Economics And Intuition

I was a bit puzzled by the recent observation of economist (and physicist) Noah Smith that the reason some economists advocate austerity as the solution to our present situation is not because their models say so, but because of their intuition. "Economic theories," he says, "like all scientific theories are built to be counterintuitive..."

Now Noah Smith is a bright guy, and his blog provides some of the best available commentary in his field. But I have a hard time with this particular thought.

It seems to me that the views of those economists usually identified as Keynesian are eminently intuitive. In fact, analysis of any set of numbers (which is what economists do) needs to be tethered at some point with the real world, including the world of intuition. Here, for example, is a recent article by Paul Krugman in the New York Review of Books. One can believe (as I do) that his political analysis is not sufficiently pessimistic and still accept that what he says about the economy makes sense.

Take the economic downturn; if a person loses his job, it seems intuitive to me that he will do his best to reduce spending until he gets another. If he has monthly payment obligations and family to feed, there will be limits to how much reduction in income he can accept in a new job.

If a lot of people lose jobs, a lot of people will spend less. Businesses who sell goods and services to people will make fewer sales. They will have to lay off some workers and reduce their own purchase of equipment and services.

Reduced economic activity will reduce government revenues. Government expenses for safety net programs will increase. If anything, such expenditures ameliorate the negative effect of short term unemployment on businesses. But government at state and local levels will eventually be forced to lay off employees. Which adds to the reduction of purchasing power for goods and services. Which adds to overall economic distress.

Is there anything here that goes against intuition? If so, I don't see it.

What to do?

When FDR came into office, there were no Keynesians. Keynes' General Theory wouldn't be published for four more years. Did he wait for a theory? No. He looked around him and saw a fourth of the population out of work and barely surviving. He acted on his intuition and did something about it.

He ACTED!

Classical economic theory said to do nothing.

Today we have people in that same tradition advocating austerity instead of action.

Now THAT is counterintuitive.

And it won't work.

New note as of May 5, while waiting for the Kentucky Derby:

I still don't get it. Why is it not intuitively obvious that something that may be good for an individual person or company isn't necessarily good for the economy as a whole? Unlike Lake Woebegon, neither we nor our children can all be above average. Nor can every nation have a trade surplus at the same time.

But Paul Krugman has touched on an explanation that makes some sense: it's the "personal incredulity" syndrome.  What are the advocates of austerity missing? PK puts it this way: "Mainly, I think, [they are missing] the closed-loop nature of macro[economics]. Our intuitions about how business-y stuff works come from businesses or households selling their goods or labor to an external market. In such situations spending less is a sure-fire way to reduce debt, cutting your price or your wage demand is a sure-fire way to sell more.

"But in the economy as a whole, your spending is my income and vice versa; my wage matters only in comparison to your wage; and so on. This changes everything...." which is why personal ideas of the virtue of thrift is a poor guide to achieving general national prosperity.

But I still don't get how people can be that obtuse.