By Ed Walker, who writes as masaccio at Firedoglake. You can follow him at Twitter at @MasaccioFDL, and here’s his author page at Firedoglake.
The field [economics] is filled with anxious introspection, prompted by economists’ feeling that they are powerful but unloved, and by robust empirical evidence that they are different.
The Superiority of Economists, by Marion Fourcade, Etienne Ollion and Yan Algan.
I feel bad for these lost souls, the unloved economists, so I’ll try to help them understand why people don’t love them. It’s obvious that the principal reason is that economists refuse to take any responsibility for the Great Crash, despite the fact that it was their policy recommendations and justifications that led to the dismantling of the regulatory structure that worked for decades to prevent such massive disasters. They could have confessed that that they didn’t do a proper cost benefit analysis of the risks associated with their policies getting rid of Glass-Steagall, and ending aggressive enforcement of securities and commodities laws, and that they had absolutely no idea what might happen as a result.
But they didn’t. What they did was to define the debate over their failures as a question about their models. Here are some examples: Noah Smith, finance professor at SUNY Stony Brook, David Andolfatto at the St. Louis Fed, and Chris Dillow, economist and writer. Here’s one from December 2010, an interview with the neoliberal Gary Becker.
The gist of the defense is that it’s not fair to ask that their models predict disasters like the Great Crash. Here’s David Andolfatto:
But seriously, the delivery of precise time-dated forecasts of events is a mug’s game. If this is your goal, then you probably can’t beat theory-free statistical forecasting techniques. But this is not what economics is about. The goal, instead, is to develop theories that can be used to organize our thinking about various aspects of the way an economy functions. Most of these theories are “partial” in nature, designed to address a specific set of phenomena (there is no “grand unifying theory” so many theories coexist). These theories can also be used to make conditional forecasts: IF a set of circumstances hold, THEN a number of events are likely to follow. The models based on these theories can be used as laboratories to test and measure the effect, and desirability, of alternative hypothetical policy interventions (something not possible with purely statistical forecasting models).
That’s a pretty good description of the behavior of economists as described by Fourcade et al. They set up models and then tell politicians, central banks, legislators, regulators and all the rest of us how to behave and what policies are best.
But it turns out that not only are their models not going to give “time-dated forecasts of events” like the Great Crash, there are no circumstances under which their models will predict a financial crash until it’s upon us. Consider this paper from the staff of the International Monetary Fund. The abstract tells us “[t]his paper presents the theoretical structure of MAPMOD, a new IMF model designed to study vulnerabilities associated with excessive credit expansions, and to support macroprudential policy analysis.” They explain
As has been emphasized in a number of recent theoretical and empirical studies by the world’s leading policy institutions (see for example Macroeconomic Assessment Group, 2010), the critical macroprudential policy tradeoff is between reducing the risks of very costly financial crises and minimizing the costs of macroprudential policies during normal times.
The obvious implication is that economists never thought of using their models to figure out any of the circumstances under which those models would predict a crash. Worse, they didn’t use their models to estimate the cost generated by crashes until several years after their favored policies wrecked the financial system.
In this paper by Del Negro et al. of the New York Fed, the authors describe tweaks they made to a standard DSGE model and the addition of data as late as Fall 2008. Here’s their conclusion:
We show that as soon as the financial stress jumps in the Fall of 2008, the model successfully predicts a sharp contraction in economic activity along with a modest and more protracted decline in inflation. Price changes are projected to remain in the neighborhood of one percent. This result contrasts with the commonly held belief that such models are bound to fail to capture the broad contours of the Great Recession and the near stability of inflation.
The paper tells us that if you put in the data about a crash, their modes can predict the outcome. Of course, no one thought of doing that in the 20th Century when these guys were busy tearing down the regulatory structure. This model wasn’t even created until after the Great Crash, and it still won’t predict a crash; the authors had to put the crash into the data.
The plain fact is that economists converged on a set of ideas, perhaps because of the way the field is organized, as explained by Fourcade et al. Those ideas furthered the personal and corporate interests of the rich and of Wall Street, and drew their enthusiastic support. To these economists and their self-interested supporters, economic efficiency was so important that it wasn’t useful or reasonable to evaluate the costs of a crash. The US and other countries adopted their favored macroprudential policies, like getting rid of New Deal financial regulation. The result was trillions of dollars of damage. And how much were the gains from purported economic efficiency? And precisely who reaped those gains? And who paid the price? No surprises here: the gains, whatever they were, went to the rich and their friends on Wall Street, and the price was paid by the rest of us.
The problem is not that models created by economists didn’t predict this Great Crash. The problem is that the models are not designed to predict crashes. And even worse, they weren’t set up to evaluate the costs of events like the Great Crash. That means it was in utter ignorance of the costs of failure that economists told policy makers it would be great to get rid of the entire New Deal regulatory structure.
That’s one reason why people don’t love economists.
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People get no traction trying to ask economists to step outside of the Ivory Tower to see how citizens are coping in the real world. Controlling the terms of the debate means that there is no debating. What is the endgame for a group of economists that is intellectually bankrupt? Others throughout history have seen orthodoxy challenged with some resulting reformation or other updating of ideas. Why not the economics profession?
“What is the endgame for a group of economists that is intellectually bankrupt?”
Their heads on spikes. And I mean that literally.
I liked Taleb’s take: not to trust anyone who doesn’t have skin in the game.
The saying “A Fool with a Tool, is still a Fool” is proven by the reaction of economists to the Crash of 08. Their unwillingness to recognize their errors of theory should ensure that we ignore any and all of their pronouncements in the future. All models are based on assumptions so if the people making the assumptions are wrong then the models are wrong, no matter how fancy.
A Fool with a Tool is risky enough. As 2008 proves Tools built by a Fools are extremely dangerous!
Who thinks much about economists, and cares? Not many people.
Prior to the crash my own personal irritation with economists, particularly in the US, is the incredible confidence with which they approach subjects they don’t understand. This seems to be because they believe economics to be a *secret code to the workings of the universe*. I recall Bryan Kaplan, an extreme example, dismissing climate modelling because he had worked with economic forecasting models and found them wanting, and assumed this to be a sound way to judge climate models.
Hilarious given that economists cling to equilibrium models like a drunk to a bottle, while the rest of the world has moved on…
I think the better drunk analogy is the one about him searching for his car keys under the street light – not because he lost them there, but because the light is better.
“I recall Bryan Kaplan, an extreme example, dismissing climate modelling because he had worked with economic forecasting models and found them wanting”
When we are dealing with modeling a global system, it is profoundly more complex than a DSGE econometrics model. All the climate models predicted higher temps than we have now. The feeling now is that they did not factor in the albedo effect of volcanos like we had in Chile. Another classic failed model was Jay Forrester’s model used by Donella Meadows in her book “Limits To Growth”. It was written in the 70’s and predicted that by the 1st decade of the 21st century that the global economic system would collapse because of a collapse of the oil supply. GONG! If you are going to bet your house on something, make sure your decision is not based on the prediction of a model.
The problem is not just that the models fail to predict crashes: it’s that the policy recommendations that the models lead to were themselves the cause of the crisis. This goes not only for the recommendation to repeal Glass-Steagall (already a dead-letter by that time anyway, as Yves often points out), but also for the contractionary demand that the Federal government run “a balanced budget.” Let us not forget that the budget surplus under Clinton (which required a concomitant budget deficit in the private economy) was another direct cause of the financial crisis. And let’s not forget the policies of the Fed, which have been helpful in holding down wage “inflation” (known as “getting a raise” to us working stiffs), also bear some responsibility for the amount of pain experienced by the poor, who might have had more cushion to fall back on had they not been the decades-long victims of wage-suppression policies.
I graduated in 2004, and I well remember the triumphalist tone of most of my instruction at the time. The Fed had monetary policy down cold–systemic financial disasters were a thing of the past–2001 was just a blip and quickly recovered from. I was mocked by an instructor for raising the possibility of price collusion in an ostensibly free market. Global “free trade” would lift all boats, the Federal gov’t was finally spending responsibly, and they only fly in the ointment was the low level of personal savings, which a few of my instructors seemed a little distressed by. The only solution offered for that, of course, was for people to be more frugal, spend less of their income and not use their credit cards so much. The connection between public and private debt was never grokked by them at all, much less explained.
Nope, everything was just peachy with economic theory and policy, according to all but two of my professors: the commie and the libertarian…but the mainstream consensus was that anyone questioning the mainstream consensus was a little cuckoo. And then the crisis happened–caused by policies they had recommended–and they failed utterly to get the point…and then they b*tch about getting no love from the populace whose immiseration they continually justify…amazing.
+1000
I’m 58 and over the years I’ve watched economists promote every idiotic idea the business sector poots out. Working people would be so much better off without them.
Engineers don’t try to predict exactly when a part will fail, either. But they are modest enough that most designs include a “safety factor.” …Figure out how strong it needs to be and then make it it half again stronger could be their defining mantra. it’s not like they’re unfamiliar with the cost and performance cost of doing this…And they do sometimes get thing tragically wrong. But when that happens they either figure out where there mistake was or raise the safety factor to account for their inability to calculate. They don’t just say “not part of my model,” and drive on.
Economics used to be primarily concerned with political-economy, getting back to that would solve quite a few of our current problems, or at the very least, get us to a place where we can begin solving them.
Blaming economists for the crash is like blaming the piano player for your VD.
Those piano players were part of the gang that did the rape. Not even a condom among them, much less a “thank you for letting me service you.” They pulled the panties down and cheered as the First Team did its business, and did not hesitate to get on, get off, add their emissions to the mix, transmitting the social diseases that are still endemic to them since they reject even the idea that their precious fluids are polluted and they need a big-ass dose of politico-econobiotics…
Whorehouse piano players are paid by the house. They are there to entertain/distract the customers. They are not innocents. They are not part of management.
This is apparently all news to you
I haven’t ever patronized a whore house, especially one with a piano player, but I’ve seen enough to know how they fit into that particular “victimless crime” scene. I was commenting on what seems to me to be very wrong with that analogy. Economists are not “house-paid piano players, there to entertain and distract.” The ones discussed here are definitely disgusting parts of “management,” they clearly get a nice share of the take, as far as I can see, and they spend their off hours out in the street, touting for the clip joints next door.
As one of the incredible number of victims, let me assure you they did not assault us poor innocents from the front.
Dumb question: do economics departments offer courses in economic history?
Generally, no.
Good question. Once upon a time, the history of economics was widely taught. That’s not the case any more. As the teachers retired, they weren’t replaced at many US schools.
Mine did…one…but the prof. who taught it (my advisor, the commie) is retired now and I’m not sure if they kept it in the curriculum.
I was likely removed the day the prof walked out the door, and the board likely popped corks to celebrate the removal…
Interesting how the neoliberal grand bargain ( sic) includes this long term strategic move of removing from all curricula any insights and historical context that might arm the citizenry mentally against the long war attack on comity and decency. Ignorance is not bliss, it’s slavery…
I see those courses offered all the time actually, I’m not sure they are really geared to or a requirement for economic majors though so much as just offered for social science credits perhaps.
Dr. Michael Hudson makes the explicit point here that economics history was entirely stripped out of the curriculum of economics departments everywhere to make neoclassical economics seem like the only possible kind of economists that exists or ever existed. The disfavored economic ideologies (those that did not serve the interests of power nearly so well as the modern version of neoclassical economics) were largely buried:
http://www.extraenvironmentalist.com/2013/10/16/episode-67-bubble/
It’s a feature, not a bug.
Power tends to corrupt, and absolute power corrupts absolutely.
Too big to fail is yet another example.
Unfortunately, this doesn’t show up on IS-LM curves.
~
Economists are a joke, the come up with nonsense theories wrapped in mathematics that any real scientist/mathematician or engineer would laugh at. My cousin who studied chemical engineering at MIT and Yale says they would laugh at the econ students.
I think they are exacting revenge against a life and world that forbids them from playing in the ‘real’ hard and natural science sandbox.
Would that economists are a joke… I think they understand very well. They do as they are told, and they are paid well for it. If their theories are such ‘nonsense’, how come the big name economists are making big bucks, and the engineers are having their jobs outsourced and are increasingly underemployed?
‘Crazy like a fox’ doesn’t quite do them justice. ‘Stupid like J.P. Morgan?’ Help me out here.
It’s like the old joke about a mathematician, an engineer, and an economist being asked: “What is 2 + 2?”
Mathematician: 4.
Engineer: 4.0000 +/- 0.0001
Economist: How much do you want it to be?
http://globuspallidusxi.blogspot.com/2014/05/economics-is-to-economy-as-alchemy-is.html
http://en.wikipedia.org/wiki/The_Economic_Consequences_of_the_Peace
There are economists who can see the logical outcome of current policies, and there are economists who can’t see the logical outcome of current policies.
The difference today is that we seem to have a whole reactionary group that would argue that Versailles was waaaaay too soft and conciliatory…..
Counterweight Stacking: The Politics of Identity Projection & Association
Appearance, the basis of legal doctrine, the dress, is the poorest form of judgment, which is why equality under the law has such poor outcomes. The more laws the critters write, the further behind they get, always focused on the past, and extrapolation with dc computer scripts, increasing the efficiency, is no exception, to measuring the fall of the counterweight as work.
Knowledge, sharing perception to scale, the basis of public education, with the pretense of diversity based upon appearance, is even more suspect, because it multiplies the misdirection away from the shared behavior, resource exploitation measured as GDP.
Automating a dairy farm and converting the fertilizer directly to energy, for consumption in a city of growing gravity, trading currency for toys and ignoring the falling living standards, while blaming climate variability on symptoms instead of the resulting gravity, solves nothing for no one.
Controlling energy to maximize tax on inflated real estate, through Iran, is just the latest iteration, trading immigrants to deflate wages and feed the actuarial ponzi with poverty behavior. Politics is dirty work, but someone is going to do it, because that is the nature of gravity in the counterweight, expedient welding of the feudal state, as resource exploitation becomes increasingly limited.
Sometimes a problem is a solution. In the empire, the problem is always the solution, and it goes both ways. Learning to work ahead, and then go back to install the bridges, is the hardest lesson for most, who busy themselves rebuilding the first two bridges, as a make-work project, always repeating the past, with the latest and greatest technology.
The problemsolution is the efficiency of population density and the associated stupid SMART technology, not the absolute population of human biomass, which remains relatively trivial. Natural diversity is declining because empire behavior shorts it, layer by layer, as it sees them. Of course the critters need new infrastructure, but all they can do is go to the office, print and exchange paper, and pay automatons to do what they are told, increasing control in exchange for falling living standards, poorly hidden by inflation.
A complimentary marriage nets a new result. A contract marriage merely multiplies the existing result, with a more complex dress on an increasingly barren frame. Family Law exists because the majority wants it to exist, creating their own threshold to exit, waiting for Nature to respond at the aggregate level, when it is far too late, every time.
The females that take advantage when the law is geared against males, and the males that take advantage when the law is geared against females, are the monkeys. The males and females mimicking marriage to take advantage of their own, with event horizons by class, are the apes, black, white or pink. The Clintons didn’t invent the game, breeding ignorance to take advantage of it.
If you subsidize transgender psychology with equal rights and affirmative action, the expected result, do you expect more or less, and where must the additional work come from, other than a disappearing workforce replaced by technology, in a perennially bankrupt empire, welding the stack. In the beginning, the stack is dynamic and may be reorganized in real time, but America is not at the beginning. Haiti was no accident.
The work is carrying the growing dead weight up the hill and throwing it off the cliff, to raise your children, reorganizing the local counterweight component accordingly, and the politicians will pit gravity against itself for you if you let them. The money changers can no more replace labor with technology than they can replace the universe, by defining their knowledge as the universe, leaving nothing but the illusion of misdirection.
Instinct beats knowledge doctrine every time, because there is always much more you don’t know than you do know, even at the global organization level, and getting emotional about it only gets you one step further, in the drink, with blind trial and error. If all the doors are closed, you are looking at the past, with critters busying themselves with busy work. It’s the development of your instinct that matters, not the problem.
Have you ever calculated how much accounting labor goes into an oil well, and how much accounting money comes out in the duration mismatch, or what went into that Qualcomm spy technology, and what comes out in the form of patent accounting profit? Paying artists to paint portraits of cats, while collecting rent from below and paying rent up, blaming Jeb and Hillary for the outcome, is not a real economy.
Hitler’s voice was simply a function of gravity, resonating in the head of public education, depravity by bell curve, a roads scholar replacing intelligent labor with arbitrary doctrine, leading the so-manufactured majority into the black hole of stupidity. People serving a machine, for toys produced by that machine at an increasing loss, with mark to fantasy financial pricing, new empire always the same as the old, exploiting resources until it can’t, moving backward, is the counterweight.
The moneychangers have to print, in any and all cases, to maintain it. Where they print from, who writes the laws, and upon what theory, is of no concern to labor, because the outcome is always the same: media noise, feudalists chasing their own tale, and middle class war.
what do you suppose is going to happen as young people begin to ‘see’ the multidimensional re-generator in the economic motor-generator?
Goliath is getting beaten to a pulp, as he approaches the cliff edge, but he doesn’t ‘see’ it, yet…
I have come to understand that the majority of activity in the economics sphere revolves around grafting academic credentials to policies that elites want to pursue anyway. As a pseudoscience this is entirely possible of course, as it can be made to say anything, for anyone, without qualification. Throw in some fake math with a dash of pseudo-empiricism and you get a cultish ideology that taps into our cultural DNA, with the unexamined worship of “science” and “progress” that we have.
The overwhelming majority of those in our culture, in fact not understanding what science and empiricism and progress are despite having blind faith in these things, are uniquely susceptible to conceptual structures that have the trappings of such without the substance. Thus economics is a powerful religious tool deployed by the elites against this society that imagines itself to have no myths and no religion, and it serves as such in the narrative.
Probably, today even nearly all economists and elites who use them have bought into this economics myth that they originally made up and promulgated, despite all of it being complete bullshit. I think that’s as good a summation of the mass psychosis engulfing our zeitgeist today as any you’ll find. And it seems intuitively true to me that this kind of self-reinforcing delusional spiral happens in every age at some point, and sinks every civilization that succumbs to it. As for a gauge, the crazier and more detached from reality our elites and academics become, the closer we are to the fall. Economists play a central role in this story, and so of course those who have fallen off the industrial project wagon (soon to be the majority of people in America if not already) that still pretends to promise Good Things to All will despise economists–who are being seen more and more as high-priests of a delusional cult ideology/religion.
Seems that if one want sanity, Kingston is the only place to go right now…
The issue isn’t blame. It is authenticity.
Higher ed today, especially economics, is fake. It is (mostly) men of (almost always) small thinking pretending that they are giants, that they have some special insight into the world that renders them superior to people lacking the right credentials and connections.
Expecting a PhD to accept blame is like expecting an actor in a movie to break character and start playing themselves. It makes no sense. That’s not how the system works. Even if an individual actor rebelled, it would be meaningless, because that scene wouldn’t make it through the editing process into the finished product.
Authenticity as established by funding and money comports to truth….
Skippy…. when facts are for sale thingy….
Yep. although I might tweak it slightly that it’s not the facts that are for sale so much as the interpretation of what they mean. One of the ruts in which the system is trapped is that the actors go to extreme lengths to not technically lie.
Economists are a symptom of the American legal system. By that I mean our system of enacting and enforcing our laws. Remember, we have an adversarial system. Legislating and enforcing laws requires two “adversarial” sides who are required to consider the “facts” and then correctly decide who wins. Economists are merely one group who are instrumental in this scenario because when “facts” do not actually exist, so-called experts must be called upon to provide them (for a handsome fee, of course) so that legislators can legislate and the executive and judicial members can arrive at their verdicts. This is not rocket science. The nightmare we are living through is the inevitable result of gaming our legal system to focus on providing maximum benefits to the right players rather than society as a whole, and, as Bill Black points out in another post, those who cheat and game the system are rational players just responding to incentives, according to economists. Of course, a true professional who wanted to pass the laugh test while claiming to be an honest economist would correctly focus on those “incentives” when arriving at their theories. But really, why focus on making society better when society is just not inclined to pony up the fees demanded by the players. Also, most economists, and the rest of the beneficiaries of our legal system know too well that they would be biting the had that feeds them if they raise the issue of “incentives”. It is indeed unfortunate that the Founders’ much heralded system of checks and balances was destined to be thwarted by those who saw an opportunity to cash in at the expense of the majority. Right now we’ve got the fox guarding the hen house as far as making and enforcing our laws, and economists are merely making hay while the sun shines.
If capitalism is an inherently strong and viable economic system (and I think it is, or can be), it doesn’t need a constant stream of concessions and regulatory lenience. I think that the regulatory laxity of recent decades has hurt capitalism more than it has helped it, by permitting corruption and fraud to erode the efficiency of return for value (circulation of value), as well as the confidence of both investors and consumers.
Ecomomism is not economics.
They paid lip service to power – telling those in charge what they wanted to hear. Mutually beneficial. That’s human nature.
The disturbing trend in the western world is that these people, who are proven wrong, continue to wield influence on how society is run. This is more obvious in politics: the neocons being wrong on Iraq but continuing to call the shots and be the darlings of the MSM. Or the Danish PM wrong about WMD so let’s promote him to head of NATO! Likewise the media. How about all those terrorist attacks at the Sochi Olympics? How many of those journalist lost their jobs or were demoted for being wrong?
Like the multi-national corporations, our civilisation rewards obedience to power. Being right or wrong doesn’t matter. Thus our society is being run by incompetant order takers. Surely a sign of social decay if there ever was one.
Thanks, Ed. You’re are too polite in stating the obvious. The economists were paid for the models their funders wanted not for an accurate understanding of how the economy was actually operating. The followed the salary and career paths of folks like Friedman and Laffer and the folks who made the Fed more important than Congress to the economy. Sold out is too kind a term for the corruption in the economics profession.
I have a blog post that explains how to think about economic theories.
Constructing Models of the Economy
My undergraduate introductory courses in microeconomics and macroeconomics were very useful helpful to me. They showed me very quickly and plainly that I would be happier concentrating on something else.
In my memory, from Milton Friedman on, modern economic theory is a mere apologia for greed. You can’t do a straight sales pitch “Return to the Robber Baron Era” , so you have to gussie it up with “the Market” and “Them”.
Works like a charm. And oh, is it just me, or is Jim Cramer Wall’s Street’s circus barker?