In which John Quiggin intellectually pulpifies Stephen Williamson

Being the mild and nonconfrontational guy that I am, I was a little embarrassed to give this post such a combative title, but after implying that I couldn't pass Wash U's prelims, Dr. Williamson just might be due for a little needling. ;-)

The intellectual pulpification in question involves a post by Dr. Williamson that reviews a book, "Zombie Economics," written by the economist John Quiggin. Williamson introduces Quiggin thusly:

What is Quiggin's claim to fame? His early work is an odd mix of agricultural economics and decision theory, but he seems to have distinguished himself mainly in public policy. He writes regularly in the mainstream media, writes a blog, and Zombie Economics appears to have sold well. 

Now, what is Quiggin up to in Zombie Economics? Roughly, Quiggin is the Australian farm team in the Krugman/Thoma/DeLong league.

Although I would probably give at least one toe to be described as the "Krugman/Thoma/DeLong farm team," I thought this to be mildly disparaging, and potentially a little unfair. So I looked up John Quiggin on Wikipedia and learned the following:

Quiggin is one of the most prolific economists in Australia, illustrated by his output over diverse, high-quality journals^[1] and by citation frequencies in the period 1988-2000.^[2] He is among the top 500 economists in the world according to IDEAS/RePEc.^[3] He is best known for his work on utility theory. Quiggin has frequently been awarded and recognised for his research, including twice receiving Federation Fellowships from the Australian Research Council.^[4]

And who is Stephen Williamson? I looked him up on Wikipedia as well, and found the following:

Stephen Williamson (28 June 1827 – 16 June 1903) was a founder of the Liverpool shipping company Balfour Williamson & Co. and a Scottish Liberal Party^[1] politician.

Oh wait, wrong Stephen Williamson. Where's the disambiguation page? Turns out there isn't one, because Stephen Williamson, the Robert S. Brookings Distinguished Professor of Arts and Sciences at Washington University, apparently does not meet Wikipedia's cutoff for significance.

(Don't take it too hard, Steve. I tried to get myself on Wikipedia, and they booted me. Even when I claimed to be the founder of string theory and son of Sean Connery. But I digress...)

Anyway, Williamson's post is intended as a comprehensive takedown of Quiggin's book. Zombie Economics is about five big ideas that Quiggin thinks have outlived their usefulness. These ideas are:

1. The Great Moderation.

2. The Efficient Markets Hypothesis. 

3. Dynamic Stochastic General Equilibrium 

4. Trickle-down economics 

5. Privatization

Williamson goes through these one by one, and purports to show that Quiggin doesn't know what he's talking about. So I'll stick to the same format. Quiggin has a partial response on his own blog, upon which I will draw as I go through Williamson's points. 

Warning: brutal pulpification is imminent.

Williamson Point #1:

The Great Moderation: Quiggin is a little confused on this one, as the Great Moderation simply characterizes a set of properties of US aggregate time series. From about 1985-2007, inflation was lower and less variable, and real GDP was less variable about trend than had been the case previously. Quiggin is certainly correct, though, in finding fault with those (Ben Bernanke included) who wanted to argue that the Great Moderation was due to a regime change in economic policy. If policy was so great, it should have done a better job over the last four years.

So, according to Williamson, Quiggin is "confused" because he uses the term "The Great Moderation" to describe the notion that certain changes in aggregate time series from '85-'07 represented a structural change. Williamson then criticizes everyone who actually did think that it was a structural change. And he uses the phrase "Quiggin is certainly correct." So how is Quiggin the one who is confused, here? Williamson is dissing Quiggin over a semantic point, then substantively agreeing with him. Not much of a takedown...

Williamson Point #2:

The Efficient Markets Hypothesis: For Quiggin this is "the idea that prices generated by financial markets represent the best possible estimate of the value of any investment." Here, Quiggin is badly confused, but maybe the finance practitioners are not helping him out much. Market efficiency is simply an assumption of rationality. As such it has no implications. If it has no implications, it can't be wrong.

First, I will unleash Quiggin himself, who points out that a theory with no implications is a worthless waste of time:

That’s right, Williamson not only defends the EMH on the basis that it’s not even wrong, but follows up by making the same claim about the whole of modern macro. Those are, quite literally, his only criticisms of these chapters. His commenters (none of whom seem particularly favorably inclined towards me) try to suggest that isn’t the most effective line of attack, but he comprehensively misses the point.

Yes, Stephen Williamson defended a theory by saying that it can't make any predictions about the real world. You read that right.

But it gets worse. The EMH is most certainly NOT an "assumption of rationality." The EMH does not even require rationality in order to be correct; it requires only that the aggregate effect of individual investors' irrationalities not be predictable. And Williamson also seem not to realize that Quiggin's statement of the EMH is perfectly legitimate; it is the "strong form" of the EMH, as stated by Eugene Fama. Conclusion: Stephen Williamson does not know what the Efficient Market Hypothesis is.

(Random note: I like the EMH. I don't think it's completely correct, but I think it's the unique starting point from which any analysis of financial markets should begin. As opposed to, say, DSGE macro, which is just some random thing that doesn't work. Anyway...)

Williamson Point #3:

Dynamic Stochastic General Equilibrium: Quiggin claims that this is "the idea that macroeconomic analysis should not concern itself with economic aggregates like trade balances or debt levels, but should be rigorously derived from macroeconomic models of individual behavior." I can hear you snorting with laughter. Why is "but" in that sentence? Like the "efficient markets hypothesis," DSGE has no implications, and therefore can't be wrong. Indeed DSGE encompasses essentially all of modern macroeconomics. Which of our models is not dynamic, with uncertainty (and therefore stochastic), and with some equilibrium concept.

I hesitate to say this, but Stephen Williamson appears also to not understand DSGE. If he thinks it has no implications, I mean. DSGE is not just "some equilibrium concept," but a very specific one: the dynamic, stochastic generalization of the general equilibrium framework of Arrow, Debreu, and McKenzie. This means that DSGE does have implications - for example, that markets clear and that agents are price takers. Those things can be wrong, as can the results that follow from them (e.g. the Law of One Price). So Stephen Williamson's attempted defense of DSGE, which was looney in the first place ("It has no implications! It's utterly useless and therefore unassailable! Gurrrrhhh!"), also happens to be flat-out wrong.

Williamson Point #4:

Trickle-down economics: This one puzzled me. For the previous three zombie ideas, Quiggin is confused, but I could see where the confusion might come from. However, while the words "trickle-down economics" are familiar to me, I have a hard time associating that idea with the mainstream ideas of any academic economists. 

Um...how about dynamic Laffer effects, as posited by John Cochrane? I'm pretty sure John Cochrane is a mainstream academic economist. He's on Wikipedia, at any rate.

Williamson Point #5:

Privatization: Here, Quiggin offers a litany of government privatization efforts gone awry. If I wanted to, I could take this evidence as supporting the hypothesis that government is really bad - so bad that it can even screw up privatization.

Sure, if you wanted to. If I wanted to, I could take the Mongol Conquests as evidence supporting the hypothesis that Radiohead is the Best Band Ever. It's called "intellectual dishonesty."

Anyway, Quiggin also points out that Williamson doesn't offer any evidence to refute the book's claims. This is true. It's as if Williamson thought that he could refute Quiggin's entire book by tossing off a quick and sloppy mix of vague handwaving, semantic nitpicking, utter devaluation of the theories Quiggin is attacking, complete and utter mischaracterization of those same theories, and lame personal jabs.

I score this Quiggin: 5, Williamson: 0. (Or maybe Williamson: -1, given that he thinks "not even wrong" is a feature rather than a bug.) Pure and utter pulpification.

Oh well. At least Stephen Williamson can take comfort in the fortunes he's made off of the Balfour Williamson & Co. shipping venture. Oh wait...that's the wrong Stephen Williamson! Dang you, Wikipedia!!!