By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.
We are in the midst of severe economic and financial crises. These crises have led to reappraisals of received economic and financial doctrines. The Institute for New Economic Thinking was established to challenge recent conventional (economic and financial) wisdom. Lord Turner did just that in a speech to the Institute’s inaugural conference. Even as I find myself in general agreement with Turner, I think that there are two areas in this speech where Lord Turner’s criticism is either too narrow in scope or overemphasizes one factor at the expense of others.
Perhaps it reflects Turner’s current position as a regulator, but in his speech he focused almost exclusively on the (micro) economics of markets and by implication suggests that the conventional macro wisdom is not in need of as rigorous a re-think.
Turner also describes a process by which economic and financial policymakers became prisoners of an ideology. I do not doubt that ideology has affected the evolution of economics and policy. However, I believe that Mr. Turner has underestimated the importance that macro economists attached to the elegance of their models and their failure to continuously verify the models’ accuracy and usefulness.
Turner On Economics
Turner attributes the crises to “..bad economics – or rather over-simplistic and overconfident economics–” I would have preferred he reversed the order, i.e., overconfident before over-simplistic. Simplicity is required in economic model building. Economic models, like maps, are useful because they are simpler than the reality that they represent. (Have you ever seen a map with a scale of “1 mile=1 mile”?) However, it is impossible to ex ante know with certainty if a model remains useful despite abstractions or is overly simplistic.
Given the dynamic and stochastic world in which we live, policymakers, traders and investors and other users of models face a sad truth: their models will not always be appropriate. The resulting forecasts, decisions and policies will produce results that would have best been avoided.
While macro-policy decision makers must be confident enough to make a decision, they must also be open minded enough to admit a mistake and correct it. They must trust their models, but they must also continuously verify their accuracy and usefulness. Much as the safety and effectiveness of drugs and medical devices are monitored even after they pass tests and are approved, macroeconomic policy makers should have actively explored the possibility that policies were producing unexpected and unintended consequences.
Unfortunately, while US macro-economists and policymakers were quick to take credit for the efficacy of policy in moderating swings in output and inflation, they dismissed the signs of unsustainabilities in asset prices, balance sheets and external imbalances. The unwillingness of policy makers to explore the possibility that they have made an error poses a great risk.
In the speech, Lord Turner’s relative emphasis suggests that he limits “bad economics” to microeconomics: “There was a dominant conventional wisdom that markets were always rational and self equilibrating, that market completion by itself could ensure economic efficiency and stability, and that financial innovation and increased trading activity were therefore axiomatically beneficial.”
However, to support the view that the dominant conventional wisdom was used to dismiss warnings, he cites the dismissal of warnings that were aimed at least as much at macroeconomic policy as they were at microeconomic-based regulatory policies: “..that dominant conventional wisdom was used to dismiss the concerns expressed by several commentators – by, for instance, Bill White in his BIS Reviews, or by Raghuram Rajan in his paper at Jackson Hole in 2005.”
As part of his “caricature” of the dominant conventional wisdom: Turner presents a set of four policy prescriptions, only one of which relates to macroeconomics: “Macroeconomic policy – fiscal and monetary – was best left to simple, constant and clearly communicated rules, with no role for discretionary stabilisation.”
This prescription appears on page two and is the last sentence in the fourteen-page speech which links to macroeconomics or monetary policy, although argues for enhanced regulatory regimes. However, Lord Tuner had previously linked the current crisis to macroeconomic variables:
“At the core of the crisis was an interplay between macroeconomic imbalances which have become particularly prevalent over the last 10-15 years, and financial market developments which have been going on for 30 years but which accelerated over the last ten under the influence of the macro imbalances.”
Given that monetary policy and regulatory policy are intertwined (monetary policy is in part transmitted the expansion and contraction of financial institutions balance sheets) and that macro-economic imbalances were at the core of the crisis, should not a new macro-economic thinking be as central to any new economic thinking as micro- or regulatory economics?
Turner is correct. There are decided shortcomings in conventional economic wisdom, but there are shortcomings are in macroeconomics as well as in microeconomics.
The Role of Ideology in Macroeconomic and Financial Models
Some economists are ideologues. I have no doubt that economists drawn to politics and policy areas are even more likely to carry ideological baggage than other economists, but it is a leap to assume that a “free market ideology” embedded in macro and regulatory economics was the driving force behind the crises. However, Turner’s speech suggest just that: “For it is striking in the pre-crisis years how dominant and how overconfident, at least in the arena of financial economics, was a simplified version of equilibrium theory which saw market completion as the cure to all problems…”
However, a desire for elegance and tractability on the part of macro-and financial model builders is a better explanation for the crises than is adherence to a free market ideology. Turner points out that economic equilibrium theory has not been monolithic. He notes that economists working in the area of microeconomics and general equilibrium theory (the presumed home of the ideology) and who questioned the conventional wisdom are viewed as stars by the profession (and hold Nobel prizes). On the other hand, he notes that economists (including Schiller, Rajan and White), who prior to the crisis questioned the conventional macroeconomic wisdom, were dismissed or marginalized by officialdom and the economics profession. The macroeconomic orthodoxy closed ranks, while equilibrium theorists have not.
While micro-based economists first assumed perfect knowledge and then explored the implications of relaxing the assumption, macro and financial economists assumed perfect knowledge and then added “rational expectations” which might more accurately be called perfect foresight. They have never looked back. Attributing clairvoyance to economic agents was not part of any received microeconomic canon or ideology.
Other sub-disciplines of economics are built on “market failures” and their implications, e.g., environmental economics is largely driven by market incompleteness. Hence if one is to ascribe failures of macro and financial economics to an overarching microeconomic-based ideology, one must explain why that ideology is reflected in those two sub-disciplines of economics but not in others.
Furthermore, there is a problem, even if one assumes that a free market ideology explains why the Fed and monetary economists did not feel a need to adjust the Taylor Rule in light of asset market behavior. Given that the exchange value of the Dollar was not determined in anything like a free market, adherence to a free market-based ideology cannot explain why monetary policy was not adjusted to reflect the unsustainable external imbalances and the impact of imported deflation on inflation.
Occam’s Razor suggests a simpler explanation is better than a compound explanation. There is a simple single explanation for failures of macroeconomics, regulation, and financial models: the model builders prized elegance and simplicity above all else.
Turner made note of Lancaster and Lipsey’s theory of the second best during his discussion of the fact that economists had recognized violations of the assumptions underlying the argument that markets promote optimal allocations of resources. Second best considerations support the thesis that simplicity and elegance were the principle drivers of choices made by the macroeconomic model builders.
Turner summarized Lancaster and Lipsey’s findings as: “Lancaster and Lipsey illustrated that if some markets were imperfect, then making other markets closer to perfect might not be welfare optimal.” Transporting Lancaster and Lipsey’s finding from the realm of general equilibrium to that of macro policy suggests the following: if some macro policies were sub-optimal, then making other policies closer to perfect might not maximize sustainable growth. In the current case, given the absence of any market or policy promoting external balance as well as a regulatory structure incapable of maintaining financial stability, a move to an otherwise more optimal monetary policy regime might very well be detrimental to sustaining trend growth.
Second best considerations inherently introduce a bewildering amount of complexity. Second best considerations preclude theory-based a priori judgments on the welfare and efficiency effects of policy regimes or change in policy. For the sake of elegance and to retain their influence over policy, macroeconomists of many persuasions went along with the herd and happily turned a blind eye to a series of market imperfections, second best considerations and disturbing unsustainable financial and macro-imbalances.
Many economists have promoted economics as a hard-mathematical-non-laboratory science such as astronomy and certain branches of physics. Unfortunately and for many reasons, economics will never have the predictive or explanatory power of astronomy or physics.
Astronomy and physics are simply bad role models for economics. (Medicine or public health might be better fits). Recognizing the short comings of the astronomy/physics paradigm, some economists are now focused on finding and using “natural” experiments, but it will be difficult, if not impossible, to find a body of “natural” macroeconomic experiments. This does not imply that macroeconomics is without value and good macroeconomic policy an oxymoron. It does imply that macroeconomics has been oversold and that macroeconomic models will never be in the set-it-and-forget-it camp.
Complacency and overconfidence are risks to good macroeconomic policy. Economists and policymakers must be open to any evidence that the economy or markets are adapting in an unforeseen and counterproductive manner.
Turner is correct in saying we need new economic thinking, but macroeconomics is as much in a need of a rethink as microeconomics and overconfidence in models is more of a risk than any ideology.
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This is all bullcrap for two reasons. If you are a student of the modern financial system, then “Stabilzing an Untable Economy” reads like a playbook for everything that has ever occurred during my lifetime. Minskey’s early chapters on bailouts, his analysis of the lender of last resort role, and his hypothesis on on the hedge, speculative and ponzi role of servicing debt are nothing new. Any anaylst that claims we need new macroeconomics need only go back to 1986 and hang out with Minsky.
If you’re not a Keynsian and you don’t believe the setup he laid out in 1986, which I think lender of last resort being his main premise, then you only have to go back to Hayek and Mises and decide that financing is not the end all and be, but capital misallocation dicates real financial cycles.
I’ve focused on Austrian economics, but Minsky was amazing. I have trouble differentiating from either thesis except that Minskey is a Keynsian and says that profits = consumption. A business will not build more unless she can sell first at a profitable rate. Austrians prefer the point of view that the business cannot generate profits because it is not profitable in the first place.
The only new macro we need is one that is based savings, not expectations. I’m an Austrian. We need a new macro that is not so scared that if stock prices drop capitalists will pull all investment so we cannot let stock prices drop ever again. We need a new macro that creates capital investements that are more profitable than a zero percent interest rate so that we can not be so scared of interest rate increases. The only macro we need is real macro, not fudged macro.
Scott
A few… philosophical/historical comments about this post.
It appears that the word “ideology” is gradually taking on negative connotations…
I was trained as a shrink (have now abandoned my practice), and I feel… qualified to say that our ideas and our beliefs are behind EVERYTHING we do.
Our ideas and beliefs are behind our thinking about the economy, which means initially, the life of the house.
Since the 18th century at least we have been involved in increasingly compartementalizing our thoughts, while constituting “objects” of study that we then proceed to treat under the illusion that we are being.. objective.
The ideology behind THIS process is called.. scientific materialism, by the way. It has been written about. (Theodore Roszack, for one.)
Thinking that we are being.. objective about anything allows us to illude ourselves about our beliefs in scientific materialism.
What intrigues me in your post is your observation (!) about elegance and simplicity (to a lesser degree…).
These two qualities, where I come from are prized in…. geometric demonstrations. Mathematical models. (There is great hubris here, but I won’t go into this for now.)
Question…
SHOULDN’T WE OPERATE A SURGICAL CUT between mathematics and economics ?? Get rid of our mathematical models IN THIS DOMAIN ?
Isn’t the IDEOLOGICAL assumption that mathematical equations and economics make comfortable bedfellows one of our major problems at this time ?
I will leave you with one last observation :
A very careful, and thoughtful reading of the… GOSPEL will put into your hands most, if not ALL of the IDEAS any economist needs in order to think about how the economy works.
Careful, now. I am NOT a Christian.
But I have read my Gospel.
Logical that the Gospel should talk about the life of the house, now, isn’t it ?
Another little laboratory for how the economy works (and why it DOESN’T work…) can be found in Shakespeare’s “The Merchant of Venice” for those who enjoy their poetry too.
Too bad that the people who call themselves “economists” often do not have access to a literary culture. The result of all that.. compartementalizing, now, right ? And “ideas” about what has “value” and what doesn’t…
“SHOULDN’T WE OPERATE A SURGICAL CUT between mathematics and economics ?? Get rid of our mathematical models IN THIS DOMAIN ?
Isn’t the IDEOLOGICAL assumption that mathematical equations and economics make comfortable bedfellows one of our major problems at this time ?”
In other words you want to abandon the ideological assumption that math is useful in economics by substituting your ideological assumption that math is _not_ useful in describing economics.
Of course we could do something really wild and empirically test whether certain mathematical hypotheses provide a useful description of economics in our society, but that would be “scientific materialism”. Alternatively we could abandon that approach and treat economics as a cult, but lots of economists already do that.
Hmmmm….”useful”? Rather a loaded term, ehwot?
Kinda assumes the answer, if ya ask me…tell me, what is useful in art? Or beauty?
As to economics vs. math: aaah, for the days of “political economy”….
Debra: “illude”? I think it’s “elude”.
Thanks for the posting and I want to support your call for a structural review of the underpinnings of macroeconomics.
It has been my position for some time that “free market” capitalism is a faith based ideology that consciously aligned itself with the fundamentalist faith based Xtians to set social and economic policy. IMO, most macro models are props for the support of that ideology rather than ideology neutral models.
I believe that society needs to initially deal with the dissonance caused by the ideological split between the desires of the worlds masses and those that own all the world wealth and control all the world governments and institutions.
I have a hard time believing there is a middle ground between these ideologies and so macroeconomic “thought” will continue to support the current class structure or evolve to support a more egalitarian and humanistic socio-economic structure.
As a member of the underclass, I vote for the latter.
Hmmm… the desire of the world’s masses…
The concept (or idea…) of mass is a totalitarian one to begin with. Count ME out of totalitarianism in WHATEVER form it may take.
My long term study of belief induces me to… believe that there is no way we can escape belief.
But… belief without faith, that is a problem.
The social contract is underpinned with faith.
Fiat money is based on faith.
No faith… no economy.
Now… WHERE are you going to put your faith, and WHAT are you going to believe (in) ? American coins and paper money STILL have… “In God we trust” marked on them. Anybody here want to take that off, by the way ?…
Big questions for our time.
Free market capitalism is based as much on social darwinism as it is on the… Protestant work ethic.
And social Darwinism is structured around..despair and self hate.
I strongly recommend that everyone here start cracking the history books a little bit to see where our civilization comes from.
You sound like a flower child Debra. :) You’ll never tame the dragon of thanatos without money and property. And as a pyschologist you know that. It needs to be channeled with totems and taboos that don’t involve sacrifice or slaughter or scapegoating. Like training a horse. In other words, conscience and consciousness need to be imbedded, through processes that are fixed in the noousphere and that energize the morphic fields, into every financial transaction. This is what Jesus was saying. I’m a Professor of Contemporary Analysis with a practice in communal therapy at the University of Magonia. It’s like wrestling with a damn greased pig.
-Professor DT Tremens, PhD, BA, GED
“You’ll never tame the dragon of thanatos without money and property.”
Is it tamed? Was (is) it wild amongst those without money and property, such as the many variants of hunter-gatherers and the people of St Kilda?
“It needs to be channeled with totems and taboos that don’t involve sacrifice or slaughter or scapegoating”
Don’t we have all those things with money (in your order translated to: poverty, war and politics)?
Why must there be ignorance and ‘low’ civilization without money and property?
Innocent questions by the way, though biggies. I certainly can’t find the answers in my thoughts…
I have elaborate theories about this that get kind of complicated. I may be wrong, or my thinking may be incomplete. There are certainly small tribal units in history that have transcended, although most tribes will eventually collide in genocides. And the ones that transcended did so at a tremendous cost to creativity and interpersonal freedoms (like the small island that Jared Diamond describes in his book Collapse that somehow existed for a few thousand years in pretty much a state of permanent peace, but with totems and taboos that we’d find more than onerous).
Western Civ is far too far gone for that. In our mythology, Prometheus stole the fire from the Gods and we pay, still.
My school of thought is informed by the perception of the procession of metaphors and their energetic relationships. There I find that barter = exchange of creativity and nurturing = exchange of spirit = substitution of spirit with money where money = spirit = property = force = protection, just as particle = wave = energy = force.
And so the manipulation of money is metaphorically equivalent to the manipulation of the spirit of a society and the illnesses of spirit manifest in the illnesses of its financial system. Clearly there is causation in the other direction. This is not a Cartesian analysis.
Since thanatos is constrained both by spiritual awareness and force and protection, it’s inextricably intertwined with the manipulation of money and property in a “enlightened” for lack of a better word, way.
I admit this all may come across as metaphysical mumbo-jumbo, but it’s like a form of drawing or painting. It’s not reality, or even a model of reality, but it is a representational system that can provoke insights about reality.
Fascinating answer, resonates strongly with me. And don’t worry, I’m very drawn to metaphysical mumbo jumbo (I mean, what’s matter anyway?).
“barter = exchange of creativity and nurturing = exchange of spirit = substitution of spirit with money”
I don’t think exchange of sprit necessarily = subsitution of spirit with money, more that it can = such a subsitution. We two, for example, are using language (and other technologies) to exchange creativity (our ideas) with one another, and I find it ‘nurturing’ (or interesting). There need be no money to affect this. Indeed how could we put a price on this transaction/exchange or quantify it at all, and where is the true ownership? Do we ‘own’ our ideas?
As best as I can tell we have ownership and money when there is scarcity to be dealt with. Money solves the problem of scarcity, on e a functional level anyway. The downside is when scarcity becomes an economic good where abundance (say in water and good food) might well be a societal good. I think we’re at that crossroads culturally. We need a new relationship with money or a new money that can cope with abundance levels than render the need for an exchange medium like money redundant, a catch-22. But this is long term stuff, and most people don’t want to consider it.
A second problem with money is distributing it. With language as medium for the distribution of ideas and other things there seems to be great adaptability and abundance, and no ownership necessary. Hence (questions of class and education to one side) no real problems with entrnched divisions, hoarding, wealth-gaps etc. Money is a different type of medium, predicated on scarcity and property. Being rich is better than being poor, by definition, hence hoarding and social classes. You also need something like waged-labour to get money out there to the consumers. Hence things like technological unemployment, hoarding, debt and so on are problems particular to money, not to mention other worrisome side effects like perpetual GDP growth. So, in my book money is a problem, only, how to address it…?
“Given the dynamic and stochastic world in which we live, policymakers, traders and investors and other users of models face a sad truth: their models will not always be appropriate. The resulting forecasts, decisions and policies will produce results that would have best been avoided.”
This is something that Yves mentions repeatedly, in Econned and here at NC, and it is a very important point. Deciding how best to organise society can only ever be experimentation of the most delicate and serious kind. We don’t have a test-planet populated with identital test-humans and kitted out with test-infrastructure on which to do our modelling. When we model, our models can only ever be populated with assumptions, and as we try to remove ‘value’ from our hypotheses, so we strip variables and real-world phenomena from the process. We’re damned if we do and if we don’t. How can we be ‘scientific’, ‘objective,’ ‘rational’ and ‘bipartisan’? It’s not possible. The Great They muddle through and make best efforts to present their muddlings as ‘The Only Way’.
“Some economists are ideologues.” How can an economist not be an ideologue? Economics is about the distribution of scarce goods and services, but along what lines? Well for societal good of course, but what is societal good? And should ‘efficiency’ be the ultimate goal of markets? What of redundancy, resilience, and diversity, all key elements of sustainability.
“However, a desire for elegance and tractability on the part of macro-and financial model builders is a better explanation for the crises than is adherence to a free market ideology.” This seems to me an unhelpful casuistry. The ideology of ‘free markets = freedom = democracy’ is precisely the driving force of recent crises, but has its roots deeper still, in things like elitism, scientism, and the liberal philosophies of the last few centuries.
“Occam’s Razor suggests a simpler explanation is better than a compound explanation. There is a simple single explanation for failures of macroeconomics, regulation, and financial models: the model builders prized elegance and simplicity above all else.” A strange conclusion: the simple explanation as valid and damning critique of a discipline guilty of wilful adherence to simplicity.
Neoclassical economics has needed and indeed taken a sound beating for decades, yet soldiers on regardless. It is the heavyweight no outside blow can put down, because it is the ‘natural’ outgrowth of centuries of skewed thinking. It is now slumping to its knees as a consequence of inherent failings. Its prescriptions, predictions, assumptions and proscriptions have generated a mess it simply cannot undo. Sadly, its advocates have been stupendously successful, so we have a culture reluctant to read, and perhaps even incapable of reading, the writing on the wall. Much of what has been built on neoclassical foundations still — more or less — ‘works’, and those who enjoy the job of maintaining this particular status quo will not give it up without an almighty struggle.
And all this in the context of ever deeper and more complex interdependencies, at a time when the nation state is itself becoming an anachronism, as nationalist fervour rears its ugly head in the confusion, as communication technologies bring us closer together while keeping us more apart than before, and the information flow becomes a blizzard of unmanagable proportions. This crisis has more than economics at its core. This is a paradigm change never before experienced in human history. I’ve not mentioned it in a while, but technological unemployment is going to rear its head too. Then there’s the biosphere, fossil fuels, money itself, debt, politics, and so on. Who on Earth can gather together all relevant threads and out of them weave a convincing story of what is happening, and how it will turn out? Economists? Politicians? And if anyone managed, how many of us would understand or agree? How can a new consensus emerge prior to collapse?
We will tumble down the scree of this collapse, at first so slowly we’ll see it as progress or at least managable, then increasingly quickly until we lose control. After that it’s anybody’s guess.
Marxist economics didn’t work out so well so it was coated with a Keynesian patina. That’s also not working out so well, we new a new color. What color will it be? George Soros will help us choose a new lipstick for the pig.
What do you suggest? Re-instating the Hapsburgs?
I am currently reading Jacques Barzun’s “From Dawn to Decadence, 500 years of Western Cultural Life”.
I humbly think that Jacques (and Toby) are right, and that we have currently reached the endpoint of the playing out of RENAISSANCE thought and ideas in our Western civilization. (They are… sputtering out now. They can’t muster or bolster any FAITH in us any more.)
That goes a long way back, you guys.
Way back past Freud, by the way (and I am NOT a psychologist…).
The good news (!) is that our civilization is NOT JUST built on Renaissance ideas… we are just starting to open up that much maligned black box that we formerly called the…”Dark Ages”, and finding some exciting.. spiritual nourishment there.
Whew. About time the wind changed.
As Toby mentions elsewhere, the bankruptcy of Renaissance thought is going to toss us on tempest torn seas, but… maybe we’ll pull through.
Cynicism is our WORST ENEMY.
I underestimated you. I thought you were just going to throw away everything from the Enlightenment on, but you want to throw out the Renaissance too.
Alas cutting edge economists have already beat you to it. They have reverted to the faith based approaches. My problem with that is not that I don’t believe in faith, but the restrictions I place on it go back much further (3321 years to be precise):
“I am the Lord your God … you shall have no other gods before me. You shall not make for yourself an idol … You shall not bow down to them or worship them”
Wantonly un-empirical economic thought may not be as bad as a golden calf, but I’ll avoid it just the same.
alex, you sound like a wise cracking kind of guy.
As it turns out, you quoted one of my MAJOR objections to monotheism.
I said way up there that… I was NOT Christian in any classical sense of the word, and I’m certainly not Jewish either.
But I STILL hold that the Gospel is a good read on economics.
And it works.. EMPIRICALLY too, while we’re at it.
I’m NOT living in the U.S., and haven’t been for the last thirty years so your.. assumptions about who I may be will NOT pan out for you.
If you care to address your… obvious PREJUDICES, that is…
“you sound like a wise cracking kind of guy”
I’ve been a Wise Alec all my life.
“I said way up there that… I was NOT Christian in any classical sense of the word, and I’m certainly not Jewish either.”
Nor did I say or assume that you were. What’s your point?
“And it works.. EMPIRICALLY too, while we’re at it.”
Empirically? Sounds like you’re a prisoner of Enlightenment or Scientific Revolution era thinking.
“I’m NOT living in the U.S., and haven’t been for the last thirty years so your.. assumptions about who I may be will NOT pan out for you.”
Again, nothing I wrote in any way assumed you were in the US. I don’t think that your religion or country of residence is relevant to this discussion, but if you do why not stop trying to sound clever by being mysterious and just state it?
“If you care to address your… obvious PREJUDICES, that is…”
You also have to work on your overuse of the CAPS LOCK key. Probably a PREJUDICE of mine, but it’s a sure way not to be taken too SERIOUSLY.
You’re right, wise Alec, I am an (almost) PURE PRODUCT of scientific materialism. How could it be otherwise ?
Gotta be careful about mirror image thinking, though.
Matching MY extremism (good point about cutting out mathematical models) with YOUR extremism (BAD point about dumping on the Renaissance because I was NOT talking about abolishing Renaissance thought, it is… imploding on its little old lonesome without “my” (hubris…) having to do anything at all to help it along) will NOT further the discussion.
Look at how much irrational polarisation is going on in the blog comments, and on the blogs. “Rational” thinking is in a bad way, Alex.
Go ahead and disqualify my thinking all you like.
I’m NOBODY.
Think again before disqualifying Jacques Barzun’s thinking.
He’s a historian of ideas who’s been hanging around down below here for 113 years now, and is a much better… scientific materialist than I am.
FOR THE CAPS ?
Most of the people on the blogs I hang out on have got used to them.
THEY have learned that I often say something… that makes them think.
And.. THEIR prejudices don’t get in the way either.
YOU might be interested in something I wrote on my shared blog called… “Reality Check : HOW are you reading these days ?”
i should go back and read it every day to remind myself, and check hubris, too…
C’mon Richard, you’re talking about one of the most fundamental problems of humanity: When to abandon a model.
Every model will provide some kind of template or prediction of the world we live in. Some models are math based, some are evidence-based and others are tradition- based (like a religious belief system). But they are all models.
A model is only useful if we can rely on it as the real world goes about its Brownian leaps. At the core, models rely on some type of reversion.
As a result, all models face a crisis of faith or a stress test. During these times, the fundamental question is: Will the messy real life revert back to what my model expects?
If reality does revert back, we reasonably continue relying on that model.
At some point, the model may prove to be deficient or antiquated. Along the way of realizing that a model is broken, however, we will find ourselves in a familiar position of stress and crisis. Since the model has served us well in the past, we go with it.
But we don’t realize model deficiencies until it’s too late. And that stinks.
But what’s the alternative?
This issue is fundamental to all of us. But you’re throwing it out there…as if the resolution to this timeless issue can be accomplished by a think tank.
As the first Commenter pointed out, Minskey was all over this. Our models, “which make things stable”, end up making things terribly unstable.
This crisis is not about over-confidence on our models. It’s about refusal to take our medicine when our models inevitably break down. [Which is what breeds the over-confidence to begin with, as there are no consequences our model reliance.]
If anything, this crisis is about a lack of confidence. When the dot.com crash occurred, and Nasdaq was chopped at the knees, we panicked and over-reacted. “We cannot deal with a recession of this magnitude. We’ve got to do something!”
So we did. 0% interest: Now there’s a model which will temporarily paper over the deficiencies of all other models….]
We refused to accept the fact that models break down and cause a mess. We refused to accept the stress that comes along with all model failures. And…here we are.
We need to take our medicine after the first failure and avoid the temptation of the models which are nothing more than “extend and pretend”.
More drivel from Alford
Alford again directs our attention away from the true problems. Now its the grunts, stupid! If only they built better models we wouldn’t be in this mess . . .
Alford, its your friends on Wall Street cheating the system (i.e. all of us) by buying the regulators and the politicians.
That’s recursive logic. The purchase was, itself, financed by the models. :)
OT:
Another good one from the Onion…. Funny…!
“… White House Jester Beheaded For Making Fun Of Soaring National Debt
MAY 25, 2010 | ISSUE 46•21….”
“….Tensions rose when a happily beaming Obama demanded to be riddled. After a string of well-received topical posers, Motley asked the following:
A pocket-hole that grew so large,
A giant couldn’t eat it.
A cache of gold that never was,
But nonetheless depleted.
When the President confessed to being stumped, Motley revealed the answer to be “the National Debt, of course.”
Witnesses said Obama’s mood immediately darkened and, pounding on the arm of the Presidential Throne, he demanded new jesting. After nervously clearing his throat, Motley was heard to ask, “Wherefore is the National Debt like a sprouting leaf of spinach?” When a glowering Obama demanded the answer, Motley stated, “For it shall rapidly grow into something our children cannot bear.” …..”
Best regards,
Econolicious
Here’s the link……
http://www.theonion.com/articles/white-house-jester-beheaded-for-making-fun-of-soar,17495/
“…. At this, Obama reportedly dropped the large turkey leg in his hand ….”
Eco
Almost as funny as (G + something) = (S + something else) – NE
Gotta love economic humor!
I just heard this Abraham Lincoln quote and thought it appropriate to this discussion:
“The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion.”
Interesting use of the word “with” there. Hints at a knowledge on Lincoln’s part of how bound up we are in events, not masters of them.
I just want any economic “model” to account for the reality that the smart amoral scumbags eventually get all the loot. Something like:
Assuming I pull a smart amoral scumbag out of my ass, it follows that…. (fill in HUGE amounts of BS here) … the smart amoral scumbag (which I pulled out of my ass) has all the loot.
Is that sooo hard?
Not for long they don’t.
Perhaps your attention span is too short?
In true scientific materialist fashion, I find it EXTREMELY interesting that the corruption soapbox monopolizes all the (irrational…) discussion.
Corruption has been around since the Paleolithic at least.
What is interesting is… WHAT makes us suddenly develop a flaming allergy to it, and get all worked up about it ?
The timing of the outrage, if you like ?
As I am sure you are aware, one of the touchstones in mental illness of whether you have the trait or the disease is how it impinges on or inhibits normal functioning. It is the same way with corruption. What is different now is that corruption just produced the second most severe financial shock in our history. We have seen banksters lose trillions in pervasive frauds. Then essentially using their capture of government to steal trillions more from the public. They remain unreformed and the system will blow up again, sooner rather than later. What we have is not the trait but the disease. As I have said before, we have a system that can not last and elites that can not reform, or perform even minimal levels of governance. That is what is different this time around.
It seems to me that the ideology that economics is wedded to is that of steam age mathematics.
We hear of new supercomputers being built for nuclear fusion modeling, weather modelling, and climate modeling. Where are the supercomputers for world economy modeling?
Q: what do nuclear fusion, weather, and climate model NOT have to take into account that economic models do?
A: Dumbasses and the smart amoral scumbags that manipluate them.
Economics isn’t science just becuase it has lots of numbers.
It is as much as science as politics ever was.
“A science” not “as science”. oops.
Why do we need models? You can understand the ideas of Keynes, Fisher, and Minsky without having to stick them in a model. They are really mostly astute observations.
Personally, I think it is much more useful to study how markets/the economy, policy, and politics interact to gain an understanding of what’s been going on for the last 30 years. To this end, I would note that any theory that ignores the construction of the paper economy, 30 years of flat wages for most Americans, and the massive maldistribution of wealth upward during that period with its legacy of debt, malinvestment, bubbles, and political capture is worthless, good only as a source of publication for another tenured generation of academic economic witch doctors.
“However, a desire for elegance and tractability on the part of macro-and financial model builders is a better explanation for the crises than is adherence to a free market ideology.”
I don’t know which is more damning of the economics profession. Suggesting that many economists have a core set of unquestionable beliefs that are nevertheless presented as science (Turner), or suggesting that economists are mathematicians that are too stupid to realize their technique drives their conclusion (Alford).
Just to cover my bets, I’d like to suggest both Turner and Alford are correct. These don’t need to be mutually exclusive positions.
“Astronomy and physics are simply bad role models for economics. (Medicine or public health might be better fits). Recognizing the short comings of the astronomy/physics paradigm, some economists are now focused on finding and using “natural” experiments, but it will be difficult, if not impossible, to find a body of “natural” macroeconomic experiments. ”
Why, no, not difficult at all.
Our economy functions with remarkable parallels to a natural system — a large eco-region of forest, subject to variable weather over years, with natural fires and human interventions against fires (fire-fighting that allows undergrowth to build up). The results, over decades of time, are quite similar to our economy.
Actually, physics and astronomy could be useful models – economists just stopped halfway in their desperation to become a science.
At least in physics, you check whether your models (i.e. your approximations) are valid and accurate to within the degree required. For example, when you approximate a planetary orbit (ellipses) by a circle, you check to see whether this approximation is not too horribly bad.
I think economics adopted the math focus, but not the reality check.
But of course math works a treat when you assume “rational expectations”. You can “prove” all sorts of wonderful things, never mind how awful the original assumption.