The Economist has its lead editorial and two articles (here and here) on the state of play in the economics discipline, given its failure to see the financial train wreck coming and its dismissal of those who raised early warning flags. I must confess I only got a few paragraphs into it before getting thoroughly annoyed. It’s one of those damage control affairs that does a clever job of asserting the failing of the discipline are really not all that serious. In fact, the refusal of the discipline to cop to much in the way of error is remarkable. By contrast, a period of failing enrollments in the 1990s produced vastly more soul-searching (doubters can read Mark Blaug, “Disturbing Currents in Modern Economics” Challenge, 1998, and contrast it with the state of play now).
Linda Beale. professor of law and creator of the blog, ATaxingMatter, will have none of it. She agreed to run her take on it as a guest post her.
From Beale:
The July 18th issue of The Economist is focused on the economic crisis and the economic theory that failed to prevent or, for most, even foresee the crisis. The cover is telling–a book labelled “Modern Economic Theory” that is melting away, with the words “Where it went wrong-and how the crisis is changing it” beneath. That sounds like the magazine intends to investigate the sources of the crisis in modern economic theory. But does it? Only in a sort of halfway approach. There’s a lead-in on “what went wrong with economics” (page 11). It claims that economics as a discipline “deserves a robust defence” and that “so does the free-market paradigm.”
There is, to be quite clear, very little real justification for those statements. Both, in my view, have failed us, in that the free-market paradigm does not work–without substantial state processes and institutions that impose restrictions on free markets–such as regulatory agencies looking out for consumers, anti-trust enforcement preventing singular companies from growing so large that they can have a systemic effect on the system–we will have skullduggery llike the Madoff ponzi scheme and market control such as that exerted by the several large banks who have essentially set anti-consumer/pro-rent policies in lockstep over the last few years, while engaging in speculative behavior and abetting tax avoidance in many cases like UBS’s that are bad for the system and bad for ordinary Americans but good for greedy bankers.
What does the lead-in admit to, then (if it still thinks economic and free market theory are worth defending)? It acknowledgs that the discipline is subject to three critiques:
1) it helped cause the current economic crisis
2) It failed to see it coming
3) It doesn’t know how to fix it.
In my book, that doesn’t leave much out. A theory that actively causes harm, can’t prevent it, and can’t cure it is not much of a theory.
28 comments
Comments are closed.
Of course it is the mainstream of economic theory that failed to see the crisis coming. The Austrian theory saw it coming chmall along, maybe too all along. In the memorable words of Murray Rothbard, "The boom causes the bust."
Note that John Quiggin over at Crooked Timber is also tackling this idea.
I picked up the issue a few days ago. Completely unimpressed.
The issues they find and discuss are tailor made to be able to defend, without really ever discussing the real problems with economic thought and the anarchy rules of "the free market".
What surprises me is how ingrained the idea of 'free market capitalism' is with joe the plumber. They can go on and on about how competition works and how the government is actually the source of the problem.
Then you ask them where canada is….Blank stare-what does that matter. Try telling them that China is not the US's largest trading partner and see them come completely off the rails.
How can an entire population be poised with bad economic theory, and in the same breath so stupid.
Can the people who are teaching these "ideas" please start with the basics. Math, in this instance would seem to be the most valuable. Next up, critical thinking.
bob
For there to be critical thinking there needs to be the absense of manipulation by the oligarchy. It case it has passed you by the media machine is capable of convincing the masses of just about anything it wants and as a defensive measure can conflate, obfuscate or create doubt about anything or anyone they please. The textual white noise we share in blogs like this is not a pimple on the ass of their control.
I just "participated" in a Move On gathering in Portland, OR to put pressure on Ron Wyden to support a public Health option and stop slowing the process and less than 200 people were there. IMO, the public is not hurting enough yet to be paying attention.
Beale tells it like it is. The Economic Emperor has no clothes.
Could someone explain to me, because by my lay-man reckoning, without purchasing power the paradigm of capitalism collapses. The idea of sustainable growth is just chasing rainbows. Surely the tsunami of technological unemployment is one of the single biggest threats that we face as a developing civilization. If we attempt to force our economic fundamentalism on the developing consumer markets such as China and India, this will only create further bubbles, and where are the markets after that? I applied for a credit card for my spaniel, but he is so far showing very little interest in retail.
Her explanation leaves much to be desired. She does not address any major economic theory or any part part of any any major economic theory. What does she take issue with? Neoclassical price theory? Rational expectations theory? Monetarism? Neo-Keynesianism? The Austrian School?
Where's the beef?
RPB,
I suggest you read the Economist link first. It is remarkably non-specific overall and get specific only to cherry pick favorable factoids. Her response is pretty much in keeping with the source.
The Economist, moreover, would deem monetarism and the Austrian school only to be of historical interest, not germane to modern policy-making. This is about the failure of economics as related to policy choices.
I was studying economics back in the 1990s. I quit for the following reasons: people are not rational, the free market does not maximize utility but instead merely creates externalities and ignores them, and "free trade" is a religion to which I cannot adhere.
Mainstream post-keynesian economics has been wrong in its most basic assumptions for a very, very long time. And now there is a very active part of the antitrust scholarly community arguing that Section 2 is no longer needed, perhaps never was? Personally, I think those people are nuts.
Make no mistake, economics was massively broken long before the crisis. If it fails to use this opportunity to examine its basic failings, it will continue to become more and more irrelevant.
Salon just published three articles (Wed, Thurs, Fri) on Who Caused the Economic Crisis by Simon Johnson and John Talbot.
To his credit James Galbraith has written forcefully (whew!) about this matter. See his book Predator State, written in 2007 and published in 2008.
Of course, being right (and therefore in the minority of economists) has evidently led Obama's wall-street friends to sideline Galbraith in favor of garden-variety mainstream economists, cut from the go-along-get-along cloth so necessary to keep the creaky wheels greased on the Street.
Everybody assumes that economics is taken seriously by the politicians; it's not. It just provides marketing copy for their positions.
Let's force the politicians to talk about the morality and distributional consequences of their scribbler-supported positions. Let's get real, in other words.
See http://animalspiritspage.blogspot.com/2009/07/on-failure-of-macroeconomics.html
I read the Economist piece. I had a hard time in identifying what problem was being discussed. Several economic theories have been identified as being inacurate if not wrong. My point of view is that Efficient Market Hypothesis is/was hogwash. I have never believed that the Fed could direct the economy so as to achieve the intent of the Full Employment Act of 1946. The more recent directions of the legislature are not achievable as well. So long as yoy have a fractional reserve system wherein the required level of reserves is as low as it has been over the past 75 years, you will have the serious potential for systemic insolvency. Going off the gold/silver standard in 1971 was the absolute precusor of our current dilemma. If one has an argument with the hallowed halls of consensus economics, one should begin by examining the history of economic thought. In that examination you will find that while they do not have all the answers, the Austrian point of view does a better job of anticipating policy outcomes. In the coming months we shall all come to understand that you cannot borrow your way to prosperity! Similarly, at some point, as a society, we will have to replace the poltroons who populate the Senate and the House. For those of you with children, I commend to you the Federalist Papers and urge you to ask that your school system make that body of discussion required study. The Federalist papers would be a good replacement for such whimsy as 'intelligent design'.
It would be hard to believe that a publication called the Economist could ever seriously take issue with the field upon which its identity is founded. What would it do, rename itself the Non-Economist? More likely it would go with something like The New Economist. You know something which promises change but doesn't deliver on it. In this regard, The Obama Economist would be appropriate but perhaps too topical.
The truth is the Economist is part of an Establishment that should be far more discredited than it is. It has gotten just about everything wrong that could be gotten wrong, and done it in a spectacular fashion. Yet it has remained oblivious to its failures. Our elites could never be so very wrong because how could they justify being our elites. It would all be nepotism and cronyism. Ergo they weren't really wrong or if they were, not seriously so. QED.
Well it seems that at least Karl Marx saw the current crisis coming, some 150 years ago (but no date). But then he wasn't an economist, contrary to common belief.
Well it seems that at least Karl Marx saw the current crisis coming, some 150 years ago (but no date). But then he wasn't an economist, contrary to common belief.
I would argue economics has not "failed" anyone. The modern Economist's role is to rubber-stamp policy makers desires.
Economists are chosen to inform policy makers because their world view agrees with or enables the policy maker wishes.
This is a attempt to hang the burden of the failure on Economists in the retelling of recent economic events. Cowards.
Greetings.
"People are not rational." Well, I submit they are rational – but they just aren't rational all of the time. Worse, it is impossible to tell other than retroactively what mood they were in at any given time – rational or irrational. (And if this is true for populations at large, it is even more true for individuals.) Nobody is irrational on purpose – and yet, irrationality happens.
"The free market does not maximize utility" – maybe it does; i.e. it might just be the case that it doesn't maximize the utility of every single market, of either goods or services. (A similar argument could be made for social, centrally run economies.) Different species occupy different niches. Which species for which niche? Ah, there's the rub.
"The textual white noise we share in blogs like this is not a pimple on the ass of their control."
I think you are assuming there is only one kind of power or control. The example was once given to me of the wealthy man negotiating with a Bombay railway station vendor over the price of a brass pot. At first glance, the wealthy man seems to have all the power. But the vendor, poor as he is, might know his own, individual market better. This gives himi more alternatives to selling to the wealthy man than is at first apparent. In short, even the seemingly poor and dispossessed usually have some marginal advantage in some situations.
I really enjoy blogs like this one, but I note that birds of a feather tend to congregate together. It is exceedingly hard to hold a contrarian view, much less express it. (I'm speaking in general here, I don't mean that this blog in particular squelches contrarian views, or even that the attempt isn't made to welcome different points of view. It is just that humans loathe confrontation, as a rule, and won't risk it even at express invitation.)
Economists as a whole are no different. They prefer to congregate with those of like views. It takes a lot of energy to present a contradictory view…..and most people loathe confrontations. Thus is any motivation to explore alternatives given a firm squelching.
asphaltjesus I'm in total agreement.
Paradise Lost
Ever since Adam was kicked out of Eden, that is when some tribes discovered agriculture and work (travail, trabalho, derived from latin tripalium, a torture device made of three poles), producing a surplus that could be appropriated, societies have been divided into 4 main castes: the Warriors (earthly power, governement), the Brahmin (spiritual power, i.e. priests whose job was to legitimize the earthy power, that you can find in Ancient Egypt, Mayan Empire, Catholic Church a.s.o.), the Merchants (the economy), and the untouchables, i.e. slaves, serfs, proletarians. The contemporary Brahmin caste is called economists.
asphaltjesus I'm in total agreement.
Paradise Lost
Ever since Adam was kicked out of Eden, that is when some tribes discovered agriculture and work (travail, trabalho, derived from latin tripalium, a torture device made of three poles), producing a surplus that could be appropriated, societies have been divided into 4 main castes: the Warriors (earthly power, governement), the Brahmin (spiritual power, i.e. priests whose job was to legitimize the earthy power, that you can find in Ancient Egypt, Mayan Empire, Catholic Church a.s.o.), the Merchants (the economy), and the untouchables, i.e. slaves, serfs, proletarians. The contemporary Brahmin caste is called economists.
No really, guys – if you follow this stuff academically, there is a great deal of discourse and disagreement about many aspects of economic analysis — but not the very basic assumptions upon which the whole thing hangs (unless you count some serious outliers). And those are necessary for the basic math to work for building models and drawing curves – but they have been disproven in the real world. That's the rub. The very basis of the science of economics is in crisis, and it's grown so irrelevant (for some of the reasons cited) that no one really even seems to care. At this point, economic analysis is a kind of magic thinking masquerading as a science: that's the problem.
Look – I work with this. I build regression analyses, I need expert economists to provide testimony, and I need to prove market impacts. None of it has any validity and yet, ironically, has finally reached the point where it is "widely accepted methodology" that the courts will mostly accept.
It was ever thus.
@Devil's Advocate
@asphaltjesus
If you're interested in a viewpoint contrary to your own, you might find this article about Nazi science (economics being a science) interesting, where the author concludes:
Leo Alexander, in his 1949 article "Medical Science Under Dictatorship" (NEJM), suggested that, "Science under dictatorship becomes subordinated to the guiding philosophy of the dictatorship (28) ." I am proposing the inverse, that Politics under Science becomes subordinated to the guiding philosophy of that Science.
http://www.fasebj.org/cgi/content/full/22/2/332
It seems to me that the logical outcome of the dominant economic ideology (free-market, capitalism, laissez-faire, whatever you want to call it) is the privatization of Government.
It seems to me that the logical outcome of the dominant economic ideology (free-market, capitalism, laissez-faire, whatever you want to call it) is the privatization of Government.
"Economics is less a slavish creed than a prism through which to understand the world. It is a broad canon, stretching from theories to explain how prices are determined to how economies grow. Much of that body of knowledge has no link to the financial crisis and remains as useful as ever." (From the editorial…)
(And from the article The State of Economics …)
"It is, for example, often convenient to assume that markets are “complete”—that a price exists today, for every good, at every date, in every contingency. In this world, you can always borrow as much as you want at the going rate, and you can always sell as much as you want at the going rate.
Before the crisis, many banks and shadow banks made similar assumptions. They believed they could always roll over their short-term debts or sell their mortgage-backed securities, if the need arose."
Right, not much of a link at all …
Comrade Raithel
Harpo Marxist Brigade … signing off …
"the free-market paradigm does not work–without substantial state processes and institutions that impose restrictions on free markets–such as regulatory agencies looking out for consumers, anti-trust enforcement preventing singular companies from growing so large that they can have a systemic effect on the system"
I think of it like: The "free market" is a river and regulation is the levees and sand-bags which keep the river from overflowing into the surrounding civilization. If, like New Orleans, one ignores obvious problems with the levees, disaster will ensue. It does not mean the concept of a river is bad or useles. it means you need strong levees, and you need to pay attention.
I used to love The Economist, and it was one of two English-language magazines I splurged on for home delivery (US citizen living outside the US now).
No more. I didn't renew my sub. this year, and I truly miss their book reviews, science reporting, and small pieces about places and events most outlets ignore. But I just could not forgive their complete blindness towards and continued marginalization of the world-wide credit/securities disaster.
Really, those seeking reality and a clearheaded discussion of the (financial) truth have to piece crumbs together from dark corners peopled with Ayn Rand disciples and racist gun nuts [except for Yves and a couple of other bloggers]. It's a shame, a crying shame.
“What went wrong with economics” is: Economics lacks at least one fundamental foundation. Installing this fundamental will elevate Economics to another platform.
What is this fundamental? It is something that sciences cling on tightly, but economics does not. So, economics has departed from this fundamental, perhaps unconsciously.
What is it then? It is the Fundamental Axiom or Law of Causality, simply means: Cause gives rise to Effect, In = Out, Debit = Credit, a Source for every Outcome, etc which are common senses or self-evident truths.
Tell us in what way the Economics runs away from this fundamental? If you ask: You win, I win, everyone wins, who is the loser or provider of wealth? Most of economists will tell you that there is no loser. The Economics textbooks also say so. But it cannot be no loser, as it violates the fundamental Law of Causality. So, we must insist for the presence of loser, as dictated by the Fundamental Law of Causality. On this insistence, one great researcher by the name of HNM had successfully uncovered the mask of the loser after an effort of several decades. Needless to say, he has restored the Fundamental Law of Causality back to the economics and make it a strong and real science. Using his new theory, all events in the past or present could be explained with ease, and that it could even provide future policies and directions for our world.
If you are really interested to find out more, please write to me via my email: chinfuilan@yahoo.com