A: What do you think about F.A. Hayek’s criticism that economic models can never “exhaust” societal problems and therefore that we cannot rely on them overmuch?
B: Well, Hayek does allow for what he calls “pattern predictions” in some cases, but it’s true that his epistemology often leads him into the position that “we can never say anything about anything.” Overall, I actually agree with him that there’s a lot that we cannot know, but on the other hand, I also think he goes too far sometimes. See, if you’re really a die-hard Hayekian, you would say that thinks that were have evolved “bottom-up”; by having been discovered over time should not be tampered with. – Since we cannot know their full epistemological import, we cannot know that society won’t collapse if we start altering them too radically. But slavery and racism also fit these criteria – they were also discovered over time and evolved “bottom-up.” Personally, I think we can say something about these things and that, no, society won’t collapse because they are abolished. That’s where things can get a bit precarious and I think that Hayek loses himself in his own skepticism.
A: On the other hand, though, isn’t it true that unquestioning faith in economic modelling has caused considerable society damage over the years?
B: Oh yes, it’s very true. Economists have done a lot of damage over the years. But I think it has gotten better. I actually think that modern economics has absorbed a lot of Hayek’s thought, even though his name is rarely mentioned in the textbooks.
A: That may be so, but then again, modern economics has also absorbed some of Keynes’ thought, so couldn’t you argue that the two balance each other out?
B: No, I don’t think so. Intellectually, there’s very little left of Keynesianism in mainstream economics. Even modern Keynesians openly tend to say that they have no theory; no intellectual leg to stand on. Why, last December, one of them wrote a piece entitled “Try Anything”! – it’s not so much that they are Keynesians, as that they simply don’t believe in the present course.
A: That is not my impression. When you had the huge stimulus packages under Obama, and when certain European countries try to “kick the economy into gear” through short term spending increases, isn’t that in the spirit of Keynes?
B: Well, the stimulus packages in the USA could be regarded as a series of gigantic experiments in Keynesianism. And most economists I talk to say that the lesson from those moves was that it didn’t work and that monetary policy is far more important when it comes to handling a depression. It is true that some European countries have followed suit, even after it was clear that the American stimulus did not work, but that has far more to with the way laypeople perceive economics than what economists think: A lot of people approach economic crises with an unfortunate mixture of amateur philosophy, amateur psychology, and amateur economics where they think that public spending will raise everyone’s faith in the economy and get the wheels rolling again. Most of the really high-ranking economists I talk to know that it doesn’t work that way. But on the other hand, the politicians and central bankers can’t be seen “doing nothing” while people are hit by a crises that puts them out of a job, so they tend to throw some “stimulus” out there, even though they know it won’t work. In a way you could say that stimulus spending is like the bright lights and window dressing that people think is the heart of economics while monetary policy is the greasy engine room that really runs the ship.