Thursday, September 20, 2012

Foxes, Hedgehogs and Economics

I'm still struggling with this foxes and hedgehogs concept. The hedgehog, as I understand it, is a specialist, whether at curling up into a ball or whatever.  A fox is a generalist.  In terms of conceptual analysis, a hedgehog has a fixed template and plugs the facts in to form an answer.  A fox gathers up to facts and assembles them to form a template.  In the field of punditry, foxes regularly outperform hedgehogs. People who attempt to apply a single ideological template to all situations invariably find that the facts confound their predictions. People who look at the complex facts of each individual situation and and analyze them separately do better.

But there are other fields more favorable to hedgehogs.  Science, for instance, is a hedgehog-y discipline.  Scientists discover scientific laws that apply in all instances, with no exceptions.  But the hedgehog approach to science has its limits.  Scientific laws with no exceptions apply better the simpler the system being studied.  The more complex the system, the more it starts calling for a fox-like analysis.  Journalistic hedgehogs are trying to make punditry into a science, but the system they are studying is too complex.  When the hedgehog template applies to a particular situation they can be impressively right and come across a predictive geniuses.  But because reality is much too complex to fit into anybody's ideological mold, they are wrong most of the time.

Which leads to the subject of my last post, Scott Sumner.  Sumner is a hedgehog's hedgehog.  He has a one-track mind.  He reduces everything to monetary policy.  He even compares himself to the man with the hammer who thinks everything looks like a nail.  It is maddening.  To use an overworked metaphor, it is as if someone noticed that cars go faster when you push on the accelerator and slower when you hit the brake and so reduced everything about their speed to the brake and the accelerator.  There are clear disadvantages to this approach.  Suppose a car is going up a steep hill into a strong headwind and the driver has floored the accelerator, but it is still losing speed.  If you reduce everything to brakes and accelerators, hard money guys will see the accelerator floored be certain this is madness and you have to hit the brake fast or the car will careen wildly out of control.  Sumner will look at the speedometer, notice the car is losing speed, and say no, you have to hit the accelerator even more.  Hard money guys will be baffled as to how you can floor the gas and not run out of control, and Sumner will have no other answer than that the car is not, in fact, running out of control, so the brake is not needed.  The conversation would be a whole lot more productive if you could introduce concepts like "hills" and "wind" to explain why what is appropriate in one circumstance is wrong in another.  And this is what Sumner refuses to do.  And yet he seems to be getting a whole lot right.

So, granting that science is advantage-hedgehog and punditry is advantage-fox, which is economics more like?  Economics, after all, is considered the most "scientific" of the social sciences, but still not a true science.  Is it "scientific" enough to allow room for successful hedgehogs?  The best I can suggest is that certain basics in economics, particularly monetary economics, show something like a scientific rigor.  Printing too much money causes inflation.  To little money chokes off credit, with severe detriment to the real economy.  Deflationary pressure causes distortions and depressions.  Over-valued currencies are devastating to an economy.  These conclusions, at least, are consistent enough to allow reliable hedgehog predictions.  And what of Sumner's theories of nominal GDP targeting?  We may soon find out.  My guess, though, is that it will all turn out to be more complicated than he foresaw.

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