I was listening to the lecture by Paul Krugman as mentioned in my previous post, Krugman Lectures on the Depression.  He described  how he was convinced by another Nobel Prize winning economist, Milton Friedman. to abandon what he learned from John Maynard Keynes’s analysis of the great depression.  He now realizes how Friedman looked at the wrong data to come up with his erroneously convincing theory.

I have recently been reading the book, The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb.  This is a perfect example of what Taleb thinks is wrong about the way we study history.

Taleb is all in favor of histories that tell you what happened in the past.  He is very suspicious when historians try to provide a narrative that explains why they happened.

I’ll try to recall one of Taleb’s thought experiments from his book that describes the problem.

Suppose you see an ice cube on the floor.  If you have sufficient knowledge of physics, you will be able to predict the resulting puddle that will be there when the ice cube melts.

Now consider the case, where you walk into a room and see a puddle on the floor.  It does not make any difference how much physics you know, you will not be able to say for sure what the ice cube looked like before it melted. There are many possible ice cubes and non-ice cubes that could be responsible for that puddle.

Likewise, in history, there are many plausible explanations that would explain how events unfolded as they did.  It is not very likely with our limited knowledge of all the details that we will be able to know with any certainty which explanation, if any, is true.  More likely, none of the explanations are true, because we each have our own biases and knowledge limitations in choosing what we think are the major factors that caused the events. Taleb has explanations, that I won’t descibe here, of why we don’t attribute what happened more to luck than we ought to.

Taleb talks about using common-sense.  Although common-sense is not always so common.  In the case of the Keynesian explanation of the causes of the prolonged depression, they make a lot of sense.  There is a lot in what Keynes’ said to show that  Friedman’s alternate explanation is not likely to be the right one.  If people like Krugman had not forgotten what they had learned, they would have delved deeper into how Friedman misled them.  They would not have waited until 2008 to figure it out.

Why do I have to be the one that responds to Krugman, “Well, duh?”, when Krugman finally comes to his senses and realizes that the explanation that Keynes’ gave is much more reasonable than the one Friedman gave when applied to the conditions that prevailed during the depression.

RichardH sent out an email with some links to Paul Krugman’s delivery of a London School of Economics lecture series.

Part I--The Sum of All Fears
Audio: http://tinyurl.com/kj43gf
Slides (pdf): http://tinyurl.com/n6gevo

Part II--The Eschatology of Lost Decades
Audio:  http://tinyurl.com/mjvq65
Slides (pdf):  http://tinyurl.com/lcavs7

Part III--The Night They Reread Minsky
Audio:  http://tinyurl.com/m4hww2
Slides (pdf):  http://tinyurl.com/m92wpj

I was able to open the audio in one browser window and look at the slides in another browser window.  After hearing Part I, this was my feedback to RichardH.

I am beginning to think that Taleb was right about Nobel Prize winning economists, but not only for the reason he talks about.

I am surprised that I seem to know more about what is going on than Krugman does in some respects.

Apparently he, along with Samuelson, lost faith in Keynes with the rise of Milton Friedman. Only now is he realizing what I knew all along. Keynes analysis was applicable at the time to the conditions at the time. When those conditions are far from what you need to apply his reasoning, then you are in a different regime where different forces dominate. The famous caveat to all simplified economics – “everything else remaining the same”.

Well everything else did not remain the same. Why is it such a surprise that when the conditions did go back to the ones during Keynes’ time that the prevailing balance of forces would return to what he analyzed?

I am listening to the first question asked of Krugman about the falling world trade. Both he and the questioner agree that there is no tightening of free trade and other explanations are also missing. Krugman appears to be lost for any explanation until he finally gets around to the fact that people are buying less stuff because we are near a depression. Well, duh?

Do the succeeding lectures get beyond the obvious? Maybe Krugman should sit in the audience and let me explain the facts of life to him.

Unlike the black swan of Taleb, these extreme happenings that surprise Krugman so much have happened before during the lifetime of a few people who are still alive. We have books, for goodness sakes, that record history. This history surely can’t have been forgotten so easily by Nobel prize winning economists. Apparently, I believe in the scholarship of major thinkers too much.

Krugman had the brilliant insight during the lecture that when the economy has a lot of slack and you can’t keep your factories and stores busy, you are unlikely to want to invest in more of these items. To this I also say, well, duh? Do I really need a Princeton professor to tell me this?