Farewell Paul Samuelson

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His work and his methods drove economics into the position it is today.  In terms of driving the economic method forward (and establishing “economic science”) he is the most important economist of the 20th century in my opinion.

Here are some links discussing his life and work:

Economist’s View.

Marginal Revolution (and, and)

Anti-Dismal.

Paul Krugman.

Econlog.

This quote from Lucas is apt:

Samuelson was the Julia Child of economics, somehow teaching you the basics and giving you the feeling of becoming an insider in a complex culture all at the same time. I loved the Foundations. Like so many others in my cohort, I internalized its view that if I couldn’t formulate a problem in economic theory mathematically, I didn’t know what I was doing. I came to the position that mathematical analysis is not one of many ways of doing economic theory: It is the only way. Economic theory is mathematical analysis. Everything else is just pictures and talk

Matt Nolan

What happened to the term monetarism?

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Given the sudden rapid attack on New Zealand monetary policy from various segments I’ve begun to notice a few more things crawling around in political language that confuse me.

For example, the term monetarist.  In a discussion with my sister and on this post from the DimPost the term “monetarist” was used to describe a relatively right wing outlook about political issues and policy in general.  However, this confuses me.  My impression was that monetarists at their most narrow are people that believe money supply growth = inflation completely.  While more generally a monetarist is someone that believes money supply growth is in some way related to higher long run inflation.

In this sense, even some of the most left-wing economists have a touch of monetarist in them.  Monetarism is a set of beliefs about how changes in the money supply influence inflation – not a set of beliefs regarding the appropriateness of “economic freedom” or “government intervention”.

When replying to my sister I said:

Monetarism is simply people saying, if we print a whole bunch of money it will end up increasing prices. Evidence and logic add some credence to this view, and so even very left wing economists are in some sense monetarists.

However, an early monetarist was Friedman. He also wrote heaps on “economic freedom”, which is viewed as quite right wing a lot of the time. As a result, people have said Friedman=monetarist and have associated that word with political views that have nothing to do with it.

I think what they mean is “capitalism based on the idea that individual freedom almost always leads to the best outcomes for society” instead of “capitalism based on monetarist theory” – as the second statement doesn’t actually make any sense to me.

Update:  Paul Walker blogs Milton Friedman’s own views on what monetarism is.

Matt Nolan

The lingo never changes …

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From a blog that it looking at each day in 1930 we have this beaut of a quote (ht Paul Krugman, and initially Scott Sumner):

Leading economists and market observers are looking for clues on how long the current trade depression will continue. Since 1873 there have been thirteen periods of business depression. Ten of these had an average length of 15 months. The remaining three were much longer, but there were exceptional circumstances in each case that it is clear don’t apply here. Credit is easy, inventories are not high, and the banking system was never sounder. Therefore the current depression should not last longer than 15 months. Since it began in July of 1929 in improvement is to be expected at the start of the fourth quarter.

So during the Great Depression people were saying it was more moderate than previous significant downturns.  Interesting 😀