This is an assorted collection of quotes I have found useful from time to time in different contexts. I am putting them all together for my own reference, as well as for the benefit of others who may find them similarly useful to make points.
JM Keynes Quotes (mostly from General Theory GT):
The composition of this book has been for the author a long struggle of escape, and so must the reading of it be for most readers if the author’s assault upon them is to be successful,— a struggle of escape from habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds. (GT)
It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in bedlam. (GT)
It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics (along with the other moral sciences), where it is often impossible to bring one’s ideas to a conclusive test either formal or experimental. (GT)
For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premises – (GT)
For professional economists, after Malthus, were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation;— a discrepancy which the ordinary man has not failed to observe, with the result of his growing unwillingness to accord to economists that measure of respect which he gives to other groups of scientists whose theoretical results are confirmed by observation when they are applied to the facts. (GT)
The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required today in economics. (GT)
I cannot persuade myself that this sort of treatment of economic theory has anything significant to contribute. I suspect it of being nothing better than a contraption proceeding from premises which are not stated with precision to conclusions which have no clear application … [This creates] a mass of symbolism which covers up all kinds of unstated special assumptions. RWER blog: Letter from Keynes to Frisch.
To understand my state of mind, however, you have to know that I believe myself to be writing a book on economic theory which will largely revolutionalise – not, I suppose, at once but in the course of the next ten years – the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can’t predict what the final upshot will be in its effect on action and affairs. But there will be a great change, and, in particular, the Ricardian foundations of Marxism will be knocked away. — [[ The hopes of Keynes were partially realized, but also partially frustrated. See Understanding Macro: The Great Depression, and also the Keynesian Revolution and the Monetarist Counter-Revolution]]
For many more quotes from Keynes, see: WikiQuote Entry on General Theory
Robert M Solow:
Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon. Now, Bob Lucas and Tom Sargent like nothing better than to get drawn into technical discussions, because then you have tacitly gone along with their fundamental assumptions; your attention is attracted away from the basic weakness of the whole story. Since I find that fundamental framework ludicrous, I respond by treating it as ludicrous — that is, by laughing at it — so as not to fall into the trap of taking it seriously and passing on to matters of technique.
RM Solow, “How Did Economics Get That Way and What Way Did It Get?” Daedalus, Vol. 126, No. 1, American Academic Culture in Transformation: Fifty Years, Four Disciplines (Winter, 1997), pp. 39-58 — Article describes the shift from historical/qualitative mode to mathematical model building, while defending this transition as basically useful, with some flaws. One quote: ” Oscar Wilde described the fox hunt as the unspeakable in search of the inedible. Perhaps here we have the over-educated in pursuit of the unknowable.” — this is about use of overly mathematical models pursuing questions which are far beyond ability of data to answer. But still, he is satisfied with this: “But it sure beats the alternatives.:.
Prepared Statement by Robert Solow, Professor Emeritus, MIT for House Committee on Science and Technology Subcommittee on Investigations and Oversight, “Building a Science of Economics for the Real World” July 20, 2010
I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way.
I do not think that this picture passes the smell test. The protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think that this claim is generally phony. The advocates no doubt believe what they say, but they seem to have stopped sniffing or to have lost their sense of smell altogether.
(On the use of DSGE models for policy); A thoughtful person, faced with the thought that
economic policy was being pursued on this basis, might reasonably wonder what planet he or she is on.
Steve Keen :How anybody can think they can analyze capital while leaving out Banks, Debt, and Money is a bit to me like an ornithologist trying to work out how a bird flies whilst ignoring that the bird has wings…”
“How did Economists Get it So Wrong?” the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth
By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macro-economics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote. Source: Macroeconomic Madness – column quotes Meyer about RBC models as being a … “caricature that’s so silly that you wouldn’t want to get close to it if you were a policymaker. … My views would be considered outrageous in the academic community, but I feel very strongly about them. Those models are a diversion. They haven’t been helpful at all at understanding anything that would be relevant to a monetary policymaker or fiscal policymaker.”
Ariel Rubinstein: Nearly every book on game theory begins with the sentence: ‘Game theory is relevant to …’ and is followed by an endless list of fields, such as nuclear strategy, financial markets, the world of butterflies and flowers, and intimate situations between men and women. Articles citing game theory as a source for resolving the world’s problems are frequently published in the daily press. But after nearly forty years of engaging in this field, I have yet to find even a single application of game theory in my daily life”
Card & Krueger wrote “Myth & Measurement” in which they established that a rise in minimum wages led to an increase in employment, contrary to predictions of Supply and Demand. In an interview, Card said: I’ve subsequently stayed away from the minimum wage literature for a number of reasons. First, it cost me a lot of friends. People that I had known for many years, for instance, some of the ones I met at my first job at the University of Chicago, became very angry or disappointed. They thought that in publishing our work we were being traitors to the cause of economics as a whole. [[ See POSTSCRIPT to Understanding Macro for more details on “70 years of economists’ failure to understand labor supply and demand]]
When Joseph Stiglitz was asked at a private dinner party how economists can make repeated falsified claims without having their careers terminated, he reportedly answered: “I agree with you, but I don’t understand why you are so puzzled. What you should be assuming is that — as is done by most economists — economics is really a religion. So why should you be puzzled by the fact that they cling to and never give up their views despite frequent falsification?” – from Jon Elster: Explaining Social Behavior.
Stiglitz: Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.
Ricardo J. Caballero: Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome –In this paper I argue that the current core of macroeconomics – by which I mainly mean the so-called dynamic stochastic general equilibrium approach – has become so mesmerized with its own internal logic that it has begun to confuse the precision it has achieved about its own world with the precision that it has about the real one [[Common Problem: Confusing Models with Reality]]
John Cassidy: After the Blowup – [[Cassidy went hunting for apostates in Chicago. Posner has recanted his free market stance, and several others are expressing doubts. But Fama is sticking to his guns — argues that recession was caused by (unknown phenomena, phlogiston) and the stock market forecast the coming recessing and turned down earlier!]] Surely, I said, we had experienced a giant credit bubble, which eventually had burst. “I don’t know what a credit bubble means,” Fama replied, his eyes twinkling. “I
don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.”
Narayana Kocherlakota: Minneapolis Federal Reserve President (2010-2015), “Toy Models”, July 14 2016 “The starting premise for serious models is that there is a well-established body of macroeconomic theory… My own view is that, after the highly surprising nature of the data flow over the past ten years, this basic premise of “serious” modeling is wrong: we simply do not have a settled successful theory of the macroeconomy.”
Olivier Blanchard IMF Chief Economist (2010-2015), “Do DSGE Models Have a Future?”, August 2016 “DSGE models have come to play a dominant role in macroeconomic research. Some see them as the sign that macroeconomics has become a mature science, organized around a microfounded common core. Others see them as a dangerous dead end…” and “There are many reasons to dislike current DSGE models. First: They are based on unappealing assumptions. Not just simplifying assumptions, as any model must, but assumptions profoundly at odds with what we know about consumers and firms.”
Blanchard has characterized all the mainstream economic theory models widely used by economists at government agencies, central banks, in academia, etc. as follows :
“All the models we have seen impose the neutrality of money as a maintained assumption. This is very much a matter of faith, based on theoretical considerations rather than on empirical evidence.” Blanchard, “Why Does Money Affect Output?”, in Handbook of Monetary Economics, 2, edited by B. M. Friedman and F. H. Hahn, (North Holland, New York, 1990), p. 828.
Lord Mervyn King: Governor, Bank of England, speech speech in New York in October 2010, Banking: from Bagehot to Basel, and back again “Of all the many ways of organising banking, the worst is the one we have today.” and “Change is, I believe, inevitable. The question is only whether we can think our way through to a better outcome before the next generation is damaged by a future and bigger crisis. This crisis has already left a legacy of debt to the next generation. We must not leave them the legacy of a fragile banking system too.”
Alan Greenspan: (co-winner of Dynamite Prize, for causing the GFC)
quotes from I was wrong about the economy — sort of (title of Guardian article).
“I have found a flaw (in my economic philosophy) I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
“I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms,”
Greenspan, 82, who retired in 2006, called the financial crisis a “once-in-a-century credit tsunami” and said it had “turned out to be much broader than anything I could have imagined”.
He suggested his trust in the responsibility of banks had been misplaced: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity (myself especially) are in a state of shocked disbelief.”
The congressional committee’s Democratic chairman, Henry Waxman, pressed him: “You found that your view of the world, your ideology, was not right, it was not working?” Greenspan agreed: “That’s precisely the reason I was shocked because I’d been going for 40 years or so with considerable evidence that it was working exceptionally well.”
Following quote about Greenspan taken from Paul Davidson’s book: Who’s Afraid of JM Keynes?
In an amazing “mea culpa” testimony before the House Committee on Oversight and Government Reform on October 23, 2008, Alan Greenspan, the former Chair of the Federal Reserve System and a strong advocate of unregulated free markets, admitted that he had overestimated the ability of free financial markets to self correct any problems that may occur. Greenspan indicated that he had entirely missed the possibility that deregulation could unleash a destructive force on the economy. In his testimony regarding the onset of the global financial crisis, Greenspan stated: “This crisis, however, has turned out to be much broader than I could have imagined…those of us who had looked to the self interest of lending institutions to protect shareholders’ equity (myself especially) are in a state of shocked disbelief.…In recent decades a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize [in economics] was awarded for the discovery of the [free market] pricing model that underpins much of the advance in [financial] derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed.”
Under questioning by members of the House Oversight and Government Reform Committee, Greenspan admitted “I found a flaw in the models that I perceive is the critical functioning structure that defines how the world works. That’s precisely the reason I was shocked… I still do not fully understand why it happened, and obviously to the extent that I figure it happened and why, I shall change my views”.
Despite these and other policy successes, the episode as a whole has not been kind to the reputation of economic and economists, and understandably so. Almost universally, economists failed to predict the nature, timing, or severity of the crisis; and those few who issued early warnings generally identified only isolated weaknesses in the system, not anything approaching the full set of complex linkages and mechanisms that amplified the initial shocks and ultimately resulted in a devastating global crisis and recession. Moreover, although financial markets are for the most part functioning normally now, a concerted policy effort has so far not produced an economic recovery of sufficient vigor to significantly reduce the high level of unemployment. As a result of these developments, some observers have suggested the need for an overhaul of economics as a discipline, arguing that much of the research in macroeconomics and finance in recent decades has been of little value or even counterproductive.
Lawrence Summers (co-winner of Dynamite Prize, for causing the GFC) quotes from Economics in Crisis, by Bradford De Long. Financial Times columnist Martin Wolf quizzed former United States Treasury Secretary Larry Summers, President Barack Obama’s ex-assistant for economic policy. “[Doesn’t] what has happened in the past few years,” Wolf asked, “simply suggest that [academic] economists did not understand what was going on?”Here is the most interesting part of Summers’ long answer: “There is a lot in [Walter] Bagehot that is about the crisis we just went through. There is more in [Hyman] Minsky, and perhaps more still in [Charles] Kindleberger.” That may sound obscure to a non-economist, but it was a devastating indictment. [[Because, Summers was forced to name three dead men, and old and forgotten books, as the only ones who had explanations for the crisis, completely incomprehensible to modern economists like himself]]
Barbara Bergmann: Needed: A New Empiricism — [[ Opening paragraphs explains how marine biologists studied dolphin behavior for hundreds of hours to come up with conclusions; in contrast ]] “The material about business behavior that students read about in economics textbooks, and almost all of the new theoretical material developed
by mainstream professionals and published in the profession’s leading journals was
composed by economists who sat down in some comfortable chair and … simply made it up.” [[In addition, people who study actual behavior of humans and business firms are regarded as irrelevant pests — Barbara arranged a talk by Nobel Laureate Herbert Simon at University of Maryland ]] “but my colleagues were not impressed. They let me know that his talk had wasted their time. It wasn’t economics, they said.”
Finally, we provide a brief outline of Romer, picking out quotable quotes:
Paul Romer: The Trouble With MacroEconomics
For more than three decades, macroeconomics has gone backwards
Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as “tight monetary policy can cause a recession.” Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes
[Modern macro started with the Lucas critique of incredible identifying assumptions used in econometric models, but, after thirty years of work instead of progress, there has been regress] Canova and Sala (2009) signal with the title of a recent paper, we are now “Back to Square One.” Macro models now use incredible identifying assumptions to reach bewildering conclusions.
[Romer finds it incredible that a leading macroeconomist would feign ignorance about effects of monetary policy] To appreciate how strange these conclusions can be, consider this observation, from a paper published in 2010, by a leading macroeconomist:
… although in the interest of disclosure, I must admit that I am myself less than totally convinced of the importance of money outside the case of large inflations.
Macroeconomists got comfortable with the idea that fluctuations in macroeconomic
aggregates are caused by imaginary shocks, instead of actions that people take, after
Kydland and Prescott (1982) launched the real business cycle (RBC) model.
In this [RBC] model, the effects of monetary policy are so insignificant that, as Prescott taught graduate students at the University of Minnesota “postal economics is more central to understanding the economy than monetary economics” (Chong, La Porta, Lopez-de-Silanes, Shliefer, 2014).
[After discussing an episode of tightening of monetary policy by the FED] If the Fed can cause a 500 basis point change in interest rates, it is absurd to wonder if monetary policy is important. Faced with the data in Figure 2, the only way to remain faithful to dogma that monetary policy is not important is to argue that despite what people at the Fed thought, they did not change the Fed funds rate; it was an imaginary shock that increased it at just the right time and by just the right amount to fool people at the Fed into thinking they were the ones who were the ones moving it around.
To my knowledge, no economist will state as fact that it was an imaginary shock
that raised real rates during Volcker’s term, but many endorse models that will say
this for them
Macroeconomists got comfortable with the idea that fluctuations in macroeconomic
aggregates are caused by imaginary shocks, instead of actions that people take, after
Kydland and Prescott (1982) launched the real business cycle (RBC) model. The real business cycle model explains recessions as exogenous decreases in phlogiston (an unexplained residual).
The noncommittal relationship with the truth revealed by these methodological
evasions and the “less than totally convinced …” dismissal of fact goes so far beyond
post-modern irony that it deserves its own label. I suggest “post-real.”
Once macroeconomists concluded that it was reasonable to invoke an imaginary
forcing variables, they added more. The resulting menagerie, together with mysuggested names now includes:
• A general type of phlogiston that increases the quantity of consumption goods
produced by given inputs
• An “investment-specific” type of phlogiston that increases the quantity of
capital goods produced by given inputs
• A troll who makes random changes to the wages paid to all workers
• A gremlin who makes random changes to the price of output
• Aether, which increases the risk preference of investors
• Caloric, which makes people want less leisure
With the possible exception of phlogiston, the modelers assumed that there is
no way to directly measure these forces. Phlogiston can in measured by growth
accounting, at least in principle. In practice, the calculated residual is very sensitive
to mismeasurement of the utilization rate of inputs, so even in this case, direct
measurements are frequently ignored.
To allow for the possibility that monetary policy could matter, empirical DSGE
models put sticky-price lipstick on this RBC pig. The sticky-price extensions allow
for the possibility that monetary policy can affect output, but the reported results
from fitted or calibrated models never stray far from RBC dogma. If monetary policy
matters at all, it matters very little
[[FWUTV — Facts with unknown truth value — Romer shows that in order to identify parameters, we feed in lots of arbitrary assumptions — which he calls FWUTVs — into the model. Shows several specific examples of this in action. Lucas critique said that use of arbitrary assumption to identify econometric models made estimates unreliable. However, their techniques introduce even more arbitrary assumptions to identify their models.]] “Post-real macroeconomists have not delivered the careful attention to the identification problem that Lucas and Sargent (1979) promised. They still rely on FWUTV’s. All they seem to have done is find new ways to fed in FWUTV’s ”
[[ Romer explains how identification is achieved by hiding the assumption within a maze of mathematics almost impossible to track down, and never made explicit. He provides a specific example where an assumption the E log u = 0, about an unobservable error creates identification. Assumptions on unobservables are hard to spot, and harder to challenge, since they are, after all, unobservable — hence the term FWUTV. Another way to achieve identification is via Bayesian priors. You can put anything you like into the priors, which are arbitrarily chosen, and achieve identification. This section reminds us of the following Keynes quote:]]
Keynes: Too large a proportion of recent “mathematical” economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols. GT Book 5, Chapter 21,Section 3, p. 298
[[Romer shows how members of the Chicago school support each other, even in face of conflicting evidence known to them. He explains the sociology of knowledge, how the publications process ensures loyalty. He explains that he is free of the constraints, and therefore free to express his deep dissent, because he is no longer operating within an Academic environment. Parenthetically, it is similarly true, that I can make very bold attacks on economics and economists ONLY because my pay, promotions, publications are no longer dependent on how professional economists in the USA evaluate me. Those operating within the Western academia find that severe penalties are imposed upon them if they dare to step outside the boundaries of permissible dissent. ]]
Back to Square One: I agree with the harsh judgment by Lucas and Sargent (1979) that the large Keynesian macro models of the day relied on identifying assumptions that were not credible. The situation now is worse. Macro models make assumptions that are no more credible and far more opaque.
[[Romer argues that the Chicago School criticized Keynesian harshly for failing to predict stagflation. However, the Lucas prophecy that there would be no more recessions is an even more dramatic prediction failure.]] ” what Lucas and Sargent wrote of Keynesian macro models applies with full force to post-real macro models and the program that generated them: That these predictions were wildly incorrect, and that the doctrine on
which they were based is fundamentally flawed, are now simple mattersof fact …
… the task that faces contemporary students of the business cycle is that of sorting through the wreckage …(Lucas and Sargent, 1979, p. 49)”
Some economists counter my concerns by saying that post-real macroeconomics is a
backwater that can safely be ignored; after all, “how many economists really believe
that extremely tight monetary policy will have zero effect on real output?”
To me, this reveals a disturbing blind spot. The trouble is not so much that
macroeconomists say things that are inconsistent with the facts. The real trouble is
that other economists do not care that the macroeconomists do not care about the
facts. An indifferent tolerance of obvious error is even more corrosive to science
than committed advocacy of error.
It is sad to recognize that economists who made such important scientific
contributions in the early stages of their careers followed a trajectory that took them
away from science. It is painful to say this so when they are people I know and like
and when so many other people that I know and like idolize these leaders