Monday Smackdown Watch: Nick Rowe's Smackdown of Stephen Williamson as Economics's Sokal Hoax
The Sokal Hoax occurred when physicist Alan Sokal conducted a rather mean-spirited cognitive-science experiment on the editors of Social Text: would this journal of post-modern cultural studies publish an article that made no sense at all--that was complete word-salad, and where it was not word salad was wrong? So he submitted ""Transgressing the Boundaries: Towards a Transformative Hermeneutics of Quantum Gravity". And they did indeed publish it.
Now comes Nick Rowe to shakedown Stephen Williamson for making the absurd and wrong argument that quantitative easing is contractionary based on a model Williamson has built that Williamson does not understand. Agreed.
Then he tries to smack down the rest of the economics weblogosphere for failing to agree immediately on just why Williamson was wrong and absurd. Here I disagree: to make any sense of Williamson, you had to add a great deal of coherence mix to his paper to get it to jell. And because you can add coherence mix in a great many different ways, and how his argument was absurd depends on which way it jells, everyone I at least have read has contributed something useful.
And I think "Economics's Sokal Hoax" is much too strong.
"Transgressing the Boundaries: Towards a Transformative Hermeneutics of Quantum Gravity" was complete word-salad. Williamson has a not-unreasonable model that happens to have lots of equilibria, and he picks the wrong equilibrium to study because he never read Frank Fisher's Disequilibrium Foundations of Equilibrium Economics or watched the highly intelligent and thoughtful George Evans talk on the subject. But those are flaws that can easily be corrected, and then useful analyses of the model can proceed. By contrast, nothing can rescue "Transgressing the Boundaries: Towards a Transformative Hermeneutics of Quantum Gravity"...
Nick Rowe: Worthwhile Canadian Initiative: Does house building cause house price inflation? Our Sokal hoax:
What we have just witnessed is the economics equivalent of the Sokal hoax... not a hoax, just a mistake, but the effect was the same. We all make mistakes. What matters is that the rest of us didn't all spot that mistake immediately.... We can't blame the person who made the mistake if we didn't immediately see it either.
Speak for yourself! I knew because I remembered Frank Fisher's Disequilibrium Foundations of Equilibrium Economics because I used to listen to Andrei Shleifer rave about it in evenings after class...
Nick:
Many economists have been puzzled by recent house price inflation. My theory shows that house price inflation was caused by too many houses being built.... Loadsa theory.... Let me give you the intuition with a simple thought-experiment. Suppose builders suddenly increase the stock of houses on the market. The rate of house price inflation must increase for people to be willing to hold those extra houses, because people demand more houses when they expect rising house prices...
If you believe my explanation makes sense, you will also understand why Zimbabwe had hyperdeflation. There needed to be ever-accelerating deflation, so that people would willingly hold all that extra money. But why didn't we immediately see what was wrong?...
The quantity of money demanded is a positive function of the price level and a negative function of the expected rate of inflation... assume perfectly flexible prices and continuous market-clearing, just to keep it simple... assume actual and expected inflation are the same, just to keep it simple. Assuming a simple log-linear demand function... the supply=demand equilibrium condition is....
It is well-understood... that this equilibrium condition permits an infinite number of solutions... the "fundamental" solution... [plus] an infinite number of "bubble" solutions. Even if M(t) is constant for all time, P(t) can rise without limit at an ever-increasing rate, or fall without limit at an ever-increasing rate....
If there is an upward jump in M(t), that was not foreseen, and if people expect that increase to be permanent, the fundamental solution says that P(t) must jump too...If the theorist forgets that P(t) can jump up, the only way to restore equilibrium is to assume that Pdot(t) jumps down. A permanent increase in the money supply causes a fall in the inflation rate. But that means the theorist is assuming the economy has moved from the fundamental equilibrium path onto one of the bubble equilibrium paths.
There is an alternative way to get an increase in the money supply to cause deflation, while sticking to the fundamental equilibrium. You need to ensure that when M(t) jumps up, Mdot(t) jumps down at the same time. The money supply increases, but is expected to start declining from now on. The jump up in M(t) causes the P(t) to rise. The jump down in Mdot(t) causes Pdot(t) to fall, which in turn causes P(t) to fall. If you rig it just right, so the two changes have just the right relative magnitudes, the net effect is no change in P(t), and a fall in Pdot(t).... This fundamental solution, where an increase in the money supply causes no rise in the price level but a fall in the inflation rate, requires people expect that the money supply will eventually be lower than if it had never increased in the first place. QE causes inflation to fall because QE causes people to expect a bigger negative QE in future than the original positive QE. That seems implausible to me.
The proper way to discuss questions like this is to talk about the extent to which QE is expected to be permanent or temporary.... Instead, Steve Williamson's posts have served only as a Rorschach test (I forget who said that) for far too many people, who read into it what they wanted to read....
So, what went wrong? How come even those of us who did get that something was wrong didn't immediately figure out what exactly was wrong? I blame maths. Only when Steve said it clearly in words (for which he deserves credit), could I clearly see what the problem was...
