Can economics change your mind?

Adam Ozimek wrote the blog post everyone else is talking about; he gives good examples there.

Where to start?  I could write a whole ongoing blog on this question (wait…).  In any case, here are just a few examples of where I have changed my mind due to economic evidence:

1. Before 1982-1984, and the Swiss experience, I thought fixed money growth rules were a good idea.  One problem (not the only problem) is that the implied interest rate volatility is too high, or exchange rate volatility in the Swiss case.

2. Before witnessing China vs. Eastern Europe, I thought more rapid privatizations were almost always better.  The correct answer depends on circumstance, and we are due to learn yet more about this as China attempts to reform its SOEs over the next five to ten years.  I don’t consider this settled in the other direction either.

3. The elasticity of investment with respect to real interest rates turns out to be fairly low in most situations and across most typical parameter values.

4. In the 1990s, I thought information technology would be a definitely liberating, democratizing, and pro-liberty force.  It seemed that more competition for resources, across borders, would improve economic policy around the entire world.  Now this is far from clear.

5. Given the greater ease of converting labor income into capital income, I no longer am so convinced that a zero rate of taxation on capital income is best.

6. The social marginal value of health care is often quite low, much lower than I used to realize.  By the way, hardly anyone takes this on consistently to guide their policy views, no matter how evidence-driven they may claim to be.

7. Mormonism, and other relatively strict religions, can have big anti-poverty effects.  I wouldn’t say I ever believed the contrary, but for a long time I simply didn’t give the question much attention.  I now think that Mormonism has a better anti-poverty agenda than does the Progressive Left.

8. There are positive excess returns to some momentum investment strategies.

Overall I find that history and theory-laden observation tend to be the forms of evidence which have convinced me the most.  #3 and #8 are examples of “sheer econometrics,” but that is not usually how minds are changed, mine included.  But I don’t intend that as an anti-econometrics remark, rather econometrics is a very useful check on our theory-laden historical observations.  If you can’t get your synthetic, empirically-driven intuitions to work out in the numbers more formally, and that is indeed sometimes the case, your views probably still need more tweaking.  And for some questions, especially in number-heavy, numbers-mean-clear-things finance, it’s sheer econometrics from top to bottom.

Here is Paul Krugman on the topic; he seems to hold a broadly similar view of econometrics.


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