Have an opinion about string theory? How about macroeconomics? By Scott Sumner

Here’s Paul Krugman:

In his incredible essay “The Great Slump of 1930” – an essay that reads remarkably well to this day, as an analysis of our crisis as well as his – Keynes briefly vents a bit of frustration. “For — though no one will believe it–economics is a technical and difficult subject.” It’s a peevish line, easily taken the wrong way. But it is a line I think of fairly often, and it came to mind reading a recent post by Brad DeLong. . . . And what made it sadder was that Kinsley clearly didn’t understand what was going on – that there are issues on which there’s a big difference between just being clever in general and being a guy who really knows what he’s talking about. He thought that a gut feeling – he himself put it that way – plus slick writing entitled him to weigh in on macroeconomics. It didn’t. I’m not talking about being a paid-up, card-carrying member of the guild. There are quite a few people with all the professional credentials who are nonetheless useless or worse on actual policy issues, and a significant number of self-taught people without formal credentials who do a fantastic job. No, what matters is a large investment of time and hard thinking – and also a lot of reading of what other smart people have said, not to mention economic history. Sorry, but just being a clever, facile writer doesn’t cut it – and imagining that you can just brazen it out in this arena is a recipe for serious embarrassment. And to turn from the generic to the personal, when it comes to liquidity-trap economics – what happens when short-term interest rates are near zero, so that conventional monetary policy no longer works – I invested a lot, a long time ago. There are issues I didn’t cover in my work on Japan back in 1998, notably the effects of private-sector debt, but I covered a lot. When I make predictions about the effects of monetary or fiscal policy in this environment, I could very well be wrong, but I’m not going to be wrong in ways that someone who has never studied these issues and is shooting from the hip or listening to his gut is going to discover.

Notice that Krugman is aware that this view could be “taken the wrong way.” So let’s think about why that is. Suppose we were talking about string theory instead of macro. Imagine I was debating a string theorist, and I told him the theory was a bunch of worthless nonsense, as it was not refutable. He might respond that I didn’t know what I was talking about. And to be honest I would have to agree with him, I don’t know what I’m talking about in the realm of string theory. And having once read someone who does, who also criticizes the theory for being unfalsifiable, doesn’t change that fact.

I don’t think many people would be insulted if you told them that they are not qualified to debate quantum mechanics, or biochemistry. But they do get offended when you tell them they are not qualified to debate macroeconomics. Why is that?

Perhaps because people can immediately recognize that fields like physics and biochemistry are way over their heads, but macro looks deceptively simple. Macro uses a lot of terms like money, saving, interest rates, investment, income, demand, unemployment, inflation, exchange rates, debt, deficits, etc., that seem to correspond to things in our everyday experience. And we obviously do have opinions on things in our everyday experience. And we are entitled to those opinions. But in fact almost none of these terms mean the same thing in macro as in everyday life. Commenters are often puzzled by the S=I identity. How can it be an identity if I were to decide to put some money under my mattress and yet investment did not rise at that same moment? They don’t realize that putting money under your mattress is not what macroeconomists mean by saving.

And the same is true for the others. When people hear about the Fed pumping money into the economy they wonder who the lucky duckies are that get all this money. They think of money as being like wealth. “Bill Gates has a lot of money.” Um, no he doesn’t, not ‘money’ in the sense that I use the term (cash and bank reserves.) It also makes a huge difference to a macroeconomist whether you are talking about real or nominal exchange rates, and yet most people don’t know the difference. People often don’t know that home building is capital investment, and contrast people who “save” with those who “spent” money on a new house (a nonsensical statement to a macroeconomist.) They think an unemployed person is an adult without a job. They don’t know the difference between supply-side and demand-side inflation, and hence think inflation reduces living standards. They think deficits are bad because, well because they sound bad. Or because families have to live within their means. Or because current account deficits mean we are exporting jobs (not true.) Or that current account deficits mean we are borrowing money from the rest of the world (not true, although even some macroeconomists believe this one.) Or that “income” is that stuff you report on your 1040 form. Or that the “G” in the GDP=C+I+G equation is government spending. Or they think demand means something like “amount purchased.” Or they confuse the money market with the credit market. BTW, the media feeds these misconceptions.

I know lots of conservative non-economists who oppose fiscal stimulus. Suppose one of them debated Krugman on the issue. If I watched the debate I’d probably end up agreeing with the policy view of the stimulus opponent, and also thinking that Krugman absolutely destroyed my friend. Left him on the floor in a bloody pulp.

Since I’m going to get accused of being an elitist, I might as well go all in. I’d put many PhD economists into the “unqualified to debate macroeconomics” category. And yes, there are a few non-economists who have become pretty skilled debaters on macro issues, especially in the blogosphere, including some brilliant commenters. So these are just generalizations, not hard and fast distinctions. Even more than Krugman, I’m unimpressed by credentials (but then I would say that, having far fewer than Krugman.)

Sometimes I see thoughtful comments that are wrong, and I feel bad. I think to myself “I’d have to teach an entire course on macro to really explain to that guy where he went off course.” And I just can’t do that. So I do the best I can with the limited time available. Often the comments go beyond “wrong” into the realm of meaninglessness (i.e. “banks don’t lend out reserves.”) If some of my responses seem inadequate, that’s probably because they are. Yes, I “haven’t really answered” your question.

PS. The 5 most important words in Krugman’s post are “not to mention economic history.” A macroeconomist who’s not well versed in economic history is like a political scientist who knows little of political history.