More Scholarship, Less “Science”

by Mario Rizzo

Once upon a time, in a land far away from New York civilization, a famous economist told a good friend of mine that ”we” need more scientists and fewer scholars in the economics profession. He was serious.

This is the time of year that many Ph.D. dissertations are being defended in graduate departments of economcs. We have many would-be scientists and almost no scholars. I think we need more scholars and fewer scientists.

Krugman’s No April Fool’s Joke — Unfortunately

by Mario Rizzo

I have been on an enforced vacation by the failure of my previous laptop. Now that I have access to my old files, permit me to begin where I left off at the beginning of April. The topic is of “eternal” significance.

In an April 1^st (print edition) opinion article Paul Krugman complained about the revival of so-called Mellonism. This is the idea that liquidation of over-expanded industry and a fall in prices and wages will somehow re-generate economic activity after a recession has begun.As Krugman duly notes, it is unclear that President Herbert Hoover’s Secretary of the Treasury Andrew Mellon had anything to do with this vague idea and even what his putative rationale was. Nevertheless, Krugman believes that Mellonism is still with us, some eighty years later.

But one thing is clear to any informed economist. The issue in pre-Keynesian economics was not whether prices and wages in general should fall or whether a large number of enterprises should fail. Keynes liked to summarize the “classical” position as allowing (encouraging?) the general fall in wages and prices to revive economic activity. While there was a basis for the view in the work of A.C. Pigou and some others, this was not representative of the major tradition.

Kissinger on Bismarck

by Chidem Kurdas

A man described as both great and evil, Otto von Bismarck-Schönhausen makes a fascinating study,  as Jonathan Steinberg’s Bismarck: A Life demonstrates.  Henry Kissinger reviewed this biography in the New York Times Book Review, highlighting the diplomatic and political victories the unifier of Germany won through nimble maneuvers.

The review is a bravura tribute from one practitioner of realpolitik to another. Yet a closer look at Bismarck raises doubts as to realpolitik.

While admiring Bismarck’s subtle power games, Mr. Kissinger  admits that the result lacked institutional balance and “sowed the seeds of Germany’s 20^th century tragedies.” But he takes issue with the connection Mr. Steinberg draws from Bismarck to Hitler. Kissinger points to the contrast between the two characters. “Bismarck was a rationalist, Hitler a romantic nihilist,” he writes. “Hitler left a vacuum. Bismarck left a state strong enough to overcome catastrophic defeats …”

Nevertheless, Bismarck’s actions led to those catastrophes.

Are market rates below the natural rate again?

by Andreas Hoffmann and Mario Rizzo

We know from Wicksell’s (1898) Interest and Prices, there is something important about the interest rate that balances saving and investment in an economy over time. This equilibrium interest rate is called the “natural rate of interest”. When market interest rates are below the natural rate, an unsustainable credit boom which distorts the production structure in the economy and inflation are the result.

In line with this idea, most economists agree – today – that the Fed held interest rates “too low for too long” following the burst of the dot-com bubble. As expected, this contributed to a credit boom in the US economy. With the emergence of the crisis, the Fed lowered interest rates to stabilize the price level, financial system and output. Yet, a year of recovery is over and interest rates are still low. What about the natural rate today?

Japan Nuclear Crisis vs. the Titanic

by Chidem Kurdas

The Fukushima Daiichi nuclear threat and the sinking of the Titanic are both disasters caused by acts of nature – earthquake and tsunami in one case, an iceberg in the other – interacting with technology. Yet they have radically different implications. The Japanese incident has made nuclear power less acceptable, whereas the sinking of a ship, no matter how immense the casualties and spectacular the failure, did not stop shipping. 

Generalizations in the Social Sciences

by Gene Callahan

On his blog, Daniel Kuehn notes that “relations in economies are not stable.” In fact, we can go further:  Relations in the social sciences are not stable. As an illustration, consider Zipf’s Law as applied to city size.

In 1700, London had about 575,000 people. According to Zipf’s Law, the next-sized city should have had about 280,000 or 290,000 thousand. What was the actual size of the second largest city? As far as I can determine, it was Norwich, with a population of about 30,000. (My source for the population figures is 1688: The First Modern Revolution.) Zipf’s “Law” is off by a factor of about ten in this instance.

What I suspect is that there is some historical circumstance that leads to Zipf’s Law applying to city size in recent centuries, which was not present in 1700. As political scientist Terry Nardin put it: “Generalizations about how people usually behave are not scientific generalizations about a truly time-independent class of phenomena; they are more or less well-disguised descriptions of customs specific to a particular historical situation.”