Lately a few people have accused me of being “closed-minded.” As they’d predict, I reject the accusation. I say my degree of openness is close to optimal. Consistent with Bayesian reasoning, I am as reluctant to claim vindication by events as I am to admit refutation by events. (If you disagree, I am always willing to entertain a bet).
The root problem, as far as I can tell, is that most people underestimate the extent to which a wide variety of theories are consistent with a wide range of events. In this sense, they’re too closed-minded.
During the 2008 financial crisis, for example, most economists started proclaiming that events had overturned most of what economists thought. I, in contrast, (a) never ruled out events like those of 2008, and (b) didn’t see how heterodox views made the events of 2008 any more likely than more orthodox views. Self-styled “open-minded” economists have been guilty of what Scott Sumner aptly calls a “bonfire of the verities“:
Back in 2007 one could take some pride in being an economist. There
were a set of truths that were pretty widely accepted, at least among
the more elite macroeconomists…
1. “Monetary policy can be highly effective in reviving a weak
economy even if short-term interest rates are already near zero.” The
quote is from Mishkin’s text editions 1-9 (removed from 10). Friedman
and Bernanke made similar statements, as did many others.
2. A much more stimulative monetary policy, perhaps involving leaving
the gold standard, would have prevented the 50% fall in NGDP during the
early 1930s, and thus would have largely prevented the Great
5. Low interest rates do not imply easy money. (Again, Bernanke,
Mishkin, Friedman, and many others made this point. It’s what we’ve
been teaching our students from the number one money textbook.
6. Higher minimum wage rates and extended UI benefits increase the natural rate of unemployment.
11. Natural disasters do not cause higher unemployment in big
diversified economies, AD shocks do. This explains why Japan’s
unemployment rate rose after its NGDP fell sharply in 2008-09, but did
not rise at all after the tsunami.
12. Big increases in government spending, taxes, and regulation may
cause harm to the economy, but don’t really play much of a role in the
business cycle. They don’t cause the unemployment rate to rise in the
short run, as FDR and LBJ showed.
17. Price gouging is actually a good thing.
18. The “broken windows fallacy” really is a fallacy.
The key passage, though, is in Scott’s post-script:
PS. What most depresses me is that (with a few exceptions such as
the minimum wage) I can’t see any facts, any empirical evidence, which
would have led a reasonable economist to abandon these verities. But
Whenever people start praising open-mindedness, I’m tempted to quote Chesterton: “Do not be so open-minded that your brains fall out.” Shocking events should only change your mind if they occur at an unexpectedly high (or low!) rate. Otherwise, stare decisis.
Nov 4 2012 at 10:00pm
> Low interest rates do not imply easy money.
What is the meaning of easy money? Is this a useful term? I’ve always understood it to be an analogy referring to the ease with which one can borrow money. If we assume the lender has approved the loan, what is the hardship beyond the interest rate?
If this can be explained in commonsense terms, I’d appreciate it.
Nov 4 2012 at 10:55pm
I think a reasonable meaning would be an inflationary currency.
Nov 5 2012 at 5:49am
And the bonfire of the verities didn’t just apply to economists! It’s interesting to see the wide array of individuals and groups who had been vaguely predicting doom in the 2000s and said “see!” when things went wrong.
These included religious conservatives who were uneasy with materialistic consumerism, more extreme religious fundamentalists with anti-Western agendas like Al Qaeda, populist socialists, populist right-wingers, environmentalists, anti-immigrationists: anyone who said that the present course was unsustainable in the 2000s was able to use the crisis to reinforce their prejudices or beliefs.
Nov 5 2012 at 1:15pm
Excellent! Most people do not want to accept economic reality so they will falsely claim that you are “closed minded” if you don’t agree with their proposed political solution. Then, when an economic crisis occurs, they are the first to proclaim that the “old truths” are no longer applicable in order to promote their political solutions to get around economic reality. They are the closed minded ones — closed minded to anything but their own fantasies about how the world should work.
Nov 5 2012 at 9:05pm
Easy money is when there is an excess supply of money. Tight money is when there is an excess demand of money. You can easily see this in the data. When inflation expectations are above trends, you have easy money. When inflation expectations are below trend, you have tight money.
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