Today's Quote of the Day...
…is from Scott Sumner’s August 24th 2019 blog post at EconLog “There’s No Reason to Go Heterodox” (emphasis added):
During the 1970s, high interest rates did not seem to slow inflation. As a result, all sorts of heterodox theories of inflation were invented. Too much union power, crop failures, monopoly power, budget deficits, oil prices. And each one failed, because it was monetary policy that was driving 11% NGDP growth (1971-81), which made 8% inflation inevitable. As soon as Volcker did an orthodox tight money policy, inflation promptly came down and heterodox theories of inflation were abandoned. Heterodox macro theories are the result of bad macro policies.
JMM: Scott’s final sentence can be generalized: heterodox theories tend to be the result of bad policies. Oftentimes, people (including seasoned analysts) make the mistake of analyzing some event in a vacuum: Outcome X has occurred, standard theory does not seem to have an answer for X, therefore theory must be incorrect/incomplete. Thus, all sorts of theories come about. We’re seeing this with International Trade right now with all the various (and often competing) theories coming out of the White House.
Of course, none of this is to say that heterodox theories are necessarily bad. In a sense, all theories start out heterodox. Rather, this is to say to be careful of tossing out established theory without a darn good reason.