A Question for Economists

Sincerely: do you believe your discipline has earned a status as a decider of policy? Which successes would you point to in order to highlight this? And how have non-economists fared in the policy arena compared to you?

Justin Wolfers recently tweeted to the effect that although economics is not perfect, it is the best existing way to formulate policy. Yichuan Wang has also defended economists’ record in the real world. Bryan Caplan has notoriously argued that voters do not know enough economics and therefore cannot be trusted with policy. In general, economists are always willing to trot out policy prescriptions – often at the end of mathematical papers that are largely incomprehensible to the public – on the grounds that they are scientifically determined solutions to social and economic problems. But does economists’ record formulating policies justify this? I’m skeptical: as far as I’m aware, economists’ record shows few successes, many failures, and a lot of ambiguity.

Generally, economists favourite policies actually don’t have much evidence behind them. ‘Free trade’ deals have ambiguous effects on growth. The issue of whether the minimum wage produces unemployment is famously controversial, with any of the effects predicted being undeniably small. Estimates of the Keynesian multiplier also vary widely, and are generally easy to predict based on the political biases of who is doing the estimation. There is also a surprising lack of evidence to support the contention that fiscal stimulus alone can ‘kick start’ a flailing economy. Sure: the New Deal created growth, but it didn’t end the Great Depression. Japan has had a lot of monetary and fiscal stimulus but has remained in a ‘lost decade‘. Countries that have used stimulus and done well in the recent crisis generally had strong institutions and financial sectors (Sweden, Germany) or are simply at an earlier stage of development and therefore their growth is far more resilient (China). What’s more, you get as many arguments against stimulus coming from economists as you do for it, so even if it were the case that stimulus were the ‘right’ policy, the discipline hasn’t been a beacon of scientific truth concerning the matter.

What’s more, there are many examples of economists chosen policies clearly failing when applied to the real world. Milton Friedman’s quantity-targeting monetarism failed in 3 different countries in the 1980s. The Black-Scholes formula for pricing financial assets is infamous for its complete inability to do its job properly, and has caused chaos wherever it has been used. The ‘Great Moderation’ was built on inflation targeting and financial deregulation, both of which were pushed by vocal economists, and it culminated in the 2008 financial crisis (no, the two were not unrelated). The IMF’s ‘structural adjustment programs’ – such as those used in the ‘transition’ of the former communist countries, and in sub-Saharan Africa, engineered largely by well known economists like Jeffrey Sachs – were notorious disasters. It’s true that Africa’s economic performance has been better in recent years, but this has less to do with the influence of economists and more to do with commodity booms and a decrease in conflict.

The one major example of macroeconomic success was in the post-World War 2, Bretton-Woods era. The ideas put in place – pioneered by economists John Maynard Keynes and Harry Dexter White – revolved around trade management and stable exchange rates. However, these ideas were quite far from the mainstream and are endorsed by few today; the discipline believes it has moved past them. What’s more, these ‘social democratic’ policies were erected largely because of popular support after the devastation of the depression-war period. In fact, the major aim of Bretton-Woods was to prevent another world war from happening. The whole thing was a more of a social movement based on political dynamics than an example of technocratic economists coming along and working their magic.

However, perhaps there are a few examples of this occurring elsewhere. One of economists’ go-to examples is auctioning off wireless spectrums. However, the evidence on this is actually somewhat mixed. In the UK and US, many of firms who’ve won the auctions have been incapable of utilising the spectrums they have bought and have had to sell them back to the regulatory bodies. Furthermore, since different companies often have to cooperate to prevent disturbances, fierce competition can undermine this process and engineers can be necessary to plan and coordinate things. To be sure, I don’t claim to have a definitive answer to this problem, as it is complex, but it seems that economists don’t have such an answer, either.

Now, there is one clear example of economists toolkit resulting in real world success: recent Nobel Memorial Prize winner Al Roth, whose work on ‘matching’ in kidney markets, schools and more has produced admirable results. It makes sense that this kind of thing would be an example where economics ‘works': after all, in such situations choices are clear, there are not too many actors and institutional variables, and people have access to all of the information they need. However, this is the only obvious example I can think of.

What about non-economists record with policy? Well, developed countries rose to prominence before economics as a separate discipline really existed. And, as Ha-Joon Chang has pointed out, recently industrialised/industrialising countries such as South Korea, Japan and China have largely relied on bureaucrats and lawyers to form policy (and my sources tell me that the economists in China are inclined towards Sraffian economics). Different countries have benefited from highly disparate approaches to policy: in keeping with their history, culture and existing institutions, but without much consideration of ‘economic logic’. To be sure, there are examples of both good and bad policies coming out of the democratic process, but the bad is certainly not worse than economists’ record, and it least it’s accountable to the people it affects. (Incidentally, public choice theory is not a sound argument against democracy, and even if it were, it would also be an argument against economists).

This is only a brief, cursory overview, but even so we should have expected better examples of economists’ successes, and far fewer, less catastrophic failures. In my opinion, if there is a role for economists in advising policy, it’s on small, micro-issues like Al Roth’s auctions, or on specific empirical matters. However, once we get more complex, economists’ pet policies seem to be at best neutral, and they have no empirical reason to prefer their choices to those of the electorate.

About these ads

,

  1. #1 by Roman P. on September 30, 2013 - 2:35 pm

    Worth more than a thousand words:

    http://shot.qip.ru/003nPv-4AD7h3IMJ/

    Source:

    http://www.demoscope.ru/weekly/ssp/rus_lt.xls

    It’s a table containing the data on the mortality of men in USSR/Russia in different years in comparison to 1990 baseline. As could be seen, the policies of the neoliberal reformists might be compared with genocide.

    • #2 by Unlearningecon on October 1, 2013 - 12:25 pm

      What do the numbers for the rows represent?

      • #3 by Economic bunker on October 1, 2013 - 5:20 pm

        Rows are the ages 0 to 75. 1990 column is the base year.

      • #4 by Roman P. on October 1, 2013 - 9:18 pm

        As EB says.

        Sometimes I think that this generation has escaped a civil war, but lost it at the same time – the estimates of the demographical losses are about 11 millions or so. Talk about seen and unseen. Every economist, insofar as he gives policy prescriptions or publishes theories to base those prescriptions on, might be a participant in a genocide on an unprecedented scale.

  2. #5 by notsneaky on September 30, 2013 - 4:20 pm

    “‘Free trade’ deals have ambiguous effects on growth.” – as the theory predicts. A move from autarky to growth has level effects not necessarily growth effects. The latter would depend on the existence of economy wide economies of scale. And btw, there have been papers after Rodrik & Rodriguez which have addressed their critiques and it looks like… trade does have some positive effect on growth.

    ” The issue of whether the minimum wage produces unemployment is famously controversial, with any of the effects predicted being undeniably small” – sure. If the price floor is set close to or below the market price then theory predicts it will have negligible effects. I’ll partly give you this one though, mostly because it’s a good example to throw in the face of snotty microeconomists when they get critical of macro people. But again, the effect is pretty much “as the theory predicts”

    “And, as Ha-Joon Chang has pointed out, recently industrialised/industrialising countries such as South Korea, Japan and China have largely relied on bureaucrats and lawyers to form policy” – if you believe Ha-Joon Chang. I don’t. At least in the sense that he exaggerates, probably for ideological reasons. I don’t think I believe “your sources” very much either. “My sources” tell me that Chinese businessmen and bureaucrats have never heard of Sraffa. More or less the same as US and British businessmen and bureaucrats. Get better sources. Sure, there was a good bit of state intervention in all these countries. But essentially all three of them grew by switching from mostly command economies to market economies.

    “The IMF’s ‘structural adjustment programs’ – such as those used in the ‘transition’ of the former communist countries, and in sub-Saharan Africa, engineered largely by well known economists like Jeffrey Sachs – were notorious disasters” – another myth. Czech Republic, Hungary and Poland transitioned quite well, thank you very much. Russia didn’t but that’s the place where Sachs got pissed off that no one was listening to him and left. And you can name other places where shock therapy worked exactly as it should, from Ghana to Bolivia and even… Chile. You can name places where it failed, usually either because of unique circumstances or because it wasn’t really implemented.

    Ok, I’m not gonna bother with the rest. Basically you’ve constructed some pretty weak strawmen and declared victory by citing “heterodox” critics, blog posts, magazine articles written by journalists who have no idea what they’re talking about and “my sources” etc (I’ll give you R&R and Stiglitz though keep in mind that as awesome as these guys are, one doesn’t have to accept everything they say as gospel truth). Which is another way of saying that you don’t like mainstream economics (but we already knew that) but not really a serious argument.

    • #6 by Unlearningecon on September 30, 2013 - 7:40 pm

      I guess we might make a distinction between ‘popular economics’ and ‘academic economics’. The former is, sadly, the one that has the most influence on policy. If you want to refer to empirical papers produced by economists that show small or conflicting effects and have a lot of caveats, that’s fine – I have no qualms with those. But neither are they particularly useful for policymakers.

      And focusing on the “my sources” bit? Really? Gee, that was a light hearted, throwaway comment that concerned economists I know meeting with Chinese economics departments, not policymakers. But I’ve learned before that economists lose any semblance of ‘light hearted’ when somebody criticises their discipline, so perhaps I should caveat absolutely everything I say. Of course that would make my posts even more dry than they already are.

      sure. If the price floor is set close to or below the market price then theory predicts it will have negligible effects….But again, the effect is pretty much “as the theory predicts”

      No, what I meant is that effects either way are small. Obviously, C-K actually showed a positive effect. All in all I think that the question of what the minimum wage should be has little to learn from economic theory.

      Now, in the rest of the post you make a lot of vague claims about the efficacy of economists’ policies in various countries, some of which I know more about than others, but I’ll respond to your points with what I do know.

      if you believe Ha-Joon Chang. I don’t. At least in the sense that he exaggerates, probably for ideological reasons.

      The defining feature of the policies in Japan, China and South Korea is that they were pragmatic. As are the policies in Scandinavian countries, as were the policies in industrialising Britain and the US. They all took into account existing institutions (eg state quotas in China, flexicurity in Denmark, collective workplaces in Japan). You can “not believe” Chang if you want, but you’ll have to show some evidence of mainstream economists’ influence in these examples, as it seems clear to me that all of these places were successful simply because their policies were organic.

      Czech Republic, Hungary and Poland transitioned quite well, thank you very much.

      But in Poland the reforms actually started well before shock therapy, and were far more gradual. Following shock therapy growth, unemployment etc. went in all the wrong directions. The result was that a lot of the programs were weakened and things like state credit were restablished, while tariffs were increased. That link also deals with your “they didn’t do it enough” ideas about Russia, which simply doesn’t sit well with what happened. The reforms were pretty extensive. Hungary also had a much slower transition. In general, the idea that rapid privatisation of all state owned industries has been a cause of success is questionable.

      Also, if Hungary has done such a great job of transitioning, why do most people (and many in other former EB countries) think they were “better” off under communism?

      And you can name other places where shock therapy worked exactly as it should, from Ghana to Bolivia and even… Chile.

      Wow, no. In Chile the only thing that kept the economy afloat were the exports the copper industry and corfco, which both remained state run/sponsored because the military junta refused to privatise them, against the wishes of the Chicago Boys. The areas that were deregulated, like finance, did not do very well and a speculative bubble burst in 1982, reducing GDP by 14%. After this the regime had to retionalise some of the banks and institute capital controls and other regulations. In the 90s, once democracy was restored, they also embarked on poverty reduction programs to alleviate the problems caused by shock therapy.

      In Bolivia it’s true that inflation was tamed by Sachs’ proposals, but as usual this came at the cost of increased unemployment and poverty. Honestly I know very little about Ghana, but my suspicion is that again it won’t be as simple as you imply. And of course, none of this is to mention the ‘methods’ which were used to inflict shock therapy in Latin America.

      Basically you’ve constructed some pretty weak strawmen and declared victory by citing “heterodox” critics, blog posts, magazine articles written by journalists who have no idea what they’re talking about

      Rodrik, Harford, Stiglitz, Galbraith Jr, Chang, an electrical engineer, Card-Krueger, Leif Lewin. These guys aren’t backwater cranks making blog posts. They are well known people with empirical research behind their ideas. Neither did I “declare victory”; I offered what even I termed a “cursory” exploration of economists’ record. Honestly I have no idea what you’re talking about. Anyway, do you think economists have a good enough record to end all their papers with policy advice?

      • #7 by notsneaky on September 30, 2013 - 11:21 pm

        Ok there’s really just too much to reply here. Too much wrong. Too much making stuff up. Too many links to some cherry picked study, article or … Wikipedia.

        Example:

        “In Bolivia it’s true that inflation was tamed by Sachs’ proposals, but as usual this came at the cost of increased unemployment and poverty. ”

        See. This is where I realize you’re just making stuff up. There’s no reliable data on poverty in Bolivia before 1989 or so. I don’t know if you’re just trying to bluff or if you read some “heterodox” article somewhere which said “the poverty in Bolivia is high today hence it must’ve been caused by Sachs!”. Either way – nope.

        There is some data on unemployment though. And yeah, unemployment may have increased after the shock therapy program. By a little bit. And at a slower rate than it was increasing prior to it. And then it just stayed there for a few years and then began to fall. And stayed much lower.

      • #8 by Unlearningecon on September 30, 2013 - 11:39 pm

        OK dude. Maybe if you could back up your own vague assertions with anything approaching the level of detail I have (which was far from comprehensive) then your dismissive tone would be warranted.

        By the way, you are right that we don’t have clear, standardised data on poverty in Bolivia. What we do know is that unemployment increased, real wages decreased (particularly those of the poor), PC GDP decreased, many social support programs were eliminated and begging increased in the city(s). What’s more, the cocaine industry grew massively following the reforms; it was one of the only things keeping growth and exports buoyant.

      • #9 by notsneaky on October 1, 2013 - 1:49 am

        If I’m “right that we don’t have clear, standardised data on poverty in Bolivia” (actually we don’t have it only for before 1989) then why did you claim, in the comment right above so it’s not like it’s hard to find, that “as usual this came at the cost of increased unemployment and poverty.”? If you don’t know something and have no evidence but yet proceed to make a strong claim regardless that’s called “making stuff up”

        I’m not sure what vague assertion I’m supposed to back up. That there’s no data on poverty in Bolivia pre 1989? How am I supposed to do that exactly? Look around. If you find any such data I will happily admit I was wrong and be delighted to see it.

        For unemployment, the data is easily available, just look for it.
        Between 1980 and 1986 unemployment rate went from 5.8% to 20%, or up by about 2.37% each year. Between 1986 and 1987 it went up from 20% to 20.5%. Not a very drastic increase that would support the idea Bolivian shock therapy caused massive unemployment. And what happened afterward? From 1987 to 1990 it went down to 19%. Nothing huge either but at least it stabilized and started going in the right direction.In 1991 it fell to 6.6% (which I personally regard with suspicion)

        For GDP per capita (also easy to find), whether you look at PPP adjusted or exchange rate converted or LCU real per capita GDP it dropped from the late 70’s to … 1986. For example for PPP adjusted GDP per capita it fell by about 23%, or at about a rate of 4% per year. After the shock therapy growth was in fact slow (a little over 1% per year) but at least it was in the right direction.

        And then you follow up with more completely unsubstantiated claims:

        “What we do know is that unemployment increased, real wages decreased (particularly those of the poor), PC GDP decreased, many social support programs were eliminated and begging increased in the city(s). What’s more, the cocaine industry grew massively following the reforms; it was one of the only things keeping growth and exports buoyant.”

        Data? Sources? I already showed above that PC GDP increased, so again, you’re making stuff up. And iIf we don’t even know the poverty rate in pre-1989 Bolivia how in the world can you be so certain that “begging increased in the city(s)? I mean, I’m sure you can find someone who makes that assertion but real concrete data? Wages? etc.

      • #10 by notsneaky on October 1, 2013 - 2:32 am

        And come on!

        “the cocaine industry grew massively following the reforms; it was one of the only things keeping growth and exports buoyant.”

        Seriously? You do realize that cocaine production is not counted in GDP statistics. It is not counted in exports either. So it just COULD NOT be the reason why exports and growth were buoyant (wait! I thought you said that PC GDP *fell* because of the reforms but here you are saying growth was buoyant? You really need to get your stories straight first)

        And that’s assuming that your assertion about the increase in this industry is true (maybe, why not, but it probably didn’t have anything to do with the reforms rather, you know, the explosion in demand, sometimes called the “Crack epidemic” that occurred in the 80’s)

        This is my point. Some of your statements are so wrong on so many levels that it’s just impossible to respond. The data is wrong. The logic is wrong. The statements are mutually contradictory. And some of it is just plain irrelevant.

      • #11 by Unlearningecon on October 1, 2013 - 10:28 am

        Here is my source, chapter 7, mostly starting on p.149. Real wages dropped and in particular the peasant’s income was very low. PC income and unemployment did go in the wrong directions, and the only reason things were not worse was the cocaine trade – it served as a way of alleviating the unemployment and poverty caused by the shut down of state enterprises and the general turmoil. It may not be included in the official statistics but it still brought a lot of money into the economy that wouldn’t have been there otherwise, and glossed over social problems. It is also potentially the explanation for the sudden drop in unemployment you mention, as they switched to the labour force survey measure at that time. 1 in 10 were working in the industry at the time, which is about the same amount unemployment dropped.

        Yes: I used the word “buoyant” inappropriately, true: I meant “not as catastrophic as it could have been” (I had an image of a boat floating steadily). And yes, the demand side of the equation probably had to do with the crack epidemic, but many peasants explicitly said they’d been forced into the cocaine industry by the reforms.

        Btw, even if I were completely wrong on Bolivia, that doesn’t justify your sweeping statements. It’s true my knowledge of some countries is weaker than others, but I’d like to see you argue with the point about Chile, for example. Or Russia.

        Edit: thinking about it, perhaps some nuance is being lost here. There are some things you deal with suddenly and drastically, the chief of these being runaway inflation by re-anchoring the currency and so forth. In Bolivia, that aspect of Sachs’ plan was actually a positive. However, using this as an “opportunity” to decimate state-run companies and social programs, lower tariffs and so forth only seems to create poverty and unemployment where it has been tried.

      • #12 by notsneaky on October 1, 2013 - 5:53 pm

        You really should’ve just been upfront that you’re repeating stuff from Klein’s Shock Doctrine. That would’ve saved us a lot of time. It’s not a basis for any kind of serious discussion (as already evidence by the fact that she gets the unemployment and gdp figures wrong for Bolivia, among other things).

        Still, I guess that gives you the excuse that it wasn’t you who was making stuff up, rather you just blindly relied on someone else who made stuff up.

      • #13 by Unlearningecon on October 2, 2013 - 10:49 am

        Still, I guess that gives you the excuse that it wasn’t you who was making stuff up, rather you just blindly relied on someone else who made stuff up.

        [citation needed]

        I’ve actually written about the largely intellectually bankrupt attempts to discredit Klein. Aside from her comment about 25-30% in Bolivia, which I agree is wrong, the stuff about the poverty/cocaine industry, as well as the kidnappings, is largely true.

        Btw, I didn’t actually mention shock therapy too explicitly in this post, for two reasons:

        (1) I wanted to be kind to economists. I don’t want to tar them all with the brush of what happened in Chile and elsewhere.

        (2) I didn’t want to start a shit storm filled with crap about Naomi Klein.

        And I wasn’t attacking Sachs specifically, so you can defend his personal record wrt Russia if you want. The fact remain that the transition was largely engineered based on economists’ style of thinking, and it was well and truly a disaster.

        The basic question is this: do you think it is right for economists to decide a sovereign nation’s policy without the consent of its people? Is their record in designing policy is a good one? I would answer no and no. Maybe you would answer no and yes?

      • #14 by notsneaky on October 2, 2013 - 9:42 pm

        [citation needed]

        … Aside from her comment about 25-30% in Bolivia, which I agree is wrong, the stuff about the poverty/cocaine industry, as well as the kidnappings, is largely true.

        Why are you asking for a citation when you are agreeing that Klein made up (or was wrong, whatever) the unemployment number for Bolivia?

        And above you also agreed that no poverty data exists for this period so there is no way she, or you, or me, can know what happened to the poverty rate (still, as beauris1983 points out below hyperinflation hurts the poor the most as they have no means to protect against it, so it’s doubtful that putting a stop to it made them worse off)

        She, and you, also got the GDP PC wrong – it began growing again starting in 1986 after shrinking dramatically in the period from 1978 to 1985.

        You can type “unemployment Bolivia” or “poverty Bolivia” or “GDP per capita Bolivia” (just make sure you use real not nominal) into google and easily find the numbers, or the lack there of.

        So I think that pretty much documents that she made it up. And looking around a bit it turns out I’m not the only one who’s noticed this playing loose with numbers (particularly for Poland and Bolivia):

        http://www2.warwick.ac.uk/fac/soc/economics/staff/academic/harrison/comment/shockdoctrine.pdf

        Harrison looks at six random (or maybe the first six he comes across) figures from Klein and finds only one is actually supported. He’s much nicer about though.

        As far as the increase in cocaine goes, like I already said, the increase itself might very well be true (in fact I would be surprised if it wasn’t). But it’s the casual link which you and Klein make between the reforms and the cocaine production (because “farmers were forced into it”) that’s bunk. Cocaine production increased because demand for it (in US) increased because somebody invented crack. This had nothing to do with the reforms and I see no evidence to link the two… like you say “[citation needed]”

        …The fact remain that the transition (in Russia) was largely engineered based on economists’ style of thinking, and it was well and truly a disaster.

        No such fact remains because it wasn’t established in the first place. Yes, the transition was bungled. Although given how much of a mess the Soviet Union was by the late 80’s that’s not that surprising (what’s surprising is actually the successes in Poland, Czech Republic, Estonia etc.) But no, it was not “largely engineered based on economists’ style of thinking”.

        The basic question is this: do you think it is right for economists to decide a sovereign nation’s policy without the consent of its people? Is their record in designing policy is a good one? I would answer no and no. Maybe you would answer no and yes?

        You’re trying to set up a strawman here and you are implicitly assuming your own conclusion. The economic reforms in Eastern Europe and Bolivia were implemented by national governments which had been brought to power via democratic elections. So there is no economists deciding things for sovereign nations, much less “without the consent of its people”. You sound like some Republican complaining about Obamacare and how that too is supposedly being implemented “without the consent of its people”.

        As to the record, I’m perfectly willing to admit that it’s mixed. Real world is hard.

      • #15 by Unlearningecon on October 2, 2013 - 10:58 pm

        Klein’s statement about “25-30%” unemployment was, as far as I can see, exaggerated, but on PC GDP it was not. You say that it started rising in 1986, but actually that was statistically insignificant and it basically stagnated until about 1990s.

        And above you also agreed that no poverty data exists for this period so there is no way she, or you, or me, can know what happened to the poverty rate

        I said that no standardised data exists. So what do we do – give up and go with your preconceptions? No – we look at other things: data on wages and government support, on the-ground-reports from poor Bolivians, statistics about the rise of cocaine production, etc. We can then infer a general outlook, and from what I can see it certainly wasn’t good.

        And why would I dispute that hyperinflation was a bad thing?

        So I think that pretty much documents that she made it up. And looking around a bit it turns out I’m not the only one who’s noticed this playing loose with numbers (particularly for Poland and Bolivia):

        http://www2.warwick.ac.uk/fac/soc/economics/staff/academic/harrison/comment/shockdoctrine.pdf

        Harrison looks at six random (or maybe the first six he comes across) figures from Klein and finds only one is actually supported. He’s much nicer about though.

        I’ve read Harrison’s critique before. The relevant section about statistics has its merits, and there’s no doubt that Klein’s style is journalistic and exaggerated in places. However, there are always counterpoints. For example, Harrison attributes the decline in life expectancy in Russia to a preexisting trend, but the drop is simply far bigger than any preexisting trend. Furthermore, in his section on 50s/60s Latin America, Harrison acknowledges that GDP is but one metric to judge success by, but does not look into others. In fact, most of the “growth” in eg Chile under Pinochet seemed to be in the incomes of the wealthy elite, while real wages, unemployment and poverty lingered – they didn’t really improve until democracy was reinstated. This is why people in Latin America keep voting for leftist politicians: they don’t care about GDP; only about what is actually happening to them. Such GDP fetishism was actually most eloquently dismissed by a Chilean economist. Anyway, I’m rambling so I’ll stop, but maybe I’ll follow up on this in more detail at some point.

        But no, it was not “largely engineered based on economists’ style of thinking”.

        Pro-market, anti-tariff, pro-austerity and so forth packages were obviously endorsed by the economists in charge of the IMF and World Bank. A large proportion of them were Chicago School graduates. Sachs was about as left wing as they came – barring Stiglitz, but he had little influence, hence why he left – and he still endorsed the broad bent of these policies.

        The economic reforms in Eastern Europe and Bolivia were implemented by national governments which had been brought to power via democratic elections.

        and

        What dictators were installed in Bolivia or Eastern Europe during the shock therapy programs? What dissenters were imprisoned or kidnapped? Oh wait… it was actually the dissenters who had just come out of dictator’s prisons which implemented the reforms.

        In Bolivia key opponents (trade union leaders) were kidnapped so the reforms could be pushed through, and for a long time the political situation there was so tumultuous in general that comparing it to even the low standards of western democracy is a stretch. In almost all of the former communist countries the governments were desperate for aid from the IMF, so they were forced to accept certain conditions (Solidarity being the most obvious example of this; after all, they were largely a socialist party). However, actual dictators were reserved for the grateful populations of Chile, Argentina, Uruguay and Brazil.

      • #16 by beauris1983 on October 2, 2013 - 9:58 pm

        A quick note on the “(hyper)inflation hurts the poor”, I have to correct myself. It probably hurts the middle class the most since they are the once with savings in the local currency. Poor and relatively poor people don’t have savings. They get their salary on a weekly or so basis and buy stuff when they have a little bit of cash. So they don’t get hurt by a wage-price inflation. If its only a prices its of course another story.

      • #17 by notsneaky on October 3, 2013 - 2:58 am

        I’m going to have to reply piece by piece here.

        So, first:

        I said that no standardised data exists. So what do we do – give up and go with your preconceptions? No – we look at other things:…

        But that is exactly what you’re doing! You assume that “shock therapy” in Bolivia was bad therefore poverty just must have increased, never mind that there is no proof of that what so ever. On that note…

        …data on wages…

        Let’s see this data. And I mean real data not some “Naomi Klein says that someone once told her that their uncle once heard” kind of stuff.

        and government support,

        Separate issue probably best addressed separately. Just quickly – if you’re in as much of a mess as 1985 Bolivia with insane hyperinflation one way or another you have to cut government spending. You can’t raise taxes (most of your economy has gone underground), no one will lend you money, and now you make the hard choice to stop printing money. By sheer logic and accounting, that means government spending must fall.

        on the-ground-reports from poor Bolivians,

        Maybe, maybe not. These “on the ground reports” are always selectively chosen both for sensationalist purposes and ideological ones. I could probably give you “on the ground reports from poor Chileans” (yes, poor Chileans) who talk about “St. Augusto, who saved us from communism”. It all depends on who you ask, how you frame the question etc.

        You really need hard data or at least semi-hard data.

        statistics about the rise of cocaine production, etc.

        Which as I’ve explained are completely irrelevant here.

        We can then infer a general outlook, and from what I can see it certainly wasn’t good.

        Yes, but you’re not “inferring a general outlook”, you’re making one up to fit in with your preconceptions. What is it that the blogs call it these days? Derp?

      • #18 by Unlearningecon on October 4, 2013 - 12:49 pm

        OK, so I wrote a comment but it got swallowed up, so here we go again…

        You can call it “making shit up” if you like, I honestly don’t care. What is not true is that this justifies you extrapolating to the rest of what Klein says about Bolivia and labeling it false. Both per capita GDP and unemployment slumped, at $700-800 and at 20% respectively, until about 1990. What’s more, her data on real wages was not from her uncle but from this book, and is in fact well established – for instance, see this IMF document. You might argue, as that document does, that it had less to do with shock therapy and more to do with inflation, but then we get back into the actual debate I want to have, which is this: were all of the “shock therapy” measures taken in Bolivia and elsewhere actually necessary to curb inflation?

        If the answer is no, my point about economist’s failure with policy remains. And there are examples of more ‘organic’ policies that have dealt with similar problems more equitably: you can default, like Argentina, and re-peg your currency completely; you can preserve key state industries, like Chile(!), instead of gutting everything at once based on one size fits all ‘free market’ models. Iceland didn’t have hyperinflation but their method of defaulting and reforming the financial sector, all while causing minimal harm to their populace, seemed to deal with their debt problems quite well.

        Maybe, maybe not. These “on the ground reports” are always selectively chosen both for sensationalist purposes and ideological ones. I could probably give you “on the ground reports from poor Chileans” (yes, poor Chileans) who talk about “St. Augusto, who saved us from communism”. It all depends on who you ask, how you frame the question etc.

        There’s a key difference here. Someone who tells you Pinochet saved Chile from communism is making a political judgment. Somebody who tells you they and their union members have been wiped out, and that begging has increased, is giving you information. It may be imperfect and anecdotal information, sure, but it’s more than nothing, and it’s not comparable to your example.

        Which as I’ve explained are completely irrelevant here.

        You did not explain it at all; you asserted it based merely on the fact that the industry didn’t contribute to GDP. Earth to economists: there’s more going on than GDP. By employing 1 in 10 people, the cocaine industry masked the problems caused by unemployment and alleviated poverty (it paid quite well). What’s more, even if it wasn’t counted in GDP, it produced flows of money that obviously had knock on effects – even if London’s financial sector weren’t counted in GDP, it would still be relevant to the UK economy.

      • #19 by notsneaky on October 3, 2013 - 3:03 am

        “there’s no doubt that Klein’s style is journalistic and exaggerated in places. ”

        Unlike Mark I have no interest of being polite for politeness sake, and unlike you I obviously have no desire to make excuses for Klein.

        But if you translate “polite academic-speak” or “weaselly excuses” into normal English then the phrase “is journalistic and exaggerated in places” essentially just means “she’s making shit up”

        I prefer the straight up version.

    • #20 by moiracathleen (@moiracathleen) on September 30, 2013 - 8:38 pm

      In response to “notsneaky”

      It seems to me that the point of the post, as emphasized in the second paragraph, is that economists seem to think that economics provides the most efficacious way to formulate policy. The author lists a series of examples to support this conclusion that economics does not provide the most efficacious way to formulate policy.

      You claim UL’s point that: “The IMF’s ‘structural adjustment programs’ – such as those used in the ‘transition’ of the former communist countries, and in sub-Saharan Africa, engineered largely by well known economists like Jeffrey Sachs – were notorious disasters” is a myth.

      The reference to SPAs can hardly be deemed a hollow mythical argument. SPAs are based upon neoclassical economics and monoeconomics, which together formed the newly dominant paradigm for diagnosing economic problems and prescribing solutions.

      Neoclassical economics emerged in the late 1970s as a consequence of inflationary and macroeconomic distortions in industrialized countries. The mantra “big government is bad,” was reinforced by the alleged failure of centralized planning and the subsequent collapse of USSR. Critics of big government focused on “market forces” and “efficiency” both of which were supported by the new paradigm that we know as neoclassical economics. This paradigm was used to shape development economics including the World Bank structural adjustment programs.

      Neoclassical economics derives from a set of theories on the efficacy of market forces in resource allocation. It is based upon the monoeconomics principle that insists upon universality of rational economic behavior and the existence of marginal substitution possibilities in consumption and production.

      Neoclassical economics sought to reestablish the irrebuttable presumption of a standard economics policy analysis for all economies –industrialized and developing. See the Berg Report http://www.jstor.org/discover/10.2307/4005615?uid=2129&uid=2&uid=70&uid=4&sid=21102712913953 For example, the idea was that countries in Sub Saharan Africa could not develop because of trade shocks, lack of access to foreign credit and low demand for Africa’s exports. Low income countries in East Asia experienced faster growth though each had similar external shocks, and there was higher growth in Africa in earlier years with the same external shocks. The success of the Asian Tigers was presented as evidence that domestic policies were the problem. Early on, the basic economic principles of price incentives were distorted by using empirical evidence of rational economic behavior by the poorest peasants in developing countries to support theories such as the Lewis growth model, etc.

      From this emerged the IMF Stabilization projects (austerity) and World Bank Structural Adjustment Programs, with the central policy being limit the influence of the state/government and instead rely on market forces and efficient resource allocation to get prices right. In a sense, under this paradigm, the state/government was replaced with a central authoritative bodies, comprised of the World Bank, the IMF, industrialized countries, corporations, and the Paris Club.

      The World Bank’s SPAs are distinguished from the IMFs stabilization programs. The IMF focus on short term stabilization by reducing external, fiscal, banking, exchange rate and price imbalances. To do this the IMF used what we now call austerity: drops in real wages, cuts in public spending, lower credit, sharp devaluation, and high real interest rates. Public spending is reduced except in the case where public spending is serving external debts.

      By contrast, World Bank SPAs focus on short term and long term growth. SPAs aim to restructure production capacities and restore growth over the medium and long term. Typically, an agreement with the IMF was a condition precedent for World Bank Structural Adjustment Programs.
      Principles underlying the SPAs were based upon (1) mobilizing domestic resources with fiscal policy, monetary and credit policies, (2) improving efficient resource allocation through institutional reforms, privatization, reduced subsidies, and price decontrol, and (3) trade liberalization through reduction in tariffs and quotas and domestic support for exports.

      At first, SPAs focused mainly on stabilization and not enough on long term structural adjustments. Overtime, the SPAs were modified to include sustainable development and poverty alleviation, but the basic tenet behind the SPAs remained. The transformations in SPAs are described at length in by Sebastian Mallaby in his book “The World’s Banker.” http://www.amazon.com/The-Worlds-Banker-Financial-Relations/dp/0143036793#reader_0143036793

      Even still, the major source of controversy surrounding the SPAs was the notion that one particular set of policies will produce more growth than another set of policies. The value of empirical evidence from SPA is also challenged because it was often based on a subjective value preference.
      The outcome of social programs are not directly comparable. William Easterly claims in one paper that economics expansions under structural adjustment programs benefit the poor less, but at the same time economic contractions hurt the poor less under structural adjustment. http://www.nber.org/chapters/c9656.pdf

      @notsneaky mentions transition economies were successful under SPAs, but this is not necessarily the case. The success of the SPA on social welfare depends on the preferences. http://lnweb90.worldbank.org/exteu/SharePapers.nsf/%28$all%29/C3C03817F4BEF032852571D500567C85/$File/SAPSZAWALINSKA.PDF As the author explains, if you assume that the primary concern in transition economies was an increase in efficiency in a Pareto sense, then the welfare of the group of individuals increases in move from state a to state b only if either all the individuals are better off or one individual is better off and no one is worse off. From this perspective, SAPs caused a structural welfare decline in all transition economies. If however, you extend Pareto’s principle over Kaldor’s consumption principles, then it is enough if real income increased because those who benefited from the change would compensate those who were worse off. Under this analysis, you show welfare improvement under SPAs in Romania, Hungary, Poland, and the Czech Republic.

      The criticisms surrounding SPAs relate back to the diagnosis of the crisis in these countries whether sub-Saharan Africa or the transition economies, the policy objectives of the SPAs, the instruments used for adjustments, and whether these policies were the most efficacious way to improve development based upon conditions in various countries where they were applied. As shown above, whether SPAs are successful depends on the preferences you use to start the analysis and the conditions in the country where they are applied.

      It seems to me that the tweet by Justin Wolfers carries forward the idea that economics (that is neoclassical economics) is still the dominant paradigm for diagnosing problems and prescribing solutions. I think both reason and logic compel one to ask the same questions raised in this post.

      • #21 by notsneaky on September 30, 2013 - 10:48 pm

        moiracathleen, thank you for the well written comment. However, there are several things in that comment which are incorrect, partly because the sources you are relying on are incorrect.

        I don’t want to go through all of it but I’ll provide some examples.

        First, however, I want to emphasize that I did not say that shock therapy or SAPs have always been successful. In fact my general view is that their efficacy has often been oversold. In fact my own views are pretty close to those of Bill Easterly (thanks for pointing out that paper*) that on average, it’s a wash. But I do think it’s ridiculous to describe them as “disasters” and pretend that there were no cases where they were in fact successful (and the negation of “successful” is not “disaster”, rather it’s “well, blah”).

        So. Some of the errors:

        Neoclassical economics did not emerge in the late 1970’s. You’re either thinking of New Classical economics or just following the frequent but pointless practice of using “neoclassical economics” as a shorthand for “stuff I don’t like”. Actual Neoclassical economics emerged in the 50’s (maybe earlier) with Paul Samuelson and the fusion of Keynesian macro with older micro.

        The statement “major source of controversy surrounding the SPAs was the notion that one particular set of policies will produce more growth than another set of policies” is strange. How can something which is almost tautological be a major source of controversy? Unless one thinks that no matter what is done, growth will be the same. The controversies were/are about the notion that a particular set of policies will produce more growth than all other sets of policies.

        “From this perspective, SAPs caused a structural welfare decline in all transition economies.” – this one’s not your fault, it’s the author of that (Master’s thesis?) which gets it wrong. She misunderstands the concept of Pareto optimality. If transition entailed some people becoming worse off while others became better off then under the Pareto criteria, the two situations are simply non-comparable. Basically in the real world it pretty much never happens that a given policy or change makes everyone better off. Which is in fact why we need stronger notions such as Kaldor (along with Hicks, Scitovsky etc).

        Despite that error the paper by Zawalinska is pretty good and gets the basic right. Even with shock therapy, after a few years in many of these countries not only did the average income improve but poverty also declined. This is actually related to UE’s response to my comment above – back when the shock therapy was first implemented people were running around screaming “how can you do this? Poverty will explode! People will starve! Shock therapy bad!”, then when the actual numbers started to come out they switched to redefining what is meant by “shock therapy” so that actual observed successes could not be attributed to it. Which is what that Murrell linked to above does.

        *With regard to the Easterly paper, it’s a good one but at the end of the day I’m not sure if I really believe his instruments are strong enough to account for the endogeneity and selection bias. However, I can’t say that I myself can think of any better ones.

    • #22 by rousseau1214 on September 30, 2013 - 10:46 pm

      “if you believe Ha-Joon Chang. I don’t.”

      It should be noted that Park Chung Hee of South Korea did use many aspects of a command economy to help lift South Korea out of its economic turmoil. For example:

      -He established (or at least gave power) to an Economic Planning Board

      -He used an economic plan that mobilized national resources to make South Korea and self sufficient, export lead Industrial State

      -He did all of this Park through the chaebol, who responded profitably to government development plans, reserving basic industries such as steel for state-own-enterprises (so essentially on oligarchy).

      If anything, Park Chung Hee showed how a good application of command control policy is better at kick starting an economy than a basic neoliberal program. It wasn’t the switch from command to market economies that helped because in many ways, these countries were still command economies when this growth started. Now, the switch probably helped in the long run, but that’s a different story. The main point here is that, this is contrary to many neoclassical narratives on economic history, and it’s pretty much UnlearningEcon’s point.

  3. #23 by Dan Hirschman on September 30, 2013 - 6:10 pm

    In general, I’m sympathetic to the skepticism you express here. But there’s also the issue of what else we can rely on if not economic expertise. More sociologists? That sounds delightful to me, situated as I am in sociology. But it’s not like our track record, as such, is stellar either (though we’ve rarely had enough influence to implement much – but we also tend to be much wishy-washier in our recommendations).

    The recent turn in economics towards sophisticated econometrics aimed at better estimates of the actual impact of different micro-level interventions seems like a positive development. Development economists, for the most part, are no longer trying to come up with silver bullets to produce growth but rather to figure out the best way to distribute food aid, or malaria nets, or to increase school attendance, etc. On these issues, I think governments have a lot to learn from economists.

    Also, one critique: The New Deal isn’t the classic example of Keynesian / fiscal stimulus – World War II is. The big name Keynesians of today (e.g. Krugman, DeLong, etc.) all agree that the New Deal was too small to do much – which is part of why they pushed for a bigger stimulus in 2008-2009 than ended up being enacted. Their predictions that the moderate stimulus of ARRA would be insufficient to restore full employment hold up pretty well.

    • #24 by Unlearningecon on September 30, 2013 - 7:51 pm

      But there’s also the issue of what else we can rely on if not economic expertise. More sociologists?

      Policymakers and experts in a particular field (eg the NHS should have significant input from doctors and those in the medical field), all subject to the judgment of the electorate.

      I’ve never been convinced by the WW2 argument. There was a lot going on in that period, and while state management obviously produces full employment in the short term, I’m not convinced it was what ‘kick started’ the economy: that was either down to bretton woods, or the marxist explanation of the destruction of the capital stock, or a combination of the two.

      • #25 by Dan Hirschman on September 30, 2013 - 7:58 pm

        “Policymakers and experts in a particular field (eg the NHS should have significant input from doctors and those in the medical field), all subject to the judgment of the electorate.”
        1. In general I agree. Note though that for macroeconomics, for example, the experts in the particular field *are* the economists. And not also that doctors, say, may be great for some kinds of recommendations but terrible at others. MDs receive very little training in statistics, for example, which is part of what makes it difficult for evidence-based medicine to take off. Etc.

        2. You may not be convinced by the WWII argument but it’s still worth noting that it is the argument contemporary Keynesians make – not the New Deal, which everyone agrees was too small and too slow to do that much.

      • #26 by Derek R on October 1, 2013 - 2:45 am

        I’m inclined to believe that it was the private debt reduction effect of WW2 rather than the war itself. The triple effects of massive government spending on private industry, an income for every able-bodied man and most of the able-bodied women in society and the lack of consumer goods for sale increased saving and reduced private debt greatly for five years. By the end of that period the private debts of the Depression had been more or less wiped out.

      • #27 by Unlearningecon on October 1, 2013 - 12:23 pm

        @Dan

        I agree that you probably need some people who have studied the economy to manage, say, central banks. However economists seem to think that they should do this free of democratic oversight, having pushed for central bank ‘independence’. This I do not agree with.

        @Derek That’s a great point. There was also a massive austerity drive post-WW2, so I’m not sure how well that sits with the stimulus view.

  4. #28 by Economic bunker on September 30, 2013 - 7:46 pm

    @ notsneaky – singling out Russia as a sole state that did not transition well is a bit of an understatement. Ukraine, the Baltics and all of the southern republics pretty much went down the toilet, with the Czechs and Poles being the exception ( incidentally both bordering the west with the latter undergoing drastic emigration to Germany, UK and Ireland ).

    I can’t add much to your post Unlearning, I agree with the gist. However, while on the topic of Black Scholes, I have very little knowledge of the model but could someone explain to me why this simple expression has never displaced it? http://mobjectivist.blogspot.ie/2010/10/black-scholes.html

    • #29 by notsneaky on September 30, 2013 - 9:08 pm

      Ummm… the Baltics, except maybe Estonia, didn’t do shock therapy but gradualism. That should tell you something. A good chunk of the supposed “bad effects” of shock therapy weren’t due to shock therapy but simply because we are talking about economies which were spiraling down the toilet to begin with. And btw, Estonia rebounced and grew the fastest while the slowest reformer, Lithuania experienced probably the biggest drop:

      “Lithuania, choosing a slower liberalization, suffered one of the greatest declines in output and standard of living. The most aggressive shock therapists, the Estonians achieved the most successful programme of reform because they recognized that the reduction in inflation was a precondition of growth and increasing employment”

      Thomas Lane, “Lithuania,Stepping Westward”

      • #30 by Unlearningecon on October 2, 2013 - 4:57 pm

        Here is a paper which says that it doesn’t matter which one is used, as things are largely dependent on other, institutional factors:

        http://pages.nes.ru/vpopov/documents/TR-REC-full.pdf

        I’m not sure about the Baltics. It seems that, like Ireland, they were quite fragile, and they also suffered a lot of emigration, peaking in the recent crisis.

      • #31 by notsneaky on October 2, 2013 - 10:14 pm

        I’m actually quite sympathetic to the main idea in the Popov paper. Initial conditions and initial institutions matter a lot. That’s actually why shock therapy worked in some places but not in others and why in some places gradualism or slow reform are better alternatives than shock therapy. For example, Hungary was mentioned and notice that I haven’t said much about it. That’s because Hungary was probably best placed of the former Soviet bloc countries (putting East Germany aside) when the whole thing started. It was probably the “freest” economy in relative terms, had the relatively smallest government sector, most liberal economic policies to begin with, inflation was low (“only” 30% not 600% as in Poland) etc. It didn’t need shock therapy.

        I do think he overstates the case a bit. We only have data on what happened. We don’t have data on what would have happened. And there’s obvious selection bias in terms of what kind of policies where chosen by which economies.

  5. #32 by Oliver on September 30, 2013 - 8:46 pm

    And how have non-economists fared in the policy arena compared to you?

    Pretty dismally – apart from lawyers, that is.

  6. #33 by Robert on September 30, 2013 - 11:13 pm

    “In general, economists are always willing to trot out policy prescriptions – often at the end of mathematical papers that are largely incomprehensible to the public – on the grounds that they are scientifically determined solutions to social and economic problems.”

    I always wonder how economists that distinguish between normative and positive theories can think that this is a valid form of argument.

    Notsneaky: “If the price floor is set close to or below the market price then theory predicts it will have negligible effects.”

    If you understood economics, you would know that the concept of “the” market [sic - should be equilibrium price] is generally incoherent. By name links to one post of mine demonstrating this.

    I am always impressed how (some) economists are socialized to spout nonsense and lies.

    Some interesting references:

    Donald P. Green and Ian Shapiro (1994). Pathologies of Rational Choice Theory: A Critique of Applications in Political Science, Yale University Press.

    Gunnar Myrdal (1953). The Political Element in the Development of Economic Theory (Translated by Paul Streeten). Routledge & Kegan.

    • #34 by notsneaky on October 1, 2013 - 2:00 am

      Hey there Robert. I do understand economics or at least a good chunk of it and I’m pretty sure that the concept of a market price is in fact generally coherent. Most people who think they understand economics, occasionally referred to as “economists”, also think it’s coherent. I realize that you don’t think so and that you imagine that you have somehow “shown this” but the honest truth is you haven’t (what does the NRU have to do with this?)

      I’ve read your blog aplenty in the past and I know how this game works. Introduction. Some (often interesting) model. A particular result (often interesting). And then some completely ridiculous assertion presented as if it was a derived conclusion. Which doesn’t really follow from the premises but just is a restatement of your own hangups and preconceived prejudices. And then people point out to you that “hey, you know, that doesn’t really follow” or “you’re trying very hard not to understand what it is you’re criticizing”. Then you call them “ignorant” or accuse them of lying and then repeat the same thing a couple months later.

  7. #35 by Robert on October 1, 2013 - 6:29 am

    I re-assert my claim. Talking about “the” market-clearing price or “the” equilibrium price of labor is, at best, just ignorant. (I do not know why notsneaky writes about a “market price”, after correction.) The standard textbook treatment of minimum wages is just incompetent. And, yes, I have shown that, as have many others, in the published literature.

    And when correcting others, it is helpful not to make these silly slips: “Actual Neoclassical economics emerged in the 50′s (maybe earlier) with Paul Samuelson and the fusion of Keynesian macro with older micro.” The classic works of Jevons, Menger, and Walras date from the 1870s.

    (Many) economists, when they talk to the general public, are, as a matter of empirical fact, socialized to spout lies and nonsense about what the theory and the data say.

  8. #36 by Luis Enrique on October 1, 2013 - 10:00 am

    re: your twitter feed. What proportion of economists are deluded shills, would you say? Just give us a ballpark figure.

    I’m not sure disagreeing with you about Boliva equals “bankrupt” either.

    • #37 by Unlearningecon on October 1, 2013 - 11:01 am

      Not sure to be honest, I’d have to do some sort of survey.

      And defending Chile, and Russia, and shock therapy in general, is shilling. There’s no other way to put it.

      • #38 by Luis Enrique on October 1, 2013 - 11:44 am

        but you are able to claim “so many” are deluded shills. Why can’t you say what you have in mind by “so many”?

        suppose I’d been arguing with you, then tweeted: “Sometimes I feel like I’m too charitable toward heterodox economics bloggers because of the good ones. But so many are quite simply deluded ignorant blowhards”

        that might get up your nose [I know it's notsneaky not me who prompted that tweet].

        and of course there are things that might be said in defence of economic policy advice in Russia and Chile that are not shilling, but perhaps correcting mistaken criticisms or pointing to mitigating factors, or whatever. Not everything critics throw is going to correct.

        But it was notsneaky was not defending Russia, it was his claim Chile, Bolivia and Poland did okay that prompted to you say how bankrupt the discipline can be. Him having different views to you on this does not make him a shill or bankrupt.

        I think you need to check your attitude, or at least be prepared to get as good as you give, without complaint.

      • #39 by Unlearningecon on October 1, 2013 - 12:22 pm

        Why can’t you say what you have in mind by “so many”?

        Off the top of my head:

        – ‘Chicago school’ or ‘neoliberal’ economists like Friedman, Lucas, Barro, Laffer

        – ‘Popular’ economists like the Freakonomics gang

        – GMU economists

        – Those such as the ones who were interviewed on inside job, who wrote favourable reports about banks they had shares in

        You could tweet whatever you wanted, I honestly wouldn’t care. What I would ask you to do would be to engage me directly, which I also do when I’m venting about someone.

        What happened in Chile and Russia, and to a lesser extent, places like Bolivia and Poland, was disgusting. There may have been some positives, but the “shock therapy” project as a whole implemented policies without consent, against people’s wishes, and caused a lot of hardship and poverty, all unnecessarily. I don’t know why anyone would want to defend the approach.

      • #40 by notsneaky on October 1, 2013 - 5:51 pm

        And really, acting polite on the blog then turning around and making snotty and obnoxious comments on twitter (which you shouldn’t assume everyone reads) about people is really immature and boorish. It’s ‘talking behind someone’s back’.

        Especially when it involves lying about them, as I’ve never defended Russia, just pointed out that you can’t blame it on Sachs. And for the record I am not being paid to defend anything. If you know of a gig which involves getting paid to comment on some guy’s blog let me know. My kid might be interested.

  9. #41 by beauris1983 on October 1, 2013 - 2:19 pm

    Please don’t change your attitude unlearning. I love it when somebody writes things I was thinking for many years. And I guess a lot of people feel the same way.
    As for Bolivia: The country was run by people educated in US-Universities on neoclassical basis until there was a revolution. I don’t know if that counts as “worked”.

  10. #42 by Luis Enrique on October 1, 2013 - 3:38 pm

    I don’t know anything about Bolivia, so did some reading. found this, might interest others. obviously likely to be self-serving, by the man who did it all and is now in exile

    http://www-tc.pbs.org/wgbh/commandingheights/shared/pdf/int_gonzalodelozada.pdf

    • #43 by beauris1983 on October 1, 2013 - 7:43 pm

      Interesting interview, thanks. Goni is very unpopular in Bolivia, but I have never heard “his side” before.
      About the shock therapy, as I recall it from Sachs book, it was mainly cutting the fuel subsidies and default on the debt that stopped the hyperinflation, wasn’t it? That sounds more like common sense than NC shock therapy to me.
      The interesting question is, would that alone, without the wage cutting and prize liberation part, have stopped the inflation? Unfortunately we will never find out…

      And the reason why the Bolivian (and other Latin American) government cannot sufficiently tax their people is because most of the money lies in Panama or the Cayman Islands in Dollars where those governments have no power. That is why inflation hurts the poor.

  11. #44 by Luis Enrique on October 1, 2013 - 8:35 pm

    “What happened in Chile and Russia, and to a lesser extent, places like Bolivia and Poland, was disgusting. There may have been some positives, but the “shock therapy” project as a whole implemented policies without consent, against people’s wishes, and caused a lot of hardship and poverty, all unnecessarily. I don’t know why anyone would want to defend the approach.”

    What happened in the USSR was disgusting, but you wrote things defending those policies.

    You did so because you thought criticism was overdone, things like unfavourable initial conditions overlooked.

    Maybe you should retract the bankrupt/ shill stuff.

    I strongly disagree with Lucas, Barro et al. But I don’t think they’re shills, I think they’re sincere.

    • #45 by Unlearningecon on October 2, 2013 - 11:38 am

      What happened in the USSR was disgusting, but you wrote things defending those policies.

      Once again: we are talking about situations of war with the USSR and much of existing communism. Shock therapy, on the other hand, was instituted without any real necessity or external pressures, perhaps with the exception of having to do “something” drastic about runaway inflation, which can and has been done by democratic governments (such as Brazil).

      Yes: Laffer etc. are sincere, not shills (although it is true that people like them and Mankiw are ‘in the 1%’, so to speak). Perhaps ‘tools’ would have been more appropriate.

  12. #46 by Luis Enrique on October 1, 2013 - 8:40 pm

    Beauris

    I haven’t seen that Sachs book, I should read it. He’s a funny one IMHO, see his ideas on foreign aid, he’s not exactly a Friedman.

    I don’t see how you could arrest hyperinflation without holding public sector wage increases back. He actually discussed the idea of imposing say 15% annual pay rises but thought a freeze would go down better!

    • #47 by beauris1983 on October 2, 2013 - 12:23 am

      I liked both books of Sachs I read, the End of Poverty (with the Bolivia story) and Common Wealth.

      As I understand it the cause of hyperinflation is always some sort of big liabilities in a foreign currency, coming from dependency on imports for vital goods, not so much too high public sector wages. So it would be worth a shot.
      I am no expert and nc economists may disagree with this but i find it much more convincing than the “state runs too much deficit” explanation.

      Anyway it happened long ago and Bolivians are happy the situations has changed. Lets just hope the hard times don’t come back when the gas runs out…

      • #48 by notsneaky on October 2, 2013 - 9:48 pm

        As I understand it the cause of hyperinflation is always some sort of big liabilities in a foreign currency, coming from dependency on imports for vital goods, not so much too high public sector wages.

        Not always but often. Always, however it involves printing a lot of money. You can also get hyperinflation or at least high inflation during war time (American Civil War, Wars of the Revolution in France) as governments try to pay soldiers/military expanses with printed currency. And you can get very high inflation simply because a government cannot borrow, cannot tax, so the only way it can finance large deficits is by printing money. That would actually probably be Allende’s Chile (I’d need to double check that though).

        But yes, often it does involve liabilities denominated in foreign currency.

      • #49 by Unlearningecon on October 2, 2013 - 10:04 pm

        Re: “money printing”, Cullen Roche has argued that it is not the cause of hyperinflation but usually a response to other hardships: shortages, political upheaval, war and so forth.

      • #50 by beauris1983 on October 2, 2013 - 10:14 pm

        Aren’t soldiers (or the military) buying more food and clothes than the country can produce in wartime the same as “imports for vital goods”? Then again government is (indirectly) trying to buy stuff denominated in another currency with the printing press, which causes the inflation.

  13. #51 by anonymous on October 2, 2013 - 2:36 am

    Economist unelected policy maker-upper with great titles and press agents.

  14. #52 by Luis Enrique on October 2, 2013 - 7:28 am

    Hi beauris

    I think that if the government is increasing nominal expenditure (including wages) at 2500% per year, your not going to be able to stop prices rising. if you want price inflation to fall to say 5% a year I think you’d have to cut wage inflation to around that too. Not necessarily a freeze, but cuts to nominal government expenditure are unavoidable, and cuts in real terms in the short run probably impossible to avoid too. I’m less sure about that.

    • #53 by Unlearningecon on October 2, 2013 - 4:51 pm

      I think wage freezes and listing price controls, as well as re-anchoring currencies, are justified and probably necessary steps. But gutting state enterprises? Lowering tariffs? Reducing social support? These things have little to nothing to do with inflation, and the economists pushing them generally knew it. They just wanted a laboratory.

  15. #54 by Luis Enrique on October 2, 2013 - 3:44 pm

    No external threat justified the persecution of Kulaks and collectivisation, for example. Shock therapy looks like a group hug compared to that. Yet you defended Soviet policy. Why can’t you just accept that if you could do that without being a morally bankrupt tool of totalitarian evil, others may defend shock therapy for similar reasons and maybe your were wrong to call them nasty names. Or, if you want to stick to your guns, a grotesque hypocrite.

    • #55 by Unlearningecon on October 2, 2013 - 4:41 pm

      Actually I didn’t defend soviet policy. I explained it within a war context, with the purpose of understanding that it was born mostly out of said context, rather than the innate evils of communism.

      And honestly the rise in mortality rates in Russia post-communism, as Roman P points out, was easily comparable to some of the communist deaths. But anyway, I am not interested in kill count porn; what I’m worried about is under which system these occurrences are paradigmatic. Saying shock therapy ‘worked’ only makes me believe further that capitalism is untameable.

      • #56 by notsneaky on October 2, 2013 - 10:21 pm

        But you don’t need foreign elites to impose them against your will and imprison/kidnap dissenters, or even install dictators to do so

        What dictators were installed in Bolivia or Eastern Europe during the shock therapy programs? What dissenters were imprisoned or kidnapped? Oh wait… it was actually the dissenters who had just come out of dictator’s prisons which implemented the reforms.

        As an aside, Roman P. is hilarious.

    • #57 by Roman P. on October 2, 2013 - 5:02 pm

      There were solid justifications for collectivisation and the persecution of the wealthy peasants, of course, just as some justified the shock therapy. Yet I must side with Luis here, Unlearningecon: there is one step you do not take. What makes some justifications better than others? Why should we prefer some outcomes to the others? I answer this question as who I am now: a left authoritarian. Some might answer it differently – as market liberals, right authoritarians, etc. But I think that being aware of the question is even more important than merely the content of the answer.

      • #58 by Unlearningecon on October 2, 2013 - 5:09 pm

        I’m not really sure what position you think I’m coming from. If you think I think that the (let’s say) 1 million people whose deaths Stalin signed off deserved to die, and that the many more put into the Gulags deserved it, the answer is a definitive ‘no’. If you ask me if I think communist revolution will invariably lead to Stalinism, I would also answer no. If you asked me how else the USSR would have survived the Nazis than with something like the forced collectivisation and intolerance of ‘traitors’, I would say that I have no idea.

        But anyway, I don’t want to get sidetracked on this again. Clearly, ‘shock’ economic programs are sometimes necessary. But you don’t need foreign elites to impose them against your will and imprison/kidnap dissenters, or even install dictators to do so. And neither do you want those elites pushing through their particular preferred reforms along with the necessary parts of the program.

  16. #59 by notsneaky on October 2, 2013 - 10:43 pm

    And if we’re gonna talk about Russia’s transition and the spike in mortality, then I thought that Mark Harrison (the Klein comment reminded me of him) already explained that to you here:

    http://blogs.warwick.ac.uk/markharrison/entry/unlearning_history/

    Pretty much everyone agrees that the increase in mortality and the decrease in life expectancy occurred as a result of an increase in alcohol consumption. Infant mortality didn’t go up (you can see that in Roman’s chart – in fact it fell). Female mortality didn’t go up nearly as much. Mortality didn’t increase in Muslim parts of Russia/SU.

    But the thing is that the increase in mortality observed is really just reversion to trend (a pretty horrible trend) AND it actually begins in 1987, not in 1991. The actual question is why did mortality fall and life expectancy increase so dramatically (by a good 3 years, or by a good 80 fewer deaths per 1000) between 1984 and 1986. The timing and distribution very strongly suggest that it had nothing to do with the “shock therapy” but rather with the end of Gorbachev’s anti-alcohol program.

    • #60 by Unlearningecon on October 2, 2013 - 11:22 pm

      I also responded to that Harrison piece. Again, it’s standard Harrison: polite, factual, but basically wildly misses the point and seems to take everything in isolation rather than piecing it together.

      In any case, this:

      But the thing is that the increase in mortality observed is really just reversion to trend (a pretty horrible trend) AND it actually begins in 1987, not in 1991

      is wrong – as somebody on Harrison’s blog pointed out, there’s just no way you can square that claim with this graph:

      I suppose you could draw a trend from the line starting 1965, but even then it appears to restabilise below the trend line, and the fluctuations quite obviously have something to do with the establishment of capitalism. Alcohol consumption may have increased but that doesn’t explain such a sudden dip. What’s more, if capitalism were that great, we’d expect some sort of reverse in the trend.

      • #61 by notsneaky on October 3, 2013 - 2:42 am

        That’s actually a pretty interesting discussion over at Mark’s blog.

        Regardless, I think pretty much everyone agrees that an increase in alcohol consumption played a very large role in both the mortality decrease and the subsequent increase.

        Your graph goes up to 2005 and you’re “eyeballing it”. If you look at actual numbers for 1965-2005 then yes, 2005 is below trend. But 2006, and all subsequent years, is above it. 2005 and earlier would probably also be above if it wasn’t for another a big drop in… 2000-2001. What was that about? So there does seem to be some change in the trend although it happens late (mid 1990’s) and has some hiccups.

        Another thing is that because of the ideological stakes involved everyone has focused on the drop. But that increase in mid 80’s surely has to be part of the stories. That’s a big and positive deviation from trend.

      • #62 by Roman P. on October 3, 2013 - 6:28 am

        I don’t have hard data on hands. but a lot of that dip came from violence, worse healthcare and Mid-Asian heroin. Meanwhile, that big and long downturn from 1965 to 1985? Now that’s alcohol consumption rising. And 1985 to 1990 is Gorbachev’s Prohibition.

  17. #63 by Jan C on October 2, 2013 - 10:46 pm

    “If you asked me how else the USSR would have survived the Nazis than with something like the forced collectivisation and intolerance of ‘traitors’, I would say that I have no idea.”

    Well, I guess the USSR would have done better in the initial phases of the war if Stalin would not have had the luminous idea of killing almost everyone in the military hierarchy who had some experience and credentials. Stalin did a lot of things in the thirties that cannot be seen as preparations for a war on life on death, but rather the opposite.
    I follow you with the idea that Stalin’s industrialisation policies (although I do not understand why sacrificing millions of peoples lives was necessary for achieving this) played a very important part in preparing the USSR for a major war, but why you mention ‘intolerance of ‘traitors’ ‘ in this regard is a riddle for me. Why would killing hundreds of thousand of people and their relatives who supported Soviet communism help to prepare for war?
    By the way, when Stalin started his industrialisation and collectivisation policies there was no threat at all for a war with Germany. The German economy collapsed, the Nazi’s were not in power yet, and the German army was tiny. At that point Stalin was reacting to an imaginary threat, unless he was a clairvoyant.

  18. #64 by Luis Enrique on October 3, 2013 - 11:33 am

    ” how else the USSR would have survived the Nazis than with something like the forced collectivisation and intolerance of ‘traitors’”

    as Jan C has already alluded to, collectivization started in 1928. And how wrecking agricultural productivity and hanging smallholders from lampposts helps the war effort, I don’t know.

    it’s pretty simple – you wrote an article saying to some extent circumstances justified Soviet polices, and that outcomes weren’t as bad as critics claim once seen in perspective. Now if you encounter somebody claiming something similar about “shock policy”, you’ve no business impugning their motives. You’re wriggling around trying to duck this conclusion, but it’s plain for all to see.

    • #65 by Unlearningecon on October 3, 2013 - 1:12 pm

      Nope, you’re making a superficial false equivalence based on an uncharitable reading.

      I am completely prepared to denounce much of what Stalin did, and have repeatedly done so. On the other hand, proponents of ‘shock therapy’ do not seem to be making a qualified evaluation such as “inflation needed drastic action, but the gutting of state support was unjustified”. Instead, we learn that shock therapy “worked pretty well”, or that the crimes of the Pinochet regime were “entirely unrelated” to the economic evisceration. This is deluded. Conversely, I would say that the USSR surely needed to industrialise but that doesn’t justify how Stalin did it.

      Let me clarify that “I have no idea”: I really mean I have no idea. I have not experienced war time, and I certainly have not led a country or really thought about how that could be done in such circumstances. If something is horrific but helps you beat the nazis, do you do it? Again, I don’t know.

      And yes, I’ve been through this timing issue before. Stalin did not know about the nazis when he started collectivisation, but he anticipated war coming; its form was just worse than even he imagined.

      • #66 by Luis Enrique on October 3, 2013 - 1:36 pm

        First “you wrote an article saying to some extent circumstances justified Soviet polices, and that outcomes weren’t as bad as critics claim once seen in perspective” is not an uncharitable reading, it’s a charitable reading. I described you doing something, in principle, entirely reasonable, providing context and perspective.

        The uncharitable reading is that you’re an ignorant morally bankrupt tool of totalitarian evil. But that isn’t my line, that’s more like the line you’re taking against those morally bankrupt shill “defenders of shock policy”.

        Second, who are these people who only express unqualified support for shock policy? What makes you think, for example, notsneaky doesn’t hold an analogous position to ” I would say that the USSR surely needed to industrialise but that doesn’t justify how Stalin did it.”

      • #67 by Unlearningecon on October 3, 2013 - 8:51 pm

        Well, I’m glad you think my perspective was reasonable in principle! Now, I don’t want to get too into Stalin talk again, so this is the last I’ll say about it here. However, I think I should state my position on the matter clearly:

        I am not particularly interested in defending the policies of Mao, Stalin and so forth, regardless of what I may have said in unguarded moments. I am incredibly interested in the history of existing communism – and modern history in general – and so talk about these things a lot, often with an eye to correcting some of the gross distortions pervading the debate. However, my most important argument has always been that whatever they did, it was not paradigmatic of socialism, and that, relatedly, socialism is still a viable alternative to capitalism. I am explaining, not justifying.

        I’m not 100% sure of notsneaky’s overall position on shock therapy. What I do know is that many such as Sachs and Friedman, and the IMF, have defended the economic side of it as whole. In fact, Friedman called Chile a “miracle”, which is so disingenuous I don’t know where to start.

        I have not seen anyone, here or elsewhere, endorse my position on ‘shock’-style economics being used eg only to tame inflation, instead of also harnessed to do things like abandon state run enterprises at the same time for ideological reasons. I would consider this progress.

      • #68 by Jan C on October 3, 2013 - 2:45 pm

        “Stalin did not know about the nazis when he started collectivisation, but he anticipated war coming; its form was just worse than even he imagined.”

        Part of Stalin´s policies were certainly initiated with a future war with a great power in mind, but a lot of what he did was also related to internal politics and his megalomaniac personality. The latter is certainly true for the purges and the terror in the second half of the 1930s. I do not see any significant measures there that are somehow related to preparing for war. Stalin was waging a war against a mostly imagined domestic enemy (the ´enemies of the people´). He killed the majority of the old Bolshevik elite, together with most officers of the army and people who played an important role in the industrialization policy. It is very difficult to imagine what his motivations were, but preparing for a war could not have been one of them, as his actions were counterproductive in this regard. That´s why it puzzled me that you wrote: “If you asked me how else the USSR would have survived the Nazis than with something like the forced collectivisation and intolerance of ‘traitors’, I would say that I have no idea.”

  19. #69 by Boatwright on October 4, 2013 - 1:48 pm

    I’m finding it most interesting that the discussion here, which started with the a question about the value of economic ideas and knowledge in the formulation of policy, has been largely political. If one looks at third world malaise, Stalinist collectivization, or correlating alcohol consumption with mortality, and chooses to call it economics so be it. But it sure smells like politics to me.

    There is of course a set of assumptions underlying all policy prescriptions put forward as economically proven. Moiracathleen above describes one such assumption:

    “Neoclassical economics derives from a set of theories on the efficacy of market forces in resource allocation. It is based upon the monoeconomics principle that insists upon universality of rational economic behavior and the existence of marginal substitution possibilities in consumption and production.”

    Unfortunately for political economists, the entire neoclassical monoeconomic principles, that put forth completeness, transitivity, non-satiation, convexity, profit maximizing, etc. as proven have been shown to be mathematical non-sense. Demand curves can have any shape, businesses set prices based on all sorts of non-rational considerations, etc.. Game theory reveals all sorts of actual human behavior that is not neoclassically optimizing.

    It seems that the majority of economic formulas applied to policy choices are nothing more than pseudo-science – a fog of self-serving expertise designed to bolster one political ideology over another.

    • #70 by Unlearningecon on October 4, 2013 - 1:50 pm

      This is very true. I’ve attacked economist’s ‘objective’ policies and gotten a political debate. Which really just seems to show that the idea of such policies is a Chimera.

  20. #71 by Blue Aurora on October 5, 2013 - 8:43 am

    Although I’m late to the discussion of this blog-post (and although blog-posts don’t need to have high-quality research content), I do have something to say: you neglect to mention that the final version of Bretton Woods Agreement was a compromise between Harry Dexter White and John Maynard Keynes that ultimately advanced American interests more. Although J.M. Keynes and his delegation team did compromise with the Americans (and despite the fact his Plan was better for the world as a whole in the long run – if they went along with his Plan and the International Monetary Fund was able to work, one could make the argument that the Marshall Plan would have been redundant), he was at the same time trying to protect the interests of the United Kingdom and trying to stop the British Empire from falling apart due to a crushing financial burden (which, combined with an immense loss of face among the people of the lands controlled by the British Empire thanks to the aggressive military campaigns of Germany, Italy, and Japan, ultimately caused it to fall apart). Of course, this wasn’t hard for the Americans to deduce, and their rising ascendancy combined with their antipathy to the British sphere of influence caused them to do just enough to help the home islands of Great Britain financially, but not the rest of the British Empire.

    • #72 by Unlearningecon on October 5, 2013 - 8:46 pm

      It’s not commonly realised that the interests behind the New Deal and later Bretton Woods were more ‘old institutionalism’ than Keynesianism, which along with a degree of nationalism shaped the differences between the two great men at the conferences. I agree that Keynes’ plan ,if implemented properly, would have been much better, but alas, the field of international politics is neither noble nor ideal.

      • #73 by Blue Aurora on October 6, 2013 - 4:32 am

        Even though a lot of things in politics are neither noble nor ideal, it’s no excuse to be so cynical to the point of paralysis. (That’s the sense I got from reading the arguments of scholars in the Public Choice School.)

        I am aware that the New Deal wasn’t influenced by J.M. Keynes until at best later in Franklin D. Roosevelt’s administration and that the economists who were involved in the New Deal were often Institutionalists or classicists with an American bent to them.

        Despite your critical remarks of capitalism, if you had been in a position to observe things at the time, would you have been glad for the end of the British Empire thanks to expansionism of the Axis Powers and finally, the (somewhat) cold indifference to the ultimate fate of the British Empire at the close of the Second World War and its aftermath?

        I have not been able to find many writings by J.M. Keynes on colonialism or imperialism, but he seems to have simply accepted the British Empire as it was (which isn’t surprising, given that he grew up under it). He genuinely believed it was in Britain’s best interest, despite the immense financial burden due to the Second World War and the decline of British influence in the aftermath of the First World War. (And I’m sorry for not being precise enough with historical sources, dates, and accounts.)

        Although I am a bit of an Anglophile and understand J.M. Keynes’s love for his own country – I think that even if the Keynes Plan had been properly implemented and even if the United States was prepared to help relieve the financial burden on the British Empire, it was still probably too late: the respect by the colonial subjects for the British was damaged beyond repair thanks to the Axis Powers.

        Debt forgiveness and financial reconstruction of the lands in the British Empire with the help of the United States and J.M. Keynes’s international monetary reforms would probably at best, only postponed matters and at worst, been a complete waste of money with no effect whatsoever.

  21. #74 by Boatwright on October 6, 2013 - 6:44 pm

    The conversation here continues to be interesting. I’m learning new things about the Breton Woods agreement effects on the declining post-war British Empire…………………..

    All of this continues to beg the original question, and is very much like listening to Protestants arguing with Catholics over whose interpretation of the word of God is true. It confirms the insight that macro-economic theory as now practiced is anything but science, and is in fact ideology.

    Ideas are interesting, can be perfectly logical and sometimes useful, but until proven are not science. The danger in listening to those who propose that economists prescriptions must necessarily be followed BECAUSE they are scientific is the same danger humanity experienced when those other supposedly scientific totalitarianisms, Nazism and Leninism murdered their millions in the name of greater good.

    • #75 by Blue Aurora on October 7, 2013 - 4:36 am

      Well, the fate of the British Empire in the aftermath of the Second World War and its connection to the Bretton Woods Conference is a bit tangential, yes. But unless I misunderstood or misread Robert Skidelsky’s account of the events in the third volume of his three-part John Maynard Keynes biography, the man’s proposal might have helped the British Empire relieve its financial burden – but even if the British Empire wasn’t an issue, the United States was always going go for what it deemed to be in the best interests as a rising major power and increasingly influential participant in world affairs.

      You didn’t have to be J.M. Keynes to figure out that it would be extremely unlikely that the United States would help relieve the British Empire’s financial burden. Nonetheless, since J.M. Keynes loved his country (and discounting his intellectual achievements and capacity for practicality), he still advocated for his own Plan anyway.

      Although his Plan was probably the better one for the world as a whole, I do wish that the Americans went along with his proposal – they could still have made it clear to J.M. Keynes that although his proposal was the better one on technical and intellectual grounds, their decision to go along with it didn’t mean that the United States would help prolong the existence of the British Empire.

      Alas, I doubt that the average American citizen or many people in the United States government at the time would have approved of the fact that the United States was supporting a proposal made by a foreigner (and especially a Briton at that).

      • #76 by Boatwright on October 7, 2013 - 2:04 pm

        One more try:

        The economic underpinning of the Bretton Woods agreement, the dollars and cents, pounds and shillings if you will, that the Dollar and the Pound would be held in a fixed relationship, backed by gold, becoming the reserve currencies of the entire world was a POLITICAL act, with economic effects. It was in no way ordained by economic science or mathematical law, as many argued at the time.

        Today it continues: political and moral decisions are presented as economic ‘science’. This is simply dishonest shilling for one ideology over another. I have no problem with a reasoned discussion of political choices, including economic factors. I do have a problem with presenting ideology as proven economic science, particularly when the entire discipline is on such unsettled empirical foundations to begin with.

      • #77 by Blue Aurora on October 11, 2013 - 12:44 pm

        Perhaps I misunderstood the point of your message initially, but now I do see where you’re coming from.

  22. #78 by Luis Enrique on October 10, 2013 - 12:17 pm

    I imagine you have seen this already, just in case not

    http://www.voxeu.org/article/stalin-and-soviet-industrialisation

  23. #79 by Jim Rose on October 26, 2013 - 1:14 am

    MITI was supposed to have picked winners. If so, MITI must have to have excellent investment appraisal skills? How would you test that?

    Look at their investment portfolios after they have retired. Much less inside information but those picking winners skills can be now used to trade on their private accounts.

    My professors at my graduate school in Tokyo were retired from MIT, ministry of finance, the lot. They worked at those ministries in the high growth years picking all those winners.

    These retired MITI and other professors kept their wealth well hidden. Clothes were the same as others. Their children went to normal schools and Japanese public universities. They all looked forward to their annual bonus (5.15 months salary).

    I thought all would be revealed when where invited to their houses for lunch. Alas no: an ordinary Japanese suburban house. Some still lived in their ministry’s apartment complex.

    Bureaucrats who could pick winners – beat the market – should be excellent investors in their private portfolios after they retire. They have the core skills.

    If special investing skills somehow appeared from the air inside MITI and other ministries, people would pay to work there, and there would be books written on the investment skills passed on by word of mouth. Someone would spill the beans.

  1. Links 10/3/13 | Mike the Mad Biologist
  2. Cavalcade of Mammals » Blog Archive » Oct 2013 Links
Follow

Get every new post delivered to your Inbox.

Join 975 other followers