The Incredulity Problem, by Paul Krugman, in NY Times: I’ve written about this before, it turns out, but doing some of the media rounds I found myself thinking once again about a favorite phrase of Richard Dawkin’s: the “argument from personal incredulity”.
Dawkins uses it to refer to people who say “I just can’t believe that something as intricate as an eye can evolve through random changes.” The point, of course, is that our intuition has a hard time dealing both with the idea of selection and the sheer length of time evolution has to do its work, so your personal feeling that something isn’t plausible is a very bad guide.
In macroeconomics, the equivalent would be people who “just can’t believe” that borrowing more can help the economy, or that a fall in wages would actually reduce employment. What are they missing?
Mainly, I think, the closed-loop nature of macro. Our intuitions about how business-y stuff works come from businesses or households selling their goods or labor to an external market. In such situations spending less is a sure-fire way to reduce debt, cutting your price or your wage demand is a sure-fire way to sell more.
But in the economy as a whole, your spending is my income and vice versa; my wage matters only in comparison to your wage; and so on. This changes everything, which is why we have paradoxes of thrift and flexibility.
Of course, that’s why we do economic modeling: precisely to scope out the areas where personal incredulity is a very bad guide to affairs.
I get a lot of mail from people who are more or less blind with rage at the mere thought that anyone could say the things I do. I’m a witch-doctor, they cry; I must be deliberately lying; nobody could possibly believe the things I say. Actually, though, I’m just an economist who is willing to take it seriously when hard thinking suggests that the usual intuition is wrong under current conditions.
And the past few years have been a triumph for that kind of hard thinking! Lots of people declared that they “just couldn’t believe” that huge budget deficits wouldn’t drive up interest rates, that “printing” lots of money wouldn’t cause runaway inflation, that slashing government spending wouldn’t have a positive effect on confidence. We know how that has turned out.
All of which makes it even worse when economists themselves seem to give up on hard thinking and, as Noah Smith says, substitute conservative harrumph-ing for economic analysis.