I once asked my friend who’s a higher-up at a hedge fund if he thought that markets were rational. He told me “No one in the financial world believes that markets are rational.” It’s always been surprising to me that professional economists do. Krugman (h/t Atrios):
As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.
Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.
I’ll spare you the details of my theory that many economists like the idea of high-powered math because they’re failed mathematicians, partly because you might find it offensive and partly because it doesn’t fully explain the problem here. Our society, especially its elites, has some weird fixation with the idea that we’re the best of all possible societies. Our markets work perfectly, we have the best healthcare in the world, and soon history will end as the rest of the world emulates our perfect societal system.
I could go on and on, but I’ll stop. The point here is that it’s hardly surprising that the same people who believe American society is the ideal final state for civilization would also have childlike naivete about how well markets work. Economists are especially disposed to believe all this crap because they’re paid so well. When you’re paid 300K a year to spin fantasies, it’s pretty easy to believe that you live in a perfect world and that your beautiful fantasies are the truth.
ominira
How exactly does one hedge fun?
DougJ
How exactly does one hedge fun?
Enjoyment derivatives?
Thanks for catching the typo.
Mike G
“It is difficult to make a man believe something when his paycheck depends on him not believing it” – Sinclair Lewis
The sceptical economists who saw the complexity and doubts were weeded out of those plum jobs long ago by the same Wall Street pollyannas who plunged the economy into a ditch with their can’t-lose fantasy debt instruments.
dan robinson
Jesus marry Joseph, yes.
What we should be talking about right now is the failure of capitalism. Capital is selfish and not at all interested in social stability. As an example of the failure of capitalism, look to cell phones in the US and the rest of the developed world. The amount of money, per user, invested in building three different cell phone networks here in the US over the last 25 years is far greater than the rest of the world. US consumers pay more for cell service than other consumers and service is not as good.
Cell service was a replay of the burst of rail road companies in the mid 1800’s where US had more rail capacity than the rest of the world put together, but there was no standard gauge.
We should be analyzing the failure of capitalism and trying to find ways to use the solution finding nature that can be driven by investment while reducing the negative social impact of unfettered capital.
r€nato
I think I read that two or three evenings ago and loved all 8 pages of it. My favorite part was the economists who believed that high unemployment could be explained by workers voluntarily choosing to go on vacation – “gone Galt” – rather than work.
Ann B. Nonymous
Not failed mathematicians, failed physicists. For a barely empirical field, there’s a crazy emphasis on microfoundations. Krugman’s “freshwater” school of macroeconomics comes out of an attempt to reconcile macro with “understood” foundations, the way a condensed matter physicist or a physical chemist might use quantum mechanics to describe a new phenomenon.
But economics is at a level comparable to early 19th century chemistry. It works, it’s a vast advance, it’s at least semi-numerical, and it helps the human condition significantly, but it’s a long long way from being an accurate representation of reality.
It’s endemic to the social sciences. Google “Physics envy.” Randall Collins, who is a remarkable sociologist, has purple passages of physics envy throughout his recent work.
jwb
It depends on the level you apply the rationality. That is, I wouldn’t say that long term the market is completely disconnected from any sort of rational pricing. (That’s why we can identify an event as a bubble in the first place.) But, yes, surely much investing involves making bets on what you believe others believe about the beliefs of others, and you can go broke waiting for the market to align rationally with fundamentals. (It can also be a completely rational act—and you can make a lot of money—investing in an inflating bubble and selling in a deflating bubble even if your buy or sell price is disconnected with what you know to be rational pricing. Of course, you can also lose a lot of money if you misjudge the market turn…)
DougJ
Not failed mathematicians, failed physicists.
In terms of their actual professional lives, yes. But a lot started out majoring, or trying to major, in math.
It’s a fine distinction anyway.
Walker
Spoken like a true (well-trained) mathematician. I met many of these when I was an undergraduate math major.
Eocnomists still cannot get over this whole map-territory thing.
DougJ
That is, I wouldn’t say that long term the market is completely disconnected from any sort of rational pricing.
Yes, I agree completely, as does my finance friend.
Steeplejack
This bugs the hell out of me, and Greg Mankiw is the worst. He is always writing blog entries in which he threatens, or considers, cutting his “work output” because of some policy or proposal he disagrees with, and he dresses it up with all sorts of “logical actor” chrome and tail fins. Instead of being impressed by his intellect, I am always stunned that he is apparently so far from the end of the food chain where most of us live that he is almost completely out of touch with reality. Anybody here work a job where they can tell the boss, “This new tax policy is going to hit me pretty hard, so I’m going to have to reduce my productivity 10 percent to adjust things”? Okay, maybe Church Lady.
I couldn’t remember the particular incident that really irked me, didn’t think I could find it, but I got on the Google and found this one in about five seconds. It’s not from Mankiw’s blog (there is a link), and it’s funny to see the commenters rip him up and down.
And I will say it’s not just economists who are out of touch. The top 1-5-10 percent (not sure where I would draw the line) have become so cocooned that they think their reality is the reality. We all do that, to a certain extent, but most of us get forcible, uninsulated reminders of how things really are.
JackieBinAZ
The law of supply and demand once attached a cash value to THIS. How rational is that? (crossing my fingers that the link works)
DougJ
Walker — I like that map-territory thing. I haven’t heard of it before, but it’s very apt.
JackieBinAZ
Yay!
corwin
The problem is this: From the end of WW II until the early 70’s, the interests of capital, labor, and consumers were relatively well aligned. You could not have one do well without all three doing well. Since then, capital has flexed its muscle to the point that capitalists can be very successful, hyper-successful even, without providing much of anything to labor or normal consumers.
As things stand now, capitalists are behaving extremely rationally, but only for themselves. Making millions by any means necessary is a rational pursuit. 99.9% of us must deal with this problem, and are having a harder time doing so. Stagnant wages, outsourcing, and the like are all in the interests of those in the top 0.1%. Unfortunately, those who are in a position to do something about it, our elected representatives in government, have fallen into the pockets of that 0.1%. They also are acting in there own rational self interest.
Ann B. Nonymous
And since you’re a mathematician, you might want to look up Saari’s papers on the instability of economic general equilibrium models (known to exist since the 1960s, but ignored in a “oh I’ll clean the garage next weekend, hon” sort of way).
Economists in the know now appeal to game theory instead, but since their results are all variations on fixed point theorems, it doesn’t really fill me with confidence.
comrade scott's agenda of rage
First, John, I would not be offended.
Second, my wife is an actual phycisist. I posed this question to her and her reply was during her undergrad days, the only people she knew who couldn’t hack physics instead went into engineering. She knew of nobody who bailed to become an economics major.
Third: the economists Krugman rightfully blasts are shitty historians, particularly economic historians. All they had to do was look at the history of capitalism in the USofA to see the endless stream of bubbles, busts, bank runs, panics and generally every other example of *irrational economic activity* that culminated in the Great Depression.
Assholes all starting with Greenspan and the rest of the Randian fucktards who gained way to much influence starting in the late 70s.
scarshapedstar
Okay, I give up: what’s this got to do with Keats?
jwb
@corwin: Don’t forget, however, that to the extent we chase performance in our pension funds, retirement accounts, mutual funds, etc., we are representatives of capital.
DougJ
Okay, I give up: what’s this got to do with Keats?
Ode on a Grecian Urn.
“Beauty is truth, truth beauty,” – that is all
Ye know on earth, and all ye need to know
MikeJ
@scarshapedstar:
‘Beauty is truth, truth beauty,—that is all
Ye know on earth, and all ye need to know.’
Or not.
jwb
@comrade scott’s agenda of rage: Wall Street recruited primarily out of the ranks of the physics post docs. And, no, they didn’t necessarily recruit the “failed” physicists; they could buy pretty much anyone they wanted and I have acquaintances, who are current Ivy league physics professors but were turned down by Wall Street for positions such as these.
SGEW
Actually, I thought it was a reference to the “a thing of beauty is a joy for ever: its loveliness increases; it will never pass into nothingness” line.
MikeJ
@SGEW: Krugman’s title for the first section is “Mistaking Beauty for Truth”, so I think the Grecian urn is more likely,
SGEW
@MikeJ: Aha! There you go.
ricky
When something is going to make me mad and doesn’t fully explain things, plese provide me all the details. It is what keeps me reading about Sarah Palin.
Brick Oven Bill
Tractors were responsible for women’s suffrage, as they unleashed hundreds of millions of years of solar power into the fields, freeing men from physical labor and creating excesses of wealth. In an era of excesses, men’s good angels tend to spread wealth to ever increasing numbers of their fellow men, including empowering women.
But this was a mistake for humanity’s best interests, as females are by nature nurturers. Nurturing is incompatible with sustainable government because man is also, by nature lazy. So when a government is willing to nurture, and men are offered the opportunity to be nurtured, you get what happened in East Germany, in contrast to what happened in West Germany.
Men’s zeal for life is dampened, and the generation of wealth is reduced, while the demand for government services is ever increasing. This is America’s current economic state. Bankruptcy and/or hyperinflation cannot be avoided at this point. Following economic failure comes whatever comes next.
The best answer is to return to a Representative Republic, where only active participants in the economy are given political representation. This creates an incentive for capable persons to become active participants in the economy, and prevents the oligarchs from manipulating a dumbed-down electorate, a la Chicago, and increasingly, the federal government.
The Founding Fathers got it right in 1789.
Engineers are smarter than physicists.
Beeb
That is, I wouldn’t say that long term the market is completely disconnected from any sort of rational pricing.
And that’s the part Krugman leaves out. Rational behavior theory doesn’t explain everything, but that doesn’t mean it explains nothing. Behavioral economics adds something, but it isn’t a complete substitute. Apart from some dorks at Chicago, no one sensible thinks markets are never noisy or that there is an incontestable link between informational efficiency and allocative efficiency. But no sensible behavioral economist thinks people are incapable of learning, either, or that context is irrelevant. There is some interesting work being done now on de-biasing strategies. Of course, it is entirely possible that none of them will work on Republicans. :>)
Amanda in the South Bay
Its not just that economists nowadays (if you really want to be successful) are failed mathematicians, but you have a large influx of people who couldnt hack it in engineering, the physical sciences, who want to be a big math fish in the small sea of economics.
That was basically my career path, till I decided it was all a pile of horse shit.
G Raleigh
Blowback by Chalmers Johnson suggested that the return of monetarism as a theory was funded and promulgated in the 50s as part of the Cold War front–Friedman and Hayek were tenured and their chairs endowed with funds earmarked for the cultural Cold War. I believe the Nobel in economics was used for the same ends–the committee pressured to give the awards to monetarists and Chicago School profs–so it’s no wonder that so many current economists have fallen back to pushing some form of Hooverism. I taught economics for years and was stunned at the amount of detail that was accorded monetarism and “rational economics” in the textbook, and how little (sometimes only a paragraph) was accorded to Keynesian economics.
Michael
Markets are great for the allocation of truly discretionary items, but not so much for the allocation of necessities, wherein the need for healthy regulation kicks in.
Robert Waldmann
It is absolutely false and offensive to suggest that most economists are failed mathematicians.
Most economists are failed physicists.
Kenneth Almquist
I think that Krugman has it right when he identifies the love of mathematical models (rather than a view that our society is basicly perfect) as the chief cause. Say you are a budding economist. You take a plausible-seeming hypothesis (e.g. the law of one price), and, after a lot of hard work and complex mathematics, you derive a significant new result. Your status changes from being a nobody just out of graduate school to being a respected economist. And your accomplishment is more than a display of intellectual virtuosity; it matches reality pretty closely. Not perfectly–a standard that is unachievable in economics–but closely enough. Perhaps your intellectual achievement would be worthless if markets didn’t function well, but markets do function well most of the time.
As the year go by, younger economists build on the foundation you laid, extending the theory even further than you did. They look up to you as the one who first found the path they trod upon. And lest anyone suggest that all this is mere intellectual masturbation, their extensions to the theory can also be shown to match reality pretty well.
Then one day the markets break down and suddenly the beautiful theory you and your followers have labored to build no longer works. It’s easy to live in denial, particularly if the data is unclear.
CalD
I can never get over how gosh-darned adorable Libertarians are when they start talking economics. It’s almost like they honestly believe that none of their hair-brained ideas have ever been tried (or had ever worked) or that anyone would really go to all the trouble of trying to impose a few rules on business or markets if they actually did work better without them. They should really start requiring more history courses in business schools.
Incertus
Another part of the problem, I think, comes from the notion that there can be elegant ways of looking at the world that also represent the real world. Krugman mentions this a number of times, but I think it bears repeating. Markets are not elegant. They are not graceful. And to the extent that they mirror the natural world they do in that respect, because the natural world is neither elegant nor graceful, as a whole. It has elegant and graceful aspects, but on the whole, it is ugly and destructive and brutal. It is filled with tension, not grace. Any grace or elegance we see in it as a whole is what we are imposing on it from the outside, and if we bank on those suppositions, we will surely be disappointed by the outcomes.
Leelee for Obama
Most economists seem to be unaffected by the fact that sometimes they are very wrong, at least in a financial sense. How many of them have lost a job, a house, considerable amounts of their retirement investments, health insurance or anything else tangible. I know very little about the subject and truthfully, I shouldn’t need a degree in economics to be able to navigate a normal life. The problem is, and ever has been, that we need to stop selling the idea that free-markets can make everything work better. That is true only in a commodities sense, and only if the market is truly free. My understanding is that there are no truly free-markets, because corporate welfare and monopolies are allowed to flourish. If the necessities of life, food, clothing, shelter, education and health-care were regulated as public utilities, then the commodities beyond these things (luxuries) would be best served by a truly free-market. When keeping yourself alive is based upon what you earn, and when too many earn too little in reverence for a free-market that is rigged, then the citizens of a country like that are not served by what their gov’t is allowing.
It needs to stop.
I know, I’m naive and not well-versed. Oh, well.
El Cruzado
If we live in the best of all possible worlds, it means we have the best of all possible elites.
If we don’t, then it means we could get better elites than the ones we have. Can’t have that, can we?
techno
I believe we should make the distinction between “finance capitalism” where the banksters control everything and get the biggest rewards, and “industrial capitalism” where the route to prosperity is to make something very difficult very well.
The key to understanding the economy is to realize that the Finance Capitalists have been in power since about 1973.
For further reading on this subject see:
http://elegant-technology.com/kossack_econ_1.html
El Cid
The fetish for certain types of mathematical models would never have taken hold had they been incompatible with a general economic agenda of rolling back New Deal era views of the regulation of private actors and the promotion of the general social welfare.
In other words, it wasn’t a generic fascination with mathematical models, but an institutionally systematized fascination with those arenas of debates which happened to coincide with where the money was.
Martin
In my experience with similar academics who enjoy mathematical models (of which I often am the supplier) they get major wood when they think I can give them some magic formula that will solve all their problems.
There really does seem to be an attitude that any initial fixed cost is worth bearing regardless of the actual recurring costs obtained, and they treat ‘work’ as the most expensive recurring costs. That is to say, they’d have me spend 500 hours to solve a problem that would only save 20 hours a year in actual work. I have to actually explain to them that the ROI would be 25 years assuming that there was no recurring maintenance costs (which there would be, probably on the order of 20 hours per year). There’s something magical about the recurring cost of work to them, and something fairly repellant about simple solutions that yield (relatively) big returns.
I attribute it to the desire that their work will be more broadly applicable to the world than it actually will be. I’ve seen it in other jobs as well and I expect the masters of the universe probably have it in spades.
Violet
Markets are not rational. Markets are emotional. I used to move in finance circles, and everyone I worked with worked under the assumption that markets are emotional.
In the long run, markets are probably somewhat rational, but that’s taking a long view. In the shorter term, which is what most of us are interested in, the emotional side of the market is what is most important.
Retirees looking to take money out of their 401K in early 2009 might have benefitted from the long term rise in the markets, but they couldn’t have been happy with the short term emotional sell-offs that were lowering their net worth every day. Short term emotion trumped long term rationality. Heck, even Greenspan talked about “irrational exuberance.” What is that, if not emotion.
I think there is a lot of physics and math and even engineering involved in economics – prod this section of the economy, see result here – but ultimately it comes down to how people behave. That’s why economics is under the social sciences. And people don’t always behave like you expect them to.
gnomedad
An analogy that occurred to me recently is that free markets are to economics what air tables are to physics. Both illustrate perfectly valid basic principles, but you have to go beyond them if you want to understand the real world.
I’d guess that most free market absolutists are primary interested in Randian aesthetics and ethics and view the “optimum results for everyone” idea as a clincher.
Wile E. Quixote
@Ann B. Nonymous
Oh, would this be the game theory that was developed by John Forbes Nash? The game theory developed by a paranoid schizophrenic where everything worked properly and all of the theory’s predictions were testable so long as all of the actors in the game behaved, like, well, like paranoid schizophrenics. Yeah, that wouldn’t fill me with confidence either.
I don’t think that most economists are failed physicists, I think that most economists are poli-sci majors with delusions of grandeur who don’t know nearly as much as they think they do. Ask yourself this: How many rich economists are there? If you had studied for years and had total and complete knowledge of how markets and the economy works would you be spending your time working at some wretched hive of scum and wankery such as AEI and making spare change by cranking out boilerplate for the editorial pages of the WSJ and appearing on the Sunday morning shows? Would you be languishing in academia, trying to explain the concept of marginal utility to bored freshmen who were forced to take Econ-101 as a distribution requirement? Maybe you would, with your total and complete knowledge of how markets and the economy work, but not me, fuck that noise.
No, instead I’d be using my total and complete knowledge of how markets and the economy works to become filthy, dirty, stinking and decadently rich in the most glorious fin de siecle way you can imagine. I’d be doing lines of blow out of the cleavage of gorgeous supermodels while I watched my private stash of lesbian fisting porn starring Maria Bartiromo and the hot anchorwomen at Fox News.
all of whom I would have hired for my 24×7 cable news channel that broadcasted the meme that the status quo was the best of all possible worlds.
gnomedad
@Wile E. Quixote:
Hey, now, I call foul. Nash was an excellent mathematician and did exactly what mathematicians are supposed to do — rigorously define a problem and explore its implications. It’s up to those using the math to demonstrate that it’s applicable.
Leelee for Obama
@Wile E. Quixote: All of this, FTW!
Linkmeister
Apropos of not much: The First rule of Forecasting is “Keep forecasting!”
Meaning, you can bury the incorrect ones with sheer volume and eventually no one will remember those.
See “Dow 36,000” author Glassman now appointed to run Bush library.
RSA
I don’t know very much about economics at all, but I’ve always had the impression that no one in the field ever has theories that are disconfirmed by data (that is, via rejected hypotheses). There are just a bunch of schools of people that argue about how to interpret real-world, and they adjust their models as they go, never admitting failure. Am I out of line here? (The reason I bring this up is because it’s the basis for one useful, practical distinction between science and math–you can test scientific theories empirically.)
gnomedad
@Linkmeister:
Now that’s poetry!
Calming Influence
@gnomedad:
This is exactly the problem with trying to get laissez faire capitalists to ever admit that their theories might actually be a pile of stinking shite: the reason we’re not seeing the results they predicted is because the market just wasn’t free enough. They’ll always find something that the government does that is gumming up the works, and if we would only get rid of that law, or regulation, or subsidy, the sun would come out, flowers would bloom, and we would have paradise on earth.
And if we’re stupid enough to do it and it doesn’t work, well then it must be something else gumming up the works. The real world will never be enough like an air table, but they’ll insist we keep trying to make it one.
Modulo Myself
Claiming economists were seduced, somehow, by the perfection of their maths lets them off too easily. I’m sure Krugman means well, but he should try applying this as an example to some field he’s not an insider of, and see how it sounds. Neocons, War-Perverts, and the Middle East, for example, or the trafficking systems of Mexican drug cartels, where there are probably hundreds of fascinated planners running mules across the border in simulations.
Americans really love to believe in abundance. Whether in it being day zero every day of the year, or having ‘beauty’ and ‘elegance’ at hand in your mind whenever needed, this we love. And even when it goes down in flames, the establishment wants to pretend that it deserved to be there; one of the privileges of being close to power, even if you are some economist, is that they allow you to use words like ‘beauty’ and ‘elegance’ as cover-ups: it is the treasure at the end of the academic tunnel. It is how these economists, all of whom basically were riders on an economy they barely understood, will somehow come back (yet marketed as humbled variants). And it’s basically what Americans expect.
gnomedad
@Calming Influence:
You have neatly flipped my point on its head. Very nice. It’s the world’s fault for not being more like an air table.
PTirebiter
Having spent almost thirty years watching the suits chase the holy grail of advertising, predicting and modifying behavior, I’ve thought about this often. I think it comes down to arrogance and a very basic human need. Krugman’s idea of the economists’ desire for intellectually elegant and all encompassing solution is probably pretty universal.
But the insurmountable problem comes when human behavior is a factor. And that’s where arrogance takes the lead. A lot of money and jobs can rely on people believing that someone can do what cannot be done. There comes appoint when it’s alchemy and I can’t help believing there were a lot of folks just looking the other way, and that was probably a very predictable behavior.
Calming Influence
@gnomedad:
Milton Friedman’s brain was an air table.
liberal
@DougJ:
The standard line is that economics is a failed attempt to parrot physics. What with trying to write the laws in terms of optimization problems, and all.
But…while I can’t really find a reference to it, there was supposedly some kind of cross-disciplinary meeting between physicists and economists a couple decades ago. When they compared approaches for solving example problems, the physicists were very interested in the data, and were supposedly amazed how the economists were mostly interested in modeling with extremely simplified assumptions.
So, based on that, it seems that economists, who are too distant from their data, really have math envy, even if they think they have physics envy.
liberal
@Steeplejack:
Really, a big part of the problem is that so many of these high-income people are just rent collectors.
They can reduce their productivity 10%, and since 90% of zero is still zero, it wouldn’t make a damn bit of difference.
Mankiw et al. are a different phenom entirely. If Mankiw reduces his output 10%, society actually benefits.
liberal
@Robert Waldmann:
Irrelevant. In terms of the fields bizarre disconnect from data, like the idiotic real business cycle stuff, they think like mathematicians. (Not saying that’s a bad thing in general, since I have a math PhD, but it’s very bad when one is a scientist who nominally should be studying a phenomenon of nature, and not just mathematizing.)
liberal
@Kenneth Almquist:
I’m not sure K quite said that, but in any event it’s clearly wrong.
It’s obvious that (a) most prominent economists are right-wingers (on the economic axis, if not the social axis), and (b) there are huge financial incentives to be right-wing. (Witness the funding support for stuff at George Mason, for example.)
In this sense, economics is wildly successful. One of the underpinnings of economics—which I agree with—is that incentives matter. Almost a priori, we should expect that the field would whore itself out to the rich and powerful. The fact that it indeed does, by and large, is really a vindication of at least this fundamental principle.
liberal
@El Cid:
Yeah.
liberal
@Martin:
Huh. That would go along with the fetish for the Marginal Revolution, what counts is marginal cost, blah blah blah.
Of course, a lot of that stuff is just sheer garbage, but they need it to justify their explanation for incomes in a firm, IIRC.
The fact that a lot of these things are meaningless “on the margin” escapes them.
geg6
The free market dimwits are exactly the same as the communist dimwits…it’s all about some utopian world that would be perfect if only there were no actual sentient, emotional human beings involved. Dreamers and idealists even as their fantasy world turns out to be a dirty, brutal, irrational place filled with people acting on their hopes and fears instead of informed self-interest. I side with Krugman. Behavioral economics makes the most sense as long as humans are in charge of the economy.
liberal
@gnomedad:
Right, but I don’t think there’s anything wrong with trying to solve problems by simplying and abstracting per se. Rather, it’s the actual examples of what they end up doing when they go down that path.
liberal
@Wile E. Quixote:
IIRC Nash made a major contribution (Nash equilibrium), but the founders of the theory were perhaps Von Neuman and (?) Morgenstern.
liberal
@Wile E. Quixote:
Well, I’m sure some of the principles at LTCM made quite a bit of money. Just that they didn’t have to give it all back when the place imploded.
:-)
El Cid
From the crazy beyond the fringe actual soci_alist left, 2002:
************************************************
[T]he 1970s and 1980s saw the emergence of a host of terms that have now become all too familiar: rigidities, restructuring, deregulation, privatization, the free market system, globalization, and (from a more critical standpoint) neoliberalism.
The goal became one of forcing down wages, breaking unions, eliminating state supports for workers and subsidies for consumers, the removal of barriers to the mobility of capital, the redistribution of income and wealth from bottom to top, and like measures clear across the globe.
In areas as fundamental as employment, health, education, retirement, food availability, the environment, etc. the principles of a no-holds-barred capitalism took over. The presumption of rationality, associated with thinkers like Keynes and Schumpeter—and before them the sociologist Max Weber, who had described capitalism as “the rational tempering” of an “irrational impulse”—appeared suddenly only a distant memory, the rhetoric of a bygone age.*
The twentieth century’s dominant myth was that of a “rational capitalism.” The two economists who did the most to promote this idea were John Maynard Keynes and Joseph Schumpeter. Both were responding to the great historical crisis of capitalism manifested in the First World War, the Great Depression, and the Second World War. In the wake of the greatest set of horrors the world had ever seen, accompanied also by the rise of an alternative, contending system in the Soviet Union, it was necessary for capitalism following the Second World War to reestablish itself ideologically as well as materially. In terms of the ideological requirement, the two economists who accomplished this most effectively were Keynes and Schumpeter—not simply because they epitomized the best in bourgeois economic ideology, but also because they were the leading representatives of bourgeois economic science. What they set out in their analyses were the requirements of a rational capitalism and at least the hope that these requirements would be achieved.
Let us consider Keynes first. Keynes, located at Cambridge in England, was the embodiment of rational capitalism. He not only perceived contradictions of the system but also believed they were subject to rational management. This was true with regard to both the relations between capitalist states and the regulation of internal contradictions of the accumulation process. In his Economic Consequences of the Peace (1919) he criticized the Versailles peace agreement for the predatory war reparations imposed on a defeated Germany, which might lead, he suggested, to another world war. In response to the Great Depression Keynes wrote his magnum opus The General Theory of Employment, Interest and Money (1936) overthrowing Say’s Law (the orthodox supply-side view that supply creates its own demand). For the first time in the establishment economic literature serious consideration was given to the nature of structural economic crisis under capitalism and what states might do about it. For Keynes the key was to get the state to intervene to ensure sufficient effective demand to guarantee full employment. As Paul Sweezy pointed out at the Istanbul University ten years ago (see “The Triumph of Financial Capital,” Monthly Review, June 1994), Keynes also believed that a rise to dominance of financial capital as in the 1920s spelled the end of capitalist rationality, turning productive enterprise, in his words, into a “bubble on a whirlpool of speculation.” He therefore called for the “euthanasia of the rentier.” He argued for a tempering of free trade and a degree of national self-sufficiency, in response to the globalizing influences of his time. He was one of the principal architects of the Bretton Woods system, designed to stabilize world trade and finance through the creation of the General Agreement on Tariffs and Trade, the International Monetary Fund, and the World Bank. In general Keynesianism is thought to have pointed toward social democracy and the welfare state as manifestations of capitalist rationality. It seemed to portend a reformation rooted in a political compromise between capital and labor.
At the outset of the Great Depression in 1930 Keynes wrote an essay entitled “Economic Possibilities for Our Grandchildren” in which he declared that the economic problem, in the sense of meeting subsistence needs of everyone in the rich societies, might be solved in a hundred years. The issue would then become one of how to deal with leisure as the work week declined to three hours a day, a total of fifteen hours a week. At that point, he claimed, a new moral code might develop to bring society “out of the tunnel of economic necessity into the daylight.” Until then, however, the world would have to stick to an alienated moral code in which “fair is foul and foul is fair,” that is, one based on the greed and exploitation associated with the accumulation of capital.
Schumpeter, located at Harvard in the United States, was a more conservative figure opposed to Keynes and Keynesianism. He promoted the notion of the rational entrepreneur as the essence of capitalism, insisting that the further growth of monopolies/oligopolies though inevitable could lead to the eventual demise of capitalism. He argued against notions of a structural economic crisis of capitalism, employing long cycle theory—the fifty-year Kondratieff cycle—to rationalize the long downturn associated with the Great Depression. Nothing was more objectionable to Schumpeter than the argument of Alvin Hansen, Keynes’s leading American follower, that capitalism was tending to economic stagnation for economic reasons. Capitalism’s problems, Schumpeter believed, were sociological: the demise of the necessary external conditions for the free development of the entrepreneurial function. In a chapter on “Crumbling Walls” in his great work, Capitalism, Socialism and Democracy (1942) he explained how “dematerialized, defunctionalized and absentee ownership” together with the “mechanization of progress” under the regime of concentrated capital took the life out of entrepreneurship, undermining its vital function and with it the capitalist system.
Schumpeter also argued that capitalism as a rational economic system was opposed to imperialism, which came about in contemporary times as in the past through the development of a war machine—and, in terms of economic factors, through the emergence of monopolistic corporations. “Capitalism,” he observed in “The Sociology of Imperialisms” (1919), “is by nature anti-imperialist….We cannot readily derive from it such imperialist tendencies as actually exist, but must evidently see them only as alien elements, carried into the world of capitalism from the outside, supported by non-capitalist actors in modern life.”
Neither Keynes nor Schumpeter was so naïve as to think that capitalism could simply develop unconstrained according to its own logic—a view associated with the myth of the self-regulating market, which has now displaced the myth of rational capitalism within the dominant ideology, and is associated with the name of Friedrich Hayek and contemporary neoliberalism. In Schumpeter’s words, “no social system is ever going to survive when allowed to work out according to its own logic. You need only look at the present situation. There is no firm, no industry, no country, which can live under those rules which it would assuredly live under if it were allowed.”* The same was true of capitalism as a whole. If left to its own devices it would so thoroughly impose its economic logic on everything existing that it would undermine the sociological-cultural elements without which its con tinuance was impossible. In Schumpeter’s pessimistic account, capitalism was destined to undercut itself in this way, since attempts to regulate it, to save it from itself, would also lead to the same end and not necessarily more slowly. Capitalism, he concluded, would not survive. Still, Schumpeter, no less than Keynes, articulated some of the conditions of what was conceived as a rational capitalism.
Of course the new mythology of a rational capitalism did not simply emerge from the heads of two economists. It reflected the spirit of an age of restored capitalism under the leadership of the United States, which had emerged virtually unscathed from the Second World War with half of the world’s output, 60 percent of its manufacturing, a currency that was thought to be as good as gold, and a monopoly of nuclear weapons. The United States, by far the most powerful economic, political, and military force following the Second World War, seemed to stand for this new capitalist rationality. The construction of the Bretton Woods system for international trade and finance and the location of the new United Nations in New York promised a different, more stable capitalism. The relatively benign approach to occupied Germany and Japan and the introduction of the Marshall Plan to aid the western European states in rebuilding their economies seemed to point to the benevolence of the new world power. The United States established the Atlantic Alliance and beyond that an alliance between the triad of the United States, Western Europe, and Japan. In Western Europe social democracy flourished in a seemingly comfortable and mutually reinforcing partnership with capital. The growth of the welfare state became emblematic of the new organized capitalism.
The European and Japanese economies were quickly rebuilt. Rapid economic growth ushered in a new golden age, reminiscent of the best years of capitalism’s youth. European colonialism receded in the face of anticolonial movements and revolutions in the third world. The United States, presenting itself as an anticolonial power, took the lead in promoting a new development ideology for export to the periphery.
In the United States itself antitrust measures were adopted to ensure continuing competition. Fiscal and monetary fine-tuning were seen as keys to management of the economy. A little over two decades after the Second World War leading American economists, such as Paul Samuelson, recipient of the first Nobel Prize in economics, proclaimed the end of the business cycle. Pundits in the United States adopted the term “Pax Americana” to describe the new era of supposedly benign American hegemony. At other times they referred to “the American Century.” Social scientists throughout the West celebrated the new rational-functional capitalist order.
All of this was occurring in the environment of the Cold War, including two hot wars in Asia. In the United States the anticommunist witch hunt known as McCarthyism was used to break the back of the New Deal coalition of labor, civil rights supporters, and small farmers. In An Essay for Our Times (1951) critical cultural historian H. Stuart Hughes called the United States the “new Byzantium,” preferring this to the “new Rome.” He sought to emphasize the conservative and religious-moralistic nature of its empire, as well as the notion that the United States had become the last bastion of a fading civilization. Washington intervened throughout the globe, and unleashed death and destruction on millions to prop up dictatorial regimes that it said were bulwarks for the “free world.” But all of this was justified in the dominant ideology as the necessary defense of a new rational capitalist civilization—not a reaffirmation of capitalist empire of old.
Naturally not all economists succumbed to the idea of a new rational capitalism. Criticism was particularly strong in the Marxist tradition. One such dissenting view arose from what has often been called monopoly capital theory associated with Paul Baran and Paul Sweezy and Monthly Review in the United States, but which grew out of economic critiques developed by Michal Kalecki and Josef Steindl in Europe. At the height of the golden age of post-Second World War capitalism in 1966, Baran and Sweezy’s Monopoly Capital was published, which argued that far from being a reflection of a more rational, more organized capitalism, the prosperity of the post-Second World War years was a transitory product of special development factors to be sought in the larger historical environment. The normal tendency of capitalism in its monopoly stage was one of economic stagnation due to the inability to absorb the enormous actual and potential surplus at its disposal. Given a tendency to stagnation in monopoly capitalism, what needed to be explained was not stagnation as much as prosperity. They thus focused on the counteracting forces to stagnation that had served to prop up the capitalist economy. Some of these were entirely transitory such as:
1. The buildup of consumer liquidity in the United States during the Second World War, which immediately after the war fed a consumer spending boom.
2. The second great wave of automobilization in the United States, which was associated with the growth of suburbs and the building of the interstate highway system and powered the steel, glass, and rubber industries.
3. The rebuilding of the European and Japanese economies following the war.
4. The stability associated with unchallenged U.S. hegemony over the world economy, marked by the absolute dominance of the dollar.
In addition to these more transitory factors, however, there were also longer-term structural changes in the working of capitalism, and particularly U.S. capitalism. These included:
5. The emergence of massive and continuing military spending in the United States, justified originally in terms of the Cold War arms race, but geared principally to the maintenance of the imperialist system.
6. The development of the modern “sales effort”—or an economy geared to high consumption, and supported by marketing and the development of a system of consumer credit or mass indebtedness.
7. The rise of a qualitatively new financial superstructure operating somewhat independently from the productive base of the capitalist economy, and leading to a financial explosion.
For Baran and Sweezy this new regime of accumulation was, in contrast to the myth of a new rational capitalism, an “Irrational System” (the title they gave to the closing chapter of Monopoly Capital). Under monopoly capitalism few if any of the characteristics of rational capitalism, as conceived by Keynes and Schumpeter, pertained. Capitalism had not become less imperialistic, rather militarism and imperialism were built into the very fiber of its day to day operations—integrated with its economic functioning as never before. U.S. hegemony was maintained only through wars in Asia and elsewhere. State promotion of effective demand through civilian government spending and fiscal and monetary fine-tuning—the hallmarks of Keynesian policy—were completely inadequate to counter the tendency toward stagnation under capitalism. The welfare state celebrated by Keynesians and social democrats was undeveloped in the most developed, most stable capitalist state—the United States—blocked by vested interests. What were viewed as successes in economic growth and stability were the product of fortuitous historical circumstances and artificial economic stimulants. Rather than relying primarily on productive investment the system was dependent for its growth on the sales effort and financial expansion. The Schumpeterian entrepreneur was no longer at the center of the system but had been displaced by the giant, monopolistic corporation. The limited quid pro quo of capitalism—its idealized system of equal exchange—had broken down almost completely under monopolistic pricing and output arrangements. High profit margins were maintained in the face of shortfalls in demand by idling plants and machinery instead of lowering prices, resulting in continuing high levels of excess capacity. Wage exploitation rather than decreasing, leading to greater leisure time as Keynes had envisioned, was becoming more severe. Meanwhile leisure itself became just another form of exploitation—“passively absorbable amusement”—designed to reinforce an economic system that while encompassing a vast productive capacity was unable to allow for a meaningful transformation of human existence or ease the chains on the individual worker.
At the center of Baran and Sweezy’s analysis was the view that the monopoly capitalist system, despite all of the massive, irrational means being used to shore it up, could not continue crisis free. The forces of stagnation constantly threatened to reassert themselves. In the early 1970s, within a few years of the publication of their book, the United States was once again caught in a serious economic crisis. This return of economic crisis was complicated by the fact that it overlapped with an energy crisis arising from OPEC’s actions in response to the Yom Kippur War, and by the decline of U.S. hegemony, as the United States encountered more economic competition from abroad. The entire U.S.-centered global economic system was proving to be unstable.
The crisis of the early 1970s was complicated still further by the U.S. defeat in Vietnam. The war had contributed to serious imbalances in the position of the dollar, leading to a vast flow of dollars abroad, and the build-up of a huge Euro-dollar market. The result was the end of the dollar-gold regime in 1971 as Nixon delinked the dollar from gold. Meanwhile the defeat in Vietnam placed constraints on the ability of the United States to continue to utilize its war machine to ease its economic problems by increasing its ascendancy abroad.
At the outset of the economic crisis Paul Sweezy together with Harry Magdoff, his coeditor at Monthly Review and the author of The Age of Imperialism (1969), not only emphasized all of the factors presented earlier in Baran and Sweezy’s Monopoly Capital, but insisted even more adamantly that stagnation was the normal state of monopoly capitalism, so that what needed to be explained were the bases of the rapid growth that had vanished, rather than stagnation itself. The fact that stagnation had reappeared in spite of all the vast means used to sustain the economy showed the full depth of the contradiction. The crisis was therefore irreversible within the given structure of things.
Now almost four decades after the publication of Monopoly Capital there is no doubt that this assessment was in its essentials correct. The per capita growth rate of world output (world GDP) was obviously slower in the 1970s than the 1960s. But the problem did not end there: it was slower in the 1980s than in the 1970s, slower in the 1990s than in the 1980s, and so far has been slower in the 2000s than in the 1990s (see “The Stagnation of Employment,” Monthly Review, April 2004). The experience of the U.S. economy and that of the other wealthy states is similar to the world economy as a whole in this respect, with decades of deepening stagnation.
The response of the advanced capitalist states to the reemergence of stagnation was fairly immediate and uniform across the board and by the late 1970s had taken a definite form at both the national and global levels. If rational capitalism (in its Keynesian version) had been something more than an ideological mirage an attempt would have been made to adopt more radical Keynesian and social democratic programs in response to the crisis. This would presumably have taken the form of a redistribution of wealth and income from the top of society to the bottom, the enhancement of the welfare state, the promotion of full employment and economic security in general—even what was sometimes envisioned as a “global Marshall plan” designed to aid the third world. The fact that none of this was tried and the much-vaunted Keynesianism vanished instantly without a fight the moment capital felt pressure on its bottom line is eloquent in itself.
As Joyce Kolko observed in her Restructuring the World Economy in 1989, “capital restructures by accretion, not by strategy.” What quickly emerged was a supply-side discourse that reflected capital’s attempt to purify its accumulation logic, abandoning all previous attempts to rein in and regulate the system. Thus the 1970s and 1980s saw the emergence of a host of terms that have now become all too familiar: rigidities, restructuring, deregulation, privatization, the free market system, globalization, and (from a more critical standpoint) neoliberalism. The goal became one of forcing down wages, breaking unions, eliminating state supports for workers and subsidies for consumers, the removal of barriers to the mobility of capital, the redistribution of income and wealth from bottom to top, and like measures clear across the globe. In areas as fundamental as employment, health, education, retirement, food availability, the environment, etc. the principles of a no-holds-barred capitalism took over. The presumption of rationality, associated with thinkers like Keynes and Schumpeter—and before them the sociologist Max Weber, who had described capitalism as “the rational tempering” of an “irrational impulse”—appeared suddenly only a distant memory, the rhetoric of a bygone age.*
Despite the continued slowing down of capitalist economies market fetishism became more not less ascendant in each passing decade.
With capitalism performing at a rate well below what it had achieved in its immediate post-Second World War period, and with class organization at the bottom of society far weaker than before, the system reverted to a more directly exploitative form, which, if it did not do much to boost the fortunes of whole nations, nonetheless enhanced the wealth at the top.
The ruling ideas, that is, the ideology of the ruling class, shifted accordingly. With a renewed belief in the system’s self-regulation, Hayek was suddenly seen as superior to Keynes.
liberal
@RSA:
Not sure, and I assume someone who really knows the field will jump on my a$$ here, but IMHO the real business cycle bullshit is a good example of un-falsifiability.
El Cid
There’s a comment in moderation which should be deleted, as I only meant to copy & paste a couple of paragraphs, not several pages’ worth. My bad.
Sloth
Fair enough. But the way to insult these guys, compare them to sociologists, that REALLY pisses them off.
Actually, I think it’s a fair way to find the good ones. The good ones might not be too bothered by that comparison.
dan robinson
I could hack physics, but didn’t like the teachers in that department. Plus, doing computer design was more interesting than the things the physics students were doing. Getting a BSEE was harder than getting an undergrad math or physics degree.
I am not being defensive.
gnomedad
@liberal:
Totally agree, and that was my point in defending Nash @44.
Sloth
Maybe, but it’s fairly true, at the macro level, but they sort of got forced into it. Without making various assumptions at a macro level (functioning markets, all things being equal, zero technological change…like that), you have a system that is not terribly easy to model, but wants to be handled using descriptive language – a “soft” science. Horrors! So make the assumptions.
Which works sort of generally OK until your assumptions blow up. Which they kind of have been doing all along, but they’ve REALLY blown up several times including a doozy last year.
El Cid
This is the section I meant to highlight from the super extra far out don’t ever touch them left at Monthly Review, ca 2002:
******************************
[T]he 1970s and 1980s saw the emergence of a host of terms that have now become all too familiar: rigidities, restructuring, deregulation, privatization, the free market system, globalization, and (from a more critical standpoint) neoliberalism.
The goal became one of forcing down wages, breaking unions, eliminating state supports for workers and subsidies for consumers, the removal of barriers to the mobility of capital, the redistribution of income and wealth from bottom to top, and like measures clear across the globe.
In areas as fundamental as employment, health, education, retirement, food availability, the environment, etc. the principles of a no-holds-barred capitalism took over.
The presumption of rationality, associated with thinkers like Keynes and Schumpeter—and before them the sociologist Max Weber, who had described capitalism as “the rational tempering” of an “irrational impulse”—appeared suddenly only a distant memory, the rhetoric of a bygone age.*
Despite the continued slowing down of capitalist economies market fetishism became more not less ascendant in each passing decade.
With capitalism performing at a rate well below what it had achieved in its immediate post-Second World War period, and with class organization at the bottom of society far weaker than before, the system reverted to a more directly exploitative form, which, if it did not do much to boost the fortunes of whole nations, nonetheless enhanced the wealth at the top.
The ruling ideas, that is, the ideology of the ruling class, shifted accordingly. With a renewed belief in the system’s self-regulation, Hayek was suddenly seen as superior to Keynes.
Mike in NC
Who could possible advocate that government should “promote the general welfare”? Marx? Lenin? Idi Amin? Over to you, B.O.B.
Ann B. Nonymous
The mention of Hayek brings to mind the real danger of moving away from a bad math praxis of economics to a rhetorical argument praxis:
Rhetoric sucks as a description of reality. Millions of people have been seduced by Ayn Rand’s prose into thinking this is an accurate model of the way the world works. It’s why Jerry damned-for-eternity Falwell’s Liberty University works so hard at cultivating a nationally ranked debate team.
And of course, Andrew Sullivan.
Even with bad math, there is a possibility of improvement and correction. With rhetoric, it’s a fast slide into magical thinking.
justinslot
#27: That was really top-notch BOBbing there. Thought more people would be talking about it.
Delia
My ex-husband is an economist. From observing him and others in grad school and forward, I’d say that at least some economists are entranced with the idea of a discipline that promises to explain all the messiness of everyday life. And then there’s this: if you can slap some quadratic equations, thermodynamics, game theory, etc., into your discipline, you can call yourself a real, authentic hard science. Not one of these squishy social sciences like sociology or psychology or history, but an honest to goodness hard science like physics or chemistry. It’s sort of like one of these Third World countries that sets itself up with a bunch of airplanes and starts an airline to prove it’s modern and powerful when its people are all starving.
Hemi
@43 As a Political Science type, I just want to make clear that you have the correlation backwards. Quant work became popular in Poli Sci AFTER it was popular in Econ. It was the same crazy-ass assumptions that made the market into a rational model (although, I’d note that more often than not, it CAN be modeled as approximating rational behavior) that let the structural realists apply Game Theory to international relations and declare that mutual agreements were effectively impossible to maintain.
The problem, however, wasn’t with using statistics and quantitative analysis, it was with putting the cart before the horse. Rather than sitting down and attempting to produce the best model that could be found, a lot of people decided what they wanted to find, and then produced the model to prove it.
Of course, that fails to align with the sneering natural science conclusion that the social sciences are unscientific, and we should just stuff them back in the history department where they belong.
Sloth
It’s more like a cargo cult. Frighteningly so.
Sloth
IF you believe in perfect markets, a lot of really messy things get clean.
Furthermore, all the solutions are easy. Just let the market decide, right?
What it is, is a free lunch. You would think that enough libertarians would have read Heinlein to understand TAANSTAFL, ,but then again I’m not convinced that Heinlein knew one when confronted with it either.
Like most things that sound too good to be true, it is too good to be true.
The really odd thing is that they are busy calling progressives and communists unrealistic and claiming that they believe in a perfect world, when the exact same thing is true on the other side and that the market worshippers are making the exact same mistakes.
Guess what? Markets break. Live with it. That means you have to do hard and messy things – like regulate them.
Leelee for Obama
@justinslot:A shunning seems to be happening with BOB.
El Cid
I’m not sure it’s so much about the field itself, or the notion of economics as a field of inquiry, but that given the importance of the field’s most prominent findings for all sorts of powerful people who prefer their controversial policy preferences to instead appear as natural scientific findings, it necessarily invites a sort of structural manipulation of incentives and disincentives, maybe more so than any other social science field.
Via Z Magazine, Edward Herman, economist and Professor Emeritus of Finance at the Wharton School of the University of Pennsylvania, 1993:
***********************************************
***********************************************
Economics, the supposed science of the market, has itself been increasingly integrated into the market system.
With the growth in importance of macro-stabilization theory and policies from the time of the Great Depression, governments and business have sought the services of economists to help them forecast the effects of policy actions and other developments. The growth of government regulation also created a demand for economists to advise and testify on regulatory issues.
In The Regulatory Game, Bruce Owen and Ronald Breautigam describe as one important business strategy the “coopting of the experts,” meaning getting them on the payroll to advise or neutralizing them by funding their research. AT&T, for example, listed corporate payments to 104 social scientists and 215 small consulting firms, many organized by academics, on its 1978 tax forms.
The corporate community went on the offensive in the 1970s, trying to transform the intellectual environment to justify lowering wages and taxes.
Business poured money into a “conservative labyrinth” of think tanks, funded scores of “free enterprise” chairs, and Sponsored numerous university lecture series and individual scholars’ research.
In the simile used by Heritage Foundation head Edwin Feulner, the design was, like Procter & Gamble’s in selling soap, to saturate the intellectual market with studies and “expert” opinion supporting the proper policy conclusions. This was a powerful and conclusion-specific “demand” for intellectual service.
Competition, financial pressure, the increasing cost of computer-based research, and simple self interest pushed many economists into the market as private consultants or employees of business, or as grantees of the conservative labyrinth’s think tanks.
The market has worked: the millions flowing into the American Enterprise Institute and offered by the Olin Foundation (among others) found an ample supply of economists willing to provide the required intellectual services.
Delia
@El Cid:
And we now see the consequences. Other industries, e.g., energy and pharma, now have their pet scientists who busily produce studies proving that global warming may not be taking place after all, or that various and sundry new drugs are just what you need for conditions you never knew existed.
grumpy realist
Major problem: “equilibrium” means something much different in an economic system than it does in a statistical particle sense of way–>basically, the number of actors and how they interact.
As I’ve always described the difficulties of applying statistical physics concepts to market movements: “gas molecules never scream and all shove into one corner of a box in panic. Humans often do.”
There was a vogue back in the 1980s for describing economics using chaos theory. Which amused a lot of complex system analysts for quite a while and produced a lot of wugga-wugga-wugga on a lot of supercomputers, but at the end, everyone gave up. Great theory, but you couldn’t predict anything. Then random-walk and the Black-Scholes equation came along and everyone was absolutely convinced that the code had been cracked. Until all the correlations went to one…..
henqiguai
@DougJ (#13):
Jumping in here on Dougj’s comment of being unfamiliar with a basic precept of Alfred Korzybski’s “General Semantics”. Link to the Wikipedia entry General_semantics; you can get to the Institute from there.
A neat science fiction read incorporating General Semantics® is A. E. van Vogt’s “World of Null-A”. Fun stuff, if you’re into such things (and yes, that would be true for me).
fledermaus
Yep. I really can’t stand the preening, self congratulating attitude of the econ fools. Even the good ones still sling a lot of bullshit. Brad DeLong, as great as he is on other topics, is still part of “outsourcing doesn’t matter because people will get new jobs doing ::handwaiving:: something that WILL PAY EVEN MORE!!! (and a pony)”
That’s almost as bad as the Milton fools who insist that no true
Scottsmanactor in a free market would abuse their power and influence to extract rents because SHUT UP THAT’S WHY!The whole profession is one giant reach-around for the status quo.
DougJ
Thought more people would be talking about it.
You know, it was so good, it was a tough act to follow.
Wile E. Quixote
@Hemi
<blockquote
@43 As a Political Science type, I just want to make clear that you have the correlation backwards. Quant work became popular in Poli Sci AFTER it was popular in Econ. It was the same crazy-ass assumptions that made the market into a rational model (although, I’d note that more often than not, it CAN be modeled as approximating rational behavior) that let the structural realists apply Game Theory to international relations and declare that mutual agreements were effectively impossible to maintain.
I too am a political science type, my degree from the University of Washington and I took a lot of political economy courses at the UW because a couple of my favorite profs taught those courses. I found that political science professors who specialized in political economy and choice theory were a lot less credulous and a lot more willing to admit that these quantitative models had limits than economics professors were.
Wile E. Quixote
@gnomedad
Yes, but if you define a problem based upon false assumptions, that is to say that everyone is a batshit insane and out to get you, you’re still part of the problem. From the original link at:
http://en.wikipedia.org/wiki/The_Trap
gnomedad
@Wile E. Quixote:
Fair enough; I confess I did not check out the link in your initial post. Very interesting.
liberal
@fledermaus:
IIRC the handwaving part is for the fed to just lower interest rates till we’re back up at full employment.
Yeah, BDL made this bullshit argument many times.
liberal
@gnomedad:
OK.
Bill Occam
The book The Black Swan by Nassim Nicholas Taleb contains a long discussion on the worth of economic experts.
Ornithologists, experts on birds, once said all swans are white. Their dazzling expertise was demonstrated decade after decade as white swan after white swan was observed. They were exactly right … until the black swan was discovered. All the bird experts were wrong all along yet were so certain they were right. Believe experts at your peril.