Professor Roger Baldwin of CEPR and the otherwise excellent Vox has a hubristic commentary of the Wolfson Prize finalists.
As we pointed out last week the list was striking for its lack of vanilla neoclassical economists – to whom Lord Wolfson initially offered the prize to. Only two had degrees in economics. Baldwin decries this saying only one has a graduate degree in economics (missing that Neil Record has an MSc degree (with distinction) from University College London and served the early part of his career as an economist with the BoE – so his comment on Record as an ‘amateur’ who needs to take a ‘crash course in macroeconomics’ is outrageous given his record (no pun intended) of publication on monetary theory).
Of course Lord Wolfson had a conservative axe to grind but the issue of the potential break up of the eurozone extends beyond the narrow neo-liberal confines of the Osbourne/Wolfson set. It has for example been a major point of discussion at this weeks Inet Berlin. Most agreed the euro was a mistake, rather less agreement of whether its breakup is possible or whether it would simply fall apart rather than be rationally broken up.
Baldwin approvingly quotes Krugman on “exploding the fallacies of vicious reasoning” as if the mere appendage of three letters was a gateway to superior esoteric knowledge. However the outbreak of the Keen/Krugman debate has shown that the real fallacy of vicious reasoning was Krugmans appalling knowledge of modern banking and central banking, which as well as running counter to the views of the vast majority of those working in this field or at central banks these days showed he had a far worse knowledge of this field than most enthusiastic amateurs. Not surprising given that banking theory disappeared from neoclassical textbooks 50 years ago.
Economists with the necessary background do not work on spec – they are already oversubscribed. No surprise then that so few economists participated – at least judging from the posted essays.
Well many did, anonymously, fearing failure to make the short list would be career suicide. Record for example submitted his entry anonymously. Architectural competitions learned this long ago, it isn’t an asinine ‘Britain’s got Talent’ approach. Competitions and prizes have an illustrious history, including of course the discovery of accurately navigating oceans by an ‘amatuer’ watchmaker to the equal annoyance of professors of astronomy. The real issue is that neo-classical economist had no solutions.
Baldwin makes a good point in quoting Eichengreen (2007)
The [devaluation] anticipation problem concatenates three facts (Eichengreen 2007):
1) Greece would leave to devalue;
2) EU capital markets and banks are extremely integrated; and
3) Leaving would take time.
Fact 1) creates a one-way wager; 2) provides the means of placing huge bets, and 3) gives everyone the time to do so – leading to “the mother of all financial crises” (Eichengreen 2007).
However we have the mother of all financial crises now given that staying in the euro and imposing austerity on peripheral debtor nations is creating debt dynamics that the markets consider unsupportable, heads you lose – tails you lose. It may not be a question of a wine drinking nation rationally leaving but a beer drinking nation such as the Netherlands considering that being forced into transfer union through support of an ever bigger bazooka was too expensive. Social turmoil or election may force the issue. Economics professors in wine drinking nations may not be making the decisions for much longer. What is his advice on what actions to take when it is forced?
Baldwin makes valid criticisms about the practicalities of (engineer) Catherines Dobbs proposal in terms of maturity mismatch, but his sneering approach is just an illogical argument from authority. If he considers (rightly) that her language on money supply is less than strict (true) then in a previous age a gentleman might have written a polite handwritten note to that effect suggesting corrections. Rather the accusation of ‘Annoying Dillitantism’ levied at her – part from being tautological – smacks more of hubris. After all it was economists who designed the EZ on the basis that markets were always right, and never predicted the GFC. As Taleb said last week teaching anything would have been better before 2007 than the models taught in universities, even gardening.
Get your trowel out Professor Baldwin (though not to dig a bigger hole), there is a lot of learn outside of the ivory tower and so called ‘amateurs’ may have a lot you can learn from.