1. I found this discussion very educational, but difficult to respond to, since since what might be controversial – and thus interesting to debate – is actually beyond the purview of Dr. Loury’s professional interests. I’ll give an example:

    Loury’s articulation of the predictability of economics in the marketplace hinges on two questionable presumptions:

    1. Players in the marketplace are primarily motivated by the wish to make money.

    2. Players in the marketplace are engaged in vicious competition against each other.

    These presumptions may be true (I suspect they are); what makes them questionable is that they raise all kind of questions concerning ethics, social psychology, and responsibility, that really cannot be addressed within the profession of economics (although they certainly ought to be raised, at least in graduate school – but are not).

    It should be noted that it was not ever thus – early capitalist entrepreneurs were also motivated by, eg., the desire to construct memorials to themselves, or to begin dynasties, or improve the lives of others – money was perceived, at least by some, as a means rather than an end. And politics – especially during wartime – often brought competitors together in ways now apparently unimaginable.

    But again, none of these issues need be brought to Dr. Loury’s door – that isn’t the kind of economics that he practices.

    But perhaps he should; perhaps these are exactly the issues economists should address….

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  2. Interesting discussion. I would make a point about the “predicting a crash” issue. I agree that the ‘how come you didn’t predict such-and-such a crash?” is a silly criticism – after all one of the predictions of economics is that the timing of any crash will not be predictable.

    But a more serious criticism is “how come you didn’t predict that such-and-such a crash was a risk?”

    Take the securitisation of low value mortgages. I can remember having a lecturer describe these things back in the nineties and expressing some skepticism about them. My main problem was a social one, that the securitisation would mean that banks would be under pressure to foreclose quickly at a time of high house prices rather than give the mortgage holder space to get over short financial problems, but another student made the point that at a time of falling house prices the market could collapse. As I understand this is just what happened, and I wonder why this came as such a surprise to those involved.

    A rational approach should have seen holders of these securities divesting from them or creating hedges for them as they saw the property market fall. But this did not appear to happen.

    Perhaps there is a role for psychology in economics after all, in analysing the psychology of traders and investment firms. The student in my class, who turned out to be prophetic, was given very short shrift by the lecturer (who was also an investment professional). Securitised mortgages were a cutting edge ‘technology’ and considered very sexy at the time by economists and business finance professionals.

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  3. Hi DanK, this was a nice conversation. It was useful and I’d like to hear more from economists mainly because I don’t know much about their work and where I do I usually come away skeptical (though I tend to like Krugman). Glenn sounded very level headed and careful about claims, which was nice.

    One thing he said about economics v social sciences was interesting. He said that they basically just need to know something like “water flows downhill and settles at the bottom” to do their work. In other words they don’t require more specific/detailed info about human behavior to understand/compute a general process. Someone would be there to drive/enact the process.

    That reminded me of when I was doing work in earth science, building units to generate energy from soil (specifically submerged soil). You just need to stick in certain materials and soil bacteria will give you electrons and so energy. This was interesting and at some point I asked the professor what bacteria they were. We could of course do tests to find out. He said he didn’t care. It didn’t matter because we know some bacteria of some kind would come to fill that role and that’s all we needed to know about that.

    But I thought I AM interested! I DO care! That IS interesting to me! And it was not long from there I said goodbye to earth science and moved into molecular biology. I think the same thing hinders my interest in economics compared to other social sciences. I want to get under the hood.

    One question I would have liked you to ask is related to such person level “ignorance” built into assumptions. When this latest economic catastrophe unfolded Greenspan famously said that their assumption of rational actors turned out not to be true. I’d be interested if Glenn felt this was true and if it has affected approaches based on those assumptions. Because here it seems to have mattered.

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