In 1998, Time Magazine asked Paul Krugman to write up a futuristic piece for the publication’s 100th anniversary issue. Time, pardon the pun, has not been kind to a lot of what he said, but in particular his whimsical predictions for the then-newly expanded internet.
The growth of the Internet will slow drastically, as the flaw in ‘Metcalfe’s law’–which states that the number of potential connections in a network is proportional to the square of the number of participants–becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.
He defends this writing as if it were non-serious, a requirement of the task which he was given. But I suspect the motivation for writing what he wrote is a serious matter, in fact maybe the most serious. It betrays what I think is one fatal flaw (among many) found throughout orthodox economics, this tendency to view everything through the lens of econometrics, thus statistics, thus in straight lines.
But in doing so, you end up underestimating so much of what makes economy’s work in the capitalist sense. Innovation, as is clear in Krugman’s joke, is reduced to a sort of commodity that has definable, even well-defined, properties. From that belief, one might believe in making absolute predictions about its behavior and by extension the future.
There is one story that makes the rounds on the internet, maybe derived from prior facsimile form, which has been editorially corroborated and tells of an 1894 Times of London article where the best (maybe) minds of that time fully expected that by the middle 20th century the whole of metropolitan London would be buried under nine feet of horse manure. It seemed eminently reasonable, even given the appearance of automobiles if in limited quantities, and despite a modern network of mass transit. There was simply at that time “too many” horses, and the ability to predict how a city of that size might deal with further growth in that incapacity was as it always is – limited.
Adam Smith wrote about the “unseen hand” and there is one for technology as well. It’s why whenever I see a movie constructed around some dystopian future I often can’t help but laugh at how it must have been written by an economist (Wall-E immediately comes to mind), where in far too many of them the bleakness of that future is environmental degradation as garbage literally piles up over the centuries. That’s not how any of this works.
Or at least it is not supposed to be that way. The global economy has a productivity problem, and because central banks employ the vast majority of economists, and those that they don’t directly employ take their cues from them, they will be the ones who will decide the fate of “secular stagnation.” Having more recently embraced the idea after being finally forced to take it seriously by being completely wrong about economic conditions from 2014 forward, how they treat it will determine whether or not we get out of it – no small consideration.
It is a frustrating and unjust condition, especially considering how powerless (in true monetary terms) central bankers are and have been for a very long time. For them now to hold the power to decide among the political powers of the world whether to meekly accept the way things are is among the worst possible of all outcomes. One of their presumed explanations for the deplorable economic state, due to low productivity, is a lack of innovation. Because it is not something you or I can define, but they think they can, their word on the subject carries with it the very grave danger insofar as turning down the path to Japanification; there is a lack of innovation, they declare, so there is nothing to be done, our fate evidently sealed by horse manure and fax machines.
The true problem is deeper than all that, of course, meaning that the world needs to remove itself from “experts.” The problem with the global economy is Economists, who prevent real solutions from being considered let alone offered, all in deference to what is truly a closed loop bubble. Because it has the proportions of a religion, anything outside of it is treated as heretical. But here’s the thing, this doesn’t appear to be a failing exclusive to Economics.
In particle physics, the Large Hadron Collider at CERN has done a great deal to advance our knowledge of the universe. It has found the Higgs boson, of course, but it found it in a peculiar place that preserves the Standard Model, and has thus left physicists with nowhere, seemingly, to turn to about what comes after it (the Standard Model, while elegant and functional, leaves far too many mysteries and inconsistencies, and so is not in any way close to a full diagram of the universe). This is, perhaps, something that should not have been a surprise, as one physicist wrote last August:
During my professional career, all I have seen is failure. A failure of particle physicists to uncover a more powerful mathematical framework to improve upon the theories we already have. Yes, failure is part of science – it’s frustrating, but not worrisome. What worries me much more is our failure to learn from failure. Rather than trying something new, we’ve been trying the same thing over and over again, expecting different results.
When I look at the data what I see is that our reliance on gauge-symmetry and the attempt at unification, the use of naturalness as guidance, and the trust in beauty and simplicity aren’t working. The cosmological constant isn’t natural. The Higgs mass isn’t natural. The standard model isn’t pretty, and the concordance model isn’t simple. Grand unification failed. It failed again. And yet we haven’t drawn any consequences from this: Particle physicists are still playing today by the same rules as in 1973.
What I believe has happened is that particle physics, like Economics, has become institutionalized and therefore behaves like a bureaucracy rather than a science. Science is and was never as it is so often idealized, with objective observers dispassionately analyzing data and making truly rational interpretations; it is like any human endeavor, subject to the frailties of humans, including ego and groupthink.
It is yet another rational basis for populism, which in the form of economics (small “e”) is a rejection of so-called experts who are only expert on matters not related to the economy (as they, like Krugman, so often prove). As to the subject of innovation, it is the pronouncements of these very people who might doom us to the worst possible fate because they feel empowered to weigh in on a subject to which they have no reasonable basis by which to claim authority. The only true basis is a tautology combined with a logical fallacy; they call themselves economists and because they occupy positions of influence they have influence, and can therefore influence all economic thinking.
Secular stagnation is an insidious device which will thwart all pathways to a global economic solution should it ever become widely accepted. Because Economics like other modern “sciences” have become so institutionalized, once it is taken into the canon it will be that much harder to drive out (and I don’t think we have that much time). We should not care that they might believe all this, but events may conspire, out of hope no less, to further entrench the view.
I am in the uncomfortable position of agreeing with Janet Yellen and the Fed as to their lukewarm reception (to be understated) over the possibilities for Trump “stimulus”, though, obviously, for vastly different reasons. What I fear most is that should the Trump administration go ahead and do another ARRA-type program and achieve the same results, as all relevant evidence suggests regardless of its ultimate form and shape, it will actually bolster the case of secular stagnation and therefore make it all but impossible for any realistic reform to take place. Economists will be able to plausibly claim that nothing works, monetary to fiscal, as secular stagnation predicts, and therefore their views on innovation and productivity will be the end of all further discussion, at least for long enough for the worst cases to develop.
Trump has been President for not even a week, so the fact there isn’t the slightest hint of monetary reform may not yet be cause for pessimism and further cynicism. Maybe I am wrong and Janet Yellen’s immediate resignation is on the agenda somewhere that politics has prevented from being closer to the front end, but her resignation would be merely symbolic anyway. There is an institutional problem to Economics that requires completely rethinking the Federal Reserve, and it is absolutely necessary that it is done before it is handed back credibility it in so many ways squandered.