Speculations on the stabilization and dissemination of the “DSGE” trade name (in progress)

Some research I’ve done for the history of macroeconometric modeling conference that will be held in Utrecht next week led me to wonder who coined and disseminated the  term “Dynamic Stochastic General Equilibrium.” Not the class of models, whose development since Lucas and Prescott’s 1971 paper has been the topic of tons of surveys.  Fellow historian Pedro Duarte has a historical meta-survey of the flow of literature in  which macroeconomists have commented on the state of macro and shaped the idea of a consensus during the 1990s and 2000s. Neither am I hunting for the many competing words used to designate the cluster of models born from the foundational papers by Robert Lucas or Finn Kydland and Ed Prescott, from Real Business Cycle to Dynamic General Equilibrium to stochastic models. What I want to get at is how the exact DSGE wording stabilized. Here is the result of a quick tentative investigation conducted with the help of JSTOR (an unreliable database for historical research) and twitter.

According to JSTOR, it was Robert King and Charles Plosser who, in  their famous 1984 paper titled Real Business Cycles, used the term DSGE for the first time, though with a coma (their 1982 NBER draft did not contain the term): “Analysis of dynamic, stochastic general equilibrium models is a difficult task. One strategy for characterizing equilibrium prices and quantities is to study the planning problem for a representative agent,” they explained upon deriving equilibrium prices and quantities.

Assuming the JSTOR database is exhaustive enough (information on the exact coverage is difficult ti find) and that the term didn’t spread through books or graduate textbooks (which is a big stretch), dissemination in print was slow at first.

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For more than a decade, only a handful of articles containing the word were published each year. Lars Hansen and Jim Heckman used “Dynamic Stochastic General Equilibrium” without the acronym in a 1996 JEP  survey on calibration. While Hansen causally used the word in many publications throughout the 1990s, Eric Leeper, Chris Sims, Tao Zha, Robert Hall and Ben Bernanke used the word and its acronym much more agressively in a widely cited 1996 BPEA survey of advances in monetary policy research (I thank  Now Here Not There for the pointer).  In a telling footnote, the authors explain that “the DSGE approach  is more commonly known as the real business cycle approach. But while it initially used models without nominal rigidities or any role for monetary policy, the methodology has now been extended to models that include nominal rigidities.” In other words, RBC models were being hybridized with new-keynesian insights with the hope of shaping a synthesis, and their name was evolving alongside their substance. In 1998, Francis Diebold published an article on macroeconomic forecasting, in which he moved from a descriptive to a prescriptive use of the name. DSGE was “the descriptively accurate name” for this class of models originated in Lucas 1972 with fully-articulated preferences, technologies and rules, “built on a foundation of fully-specified stochastic dynamic optimization, as opposed to reduced-form decision rules” (to avoid the Lucas critique).

I’ve been told that, by that time, the word was already in wide currency. But many other terms also circulated, and at some point the need for a new label reached a climax and competition intensified. In November 1999, the Society for Economic Dynamics published its first newsletter. In it, Stern professor David Backus explained that finding a new name for the models he, Jordi Gali, Mark Gertler, Richard Clarida, Julio Rotemberg and Mike Woodford were manipulating was much needed: “I don’t think there’s much question that RBC modeling shed its ‘R’ long ago, and the same applies to IRBC modeling. There’s been an absolute explosion of work on monetary policy, which I find really exciting. It’s amazing that we finally seem to be getting to the point where practical policy can be based on serious dynamic models, rather than reduced form IS/LM or AS/AD … So really we need a better term than RBC. Maybe you should take a poll,” Backus declared.

Capture d_écran 2017-04-03 à 02.35.12And indeed, Chris Edmond told me, a poll was soon organized on the QM&RBC website, curated by Christian Zimmerman. Members were presented with 7 proposals. Dynamic General Equilibrium Model (DGE) gathered 76% of votes. “Stochastic Calibrated Dynamic General Equilibrium” (SCADGE) was an alternative proposed by Julio Rotemberg, who explained that  the addition of “stochastic” was meant to distinguish their models from Computational General Equilibrium. The proposal collected almost 10% of the votes. Then came  Quantitative Equilibrium Model (QED, which Michael Woodford believed was a good name for the literature as a whole, though not for an individual model and Prescott liked as well), RBC, Kydland Prescott Model (KPM, which Randall Wright found “accurate and fair”), and Serious Equilibrium Model. Prescott and tim Kehoe liked the idea of having the term “applied” in the new name, Pete Summers wanted RBC for “Rather Be Calibrating” and Frank Portier suggested “Intertemporal Stochastic Laboratory Models.”

It wasn’t yet enough to stabilize a new name. Agendas underpin names, and in those years, agendas were not unified. Clarida, Gali and Gertler’s famous 1999 “Science of Monetary Policy” JEL piece used the term “Dynamic General Equilibrium” model, but  they pushed the notion that the new class of models they surveyed reflected a “New Keynesian Perspective” blending nominal price rigidities with new classical models. In  his 2003 magnum opus Interests and Price, Woodford eschewed DGE and DSGE labels alike in favor of the idea that his models represented  a “New Neoclassical Synthesis.”  It was only in 2003 that the number of published papers using the term DGSE went beyond a handful, and in 2005 that the acronym appeared in titles. I don’t know yet whether there was a late push to better publicize the “stochastic” character of the new monetary models, and if so, who was behind it. Recollections would be much appreciated here.

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“The American Economic Association declares that economics is not a man’s field”: the missing story


The December 1971 meeting of the American Economic Association in New Orleans was a watershed, Denison University’s Robin Bartlett remembers. The room in which Barbara Bergmann chaired a session on “What economic equality for women requires” was packed, as was the meeting of the Caucus of Women Economists who elected Wellesley’s Carolyn Bell as chair and entrusted her with the task of presenting a resolution to the business meeting. On the night of the 28th, she brought a set of resolutions to president John Kenneth Galbraith, president elect Kenneth Arrow and the executive committee. “Resolved that the American Economic Association declares that economics is not a man’s field,” the first sentence read.

After heated debates, “not exclusively” was slipped into the sentence, but most resolutions were passed unaltered. In an effort to “adopt a positive program to eliminate sex discrimination among economists,” they provided for the establishment of a “Committee on the Status of Women in the Economic Profession” (CSWEP) whose first task would be to gather data and produce a report on the status of women in the profession. It also instituted “an open listing of all employment opportunities,” the JOE. The CSWEP’s inaugural report, “Combatting Role Prejudice and Sex Discrimination,” was published in the 1973 American Economic Review. It highlighted that the top 42 PhD-granting economic departments of the country hosted a mere 11% women graduate students and 6% women faculty (including 2% professors).

45 year later, according to the 2016 CSWEP report, women now represent around 30% of PhD students and 23,5% of tenure-track faculty. It’s three time more than in 1972, but less than the proportion of female Silicon Valley managers or Oscar juries. And it is a rate much lower than in other social sciences, more akin to what is found in engineering and computer sciences. Worst, the wage gap between men and women assistant and full professor has soared in the past 20 years (a women full-professor now earn 75% of what an equivalent man earns, vs 95% in 1995). Economics is also an outlier in the kind of inequality mechanism at work. While most sciences suffer from a leaking pipeline, economics rather exhibits a “tiny” pipeline: only 35% of econ undergraduates are women, which makes economics the only discipline with a proportion of female students at the PhD level higher than at the BA level. And the former is down 6 point since the 1990s.


Several explanations have been proposed and tested. Differences in comparative advantages have been rejected by data and economists have therefore turned to productivity gaps and discrimination models, and to the analysis of biases in reviewing, interviewing, hiring and citation practices. Results were weak and contradictory. Psychologists have investigated the possible effect of biological differences (for instance in mathematical and spatial abilities) and differentiated early socialization. Researchers have also hypothesized that women hold different preferences regarding flexibility vs wage and work vs family arbitrages or people vs thing research environments. But none of these factors suffice to explain the wage gap, the difficulty in luring female undergraduates into studying economics and the full-professorship glass ceiling (this research is extensively surveyed by Ceci, Ginther, Kahn and Williams. See also Bayer and Rouse). My suggestion is that historicizing the place and status of women in economics can shed light on longer trends and generate new hypotheses to explain the current situation. Let me explain.


The uncertain place of women in economics


Millicent Fawcett

Existing histories of women in economics suggest that women economists have enjoyed a higher status at the turn of the XXth century than in the postwar period. Granted, female economists had to overcome all sorts of cultural and institutionally entrenched forms of discrimination and sexism. According to Kirsten Madden, this led them to develop adaptation strategies that included “superperformance,” “subordination” and “separatism.” The result, Evelyn Forget documents, was that 12% of those economics PhDs listed by the AER in 1912 were defended by women, up to 20% in 1920. Most of these doctorates were awarded by Columbia, Chicago, Vassar and Wellesley. There were privileged topics, such as consumption, development or home economics, but women’s interests spanned all fields, including theory, and were published in top journals. Women also largely contributed to economics from outside academia. The books in which Harriet Martineau popularized Pareto’s views sold much better than those written by the illustrious founding father himself. In the early XXth century, Beatrice Potter Webb, Millicent Garrett Fawcett and Eleanor Rathbone fiercely debated the economics underlying “equal pay for equal work,” Cleo Chassonery-Zaigouche relates.

From the 1930s onward, however, women were increasingly marginalized. Forget offers several explanations. First, social work and home economics became separate academic fields. The establishment of dedicated department and vocational programs was supported by the development of land-grant institutions, and attracted those women who were systematically denied tenure in economics departments. Other seized the new opportunities offered by the expansion of governmental needs for statistics and empirical work in consumption, price indices, poverty, unemployment and wages. Many of the students trained by Margaret Reid at the university of Chicago, Dorothy Brady, and Rose Friedman, for instance, choose a civil servant over an academic career. By 1950, the proportion of PhDs defended by women was down to 4,5%. The recovery was slow. Women were allowed into a larger number of graduate programs – at Harvard, for instance, they would receive a doctorate from Radcliffe – but they were confined to assistant positions. It was the growing awareness to discrimination issues and the establishment of the CSWEP, Forget speculates, that eventually opened the gates.


Is the fate of women economists tied to the changing status of applied work?

What led me to reflect on the history of women economists is the sheer number I encountered in the archives. Most of them, however, were nothing like the model role for economics badassery, namely Joan Robinson. They were named Margaret Reid, Dorothy Brady, Anne Carter, Lucy Slater, Irma Adelman, Nancy Ruggles, Barbara Bergmann, Myra Strober, Marina Whitman or Heather Ross. At best they had an entry in the Dictionary of Women Economists or in an Eminent Economists collection, or an interview published in a field journal, but they were usually absent from economists’ and historians’ big narratives. Most of them hadn’t written  the kind of “Theory of…” 20-pages article the Nobel committee is so fond of, but instead produced datasets and procedures to collect them, lines of codes, the first regression software, simulations, early randomized experiments and new ways to measure consumption, inequality, development, wealth, education or health. They were applied economists at a time many of the topics they researched and the tools they used did not enjoy the prestige it had at the beginning of the century and would regain in its last decades.

Though women’s enduring self-selection on some topics like labor, discrimination, inequalities, development, consumption or home economics have been investigated by Agnes le Tollec or Evelyn Forget, there is no systematic study of how the status of women in economics is tied to that of applied economics. My problem, to begin with, is that I entertain contradictory hypotheses of how the rising prestige of applied economics might have affected women economists. The straightforward assumption is that more applied economics being funded by the NSF and foundations, published in top journals, and used in policy discussions enabled more women to become tenure-track economists (the surge in 1970 to 1990 percentages documented by the CSWEP). But this process was also characterized by a shift in applied economists’ location, with more government and Fed micro and macro researchers publishing in academic journals. CSWEP surveys have covered academia only so far, and it is possible that the recent stagnation in women’s tenure-track is paired with a growing feminization of governmental and international agencies, Federal banks or independent research bodies.

womenwerecomputerPossible explanations for the slacking feminization of economics might also be found into the history of computer science, a discipline confronted with a similar problem. Yet, it is precisely the professionalization and scientization of this increasingly lucrative and prestigious discipline that led to the marginalization of women, historians of computer claim. Back in the 1940s, Janet Abbate outlines, computers were women, that is, women were routinely employed to compute, to inverse matrix, and when the first analog then electronic machines were put to work, to punch holes, to input punchcards and to code. They famously worked on the first ENIAC, calculated the trajectory of John Glen’s Apollo 11 moon mission and coded its onboard flight software. In the 1960s, the shortage of programmers allowed them to combine part time computer jobs and raising kids. In 1967, Grace Hopper explained in a Cosmopolitan article below that “Women are ‘naturals’ at computer programming,” Nathan Ensmenger notes. They flocked the new undergraduate computer science program throughout the country, and represented up to 40% undergrads in 1985.


Cosmopolitan (1967, from Ensmenger)

But another phenomenon was at work in these years. The professionalization, academicization and scientization of computer science brought a redefinition of programmers’ identity, though one not linear. Since the 1950s, a picture of the good programmer as systematic, logical, task-oriented, “detached,” chess player, solver of mathematical puzzles, and masculine was gaining traction. This gendered identity was embedded in the various aptitude tests and personality profiles used by companies to recruit their programmers. As programing rose in status and became more lucrative, this identity spread to academic program managers, then to those teams who marketed the first PCs for boys in the 1980s and eventually, to prospective college students. After 1985, the number of women computer undergrad declined constantly, down to 17% in the 2010s.


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Economists applying their tools to understand their gender issue

Did the growing prestige of applied economics from the 1960s onward result in a similar gender identity shift? I don’t know, the construction of a self-image is elusive and difficult to track. But the CSWEP record, with its mix of quantitative surveys and qualitative testimonies might well be a good place to chase it. The history of the CSWEP also points to other contexts that have shaped how economists understand their own sex imbalance. The 1973 CSWEP inaugural report opened, not with survey results, but with a lengthy introduction drafted by Kenneth Boulding, then member of the committee. Its title and opening sentences epitomized the strategy Boulding had adopted to capture his audience’s attention:

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In other words, discrimination within economics is an economic problem, one that begets economic analysis and cures. Boulding proposed to consider discrimination as part of a larger process of “role learning and role acceptance, and went on to rationalize the CSWEP’s proposals to solve the “betterment production function” : “what are the inputs which produce this output, and particularly, what are those inputs that can be most easily expanded and that have the highest marginal productivity? … Four broad classes of inputs may be named: information, persuasion, reward and punishments,” he wrote. The CSWEP was thus established at a moment economists of all stripes were developing theories and tools to study discrimination, some they were naturally draw to apply to themselves. Problem was, no one seemed to agree on what the relevant tools and theories were. At that time, Arrow was developing a theory of statistical discrimination at RAND, one that grew into a criticism of Becker’s taste-based model. He tried to explain wage differences by imperfect information, then recruitment costs. Other frameworks challenged the beckerian “new household economics” more radically, in particular Marxist and nascent feminist theories in which sex (a biological characteristic) was distinguished from gender (a social construct). In exchanges known as the “Domestic Labor Debate,” Marianne Ferber or Barbara Bergmann, among others, challenged Becker’s idea that household specialization reflected women’ rational choice and emphasized the limitations placed by firms on labor opportunities. They also claimed that economists should pay more attention to the historical foundation of economic institutions and endorse a more interdisciplinary approach. These debates were reflected inside the CSWEP. The 1975 symposium on the implications of Occupational Segregation presented   the audience with the views of virtually all committee members. How these theoretical, empirical and methodological played out in the understanding of the status of women within the economic discipline and changing status itself is also a question a systematic history of the CSWEP could answer.

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Big data in social sciences: a promise betrayed ?

In just 5 years, the mood at conferences on social science and big data has shifted, at least in France. Back in the early 2010s, these venues were buzzing with exchanges about the characteristics of the “revolution” (the 4Vs) with participants marveling at the research insights afforded by the use of tweets, website ratings, Facebook likes, Ebay prices or online medical records. It was a time when, in spite of warnings about the challenges and perils ahead, grant applications, graduate courses and publications were suddenly invaded by new tools to extract, analyze and visualize data. There discussions are neither over nor even mature yet, but their tone has changed. The enthusiasm with a tint of arrogance has given way to a cautious reflexivity wrapped up in a general zeitgeist of uncertainty and angst, even anger. Or so is the feeling I took away from the ScienceXXL conference I attended last week. Organized by demographer Arnaud Bringé and sociologists Anne Lambert and Etienne Ollion at the French National Institute for Demographic Studies, it was conceived as an interdisciplinary practitioners’ forum. Debates on sources, access, tools and uses were channeled via a series of feedbacks offered by computer scientists, software engineers, demographers, statisticians, sociologists, economists, political scientists and historians. And this, in fact, made the underlying need to yoke new practices to an epistemological re-evaluation of the nature and uses of data, of the purpose of social science, and of the relationships between researchers and government, independent agencies, business and citizens especially salient.

Lucidity: big data is neither easier nor faster nor cheaper


The most promising trend I saw during the workshop is a better integration of users, disciplines and workflows. “Building a database doesn’t create its own uses” was much reiterated, but responses were offered. One is the interdisciplinary construction of a datascape, that is, a tool that integrates the data corpus and the visualization instrument. Paul Girard introduced RICardo, which allows the exploration of XIX/XXth centuries trade data. Eglantine Schmitt likewise explained that the development of a text-mining software required “choosing an epistemological heritage” on how words are defined and how the interpretative work is performed, and “tool it up” for current and future uses, subject to technical constraints. What surprised me, I shall confess, was the willingness of research engineers and data and computer scientists to incorporate the epistemological foundations of social sciences into their work and collect lessons learned from centuries of qualitative research. Several solutions to further improve collaboration between social and computer scientists were discussed. The Hackaton/Sprint model prevents teams from divide up tasks, and force interaction yield an understanding of others’ way of thinking and practices. The downside is in promoting “fast science,” while data need time to be understood and digested. Data dumps and associated contests on websites such as Kaggle, by contrast, allow longer-term projects.

Perceived future challenges were a better integration of 1) qualitative and quantitative methods (cases of fruitful interbreeding mentioned were the Venice Time Machine project and Moretti’s Distant Reading. Evaluations of culturomics were more mixed)  2) old and new research (to know if the behavioral patterns are really new phenomena produced by social networks and digitalized markets, or are consistent with those traditional behaviors identified with older techniques). Also pointed out was the need to identify and study social phenomena that are impossible to capture through quantification and datification. This suggests that a paradoxical consequence of the massive and constant data dump allowed through real-time recording of online behavior could be a rise in the prestige of extremely qualitative branches of analysis, such as ethnography.


Unsurprisingly, debates on quantitative tools, in particular regarding the benefits and limits of traditional regression methods vs machine learning, quickly escalated. Conference exchanges echoed larger debates on the black box character of algorithms, the lack of guarantee that their result is optimal and the difficulty in interpreting results, three shortcomings that some researchers believe make Machine Learning incompatible with social science DNA. Etienne Ollion & Julien Boelaert pictured random forest as epistemologically consistent with the great sociological tradition of “quantitative depiction” pioneered by Durkheim or Park & Burgess. They explained that ML techniques allow more iterative exploratory approaches and mapping heterogeneous variable effects across the data space. Arthur Charpentier rejected attempts to conceal the automated character of ML. These techniques are essentially built to outsource the task of getting a good fit to machines, he insisted. My impression was that there is a sense in which ML is to statistics what robotization is to society: a job threat demanding a compelling reexamination of what is left for human statisticians to do, what is impossible to automatize.

tEQDan.pngTool debates fed into soul-searching on the nature and goals of social sciences. The focus was on prediction vs explanation. How well can we hope to predict with ML, some asked? Prediction is not the purpose of social sciences, other retorted, echoing Jake Hofman, Armit Sharma and Duncan Watt’s remark that “social scientists have generally deemphasized the importance of prediction relative to explanation, which is often understood to mean the identification of interpretable causal mechanisms.” These were odd statements for a historian of economics working on macroecometrics. The 1960s/1970s debates around the making and uses of Keynesian macroeconometrics models I have excavated highlight the tensions between alternative purposes: academics primarily wanted to understand the relationships between growth, inflation and unemployment, and make conditional prediction of the impact of shifts in taxes, expenditures or the money supply on GDP. Beyond policy evaluation, central bankers also wanted their model to forecast well. Most macroeconometricians also commercialized their models, and what sold best were predictive scenarios. My conclusion is that prediction had been as important, if not more, than explanation in economics (and I don’t even discuss how Friedman’s predictive criterion got under economists’ skin in the postwar). If, as Hoffman, Sharma and Watts argue, “the increasingly computational nature of social science is beginning to reverse this traditional bias against prediction,” then the post-2008 crash crisis in economics should serve as a warning against such crystal ball hubris.

Access (denied)

scrapUncertainty, angst and a hefty dose of frustration dominated discussions on access to data. Participants documented access denials to a growing number of commercial websites after using data scrapping bots, twitter’s APIs getting increasingly restrictive, administrations and firms routinely refusing to share their data, and, absent adequate storage/retrieval routines, data mining and computational expertise and stable and intelligible legal framework, even destroying large batches of archives. Existing infrastructure designed to allow researchers’ access to public and administrative data are sometimes ridiculously inadequate. In some cases, researchers cannot access data firsthand and have to send their algorithms for intermediary operators to run them, meaning no research topic and hypotheses can emerge from observing and playing with the data. Accessing microdata through the Secure Data Access Center mean you might have to take picture of your screen as regression output, tables, and figures are not always exportable. Researchers also feel their research designs are not understood by policy and law-makers. On the one hand, data sets need to be anonymized to preserve citizens’ privacy, but on the other, only identified data allow dynamic analyses of social behaviors. Finally, as Danah Boyd and Kate Crawford had predicted in 2011, access inequalities are growing, with the prospect of greater concentration of money, prestige, power and visibility in the hand of a few elite research centers. Not so much because access to data is being monetized (at least so far), but because privileged access to data increasingly depends on networks and reputation and creates a Matthew effect.

Referring to Boyd and Crawford, one participant sadly concluded that he felt the promises of big data that had drawn him to the field were being betrayed.

Harnessing the promises of big data: from history to current debates

Those social scientists in the room shared a growing awareness that working with big data is neither easier nor faster nor cheaper. What they were looking for, it appeared, was not merely feedback, but frameworks to harness the promises of big data and guidelines for public advocacy. Yet crafting such guidelines requires some understanding of the historical, epistemological and political dimensions of big data. This involves reflecting on changing (or enduring) definitions of “big” and of “data” across time and interests groups, including scientists, citizens, businesses or governments.

When data gets big

512px-Hollerith_card_reader_closeup“Bigness” is usually defined by historians, not in terms of terabits, but as a “gap” between the amount and diversity of data produced and the available intellectual and technical infrastructure to process them. Data gets big when it becomes impossible to analyze, creating some information overload. And this has happened several times in history: the advent of the printing machine, the growth in population, the industrial revolution, the accumulation of knowledge, the quantification that came along scientists’ participation into World War II. A gap appeared when 1890 census data couldn’t be tabulate in 10 years only, and the gap was subsequently reduced by the development of punch cards tabulating machines. By the 1940s, libraries’ size was doubling every 16 years, so that classification systems needed to be rethought. In 1964, the New Statesman declared the age of “information explosion.” Though its story is unstabilized yet, the term “big data” appeared in NASA documents at the end of the 1990, then by statistician Francis Diebold in the early 2000s. Are we in the middle of the next gap? Or have we entered an era in which technology is permanently lagging behind the amount of information produced?

IBM360Because they make “bigness” historically contingent, histories of big data tend to de-emphasize the distinctiveness of the new data-driven science and to lower claims that some epistemological shift in how scientific knowledge is produced is under way. But they illuminate characteristics of past information overloads, which help make sense of contemporary challenges. Some participants, for instance, underlined the need to localize the gap (down to the size and capacities of their PCs and servers) so as to understand how to reduce it, and who should pay for it. This way of thinking is reminiscent of the material cultures of big data studied by historians of science. They show that bigness is a notion primarily shaped by technology and materiality, whether paper, punch cards, microfilms, or those hardware, software and infrastructures scientific theories were built into after the war. But there’s more to big data than just technology. Scientists have also actively sought to build large-scale databases, and a “rhetoric of big” had sometimes been engineered by scientists, government and firms alike for prestige, power and control. Historians’ narratives also elucidate how closely intertwined with politics the material and technological cultures shaping big data are . For instance, the reason why Austria-Hungary adopted punch-card machinery to handle censuses earlier that the Prussian, Christine von Oertzen explains, was determined by labor politics (Prussian rejected mechanized work to provide disabled veterans with jobs).

Defining data through ownership

The notion of “data” is no less social and political than that of “big.” In spite of the term’s etymology (data means given), the data social scientists covet and their access are largely determined by questions of uses and ownership. Not agreeing on who owns what for what purpose is what generates instability in epistemological, ethical, and legal frameworks, wha creates this ubiquitous angst. For firms, data is a strategic asset and/or a commodity protected by property rights. For them, data are not to be accessed or circulated, but to be commodified, contractualized and traded in monetized or non-monetized ways (and, some would argue, stolen). For citizens and the French independent regulatory body in charge of defending their interests, the CNIL, data is viewed through the prism of privacy. Access to citizens’ data is something to be safeguarded, secured and restricted. For researchers, finally, data is a research input on the basis of which they seek to establish causalities, make predictions and produce knowledge. And because they usually see their agenda as pure and scientific knowledge as a public good, they often think the data they need should be also considered a public good, free and open to them. 

In France, recent attempts to accommodate these contradictory views have created a mess. Legislators have strived to strengthen citizens’ privacy and their right to be forgotten against Digital Predators Inc. But the 19th article of the resulting Digital Republic Bill passed in 2016 states that, under specific conditions, the government can order private business to transfer survey data for public statistics and research purposes. The specificities will be determined by “application decrees,” not yet written and of paramount importance to researchers. But at the same time, French legislators have also increased governmental power to snitch (and control) the private life of its citizens in the wake of terror attacks, and rights on business, administrative and private data are also regulated by a wide arrays of health, insurance or environmental bills, case law, trade agreements and international treaties.

consentAs a consequence, firms are caught between contradictory requirements: preserving data to honor long term contracts vs deleting data to guarantee their clients’ “right to be forgotten.” Public organizations navigate between the need to protect citizens, their exceptional rights to require data from citizens, and incentives to misuse them (for surveillance and policing purpose.) And researchers are sandwiched between their desire to produce knowledge, describe social behaviors and test new hypotheses, and their duty to respect firms’ property rights and citizens’ privacy rights. The latter requirement yields fundamental ethical questions, also debated during the ScienceXXL conference. One is how to define consent, given that digital awareness is not distributed equally across society. Some participants argued that consent should be explicit (for instance, to scrap data from Facebook or dating websites). Other asked why digital scrapping should be regulated while field ethnographic observation wasn’t, the two being equivalent research designs. Here too, these debates would gain from a historical perspective, one offered in histories of consent in medical ethics (see Joanna Radin and Cathy Gere on the use of indigenous heath and genetic data).

All in all, scientific, commercial, and political definitions of what “big” and what “data” are are interrelated. As Bruno Strasser illustrates with the example of crystallography, “labeling something ‘data’ produces a number of obligations” and prompt a shift from privacy to publicity. Conversely, Elena Aronova’s research highlights that postwar attempts to gather geophysical data from oceanography, seismology, solar activity or nuclear radiation were shaped by the context of research militarization. They were considered a “currency” that should be accumulated in large volumes, and their circulation was more characterized by Cold War secrecy than international openness. The uncertain French technico-legal framework can also be compared to that of Denmark, whose government has lawfully architected big data monitoring without citizens’ opposition: each citizen has a unique ID carried through medical, police, financial and even phone records, an “epidemiologist’s dream” come true. 

Social scientists in search of a common epistemology

If they want to harness the promises of big data, then, social scientists cannot avoid entering the political arena. A prerequisite, however, is to forge a common understanding of what data are and are for. And conference exchanges suggest we are not there yet. At the end of the day, what participants agreed on is that the main characteristic of these new data isn’t just size, but the fact that it is produced for purposes other than research. But that’s about all they agree on. For some, it means that data like RSS feeds, tweets, Facebook likes or Amazon prices is not as clean than that produced through sampling or experiments, and that more efforts and creativity should be put into cleaning datasets. For other, cleaning is distorting. Gaps and inconsistencies (like multiple birth dates, odd occupations in demographical databases) provide useful information on the phenomena under study.

That scrapped data is not representative also commanded wide agreement but while some saw this as a limitation, other considered it as an opportunity to develop alternative quality criteria. Neither is data taken from digital websites objective. The audience was again divided on what conclusion to draw. Are these data “biased”? Do their subjective character make it more interesting? Rebecca Lemov’s history of how mid-twentieth century American psycho-anthropologists tried to set up a “database of dreams” reminds us that capturing and cataloguing the subjective part of human experience is a persistent scientific dream. In an ironical twist, the historians and statisticians in the room ultimately agreed that what a machine cannot be taught (yet) is how the data are made, and this matter more than how data are analyzed. The solution to harness the promise of big data, in the end, is to consider data not as a research input, but as the center of scientific investigation.

Relevant links on big data and social science (in progress)

2010ish “promises and challenges of big data” articles: [Bollier], [Manovich], [Boyd and Crawford]

Who coined the term big data” (NYT), a short history of big data, a timeline

Science special issue on Prediction (2017)

Max Plank Institute Project on historicizing data and 2013 conference report

Elena Aronova on historicizing big data ([VIDEO], [BLOG POST], [PAPER])

2014 STS conference on collecting, organizing, trading big data, with podcast

Quelques liens sur le big data et les sciences sociales

Au delà des Big Data” par Etienne Ollion & Julien Boelaert

A quoi rêvent les algorithms, par Dominique Cardon

Numero special de la revue Statistiques et Sociétés (2014)

Numero special de la revue Economie et Statistiques à venir

Sur le datascape RICardo, par Paul Girard

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The ordinary business of macroeconometric modeling: working on the MIT-Fed-Penn model (1964-1974)

Against monetarism?

 In the early days of 1964, George Leland Bach, former dean of the Carnegie Business School and consultant to the Federal Reserve, arranged a meeting between the Board of Governors and 7 economists, including Stanford’s Ed Shaw, Yale’s James Tobin, Harvard’s James Dusenberry and MIT’s Franco Modigliani. The hope was to tighten relationships between the Fed economic staff and “academic monetary economists.” The Board’s concerns were indicated by a list of questions sent to the panel: “when should credit restraint being in an upswing?” “What role should regulation of the maximum permissible rate on time deposits play in monetary policy?” “What weight should be given to changes in the ‘quality’ of credit in the formation of monetary policy?”

Fed chairman William McChesney Martin’s tenure had opened with the negotiation of the 1951 Accord which restored the Fed’s independence, which he had since constantly sought to assert and strengthen. In the past years, however, the constant pressure CEA chairman Walter Heller exerted to keep short-term rates low (so as not to offset the expansionary effects of his proposed tax cut) had forced Martin into playing defense. The board was now in a weird position. On the one hand, after the emphasis had been on fiscal stimulus, inflationary pressures were building up and the voices of those economists pushing for active monetary stabilization were increasingly heard. Economists like Franco Modigliani, trained in the Marschakian tradition, were hardly satisfied with existing macroeconometric models of the Brookings kind, with their overwhelming emphasis on budget channels and atrophied money/finance blocks.

On the other hand, Milton Friedman, who was invited to talk to the board a few weeks after the panel, was pushing a monetarist agenda which promised to kill the Fed’s hard-fought autonomy in steering the economy. Money supply only affected output and employment in a transitory way, he explained, and it was a messy process because of  lags in reacting to shifts in interest rates. Ressurecting the prewar quantity theory of money, Friedman insisted that the money supply affected output through financial and non-financial asset prices. He and David Meiselman had just published an article in which they demonstrated that the correlation between money and consumption was higher and more stable than between consumption and expenditures. MIT’s Robert Solow and John Kareken had questioned Friedman and Meiselman’s interpretation of lags and their empirical treatment of causality, and their colleagues Modigliani and Albert Ando were working on their own critique of FM’s consumption equation. This uncertain situation was summarized in the first sentences of Dusenberry’s comments to the 1964 panel:

Decision making in the monetary field is always difficult. There are conflicts over the objectives of monetary policy and over the nature of momentary influences on income, employment prices and the balance of payments. The size and speed of impact of the effects of central bank actions are also matters of dispute. The Board’s consultants try to approach their task in a scientific spirit but we cannot claim to speak with the authority derived from a wealth of solid experimental evidence. We must in presenting our views emphasize what we don’t know as well as what we do know. That may be disappointing vut as Mark Twain said: “it ain’t things we don’t know that hurt, it’s the things we know that ain’t so.


Winning the theory war implied researching channels whereby monetary policy influenced real aggregates, but winning the policy war implied putting these ideas to work. During a seminar held under the tutelage of the SSRC’s Council of Economic Stability, economists came to the conclusion that the Brookings model previously funded came short of integrating the monetary and financial sphere with the real one, and Modigliani and Ando soon proposed to fashion another macroeconomic model. For the Keynesian pair, the model was explicitly intended as a workshorse against Friedman’s monetarism. At the Fed, head of the division of research and statistics Daniel Brill and Frank De Leeuw, a Harvard PhD who had written down the Brooking’s model monetary sector, had come to the same conclusion and started to build their own model. It was decided to merge the two projects. Funded by the Fed through the Social Science Research Council, the resulting model came to be called the MPS, for MIT-Penn (where Ando had moved in 1967)-SSRC. Intended as a large-scale quarterly model, its 1974 operational version exhibited around 60 simultaneous behavioral equations (against several hundreds for some versions of the Wharton and Brookings models), and up to 130 in 1995, when it was eventually replaced. Like companion Keynesian models, its supply equations were based on a Solovian model of growth, which determined the characteristics of the steady state, and a more refined demand set of equations, with 6 major blocks: final demand, income distribution, tax and transfers, labor market, price determination, and a huge financial sector (with consumption and investment equations).Non conventional monetary transmission mechanisms (aka, other than that the cost-of-capital channel) were emphasized.


Model comparison, NBER 1976

To work these equations out, Modigliani and Ando tapped the MIT pool of graduate students. Larry Meyer, for instance, was in charge of the housing sector (that is, modeling how equity and housing values are impacted by monetary policy), Dwight Jaffee worked on the impact of credit-rationing on housing, Georges de Menil handled the wage equation with a focus on the impact of unions on wages, Charles Bischoff provided a putty-clay model of plant and equipment investment, Gordon Sparks wrote the demand equation for mortgage. Senior economists were key contributors too: Ando concentrated on fiscal multiplier estimates, Modigliani researched how money influenced wages, and how to model expectations to generate a consistent theory of interest rates determination with students Richard Sutch, then Robert Schiller. The growing inflation and the oil shock later forced them to rethink the determination of prices and wages, the role inflation played in transmission mechanisms and to add a Phillips curve to the model. The Fed also asked several recrues, including Enid Miller, Helen Popkin, Alfred Tella and Peter Tinsley, to work on the banking & financial sector and transmission mechanisms, in particular portfolio adjustments. The latter were led by   de Leeuv and Edward Gramlich, who had just graduated from Yale under Tobin and Art Okun. Responsibilities for data compilation, coding, running simulations were also split between academics and the Fed, with Penn assistant professor Robert Rasche playing a key role.

PG1 1964 10 30

The final model was much influenced by Modigliani’s theoretical framework. The project generated streams of papers investigating various transmission mechanisms, including the effect of interest rates on housing and plants investment and durable goods consumption,  credit rationing and the impact of expectations of future changes in asset prices on the term structure and on the structure of banks’ and households’ portfolio, and Tobin’s q. The MPS model did not yield expected results. Predictive performance was disappointing, estimated money multipliers were small, lags were important, and though their architects were not satisfied with the kind of adaptive expectations embedded in the behavioral equations, they lacked the technical apparatus to incorporate rational expectations. In short, the model didn’t really back aggressive stabilization policies.

Modigliani’s theoretical imprint on the MPS model, and his use of its empirical results in policy controversies are currently being investigated by historian of macro Antonella Rancan. My own interest lies, not with the aristocratic theoretical endeavors and big onstage debates, but with the messy daily business of crafting, estimating and maintaining the model.

From theoretical integrity to messy practices

A first  question is how such a decentralized process led to a consistent result. I don’t have an exhaustive picture of the MPS project yet, but it seems that graduate students picked a topic, then worked in relative isolation for months, gathering their own data, surveying the literature on the behavior of banks, firms, unions consumers or investors before sending back a block of equations. Because these blocks each had different structure, characteristics and properties, disparate methods were summoned to estimate them: sometimes TSLS, sometimes LILM or IV. Finally, because the quality of the forecasts was bad, a new batch of senior researchers reworked the housing, consumption, financial and investment blocks in 1969-1973. How is this supposed to yield a closed hundred equations model?

Bringing consistency to hundreds of equations with disparate underlying theories, data and estimation methods was a recurring concern for postwar macroeconometric modelers. At Brookings, the problem was to aggregate tens of subsectors. “When the original large scale system was first planned and constructed, there was no assurance that the separate parts would fit together in a consistent whole,” a 1969 Brookings report reads. Consistency was brought by a coordinating team and through the development of common standards, Michael McCarthy explains: large database capabilities with easy access and efficient update procedures, common packages (AUTO-ECON), efficient procedures for checking the accuracy of the code (the residual check procedure), and common simulation methods. But concerns with unification only appeared post-1969 in the Modigliani-Ando-Fed correspondence. Modigliani was traveling a lot, involved in the development of an Italian macromodel, and did not seem to care very much about the nooks and crannies of data collection and empirical research. Was a kind of consistency achieved through the common breeding of model builders, then? Did Modigliani’s monetary and macro courses at MIT create a common theoretical framework, so that he did not have to provide specific guidelines as to which behavior equations were acceptable, and which were not? Or were MIT macroeconomists’ practices shaped by Ed Kuh and Richard Schmalensee’s empirical macro course, and the TROLL software?



To mess things further up, Fed and academic researchers had different objectives, which translated in diverging, sometimes antagonistic practices. In his autobiography, Modigliani claimed that “the Fed wanted the model to be developed outside, the academic community to be aware of this decision, and the result not to reflect its idea of how to operate.” Archival records show otherwise. Not only were Fed economists very much involved in model construction and simulations, data collection and software management, but they further reshaped equations to fit their agenda. Intriligator, Bodkin and Hsiao list three objectives macroeconometric modeling tries to achieve: structural analysis, forecasting and policy evaluation, that is, a descriptive, a predictive and a prescriptive purpose. Any macroeconometric model thus embodies tradeoffs between these uses. This is seen in the many kinds of simulations Fed economists were running, each answering a different question. “Diagnostic simulations” were aimed at understanding the characteristics of the model: whole blocks were taken as exogenous , so as to pin down causes and effects in the rest of the system. “Dynamics simulations” required feeding forecasts from the previous period into the model for up to 38 quarters, and check whether the model blew up (it often did) or remained stable and yielded credible estimates for GDP or unemployment. “Stochastic simulations” were carried out by specifying initial conditions, then making out-of-sample forecasts. Policy simulations relied on shocking an exogenous variable after the model had been calibrated.

How the equations were handled also reflected different tradeoffs between analytical consistency and forecasting performance. True, Board members needed some knowledge on how monetary policy affect prices, employment and growth, in particular on scope, channels and lags. But they were not concerned with theoretical debates. They would indifferently consult with Modigliani, Dusenberry, Friedman or Metlzer. Fed economists avoided the terms “Keynesian” or “monetarist.” At best, they joked about “radio debates” (FM-AM stood for Friedman/Meiselman-Ando/Modigliani). More fundamentally, they were clearly willing to trade theoretical consistency for improved forecasting ability. In March 1968, for instance, De Leeuv wrote that dynamic simulations were improved if current income was dropped from the consumption equation:

We change the total consumption equation by reducing the current income weight and increasing the lagged income weight […] We get a slight further reduction of simulation error if we change the consumption allocation equations so as to reduce the importance of current income and increase the importance of total consumption. This reduction of error occurs regardless of which total consumption equation we use. These two kinds of changes taken together probably mean that when we revise the model the multipliers will build up more gradually than in our previous policy simulations, and also that the government expenditure multiplier will exceed the tax multiplier. You win!

 But Modigliani was not happy to sacrifice theoretical sanity in order to gain predictive power. “I am surprised to find that in these equations you have dropped completely current income. Originally this variable had been introduced to account for investment of transient income in durables. This still seems a reasonable hypothesis,” he responded.

The Fed team was also more comfortable with fudging, aka adding an ad-hoc quantity to the intercept of an equation to improve forecasts, than Modigliani and Ando were. As explained by Arnold Kling, this was made necessary by the structural shift associated with mounting inflationary pressures of all kinds, including the oil crisis. After 1971, macroeconometric models were systematically under-predicting inflation. Ray Fair later noted that analyses of the Wharton and OBE models showed that ex-ante forecast from model builders (with fudge factors) were more accurate than the ex-post forecasts of the models (with actual data). “The use of actual rather than guessed values of the exogenous variables decreased the accuracy of the forecasts,” he concluded. According to Kling, the hundreds of fudge factors added to large-scale models were precisely what clients were paying for when buying forecasts from Wharton, DRI or Chase. They were “providing us with the judgment of Eckstein, Evans and Adams […] and these judgments are more important to most of their customers than are the models themselves,” he ponders.


Material from Modigliani’s MPS folders, Rubinstein Library, Duke University

Diverging goals therefore nurtured conflicting model adjustments. Modigliani and Ando primarily wanted to settle an analytical controversy, while the Fed used MPS as a forecasting tool. How much MPS was aimed as a policy aid is more uncertain. By the time the model was in full operation, Arthur Burns had replaced Martin as chairman. Though a highly skilled economist – he had coauthored Welsey Mitchell’s business cycles study– his diaries suggest that his decisions were largely driven by political pressures. Kling notes that “the MPS model plays no role in forecasting at the Fed.” The forecasts were included in the Greenbook, the memorandum used by the chair for FOMC meetings. “The staff is not free to come up with whatever forecast it thinks is most probable. Instead, the Greenbook must support the policy direction favored by the Chairman),” writes Kling. Other top Fed officials were openly dismissive of the whole macroeconometric endeavor. Lyle Gramley, for instance, wouldn’t trust the scenarios derived from simulations. Later dubbed the “inflation tamer,” he had a simple policy agenda: bring inflation down. A consequence of these divergences, two models were, in fact, curated side by side throughout the decade: an academic one (A), and a Fed one (B). With time, they exhibited growing differences in steady states and transition properties. During the final years of the project, some unification was undertaken, but several MPS models kept circulating throughout the 1970s and 1980s.

Against the linear thesis

Archival records finally suggest that there is no such thing as a linear downstream relationship from theory to empirical work. Throughout the making of the MPS, empirical analysis and computational constraints seem to have spurred macroeconomic and econometric theory innovations. One example is the new work carried by Modigliani, Ando, Rasche, Cooper, Gramlich and Shiller on the effects of the expectations of price increases on investment, on credit constraints in the housing sector and on saving flow in the face of poor predictions. Economists were also found longing for econometric tests enabling the selection of a model specification over others. The MPS model was constantly compared with those developed by the Brookings, Wharton, OBE, BEA, DRI or St Louis teams. Public comparisons were carried through conferences and volumes sponsored by the NBER. But in 1967, St Louis monetarists also privately challenged MPS Keynesians to a duel. In those years, you had to specify what counted as a fatal blow, choose the location, the weapon, but also its operating mechanism. In a letter to Modigliani, Meltzer clarified their respective hypotheses on the relationship between short-term interest rates and the stock of interest bearing government debt held by the public. He then proceeded to define precisely what data they would use to test these hypotheses, but he also negotiated the test design itself. “Following is a description of some tests that are acceptable to us. If these tests are acceptable to you, we ask only (1) that you let us know […] (2) agree that you will us copies of all of the results obtained in carrying out these tests, and (3) allow us to participate in decisions about appropriate decisions of variable.”


Ando politely asked for compiled series, negotiated the definition of some variables, and agreed to 3 tests. This unsatisfactory armory led Ando and Modigliani to nudge econometricians: “we must develop a more systematic procedure for choosing among the alternative specifications of the model than the ones that we have at our disposal. Arnold Zellner of the University of Chicago has been working on this problem with us, and Phoebus Dhrymes and I have just obtained a National Science Foundation grant to work on this problem,” Modigliani reported in 1968 (I don’t understand why Zellner specifically).


Punchcard instructions (MPS folders)

More generally, it is unclear how the technical architecture, including computational capabilities simulation procedures and FOTRAN coding, shaped the models, their results and their performances. 1960s reports are filled with computer breakdowns and coding nightmares: “the reason for the long delay is […] that the University of Pennsylvania computer facilities have completely broken down since the middle of October during the process of conversion to a 360 system, and until four days ago, we had to commute to Brookings in Washington to get any work done,” Ando lamented in 1967. Remaining artifacts such as FORTRAN logs, punchcard instructions and endless washed-out output reels or hand-made figures speaks to tediousness of the simulation process. All this must have been especially excruciating for those model builders who purported to settle the score with a monetarist who wielded parsimonious models with a handful of equations and loosely defined exogeneity.


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Output reel (small fraction, MPS folders)

As is well known, these computational constraints have stimulated scientists’ creativity (Gauss-Seidel implemented through SIM package Erdman residual check procedure, etc). Did they foster other creative practices, types of conversations? Have the standardization of models evaluation brought by the enlargement of the tests toolbox and the development of econometric software package improve macroeconomic debates since Ando, Modigliani, Brunner and Meltzer’s times? As Roger Backhouse and I have documented elsewhere, historians are only beginning to scratch the surface of how computer changed economics. While month-long tedious simulations now virtually take two clicks to run, data import included, this neither helped the spread of simulations, nor prevented the marginalization of Keynesian macroeconometrics, the current crisis of DSGE modeling and the rise of computer-economical quasi-experimental techniques.


MPS programme (MPS folder)

Overall, my tentative picture of the MPS model is not one of a large-scale consistent Keynesian model. Rather, it is one of multiple compromises and back and forth between theory, empirical work and computations. Its is not even a model, but a collection of equations whose scope and contours can be adapted to the purpose at hand.

Note: this post is a mess. It is a set of research notes drawing on anarchic and fragmentary archives for my coauthor to freak out work on. Our narrative might change as additional data is gathered. Some questions might be irrelevant. The econometrics narrative is probably off base. But the point is to elicit corrections, comments, suggestions and recollections from those who have participated into the making of the MPS or any contemporary large scale macroeconometric model in the 1960s and 1970s

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How much do current debates owe to conflicting definitions of economics?

Capture d_écran 2017-03-10 à 04.27.59It is not clear to me how the literature on the current state of economics got out of control. The genre is as old as the discipline itself and has grown cyclically with crises. But the last one broke out as the economic blogosphere was taking shape, and this time, the swelling tide of crisis-in-economics articles hasn’t been curbed by a new General Theory or a World War outbreak (yet). Which is why I welcomed Jo Michell’s recent idea of making a typology of econ defenses (and maybe attacks) of economics with the gratitude of a kitesurfer being handed her first F-One Trax Carbon board. What I want to suggest in this post is that sorting out current debates also requires a better understanding of what definitions of economics critics and champions of mainstream economics hold (I define mainstream as what is being published in the top-5).

Changing definitions of economics

This idea is, as usual, nurtured by the history of the discipline. That accepted definitions of economics have undergone many changes is well documented (see this survey by Roger Backhouse and Steve Medema. edit: they track changes in the definition of economics through textbooks). Economics had initially been conceived as the science of wealth, production and exchange. Marshall famously defined it as the “study of mankind in the ordinary business of life […] on the one side a study of wealth; and on the other, and more important side, a part of the study of man.” The quote shows that in the late 19Th century, an individualistic element appeared, foreshadowing the sea change Lionel Robbins brought. His famous definition of economics as “the science which studies human relations as the relationship between ends and scare means which have alternative uses” not only wrote ethics out of the discipline, but also shifted its focus toward scarcity and resource allocation. In those transitional decades, Frank Knight thought economists should focus on “social organization,” Jim Buchanan on exchange, and Ronald Coase on institutions. In a key twist, Georges Stigler and Paul Samuelson both wedded scarcity to maximization, and Robbins’ definition gradually fed into a third one: economics as the science of rational decision-making. This expanded the boundaries of the discipline: every decision, from marriage to education, prostitution and health care could be considered a legit object for economists. Some, like Gary Becker and Gordon Tullock, called this expansion economic imperialism. Backhouse and Medema’s account ends in the late 1970s, but another shift has arguably been taking place in the last decades: the replacement of a subject-based definition with a tool-based one. The hallmark of the economist’s approach would not be its subject-matter –any human phenomenon is eligible-, but its use of a set of tools designed to confront theories with quantitative data through models. See for instance this recent post by Miles Kimball: “economics needs to tackle all the big questions in the social sciences,” he titles, adding that “what is needed [for economists to influence policy] is a full-fledged research program that does the hard work of modeling and quantifying.”

From definitions to topics, methods and interdisciplinary practices: 1952

Most interesting for my purpose is how these successive, sometimes competing definitions of economics have informed what economists think are the proper subject matters, methods and boundaries of their science. And these views are nowhere as clearly articulated as when they discuss their relationships to other sciences. Take 1952, which I believe was the most important year in the history of economics. It was a time of transition when the above definitions were found clashing, as seen in the conference on “Economics and the Behavioral Sciences” held in New York under the auspices of the Ford Foundation. The minutes of the conference read:

Marschak: two fold definition of economics; (1) optimization (rational behaviour); (2) dealing with material goods rather than with other fields of decisions.

Boulding: Yes. The two don’t have anything to do with each other. It is the material goods that characterize economics. To state that the recent increase in American money wages was due to the increase of quantity of circulation has nothing to do with rational behaviour.

Marschak: it has. This was stated already by David Hume who speculated on what will people do if everyone finds overnight that his cash balance has doubled.

Herbert Simon was in the room, and his notes are slightly different from the typed minutes. He wrote “allocation of scarce resources / best decisions / the handling of material goods,” and seemingly referred to the two first as “rational.”

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Simon’s notes (source)

Kenneth Boulding, Simon and Jacob Marschak had all been much involved in interdisciplinary ventures since the War. Later, they would each spend a year at the Center of Advanced Studies in the Behavioral Science, established by the Ford Foundation in the wake of the aforementioned conference.  Yet, they held diverging views of what economics is about. This led them to articulate different pictures of the relationships between economists and other scientists, a topic back on the scene today.


Boulding: a gifted theorist – he received the second John Bates Clark medal in 1949, a year before publishing a Reconstruction of Economics aimed at merging Keynesian analysis with a balancesheet theory of the firm–, a Quaker and a pacifist, Boulding spent a lifetime reflecting on how to avoid wars, including scientific ones. His study of growth led him to study sociology and political sciences, before establishing an “integration seminar” at Michigan. “Boulding’s advocacy of integration by symbiosis between the various social sciences rather than by edification of a superdiscipline encompassing other could be taken as offering a different model for international relations: an integrated world, like an integrated social science, required collaboration, not subjugation,” Philippe Fontaine explains. The result of this integration of social science and pacifist Quaker faith was a triangle, aimed at representing society in terms of three mains organizers (‘love,’ ‘fear,’ ‘exchange’), one published months after his participation into the New York conference. He later proposed a general theory of behavior based on the concept of the message-image relationship.

simonSimon is largely absent from those giants’ shoulders 2017 critics and champions of economics like to summon, and yet he strikes me as just the kind of character whose vision should be discussed right now. By his own assessment, he developed an early (aka undergraduate) interest in decision-making in organizations, and borrowed from whichever science could help him understand it: political science, management, economics, organizational sociology, social and cognitive psychology and computer science. Simon saw no disciplinary boundaries: “there are a lot of decisions in economics, there are a lot of decisions in political science, and there are a lot of decisions in psychology. In sum, there are a lot of decisions in doing science. It is all the same subject. My version of the science of everything,” he told Mie Augier at the end of his life. The science of everything he had tried to teach and institutionalize at Carnegie’s GSIA since the 1950s was, unlike Boulding’s, unified by mathematization and quantification (must reads on Simon include Crowther-Heyk, Augier, and Sent on his economics. Edit: I forgot Simon’s autobiography).

marschakThough Simon and Marschak often found themselves on the same side of postwar debates about the future of economics – for instance in their focus on decision-making and their instance that mathematization is a prerequisite for interdisciplinary work –, their scientific visions were nonetheless different. A Menshevik activist turned marxist turned mathematical economist, Marschak headed the Cowles Commission during the 1940s. At the time of the conference, he was only beginning to contemplate interdisciplinary projects as a way to enhance his models of decision under uncertainty. If the economist can fruitfully collaborate with other scientists, Marschak wrote to Ford Foundation’s Thomas Carroll months before the 1952 conference, it is because he brings a distinctive perspective to the table. Marschak’s nascent interdisciplinary bent was predicated upon a strong disciplinary identity. His letter is worth quoting at length:

Economics is normally defined formally as dealing with the best allocation of limited resources; or (somewhat more generally) as concerned with the choosing of the best among limited set of opportunities. The word “best” refers to consistent preferences of an individual, or of a group; a business corporation, a nation. In the latter case there arise important problems of semi-ethical nature (welfare economics) […]

Many an economist (sic) tries to study comprehensively all human actions that pertain to material goods, including such things as the administration of price control, the psychology of stock speculation, the political feasibility of a monetary reform, the process of collective bargaining. Such an economist, if endowed with good common sense, can say as much any journalist so endowed. But he could say much more as a result of joint work with a psychologist, sociologist, or political scientist. In such a cooperation, the distinctive contribution of the economist consists in asking: how would the buyers, sellers, bankers, stockholders, workers, farmers behave if they consistently made choices that are the best from their own point of view? And what are the policy measures that are best from the nation’s point of view?

The economic principle of consistent choices (also known as “rational behaviour principle”) admittedly does not have power to describe all behaviour, not even in the field of commodity choices. For example, a truly rational model of a stock speculator would have to be someone like a mathematical statistician continually practicing a form of so-called sequential analysis: he will make each subsequent decision dependent, in a predetermined optimal fashion, upon the ever growing sequence of observations. While it may be advisable for a speculator to behave according to this model, no speculator does! The rational model, useful for advice, is, in this case, of little use for prediction of actual behaviour. The economist working on the theory of speculation will have to do, or learn, some social psychology, from books or from colleagues. Yet, even in this case, the economist will be able to make a contribution stating from his economic principles. The cross-disciplinary group studying speculators will be looking for a realistic compromise between the picture of mathematical statisticians engaging in speculation and the picture of stampeding buffalos. While the economist will contribute his particular method of looking for rationality, his psychological colleagues will enlighten him on how to design a series of experiments reproducing the essential elements of the investment situation. Because, as stated in your memorandum, collaboration should be seen, not as a mutual borrowing of propositions but as the interchange of methods!

[…] The economists’ peculiar concern with optimal behaviour, while astonishing and irritating to non-economists, is actually a distinct and useful contribution of economic thinking

From definitions to topics, methods and interdisciplinary practices: 2017

 To me, Miles Kimball’s post has clear Marschakian overtones: first, define what your economics identity is. Then, go and engage other social sciences on any question you wish. Writes Kimball:

That doesn’t mean the economists should ignore the work done by other social scientists, but neither should they be overly deferential to that work. Social scientists outside of economics have turned over many stones and know many things. Economists need to absorb the key bits of that knowledge. And the best scholars in any social science field are smarter than mediocre economists. But in many cases, economists who are not dogmatic can learn about social science questions outside their normal purview and see theoretical and statistical angles to studying those questions that others have not. 

By contrast, Unlearning Economics’s last critical essay seems informed by the notion that economics is about explaining how the economy works. Reclaiming the economy is also how I interpret the CORE’s recent proposal to reshape introductory economics courses. The textbook opens with histories on capitalism, wealth, growth and technology. Scarcity and choice only show up in the third chapter. Other blueprints for “radical remaking” have a Simonish flavour, perhaps not surprisingly given that their advocates are often biologists or physicists by training. And I read many French critics as plotting to subdue economics to sociology, whether bourdieusian, foucaldian, latourian or mertonian (kidding, all mertonians but one are dead).

I’m thus left wondering to what extent current debates about the state of economics are nurtured by conflicting definitions of economics. Here’s my speculation: those economists who believe the shape of economics is good usually endorse the rational decision definition. Yet in the past decades, they have shifted toward a tool-box vision of their practices. They thus view interdisciplinarity as tool exchanges. Meanwhile, critics are pushing back toward a definition of economics that was in wide currency in the early XXth century, one concerned with understanding the economy as a system of production and distribution, one rooted in capitalist accumulation, technological change, etc. They believe economists should borrow from other scientists whatever models, concepts and theories will improve their understanding of how the economy works. Those who believe the economy cannot be isolated from the social system it is embedded in additionally plead for a deeper integration of social (and sometimes natural) sciences. And that is why critics and champions often talk past each other.

Putting this hypothesis to test requires a typology of competing definitions of economics. But more systematically spelling out what your definition of “economics” is before lamenting or celebrating its current state will certainly raise the quality of current debates. Now I’m off to read Economism, The Econocracy and Economics Ruleswith the hope of riding the wave.

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How not to screw up your economic expertise: lessons from the Kennedy tax cut grandmaster, Walter Heller


What is the “crisis in economic expertise” about?

Trump’s decision to demote whoever might be nominated chairman of the Council of Economic Advisers (CEA) from his cabinet has been interpreted as a final blow to a tough year – in which economists’ advice has been systematically ignored by voters- within a tough post-financial crisis decade. Economists are under the impression that since 2008, their expertise has been increasingly challenged, and they have offered several analyses and remedies: more micro, more data, more attention to distribution and less to efficiency, more humility, more awareness to the moral and political element in economic expertise, more diversity and more interdisciplinarity –economic education included- Few of these however rely on the whopping literature on the history and sociology of scientific expertise.

A systematic review would take a book, so let’s jump to how it helps elucidate what the problem with economic expertise is. Essentially, scientists produce knowledge about the word, which they believe is, if not true, at least robust or reliable and objective because produced systematically, validated according to vetted methodologies, and often quantified. Putting this knowledge to work is what expertise is about. It is thus intimately tied with 1) application, 2) building relationships with non-scientific communities, including catching attention, building trust and establishing markers of expertise (such as a PhD). Audiences and clients for economists’ expertise are many: public bodies, in particular policy-makers (from presidents to independent regulation agencies to statistical bureaus and Feds. I tentatively put courts in that category); but also private ones (businesses, banks, IT firms, insurance companies), the media, and “the public,” citizens who make economic decisions, and, most important, vote.

Over the past decade, the “crisis in expertise” has been much about loosing voters’ trust. Yet there is no evidence that economists have ever been able to influence the public at large, nor that they have put much effort in trying to do so (Friedman and Galbraith might be exceptions here). Anxieties raised by Trump’s dismissal of economic expertise are more about loosing policy-makers’ attention, though the current US president might be an exception in that his views echo the public-at-large rather than the standard policy-maker. There is no sign that economic expertise has lost currency with journalists, even less with the private sector: economists get better wages than any other discipline (but law?), receive insane amount of money for private consulting, and IT firms have gone a long way toward luring economists out of academia. One important qualification, here, is that economists don’t merely produce knowledge; they also produce tools of analysis, technologies. One possibility, thus, is that the type of economic expertise in demand has shifted: substantial policy or management advice is loosing ground, while technical skills to implement tools and provide data analysis are on the rise.

Histories of how economists painfully gained reputation and trust during the XXth century abound. Most of them are focused on public policy – data on private businesses are more difficult to obtain, and tracking economists’ influence on the public is elusive–. And none of them fail to mention the canonical proof that economists’ expertise is/have been influential: it was Walter Heller, 4th CEA chairman, who convinced J.F. Kennedy and L.B. Johnson to propose a massive income and business tax cut, passed by the Congress in 1964.


Walter Heller, expert grandmaster

The facts are well-known: Eisenhower’s legacy was a sluggish decade, with growth stuck at 2,5% per year and unemployment at 8%. Recurring budget deficit, which topped 12 billions in 1959, prevented much needed defense, education and welfare expenditures. Kennedy’s campaign was consequently focused on the promise of restoring growth, of “get[ting] this country moving again.” The candidate had nevertheless straightforwardly rejected the fiscal stimuli proposed by those economists, including Paul Samuelson, who had participated in his Democratic Advisory Committee. Kennedy came to the oval office with the notion, inherited from his father, that the budget should be balanced and the money supply tightly controlled. Under the influence of his CEA chairman, Walter Heller, Kennedy became more favorable to sustaining a budget deficit, and by early 1963, he had submitted to Congress the largest peacetime voluntary budget deficit: $12 billion. He proposed to reduce income tax rate from 20-91% to 14-65% and corporate income tax rate from 52 to 47% and to abolish loopholes and preferential deductions to enlarge the tax base. He promised that, should the Congress pass his tax cuts, the 1965 budget would be equilibrated. The proposal was finally enacted in 1964, under Johnson. 1965 saw the smallest Federal deficit of the decade (1 billion), strong growth and unemployment down to 4%. The trend persisted throughout the decade, with inflation pressures slowly building in response to Johnson’s spending frenzy.

the-grandmasterThought the contribution of the tax cut to this period of prosperity, and to subsequent imbalances, is still fiercely debated, its positive spillovers on the whole profession commands wide agreement. Heller’s CEA has contributed to shift economists’ image from ivory tower technicians to useful experts and to strengthen public trust. It has been heralded as the canonical example for economists’ ability to increase society’s welfare, a symbol of a (some would say lost) golden age. The scope of Heller’s influence has, in fact, extended ways beyond the tax cut. He was instrumental in putting poverty on the presidential agenda, and, as recently unearthed by Laura Holden and Jeff Biddle, he was the one who turned human capital theory into an argument in favor of federal funding for education. His peculiar status as the “economic experts’ expert” was immediately recognized. He made Time’s cover twice in two years. No other CEA chair made the cover of the magazine before the late 1976, and none ever made it twice as CEA chair. But if the fallouts of his expertise are well known, its determinants are less so. The nagging question remains: how did he do it?


Beyond technocratic advice 

Let’s begin with the non-replicable aspect: Kennedy’s knack for economics, his willingness to discuss policy as well as theoretical aspects, his eagerness to read and digest memos and newspaper articles, his systematic mind. The legend says that when James Tobin told him that he may not be the best pick as CEA member because he was a “sort of ivory-tower economist,” Kennedy replied “that’s the best kind. I’m a sort of ivory-tower president.” Granted, this is not likely to happen anytime soon, but the president is not the only policy-maker economists want to influence, right? And that Kennedy was drawn to economics didn’t make Heller’s job easier. Not only was the president surrounded by advisors with conflicting economic policy views (see below), but it wasn’t clear, back then, that the role of the CEA as defined in the 1946 Employment Act was to promote specific policies. First CEA chairman Edwin Nourse and Eisenhower’s chairman Arthur Burns conceived their role as being mere advisors to the president, providing technical reports and private forecasts and refraining from making public statements or testifying before Congress. The only exception was Truman’s second chairman, Leon Keyserling, whose more activist stance created a stir. It was nevertheless one more congenial to Walter Heller’s vision of the role of the economists within society.

            The son of a civil engineer committed to public service, Heller was, by his own admission, one of those children of the Great-Depression who turned to economics because “explaning why [the economy flat on its back] and try to do something about it, seemed a high calling.” Economists from the University of Wisconsin, where Heller got his PhD, boasted a strong record in successfully influencing Wisconsin’s policy-making, not least his PhD advisor, fiscalist Harold Groves. Heller’s wartime contribution to fashioning tax increased at the Treasury, his participation into the Marshall Plan and his lobbying for federally funded education on behalf of the National Economic Education in the late 1950 strengthened his identity as a “policy-oriented economist,” a “do-something-about-it economist.” As he was nominated CEA chair, he was ready, not only to provide forecasts and technical advice, but also to advocate for those policies he believed were supported by good science, to convince the president, to testify before Congress, to engage the media and the public.

He was also willing to give much latitude for his two fellow committee members to do the same. As extensively documented by Michael Bernstein, macroeconomist James Tobin and budget specialist Kermit Gordon fully shared Heller’s conception of the role of an economic expert. Tobin later explained that “economics has always been a policy-oriented subject” and that applications of theories to “the urgent … issues of the days” were essential. In a 1961 Time article, the 3 frontiersmen thus described themselves as “pragmatists.” Promoting the tax cut really was a team effort. All 3 council members had extensive discussions with Kennedy on policy as well as on the common theoretical foundations they had borrowed from the New Economics articulated by Paul Samuelson at MIT. 


Heller, Tobin and Gordon with Kennedy, 1962 (source)


“The President’s economic education” and the art of memos

For Heller genuinely believed that his policy advocacy was rooted in solid science, and that his task essentially consisted in educating the president. Thought it was only later that he came to call himself an “educator of presidents,” the education trope was already pervasive in his favorite educative tool: his memos. His team literally flooded the president with more than a 1000 memos during the Kennedy/Johnson presidency. Hellers’ ones were of a special kind: short, devoid of technical jargon but not of figures, with a clear and apparent structure, and main arguments systematically underlined. They usually began with a quantified depiction of the economic situation, a brief policy proposal, and extensive response to possible counterarguments.

These were so convincing that, Heller remembers, Johnson once help up one of his memos at a Cabinet meeting and said “Here’s one of Walter Heller’s memos. See how it’s set up? That’s the way I want you all to write your memos.” Below is what I believed was one of the memos that convinced Kennedy to endorse the 1963 Economic Report and the Special Message to the Congress on Tax Reform Heller had contributed to draft.



What Heller did in those memos was:

1) arguing that the tax cut was a means consistent with Kennedy’s overarching policy ends, that is, national defense and growth (it was an argumentative strategy he had already successfully wielded on education funding, Holden and Biddle show). The above December 1962 memo began with “top of economic agenda – must match our progress in foreign policy and defense with a restoration of full vigor of our domestic economy.” This strategy is echoed in the introductory sentences of Kennedy’s Special message to the Congress:

“the most urgent task facing our Nation at home today is to end the tragic waste of unemployment and unused resources –to step up the growth and vigor of our national economy- to increase job and investment opportunities- to improve our productivity – and thereby to strengthen our nation’s ability to meet its worldwide commitments for the defense and growth of freedom.” 

2) Having argued that his proposed economic policy was in line with the President’s broader aims, Heller proceeded to frame complex policy choices in simple economic terms: it was all about bridging “the gap.” Already in memos issued early 1961, Heller hammered that the key question was “how do we close the gap between existing and potential levels of employment, production and income.” He used the term so much that after a 1961 hearing Joe Pechman told him “gee, you ought to stop talking so much about the gap because it just isn’t doing any good.”

okun3) Though Heller refrained from using technical terms in his memos, he did not shy away from quantification. Early on, he equated “bridging the gap” with a more specific target, the 4% unemployment rate. It was, Heller hypothesized from his knowledge of the previous decade, the rate that allowed the highest non-inflationary growth. At the end of 1961, he sensed that he needed a better picture of how increasing the capacity of production utilization could help reach this target. He therefore asked CEA staffer Arthur Okun to quantify the “output gap.” Okun’s resulting working paper, famously remembered for introducing the “Okun law” testifies to the influence of policy concerns on economic research. In line with Heller’s objectives, Okun set “full employment without inflationary pressure” at 4%, without further justification. Another target would change the figures, not the calculus, he warned. In the introduction, he further explained that “if programs to lower unemployment from 5 ½ to 4 percent of the labor are viewed as attempts to raise the economy’s “grade” from 94 ½ to 96 [use of production capacity], the case for them may not seem compelling. Focus on the ‘gap’ helps to remind policy-makers of the large reward associated with such an improvement.” Using 3 different techniques to estimate the relationship between unemployment and real GNP, he unequivocally concluded that each extra percentage point in the unemployment rate above four percent has been associated with about a three percent decrement in real GNP. It was not the only case where Heller’s quest for sound theoretical and empirical basis for the policies he was advocated stimulated new research. At about the same time, he asked Burton Weisbrod, senior staff economist at the CEA, to expand his quantitative analysis of the external benefits of education, Holden and Biddle relate.

4) Heller’s final step was to de-dramatize the consequences of a tax cut, namely budget deficits. He did so by showing that countries exhibiting a more rapid growth than the US, such as France, Italy or Germany, were not shy of running deficits to support aggregate demand. He also followed a gradual approach, first convincing Kennedy not to raise taxes to fund the additional $1 billion military expenses needed to face the building of a Berlin Wall in the summer of 1961. He also set to counter the “fiscal irresponsibility” argument, occasionally going downright political: “under present programs and outlook, a deficit in fiscal 462 is already in the cards,” he wrote in December 1962. “Once fiscal virginity is list, the size of the deficit matters very little to the critics of “fiscal irresponsibility.” The Eisenhower $12 billion deficit should restrain the stone-throwing of Republican critics. Our deficit would be less, and it would come at the right time.” 

Educating (or neutralizing) the whole decision chain

Persuading the executive branch

Educating the president was only part of Heller’s job. The whole decision chain had to be persuaded. As important, then, was educating skeptical presidential advisors, and neutralizing those who wouldn’t surrender. In those years, macroeconomic expertise within the executive branch was scattered across the CEA, Douglas Dillon and Robert Roosa’s Treasury, David Bell’s Bureau of Budget and the Federal Reserve Board, whose chair, William McChesney Martin, served between 1951 and 1970. Their task was to provide forecasts, advice and coordination, and prepare the budget. Beyond routine disagreement on forecasts, these economists held divergent visions of the major economic threat Kennedy had to deal with. Dillon, Roosa and Martin were worried about the growing imbalance in foreign payments and the associated risk of gold drain, and Martin also closely monitored the deterioration of the value of the dollar. They also believed that the high level of unemployment was the consequence of the “changing structure of the labor force” rather than of slacking demand.

To dismiss “the official Republican diagnosis (or excuse) is that growing unemployment is due to changing structure of the labor force”, Heller claimed that science was on his side. An early 1961 memo accordingly contrasted “the ‘correct’ analysis […] would be that most of our unemployment would respond to over-all measures designed to stimulate demand and investment […] would call for substantial additional spending, tax cuts and deficits” with “the ‘incorrect’ policy position that most of the unemployment and under-capacity operation are the result of structural factors.” Heller also emphasized the non-partisan character of his policies by providing long lists of those individuals and organizations across the political spectrum he has managed to convince that a tax cut was the best policy. A December 1962 briefing book listed the Committee for Economic Development, the AFL-CIO, New York Governor Nelson Rockefeller, the National Association of Business Economists, and, ironically, most of Eisenhower’s CEA members. The CEA also regularly provided memos debunking newspaper articles dealing with excess-demand inflation and the risk of government spending-induced inflation.

Heller took care to copy those memos to Kennedy’s closest policy aids. Ted Sorensen, Myer Feldman ad Richard Godwin, who had fiercely opposed budget deficits during the campaign, came to agree with the CEA, as did Treasury and BoB officials. They had been enrolled with Fed chairman Martin, in monthly meeting of what was dubbed “the quadriad,” whose agenda and exchanges were always set (and closely monitored) by the CEA. Through his memos, Heller even managed to defeat an alternative proposal to replace the $10 billions tax cuts with a $9 billions expenditure increase. No small feat. The idea was carried by Kenneth Galbraith, who since their Harvard students’ day was much closer to Kennedy than Heller, Tobin or Gordon ever were. Yet Heller tersely added a “why cut taxes rather than go the Galbraith way?” in his next memo. The answer was as short as it was efficient: “how could we spend an extra $9 billion in a year or two? Attempts to enlarge spending at the rate required to do the economic job would lead to waste, bottlenecks, profiteering and scandal.” Moreover, extra spending would make the government vulnerable to suspicions of “over-centralization, power grad of the cities, the educational system.” Tax-cut-induced deficit was more acceptable to the world financial community, he added, “ie, far less likely to touch off new gold outflows.”

Neutralizing the Fed

William_MChesney_Marting_Jr_175Neither was Heller shy to testify before the Congress’s Joint Economic Committee, in an effort to win their support for the forthcoming bill. In the end, the only enduring resistance came for Fed chairman Martin. The longstanding fight for influence between Martin and Heller wasn’t restricted to the tax cut issue. Martin wasn’t trained as an economist, and was therefore impervious to Heller’s arguments. He had also taken early steps to assert the Fed’s independence from the executive branch, and would constantly act to remind it. When Kennedy was elected, he did not offer his resignation, as was the practice in those years. To counter the deteriorating balance-of-payment, stabilize the value of the dollar and contain the inflationary pressures which he believed would derive from a tax cut, Martin intended to raise interest rates. In the early months of the presidency, he made it clear that he didn’t see fit to offset the upward pressures on the interest rates associated with the fledging recovery.

hero_grandmaster-2013-3Heller’s counter-attack was multifaceted. Longer and more technical memos to the president eschewed to Tobin, whose command of monetary policy was unequaled. In his own memos, the chair took a broader view, emphasizing that the success of the tax cut required the implementation of an appropriate “mix.” He was walking a tight rope: “monetary policy should be used, as needed, for balance-of-payments or price stability reasons,” he conceded, “but don’t offset the expansionary effect of tax cuts,” he immediately underlined. He argued that monetary policy should be discussed within quadriad meetings for the sake of “economic policy coordination,” and suggested to fill the board of directors of the 12 Federal Reserve Banks with New Frontiersmen like Tobin or Solow. He repeatedly tried to convince Martin that, while short-term interests rates should be raised as needed to avoid a gold drain, the Fed should buy long-term bonds so as to keep long-term interests rates low (“buying long”). This would stimulate investment and risk-taking, he argued. Heller also brought their disagreement to the media, an unusual practice in these years: in the 1961 Time article, he declared: “high interest rates and budget surpluses are incompatible: an Administration has to choose one or the other. Since both tend to hold how demand, tight money and budget surplus acting together have a gravely depressing impact on the economy.”

capture-decran-2017-02-19-a-15-46-25Sensing that he would never convince Martin, Heller labored toward (1) finding alternatives to control inflation pressures. To this end, he set up wage and price guideposts whereby wage increases should be guided by expected gains in productivity. And in the spring of 1962, he convinced Kennedy to oppose price increases in the Steel industry. (2) alleviating the balance-of-payment constraint. The Gold drain was accelerating since the beginning of 1962, with the consequence that Martin was taking measures to raise the short-term interest rate. Heller convinced Kennedy to make a public statement to restore faith in the dollar. “The United States will not devalue its dollar … I have confidence in it, and I think that if others examine the wealth of this country and its determination to bring its balance of payments into order, which it will do, I think that they will feel that the dollar is a good investment and as good as gold,” Kennedy declared during a transatlantic TV broadcast on July 23 1962. Heller never succeeded in bringing Martin into line, and the Fed rates doubled during Kennedy’s presidency. He nevertheless felt he had avoided more dramatic hikes on short and, more important for the policy mix, long term rates. 

Engaging the public

Heller’s final target was the public, voters, consumers, economic agents. In the early months of his tenure, he wrote in a memo to Kennedy that “a committee could contribute to public education on […] “modern” solution such as deficit financing and expanded government programs, thus overcoming in part the results of eight years of miseducation and retrogression in economic thinking under the Eisenhower Administration.” Heller devoted considerable energy to give talk to citizens, labor and professional organization, and also seized the opportunity to preach the Gospel through the media. He, Tobin or Samuelson, who had refused to chair the CEA but kept an eye on its progresses, regularly published popularization articles in Business Week, Time, Life, Business Insider, and so forth. Heller made no mystery about his attempts to “re-educate” the public. In March 1961, he told Time journalists that:

“The strain of fiscal conservatism has become strong, perhaps because it has been so well nurtured during the last eight years. There is a deep strain of conservatism bias built into the congressional system.” “The Eisenhower heritage persuades Washington’s new economists tha they must re-educate the US to make the most of its economy.”

In a December 1962, he explicitly outlined why educating the public was both crucial and difficult, in terms that resonate today:

“Problem of public attitude greater here, perhaps because of greater public participation in government decisions; Also, Americans are more prone to a tendency of ‘each man his own economist.’ In other countries, they’re more likely to ‘leave it to the experts.’ And who’s to say that our situation is worse, for a democracy?”

It was Kennedy himself who eventually suggested that “the Council do some serious thinking about how to use the White House as a pulpit for public education.” In his memos, Heller therefore looked for ways to overcome “American people and the Congress’s strong aversion to budget deficit.” His solution was to “repeat ‘deficit of inertia vs creative deficit for expansion” argument,” and this was precisely how Kennedy January 1963’s message to Congress was framed: “our choice today is not between a tax cut and a balanced budget. Our choice is between chronic deficits resulting from chronic slack, on the one hand, and transitional deficit temporarily enlarged by tax revision designed to promote full employment and thus make possible an ultimately balanced budget,” the president asserted.


Heller resigned in November 1964, in spite of Johnson’s request that he stayed for another term. He was succeeded by Gardner Ackley, and remained a close advisor to the president. Ironically, he soon found himself on Martin’s side. As Johnson proceeded into his War on Poverty program, Heller sensed that the overheated economy had to be cooled by a tax increase. Absent such measure in the 1965 budget, Martin was right in warning that he would raise interest rates. This time, Heller failed to convince the president. CEA historian Michael Bernstein has argued that Heller’s CEA was the apex of economists’ public influence. Yet those sociologists who have spent decades haunted by the sources of economists’ unwarranted influence generally agree that it is still strong, only different. While economists’ direct influence on the content of policies has been limited, at least uneven, they have contributed to the “economicization” of public policy. Economists’ influence, Elisabeth Berman and Dan Hirschman explain in a recent survey, was in shaping the data that influenced policy decisions –GDP, CPI indexes, unemployment rate–, the range of questions which could be asked – increasingly focused on efficiency–, the institutions who asked those questions, and the socioeconomic tools to implement and evaluate policies – from cost-benefit analysis to auctions and scoring techniques. I’m rather left wondering which lessons from Heller contemporary economists have learned, and which they should work on

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The problem with “economists-failed-to-predict-the-2008-crisis” macrodeath articles

macrodeathThis week has delivered one more interesting batch of economics soul-searching posts. On Monday,  the Bloomberg View editorial board has outlined its plans to make economics more of a science (by “tossing out” models that are “refuted by the observable world” and relying “on experiments, data and replication to test theories and understand how people and companies really behave.” You know, things  economists have probably never tried…). John Lanchester then reflected on recent macro smackdown by Bank of England’s Andy Haldane and World Bank’s Paul Romer. And INET has launched a timely “Experts on Trial” series. In the first of these essays, Sheila Dows outlined how economists could forecast better (by emulating physics less and relying on a greater variety of approaches) and why economists should make peace with the  inescapable moral dimension of their discipline. In the second piece, Alessandro Roncaglia argued that considering economists as princes or servants of power is authoritarian, and that giving them such an asymmetric role within society is dangerous.

75543820Rich and thoughtful as this macrodeath literature is, it leaves me, again, frustrated.  A common feature of virtually all articles  dealing with the crisis in economics is that they are built around economists’ failure to predict the 2008 financial crisis. And yet, they hardly dig into the sources, meaning and consequences of this failure (note: in this post, I’ll consider that a forecast is a specific quantitative and probabilistic type of prediction, and I’ll use the two terms interchangeably. Shoot, philosopher). The failure to forecast is usually construed as a failure to model, leading to suggestion to improve modeling either by upgrading existing ones with frictions, search and matching, financial markets, new transmission mechanism, more variables, ect., or going back to older models, or changing paradigms altogether. Yet,  economists’  approach to forecasting rely on much more than modeling strategies, history whispers.

Agreeing to forecast, disagreeing on how and why

Macroeconomics is born out of finance fortune-tellers’ early efforts to predict changes in stock prices and economists’ efforts to explain and tame agricultural and business cycles. In 1932, Alfred Cowles expressed his frustration in a paper entitled “Can Stock Market Forecasters Forecast?” No, he concludes:

A review of the various statistical tests, applied to the records for this period, of these 24 forecasters, indicates that the most successful records are little, if any, better than war might be expected to result from pure chance. There is some evidence, on the other hand, to indicate that the least successful records are worse than what could reasonably be attributed to chance.

Tcowleswo years after Ragnar Frisch, Charles Roos and Irving Fisher had laid the foundations of the Econometric Society, Cowles liaised with the 3 men and established a Cowles Commission in Colorado Springs. It is not clear to me how pervasive a goal forecasting was in the first decades of macroeconomics and econometrics, how much it drove theoretical thinking, which role it had in the import of a probabilistic framework into economics. Historical works on Frisch and Haavelmo, for instance, suggest it is difficult to disentangle conditional forecasting from explaining and policy-making. Predicting was one of the 5 “mental activities” Frisch thought the economist should perform, alongside describing, understanding, deciding and (social) engineering (see Dupont and Bjerkholt’s paper). Forecasting wasn’t always associated with identifying causal relationships, as exemplified by the longstanding debate between chartists and fundamentalists in finance, but for early macroeconometricians, the two went hand in hand. That explaining, forecasting and planning were inextricably interwoven in Lawrence Klein’s mind is well-documented by Erich Pinzon Fuchs in his dissertation.  He quotes Klein saying his

“main objective [was] to construct a model that [would] predict, in the [broader] sense of the term. At the national level, this means that practical policies aimed at controlling inflationary of reflationary gaps will be served. A good model should be one that [could] eventually enable us to forecast, within five percent error margins roughly eighty percent of the time, such things as national production, employment, the price level…”

The notion that economics is about predicting is however not usually associated primarily with Klein’s name, but with Milton Friedman’s. In his much discussed 1953 methodological essay, Friedman proposed that the “task [of positive economics] is to provide a system of generalization that can be used to make correct predictions about the consequences of any change in circumstances. Its performance is to be judged by the precision, scope and conformity with experience of the predictions it yields.” These predictions “need not be forecast of future events,” he continued; “they may be about phenomena that have occurred but observations on which have not yet been made or are not know to the person making the prediction. And this is what makes economics policy-relevant, he concluded: “any policy conclusions necessarily rests on a prediction.” Klein and Friedman’s shared statement that the purpose of economic modeling is to predict has come to be widely accepted, yet it is not clear how many competing views of what the purpose of economics should be circulated in these years.

Most important, their longstanding dispute on statistical illusions reveals that they neither agreed on the purpose nor on the proper method to forecast, nor even on what a “good” forecast was. Klein believed macro econometric models should be as exhaustive as possible, Pinzon Fuchs documents, that they should accurately depict reality. This belief was tied to his desire to conceive engines for social planning, models that could provide guidance as to which exogenous variable the government should alter to achieve full-employment. In the NBER tradition, Friedman rather endorsed simpler models with few equations. He considered Klein’s complex machinery as a failure and endorsed Carl Christ’s idea that these models should be tested through out-of-sample prediction. Erich argues that Friedman was merely trying to understand how the economic system works. I rather interpret his work as an attempt to identify stable behaviors and self-stabilizing mechanisms. As Friedman believed government intervention was inefficient, he did not need the endogeneity or exogeneity of his variables to be precisely specified, which infuriated his Keynesian opponents. “The Friedman and Meiselman game of testing a one-equation one-variable model….. cannot be expected to throw any light on such basic issue as how to our economic systems work, or how it can be stabilized,” Albert Ando and Franco Modigliani complained in the 1960s. More fundamentally, Friedman doubted that statistical testing was fit for evaluating economic models. The true test was history, he often said, which might explain why, to Klein’s astonishment, he switched to advocating goodness-of-fit kind of testing with Becker in the late 1950s. Methodological pragmatism, or opportunism, as you want to see it.

What is the failure-to-predict about: statistical methods? Models? Institutions? Epistemology? 

representative-agentAs this historical exemple suggests, claiming that macro is in crisis because of economists’ failure to predict the financial crisis is too vague a diagnosis to point to possible remedy. For what is this “failure-to-predict” about? Is is a statistical issue? For instance, a failure to estimate models with fat-tailed variable distributions, or to handle a sudden unseen switch in the mean of that distribution (what Hendry calls “location shifts”). Or is it a theoretical issue? For instance, failing to explain why stock market returns are fat-tailed, to model firms and households‘ exposure to financial risk and its systemic consequences  into macro models, to take shadow banking into account, to identify the drivers of productivity. A bigger failure to model institutions, complexity, heterogeneity?  Improving theoretical modeling is the bulk of what is discussed in the macro death literature.

overlapping2On the contrary, that changes in economic structures or in perceived ways for government to intervene in the economy (for instance through macro prudential regulations, QE, etc) have made  economists’ regular predictions  irrelevant, useless or less accurate is less discussed. Keynesian macroeconometricians have built models aimed at conditional forecasting (aka dealing wit questions such as : what happens to the economy if the government raises the interest rates?), though central bankers have sometimes used these for unconditional forecasts (to get next year’s GDP figures). But the “failure-to-predict” criticism deals with unconditional forecast, as was the case with part of the Phillips curve debate during the 1970s. Finance economists have also traditionally been mostly concerned with unconditional forecast. I’m thus left wondering whether the rise of financial dimensions in public intervention have led to misusing DSGE models, or have fostered the development of macro models aimed at hybrid forecasting.

contractions2Finally, this “failure-to-predict” literature might point to a deeper epistemological shift. It is, of course, one seen in some economists’ rejection of DSGE modeling and endorsement of alternative models (agent-based, evolutionary, or complexity), interdisciplinary frames, in their call to go back to Minsky or Kindleberger, or even to good old IS/LM. But among those economists who have traditionally endorsed DSGE macro, there also seems to be a shift away from forecasting (unconditional and conditional) as the main goal of macroeconomics or economics at large. In 2009, for instance, Mark Thoma has commented that “our most successful use of models has been in cleaning up after shocks rather than predicting, preventing or insulating against them through pre-crisis preparation,” and the blogosphere and newspaper opens are ripe with similar statements. These can be interpreted as rhetorical gestures, defensive moves, or early symptoms of an epistemological turn. Itzhak Gilboa, Andrew Postelwaite, Larry Samuelson and David Schmeidler have , for instance, recently worked out a formal model in which they suggest that economic theory  is not merely useful through providing predictions, but also as a guide and a critique to economic reasoning, as a decision-aid .(This ties in with their broader call for case-based reasoning).

Granted, this is all very muddled. I am probably making artificial distinctions (for instance, I couldn’t decide whether Gabaix’s work on power laws and granularity belongs to statistical or theoretical analysis), and I am certainly misunderstanding key concepts and models. But my point is, it should be the purpose of the macrodeath literature to un-muddle my thoughts.  What I’m asking for is two types of articles:

(1) articles on economists’ failure to predict the crisis that are explicit about what their target is and how their championed substitute approaches will yield better conditional/unconditional predictions. Or, if their alternative paradigms reject prediction as the key purpose of economic analysis, why, and what’s next.

(2) histories of how economists have theorized and practiced forecasting since World War II. A full-fledged history of forecasting in economics and finance is a little too ambitious to begin with. What I’m interesting in is why and when empirical macroeconomists, in particular macroeconometricians,  have endorsed (conditional?) prediction as their key objective, what resistances did they encounter, what were the debates over how to produce , evaluate and use forecasts, whether models built for conditional forecasting were used by central bankers and by their  own producers for unconditional forecasting (think Wharton Inc and DRI), whether it shaped their relationships with finance and banking specialists, and how they reacted to the first salvo of public criticisms (70s economic crisis, Phillips curve breaking down, ect.). Additionally, recasting public and governmental anxiety about forecasting in the wider context of changing conceptions and uses of “the future” may help understand the challenges postwar economists faced.

Note: These great fantastic TERRIFIC pictures are based on suggestions by @Arzoglou@dvdbllrd, and . One of these pictures, and only one, features real economists whose band name is an insider’s pun.

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