Thread
A somewhat belated response to Adam Tooze's uncharacteristically ill-tempered response to the latest economics Nobel 1/ adamtooze.substack.com/p/chartbook-160-kindleberger-mehrling
In large part Tooze is saying that it was all in Bagehot, Minsky and Kindleberger, and that belatedly acknowledging what everyone should have known doesn't deserve celebration. This shows a surprising lack of understanding of the role models play in economic thinking 2/
Now, I'm all in favor of economists paying attention to what smart, observant people who don't do formal models have to say. When I wrote about doing economics way back in 1991, my first principle was "Listen to the Gentiles" 3/ web.mit.edu/krugman/www/howiwork.html
But my last principle was "Simply, simplify". Richly layered discussions of economics and finance can contain valuable insights, but are much more useful when you have clear, stylized models to help figure out what's important 4/
To take one big example, Minsky in the raw is almost unreadable: the valuable morsels of insight are smothered in a thick stew of indigestible prose. It only makes sense if you have some clear, simple stories — not necessarily formal models — to help you pick out key themes 5/
Charles Kindleberger, by contrast, was an elegant and witty writer. But it could be hard to figure out what was really crucial. I actually took his international finance course in grad school; all of us came out feeling very confused 6/
Then Rudi Dornbusch, with his crystal-clear models, arrived at MIT, and a funny thing happened: not only was Rudi's approach an inspiration, but once you learned how to do clear models, Kindleberger's insights began to make sense too 7/
Maybe useful to talk about the "New Trade Theory" I and others developed in the early 80s. There had long been a sort of counterculture in the analysis of international trade, a sense that Ricardo and Heckscher-Ohlin weren't the whole story 8/
In fact, even orthodox trade people often cited Burenstam Linder's "Essay on Trade and Transformation", out of a sense that there was something there — but it was hard to say what 9/ ex.hhs.se/dissertations/221624-FULLTEXT01.pdf
It took clever little models of trade with increasing returns and imperfect competition to cut through the fog, to understand key points like the nature of the home market effect, why similar countries trade so much, the role of accident in shaping trade patterns, and more 10/
On bank runs: of course everyone knew that they happened and did harm. But there was a lot of confusion — people thinking that runs necessarily reflected mob psychology, that they mattered only because they reduced the money supply, etc. 11/
Diamond-Dybvig-Bernanke, with minimalist models of how bank runs could happen and matter, again cut through the fog. After DDB economists could read Bagehot very differently and more productively than before 12/
One final point: Tooze says that economists failed to appreciate the role of financial instability. I guess that depends on which economists we're talking about. International macro, one of my two home fields, has been acutely aware of instability from the get-go 13/
There's a large literature on currency crises, theoretical and empirical, with much of that literature emphasizing how crises can blow out of seemingly nowhere and prove self-fulfilling. In 2008 intl macro people were surprised by the particulars, but not by the possibility 14/
And while I can't prove it, I'd argue that the clarity created by models helped prevent financial meltdowns in both 2008 and 2020 fin/
