Economist, Interrupted

Posted in Issues Tagged with: , , ,

First-magnitude stars of the generation of economists who began their work in the 1970s include Paul Krugman, Paul Romer, Lawrence Summers, Jeffrey Sachs, and, a late bloomer, Ben Bernanke.

It was Romer, 59, of New York University, who made a little news earlier this month at the economists’ meetings in Boston when, at a session designed to showcase various contributions to “new growth theory,”  his own and others’, he turned to Robert Lucas and denounced Lucas’s “mathiness” in the matter.

Lucas, 77, of the University of Chicago, who, thirty years before, had put Romer in business, and one of the most scrupulously honest men in the profession, shrugged, but the tension was palpable.

“Mathiness,” said Romer, involved the use of the math the way a politician would use it – to persuade by misleading. The analogy was to “truthiness.” That coinage, meaning a conviction of certainty arising from the gut that requires neither logical nor evidentiary confirmation, was introduced by satirist Stephen Colbert and has been much employed by New York Times columnist Krugman. Mathiness was designed to enrage.

There is, said Romer:

a level of just dishonesty in the paper [by Lucas and Benjamin Moll] that was really striking. The notion that somebody knows everything that will ever be known was basically hidden in their paper…

Replied Lucas, quoting Robert Sol

Every theory contains assumption that are not quite true. That’s what makes it theory.

He added a gibe:

If anyone sees anything like politics in Romer’s JPE [1990 Journal of Political Economy] article, let me know.

It fell to Gene Grossman, of Princeton University, to reprove Lucas more gently for the model he had brought to the table – one in which the existence of Albert Einstein was simply assumed and growth became a matter of finding him and interacting. Such human-capital-alone explanation might have something to say about diffusion of knowledge, Grossman said, but he had a hard time seeing the model as generating sustained growth.

Romer was more patient the next day when Oded Galor, of Brown University, the self-described “founder of unified growth theory,” hijacked a discussion of the “optimal” growth theory of an earlier generation in order to explain, with the aid of many slides, how he, Oded Galor, had seen further than Robert Solow, Kenneth Arrow, Karl Shell, Romer and all the others, by the simple expedient of standing on his toes and peering over their shoulders.

Still, the overall impression Romer made was of a man feeling sorry for himself.  Twenty-five years ago, he told his audience, he had made three bets: that, thanks to the growth of knowledge, economic conditions were improving instead of becoming worse (that is, that that the somewhat hazy concept of increasing returns dominated the much more precise tradition of decreasing returns); that mathematical reasoning offered a promising way to say something about the how and why of growth; and that, if the math produced useful insights, these would be taken up by others.

The first two bets had paid off, said Romer, but his conviction the economics was more or less a science had not panned out.  “We’re not trying to achieve consensus,” he said, at least not in growth theory.  Instead, he asserted, “mathiness” had become a tactic in support of political aims.

Afterwards one young man assessed the session for a friend:

There is a core of interesting criticism in each of his [Romer’s] points, but he blows it so out of proportion, assumes the worst intentions of those involved, and then goes on to attack their character. He could have gained some credibility by laying out his critique of many of the modern issues in growth economics, but instead he looked like a ranting person who is totally disconnected from academia and academic pursuits.

There was an interesting back-story to that day’s confrontation – it could be understood as the second act of an earlier performance. As a columnist for The Boston Globe at the time, I was a close outside observer of developments in growth theory in the ’80s and its reception in the ’90s.  I wrote a book about it, Knowledge and the Wealth of Nations: A Story of Economic Discovery (Norton, 2006). I have kept an eye on what has happened since.  And although I haven’t spoken to Romer in seven years, I believe that I can shed some light on the sources of his discontent.

Romer’s title that day was to have been “Nonrival Goods,” a neutral framing of his most important contribution to economics.  To quote the opening sentence of his 1990 paper in the JPE, “Endogenous Technological Change,”  “The distinguishing feature of … technology as an input is that it is neither a conventional good nor a public good; it is a nonrival partially excludable good.” Or to quote from Knowledge and the Wealth of Nations,

That particular sentence… still not widely understood, initiated a far-reaching conceptual rearrangement in economics.  It did so by augmenting the familiar distinction between  “public” goods, supplied by governments, and “private” goods, supplied by market participants, with a second opposition,,,, between goods whose corporeality makes possible their absolute possession and limited sharing (an ice cream cone, a house, a job, a Treasury bond)  and goods whose essence can be written down and stored in a computer as a string of bits and shared equally by many persons at the same time practically without limit (a holy book, a language, the calculus, the principles of design of a bicycle). Inevitably most goods must consist of a little of each.  In between lie myriad interesting possibilities.

In this Romer was sweeping past an attempt by Arrow, of Stanford University, thirty years before, to identify the special characteristics of knowledge:  it was appropriable, Arrow had written – no difference there from the notion of excludability.  And it was “indivisible,” meaning a minimum size involving a fixed cost below which it was unavailable – a term rich with meaning in the elegant mathematics of general equilibrium theory, but one that is much less illuminating of the everyday world.

Many similar ideas were in the air in the late ’80s.  Nicholas Negroponte, of the Media Lab at the Massachusetts Institute of Technology, had begun distinguishing between bits and atoms.  Silicon Valley gurus spoke of hardware, software and wetware, instead of capital, knowledge and human capital.

But Romer’s formulation of knowledge as a fundamental economic variable immediately put the spotlight on intellectual property regimes, education polices, research and development mechanisms, and, ultimately, much more. The issues involved were recognized immediately as Nobel-worthy,   Many others joined in the discussion, some of them independently – for example, Philippe Aghion, now of Harvard University, and Peter Howitt, now of Brown. A behind-the-scenes battle over appropriate credit began that has continued ever since. But Romer’s contribution had a simplicity and depth that separated it from the rest of what was written and said – or so it seemed to me.

It is not unusual in science for claimants to assert that new ideas are wrong, or  trivial, or that they had been stated elsewhere better or first or both. It was obvious at the Boston session, however, that what  really bugs Romer is the resistance to his ideas from the Chicagoans and their fellow travelers at the University of Minnesota. In his informal discussion, he complained of instances in which Edward Prescott, and Michele Boldrin and David Levine failed to engage.

But his greatest disappointment, bordering on scorn, was reserved for Lucas, and the premise of his growth models that all knowledge resides in the head of some individual person and that the knowledge of a firm, or economy, or any group of people is simply the knowledge of the individuals that constitute it; and that therefore the assumption of perfect competition, of price-taking, could be preserved.

But then perhaps it is not enough to describe the economics of knowledge, no matter how well it has been mathematically pinned down.  It may be necessary to pursue it. It was Romer who abruptly resigned his professorship at the University of Chicago in 1989 after only eighteen months. He spent a year at the Center for Advanced Studies in the Behavioral Sciences, at Stanford University, and the University of California at Berkeley made him a professor the following year. For the next six years he lived in Palo Alto and commuted, until Stanford’s Graduate School of Business hired him, in 1996 — all this moving around for the sake of his family.

That much butterfly behavior might have been forgiven by the profession, but, after 2000, Romer gradually began to leave academia, if not economic science. He served as the US Justice Department’s expert witness in the remedy phase of its antitrust suit against Microsoft Corp. His plan would have split the giant corporation into at least two competing entities,  one selling operating systems and an another selling applications – until the Washington, D.C., Circuit Court of Appeals threw out the verdict. He won the business school’s teaching award.  He took a leave and started a company, Aplia, which took problem sets out of economics texts and machine graded them online. He sold the company, quit his Stanford professorship, founded a think tank and, with a TED talk instead of a journal article, launched a campaign to start “charter cities,” roughly analogous to charter schools, in developing nations around the world.  After two disappointments, in Madagascar and Honduras, I gather he teaches a class of MBAs as a professor at New York University’s Stern School of Business, travels widely, and looks for his first success.

Clearly Romer is an unusually restless citizen of economics. To have thrown himself on the mercy of the AEA as a scientist victimized by academic politics was more than a little embarrassing. On the other hand, it is time to recognize that the creation in 1969 of a Nobel prize for economic sciences has created what amounts to a gilded cage, at least for a talented few. The most talented economists, like other scientists, often do their best work when young.  Some – Summers, Sachs and Bernanke are good examples –  can confidently leave research for policy, knowing that no particular skein of work they have done, exemplary though it may have been, is likely to merit the ultimate scientific award,  Others cannot be so sure.

Michael Spence, of New York University, quit research altogether to serve as dean of Stanford’s Business School for a decade before sharing a Nobel Prize in 2001. Robert Mundell, of Columbia University, departed considerably further before being honored in 1999 for the work on currencies he had done on forty years before.  Paul Krugman, long understood to be a likely winner sooner or later for his work on international trade, closed up his research program in the mid’90s and began a second career as a journalist. Why should Romer be so widely resented for having left research in favor of development activism?

So it is possible to see Romer’s decision to switch topics at the Boston meetings as amounting to a flashback to an encounter with Lucas in 2012, before a more homogeneous audience. It came at the end of a two-day symposium in Stockholm organized at the behest of the Nobel Foundation, a meeting that assembled a glittering cast of perhaps sixty prominent economists, several of them contenders for a prize, in growth theory or some closely related field.  Romer led off the conference, with a talk not unlike the one he was slated to give in Boston.

After two days of palaver about many different fields, Romer finally found himself arguing with Lucas alone about the details  of their conflicting models, before the most august jury yet empaneled – until, with Lucas on the ropes, a rival in the chair cut the discussion short and sent the audience to dinner. Unlike the talks themselves, you won’t find that discussion on Swedish television!

A great deal hangs on the outcome of this apparently abstruse argument over the economics of knowledge. It is time for the Swedes make an award and buck the matter up to a still higher court that of well-informed public opinion.

.                           xxx

Economic Principals is midway in a redesign project and regrets various infelicities.