In a column for Reuters,The Lessons of Reinhart-Rogoff, former Treasury Secretary Larry Summers makes some points that would be difficult for someone observing from from am Austrian methodological perspective to argue with. Summers writes:
[...] there should be a reluctance to accept conclusions from "models" without an intuitive understanding of what is driving them.Summers doesn't dismiss econometric research completely, but he has planted enough roadside bombs along the road to completion of economic research, that Rothbard, Mises, Menger and Hayek would be proud.
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Second, all participants in policy debates should retain a healthy skepticism about retrospective statistical analysis. Trillions of dollars have been lost and millions have been unemployed because the lesson learned from 60 years of experience between 1945 and 2005 was that "American house prices in aggregate always go up." This was no data problem or misanalysis. It was a data regularity until it wasn't.
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The extrapolation from past experience to future outlook is always deeply problematic and needs to be done with great care. In retrospect, it was folly to believe that with data on about 30 countries it was possible to estimate a threshold beyond which debt became dangerous. Even if such a threshold existed, why should it be the same in countries with and without their own currency, with very different financial systems, cultures, degrees of openness and growth experiences? And there is the chestnut that correlation does not establish causation and any tendency for high debt and low growth to go together reflects the debt accumulation that follows from slow growth.
On a surface level Summers gets it. He needs to read the Austrian discussions of the proper methodology for economics to get the theoretical underpinnings of what he seems to get on a gut level.
Hayek's The Counter-Revolution of Science might be a good place to start. I understand another former US Treasury Secretary has just finished reading it.
Rubin?
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