A new referendum likely, says IT

The IT has answered Karl’s question in the affirmative:

Taoiseach Enda Kenny has publicly opposed the need for treaty changes and that remains the Government’s official position in advance of the summit.

However, there is a realisation among senior Ministers in Dublin that Dr Merkel’s commitment to treaty change and the backing she has received from French president Nicolas Sarkozy may have made that process unstoppable.

So, in a Union of 27, if Merkozy wants a new Treaty requiring an Irish referendum then, the IT assumes, this is what will happen. They are quite possibly right.

This should remind us that there are political objectives which the 25 should have in any new Treaty negotiations as well as economic ones. (If we are going to have a referendum, this will take time, and create uncertainty, anyway: so why not get it right?) Economically speaking, if you want EMU to survive in more than the immediate short run, you should logically want a new mandate for the ECB, and some method to provide counter-cyclical adjustment in depressed regions. (I guess we are not going to get this, and indeed we are probably going to get the opposite of this.) Politically speaking, we need moves to reaffirm the primacy of the Community method, or it will be more than EMU that is endangered in the long run. I guess we’re not going to get that either. Of course I would love to be proved wrong.

Bad arguments

We’ve gotten used to disingenuous arguments by István Székely regarding the EC/ECB stance on burning bondholders, but (given that the original interest rates they insisted on were a disgrace) this one really takes the biscuit:

Separately, the top European Commission official on the Irish bailout said critics of the decision not to impose losses on senior bank bondholders should recognise the benefit from the interest cut on Ireland’s rescue loans.

István Székely said the cut would yield €12 billion while moves to “burn” Anglo Irish Bank bondholders might have realised €3 billion.

Also, €3 billion?

Karl is right: it is too late to do anything meaningful about this, and the game has moved on. But that doesn’t mean that we should let these guys rewrite history.

The importance of economic history

Paul Krugman is upset about some pretty fanciful accounts of what supposedly happened during the Great Depression, and I don’t blame him. He also wonders whether economics is a progressive science (I am using the word ‘science’ in its German sense). Well, one of the things that philosophers of science have argued about in the past is whether, when you have a paradigm shift, you end up losing knowledge, and it’s pretty clear what has happened in this instance.

I recently came across this quotation from Mark Blaug’s 1980 book on the methodology of economics which seems worth quoting, given when it was written:

At this point, it is helpful to note what methodological individualism strictly interpreted…would imply for economics. In effect, it would rule out all macroeconomic propositions that cannot be reduced to microeconomic ones, and since few have yet been so reduced, this amounts to saying goodbye to almost the whole of received macroeconomics. There must be something wrong with a methodological principle that has such devastating implications.*

Now, as Krugman points out, this ain’t necessarily so. (See his point 5 in the last of the three links, and see this paper for an example of how you can have all the theoretical bells and whistles these days and still make a sensible argument.) But there is no doubt that a lot of people have been more than happy to say goodbye to the whole of received macroeconomics — for example, I have been reliably informed that a well-known department stopped teaching its undergraduates IS-LM just before the crisis hit in 2008. And the result is that you had people seriously peddling the line that austerity would be expansionary in the wake of the biggest downturn since the 1930s — and these claims were influential in Europe, it seems clear, in the fateful spring and summer of 2010.

One lesson is that it is one thing to play counter-intuitive intellectual parlour games in order to get tenure at a fancy university, but another thing entirely to say something about the real world. For that you need a little common sense.

Another lesson is that economists need at least some training in economic history. No-one with the slightest feeling for historical reality could believe that the Great Depression was due to supply side forces, for example. I observe that Krugman, along with such luminaries as Maurice Obstfeld and Ken Rogoff, did his graduate work in MIT, and I surmise (without having any inside knowledge on the matter) that all three were exposed to Charlie Kindleberger and Peter Temin. They are all distinguished theorists, but also have a historical sensitivity, and this makes them better economists — if your definition of a good economist includes the ability to say sensible things about our very messy real world.

One of the most important things that a bit of history gives you is a sense of the importance of context. A model will work very well in some technological or institutional contexts, but not in others. For example, the Reverend Malthus devised a model that did a pretty decent job of describing the world up to the point that he started writing, but which soon became essentially irrelevant in the century that followed, at least in the richer countries of the world. (He had an economist’s sense of timing.) Sometimes the world is well-described by Keynesian models, and sometimes it is not. And so on.

If the only thing that economic history did was protect us from one-size-fits-all merchants, it would still be worth the price of admission.

*I am looking at the 2nd edition, published in 1992, but I am betting that this sentence dates from the 1980 edition.

Krugman on internal devaluations

To Paul Krugman’s recent posts on Ireland and the Baltics, I would add two points.

1. Ireland’s quarterly GDP data are notoriously volatile.

2. Ireland is a small, open economy, and it is by common consent a relatively flexible economy. It is also an economy in which labour is both inwardly and outwardly mobile. And yet unemployment here is now running at 14.5%. So do we really think that the Irish experience can be used to argue that the austerity/internal devaluation medicine is appropriate for countries like Greece or Italy?

Industrial Revolution Roundtable and Bob Allen keynote

I did my bit for Irish service exports the other week, organising the 9th conference of the European Historical Economics Society in the fabulous Guinness Storehouse. There were a couple of plenary sessions, one of which was a roundtable on the causes of the Industrial Revolution, featuring Bob Allen, Nick Crafts, Deirdre McCloskey, and Joel Mokyr. There was also a keynote speech by Bob Allen on the causes of wealth and poverty. Karl Deeter very kindly came along and filmed the two events, and you can find the videos here and here. My sincere thanks to Karl.