John Quiggin: Market monetarism: a first look:
There’s New Monetarism, associated with Stephen Williamson. He and I had a set-to a while back, which entertained many but didn’t produce a lot of enlightenment, and left me disinclined to put a lot of effort into understanding…
Noah Smith: I score this:
Quiggin: 5, Williamson: 0. (Or maybe Williamson: -1, given that he thinks "not even wrong" is a feature rather than a bug.) Pure and utter pulpification.
Williamson Point #1:
The Great Moderation: Quiggin is a little confused on this one, as the Great Moderation simply characterizes a set of properties of US aggregate time series. From about 1985-2007, inflation was lower and less variable, and real GDP was less variable about trend than had been the case previously. Quiggin is certainly correct, though, in finding fault with those (Ben Bernanke included) who wanted to argue that the Great Moderation was due to a regime change in economic policy. If policy was so great, it should have done a better job over the last four years.
So, according to Williamson, Quiggin is "confused" because he uses the term "The Great Moderation" to describe the notion that certain changes in aggregate time series from '85-'07 represented a structural change. Williamson then criticizes everyone who actually did think that it was a structural change. And he uses the phrase "Quiggin is certainly correct." So how is Quiggin the one who is confused, here? Williamson is dissing Quiggin over a semantic point, then substantively agreeing with him. Not much of a takedown...
Williamson Point #2:
The Efficient Markets Hypothesis: For Quiggin this is "the idea that prices generated by financial markets represent the best possible estimate of the value of any investment." Here, Quiggin is badly confused, but maybe the finance practitioners are not helping him out much. Market efficiency is simply an assumption of rationality. As such it has no implications. If it has no implications, it can't be wrong.
First, I will unleash Quiggin himself, who points out that a theory with no implications is a worthless waste of time:
That’s right, Williamson not only defends the EMH on the basis that it’s not even wrong, but follows up by making the same claim about the whole of modern macro. Those are, quite literally, his only criticisms of these chapters. His commenters (none of whom seem particularly favorably inclined towards me) try to suggest that isn’t the most effective line of attack, but he comprehensively misses the point.
Yes, Stephen Williamson defended a theory by saying that it can't make any predictions about the real world. You read that right.
But it gets worse. The EMH is most certainly NOT an "assumption of rationality." The EMH does not even require rationality in order to be correct; it requires only that the aggregate effect of individual investors' irrationalities not be predictable. And Williamson also seem not to realize that Quiggin's statement of the EMH is perfectly legitimate; it is the "strong form" of the EMH, as stated by Eugene Fama. Conclusion: Stephen Williamson does not know what the Efficient Market Hypothesis is. (Random note: I like the EMH. I don't think it's completely correct, but I think it's the unique starting point from which any analysis of financial markets should begin. As opposed to, say, DSGE macro, which is just some random thing that doesn't work. Anyway...)
Williamson Point #3:
Dynamic Stochastic General Equilibrium: Quiggin claims that this is "the idea that macroeconomic analysis should not concern itself with economic aggregates like trade balances or debt levels, but should be rigorously derived from macroeconomic models of individual behavior." I can hear you snorting with laughter. Why is "but" in that sentence? Like the "efficient markets hypothesis," DSGE has no implications, and therefore can't be wrong. Indeed DSGE encompasses essentially all of modern macroeconomics. Which of our models is not dynamic, with uncertainty (and therefore stochastic), and with some equilibrium concept.
I hesitate to say this, but Stephen Williamson appears also to not understand DSGE. If he thinks it has no implications, I mean. DSGE is not just "some equilibrium concept," but a very specific one: the dynamic, stochastic generalization of the general equilibrium framework of Arrow, Debreu, and McKenzie. This means that DSGE does have implications--for example, that markets clear and that agents are price takers. Those things can be wrong, as can the results that follow from them (e.g. the Law of One Price). So Stephen Williamson's attempted defense of DSGE, which was looney in the first place ("It has no implications! It's utterly useless and therefore unassailable! Gurrrrhhh!"), also happens to be flat-out wrong.
Williamson Point #4:
Trickle-down economics: This one puzzled me. For the previous three zombie ideas, Quiggin is confused, but I could see where the confusion might come from. However, while the words "trickle-down economics" are familiar to me, I have a hard time associating that idea with the mainstream ideas of any academic economists.
Um… how about dynamic Laffer effects, as posited by John Cochrane? I'm pretty sure John Cochrane is a mainstream academic economist. He's on Wikipedia, at any rate.
Williamson Point #5:
Privatization: Here, Quiggin offers a litany of government privatization efforts gone awry. If I wanted to, I could take this evidence as supporting the hypothesis that government is really bad--so bad that it can even screw up privatization.
Sure, if you wanted to. If I wanted to, I could take the Mongol Conquests as evidence supporting the hypothesis that Radiohead is the Best Band Ever. It's called "intellectual dishonesty."
Anyway, Quiggin also points out that Williamson doesn't offer any evidence to refute the book's claims. This is true. It's as if Williamson thought that he could refute Quiggin's entire book by tossing off a quick and sloppy mix of vague handwaving, semantic nitpicking, utter devaluation of the theories Quiggin is attacking, complete and utter mischaracterization of those same theories, and lame personal jabs.
I score this Quiggin: 5, Williamson: 0. (Or maybe Williamson: -1, given that he thinks "not even wrong" is a feature rather than a bug.) Pure and utter pulpification.