Thursday, January 29, 2009

The Freshwater vs. Saltwater Debate

Paul Krugman writes about the "Dark Ages of Macroeconomics"...

Much of what he writes is right-on, and reflects sentiment I've been thinking about, complaining about, and writing about for years. Yet, there is one fundamental point that he makes that is just completely off. There is almost no difference whatsoever in how "freshwater" and "saltwater" economists are trained. I was trained by "freshwater" economists, and it just so happened that we had almost the exact same syllabus as did Princeton! So much so that I downloaded and used notes from Princeton U. occasionally... Add to that I did an MA before I started my PhD, the MA done at a "freshwater" school, the PhD at a much saltier location, and guess what, there was almost no difference whatsoever in the way the 1st year was taught. It was freaky, and in an Animal Farm, 1984'ish sense, that, "ack! everyone thinks the exact same way!". Krugman is profoundly and utterly wrong to suggest that any sort of deep chasm exists.

Now, there are two interpretations one can make of this, one respectable, one decidedly less reputable. The first is that there is just widespread agreement about what every PhD should know, and what skill set a Ph.D. should have. The alternative explanation is that no economists can think for themselves, and so they just do a combination of what they were taught and what they perceive everyone else to be teaching. As it happens, the first explanation does not hold up -- much of what is taught in the first year truly is worthless. There is no real thought involved, just endless math. There's no reading involved, no writing; just proofs and lots of fast algebra. Exams (for you do not read nor write anything when receiving your core training as a PhD), graded by TAs, are just regurgitating proofs plus an algebra marathon. So, Krugman was profoundly wrong; all Econ Ph.D.'s are trained like robots to do fast algebra. Of course, computers can do algebra more quickly and more precisely. That's not the point. The rationale is the same as training modern military men with hand-to-hand combat. It's to put hair on your chest and to make you committed to the system. To institutionalize you.

And it does put hair on your chest. The only problem is that if you go into a Ph.D. program as a market fundamentalist, you will exit as a market fundamentalist, b/c history is decidedly not taught. I can see it with job market candidates. They all think they have to flex their mathematical muscles in their job talks, and so the basic paper in economics takes a conjecture, often unsupported by any seriously-considered logic or data, and they make a hideously complicated model full of assumptions that nobody believes, and then arrive at a conclusion which matches their priors. In this way, they don't need to form an argument that their prior beliefs are correct; they've just proved it! And in doing so, they've insulated themselves from any need to support their arguments with reason...

Angry Bear is going on and on about the supposed Freshwater vs. Saltwater debate. . They are taking a holier-than-thou attitude. As liberal saltwater economists, they are proud that they aren't like those crazy UChicago wackos. The problem is that there is really only a very subtle distinction. All economists, liberal and conservative, were trained in the same way! Those of us who were liberal when we came in, are liberal now. Our basic methodology is no different; for if it were, we would not be able to publish in top journals...

Over at Angry Bear, someone writes: "In the field of macroeconomics there is a much deeper division between macroeconomics as practiced at universities closer to the great lakes than to an Ocean (Fresh water economics) and that practiced at universities closer to Oceans (Salt water economics). " This is complete crap. What's the supposed difference?

"Roughly Fresh water economists consider general equilibrium models with complete markets and symmetric information to be decent approximations to reality. Unless they are specifically studying bounded rationality they assume rational expectations, that everyone knows and has always known every conceivable conditional probability."

Please. Saltwater economists learn exactly the same models in the first year. And freshwater economists will learn Neo-Keynesian models as first years as well...

They go on to write: "
Finally I have a view of how people can devote so much effort to working out the implications of assumptions which almost no ordinary people would find other than nonsensical if they understood them. Fresh water economics uses difficult mathematical tools. Students in fresh water graduate programs have to learn a huge amount of math very fast. It is not possible to do so if one doesn't set aside all doubt as to the validity of the approach. Once the huge investment has been made it is psychologically difficult to decide that it was wasted. Hence the school gets new disciples by forcing students to follow extremely difficult courses. Last I hear very few graduate students at U Minnesota came from the USA. Undergrads over there know what the program is like. If my information is not out of date, innocents from abroad are the new blood of fresh water economics.

He actually makes a good point here; the only thing I'm quibbling with is that the above actually describes remarkably accurately what happens at pretty much all PhD programs in economics. You spend huge amounts of time investing in learning how to build models, so much so that you become psychologically invested in the process. It becomes 2nd nature. After awhile, it feels funny to read an argument that isn't supported by equations. So verbal arguments are dumped for matrices, derivatives, indirect utility functions, and expectation's operators. Proofs take the place of actual reason. The long lists of assumptions necessary for these models, too, become 2nd nature. What does not happen, however, is that one learn anything of actual use. The long parade of conservative economists, from their lofty perch in academia, unacustomed to making arguments backed by logic and trying to comment on the current crisis, revealing that they know no more than a guy on the street about subjects about which they are ostensibly experts, all but proves this fact.

While I'm attacking the profession, let me say that the main problem is that it's really difficult to find good papers that I can read, and walk away feeling that I've learned something new. The experience I've had repeatedly is that once I read any of the famous results in the past 30 years, the more carefully I look at the paper, the more they turn into total shit. The RBC model, for example, which all first year students study, says nothing about the current crisis. Alwyn Young's famous paper on productivity growth in the East Asian NICs turns out to have been faked. Alwyn Young is a sheer snake-oil salesman; he just knew how to work the system and get four pub's off of one idea for a scam. Daron Acemoglu won a John Bates Clark for creating a data set that was later revealed to be a fraud. Even in Krugman 78, for which he won the Nobel, I got the whiff of a scam. Krugman fallaciously presented the result that varieties increase due to trade as a general result; it's really just specific to his assumptions, engineered to put trade in the best possible light, probably in order to help grease the wheels for publication. The "Rose Effect" of currency unions on trade? Utter horseshit. The effect of openness on growth? Sheer crap. Growth accounting? Worthless. Game theory? Pretty much unusable in real world situations. The idea in academic research is to try to scam the referees. Get a creative idea, preferably about current events -- the financial crisis! economic growth in China! the decline of american manufacturing! Writing a "research" paper on it will consist of creating a detailed and hideously complex model that will yield a counterintuitive conclusion (which matches your priors). You need not actually know or have to read anything about manufacturing, of course, the model will suffice. Then grab a data set (about which you know nothing about how it was created, but, who cares, it was used for an AER pub; it must be good!), run a regression! and then thank all of the famous people in your department on page 1. If they are famous enough, you've got a pub at a top 10 journal; if not so famous, then perhaps you can aim for one of the field journals...

Yet, let's step away from research. Sure, that might be worthless, and the senseless drivel pouring forth from conservative Nobels now suggests that Economists just don't make good policy advisors, but don't economists also teach? People in the profession will burst out laughing at that, for economists put almost no weight on their teaching; we really have it made. After being trained hard-core in math in grad school, all we need to do for the undergrad econ majors, who, for the most part, have very little math training, is throw up some equations, maybe a derivative or two, and the students will find it difficult enough. Don't even have to prepare for lecture. Can download the multiple choice exams from the publisher. It's cake. Doesn't even require any actual thought.

Of course, undergrads learn almost nothing from their econ courses...


  1. great stuff.

    i really enjoyed reading this post...

  2. Quite a rant. I basically agree with you but I would just point out that most of the things you point to are basically macro/international papers. I think there is some worthwhile public and labor and development econ out there that is very empirically grounded and less model dependent (though they have their own frauds, like the famous Hoxby/Rothstein incident).
    Unfortunately they aim to discover very minor things - the deadweight loss from a marginal tax rate in a static model, an individual labor supply decision, the local return to schooling in a particular country, the effect of deworming drugs on school attendance, etc. On any really important question, and most of the macro questions really are big important questions, our profession has been sadly lacking and has tended to substitute mathematical rigor for realism.

  3. You are a douchebag.

  4. Anonymous-

    You're a GAF.

  5. Can you provide some references for what you say about Young & Acemoglu? thanks

  6. Hilarious. Thank you. Whoever you are.

  7. Re: First Anonymous -- I basically agree with you. I think there is some good micro work out there, just as there is some good international/macro work out there.

    Luis Enrique -- See Young "Tyranny of Numbers" & "Gold into Plowshares". In the first, he says productivity growth in the East Asian NICs was low during the decades in which their economies grew at 8% per year. In the ladder article on China, he says they had negative TFP growth from 1978-1998, even as their economy grew at 10% per year and went from being a desperately poor to middle income country... Juxtapose that with Young's recent work on Africa, which he says has grown quite rapidly... If you read any of Young's stuff with a critical mind, you'll find it's shite. It's shite, but it's so magically counterintuitive! Starving Africa has been booming while fast-growing China has been doing far worse! It's worse than a joke...

    Re: Acemoglu. Look at his "Colonial Origins" paper and see the response by Albouy, which does a good job detailing Acemoglu's data problems, but probably does not do a very thorough job critiquing the basic logic of the paper.

  8. thorstein veblenJuly 3, 2010 at 11:09 PM

    2nd article should be "Gold into Base Metals"... Other funny thing about that article is that he repeatedly accuses the Chinese of faking all their economic data, and suggests that they had actually done much worse. Trouble is, I've been to China. It looked much richer than India, and roughly the same as Peru to my eyes... And the cities on the East Coast look as developed as New York or Chicago... In 1978, even the official statistics said China was as poor as Africa. Clearly, something happened.

  9. Whilst I suspect you're right, I can't help thinking that by drawing your conclusions on the false Appalachian chasm in economics by comparing only two universities, you kind of undermined your criticism of their intellectual rigour.

  10. I came to your Blog via a quote and link in Naked Capitalism. Wanted to see who you were and look around your blog.

    I am sorry to see that you rely on advertising from payday lenders. Really, can't take anyone seriously who climbs into that bed.

  11. "Put hair on your chest"?? Make those metaphors gender neutral at the very least, unless you are suggesting that institutionalized economists are necessarily men with hairy chests.