In the financial punditry racket, there's no voice quite like the Financial Times' John Kay, certainly not in the United States: skeptical, elliptical, calm, essayistic, sneakily funny. I'm reminded of this after reading two columns, the first this weekend, the second Wednesday, that gently dismembers the pretensions of the economics profession (Kay is an economist, by the way). The Sunday column's subject was "confirmation bias," that is, the tendency to find evidence to support your own beliefs. He opens with a meeting of economists at Bretton Woods sponsored by George Soros, wanders past the International Monetary Fund and the banks, pauses at Alan Greenspan (who recanted his errors, then took it back), takes a shot at Gordon Brown, sniggers at the European Union and ends up with Ayn Rand and why he won't be lining up to see Atlas Shrugged. Think about it: Soros, Brown, the IMF, the EU and Rand. What do they share? Confirmation bias. In the end, he winds up turning his skepticism upon himself, stating his own long-held belief that "risk capital is best provided by smaller institutions in close touch with investors, not the banks to which we entrust our savings," only to conclude with a tart, "Funny, isn't it, how even one's errors confirm the power of one's ideas?"
This is a column that would probably never appear in a major American paper, for which economics is a contact sport or a grim attempt to explain what often enough is elusive, ambiguous and complex for those Who Need to Know Facts. In the former camp falls the likes of Paul Krugman, a very smart guy (see his Nobel) who writes with great clarity. But reading Krugman is like being pulverized by a machine. His humor, when it peeks out, is watery, like the sun in Seattle; his certitude is rarely less than complete; he hurtles toward his goal, usually involving Republican infamy, like a boulder dropped off a building. He is less an essayist than a polemicist. In today's column, Kay opens with a brief comment about a bon mot -- "consistency is the first siren of beauty" -- made by University of Chicago economics professor John Cochrane as part of a rejoinder to what Kay calls Krugman's "critique of modern economics" in 2009. In fact, Krugman's "critique" was really an attack on the so-called Freshwater School of rational expectation associated with Chicago and a defense of the Deepwater School, to which he belongs.
Kay, with his lighter-than-air touch, offers a broader critique that views Krugman and Cochrane, Deepwater and Freshwater, as part of the same logic-chopping species: worshippers at the altar of consistency (and undoubtedly of confirmation bias, too). "Professor Cochrane correctly identifies consistency as the most prized virtue of economic reasoning." Kay then proceeds to dismantle that pretension in his usual way: knocking it off-kilter, then edging it out the door. Consistency is not rationality ("If I commune daily with the fairies at the bottom of the garden, I am consistent but hardly rational"). Indeed in a world of imperfect knowledge -- and that, oh gods of economics, is the world we reside in -- "we see similarities where there are differences and differences where there are similarities. ... Different people will assess the same necessarily incomplete information in different ways, and the same person may assess the same information in different ways at different times. What we do depends on the social context."
In his essayistic way, Kay gently punctures the bobbing balloon of modern economics as practiced by Krugman and Cochrane: the belief in the self-interested, utility-maximizing, rational animal with an M.B.A., homo economicus. His kicker, which has its roots deep in the empirically driven liberal tradition, from David Hume and Adam Smith (Kay is Scottish) to Isaiah Berlin (Kay taught at Oxford), resembles a kind of inspired doggerel: "I am constant, you are stubborn; I am flexible, you are dogmatic. I am principled, you are ideological; I am pragmatic, you are opportunistic." And again, Kay ends up not with clarity but with complexity and ambiguity. "The injunction to be consistent is used to scold but not to help us live. Perhaps Ralph Waldo Emerson expressed a better perspective than Cochrane's: 'A foolish consistency is the hobgoblin of little minds.' "
Kay, by the way, has a new book out that pursues a similar theme: "Obliquity: Why Our Goals Are Best Achieved Indirectly." I have not yet read it, but it sounds entirely characteristic of the man.
Originally posted at The Deal.