Monday, October 17, 2011

economics has met the enemy, and it's economics...,

GlobeandMail | After Thomas Sargent learned on Monday morning that he and colleague Christopher Sims had been awarded the Nobel Prize in Economics for 2011, the 68-year-old New York University professor struck an aw-shucks tone with an interviewer from the official Nobel website: “We're just bookish types that look at numbers and try to figure out what's going on.”

But no one who'd followed Prof. Sargent's long, distinguished career would have been fooled by his attempt at modesty. He'd won for his part in developing one of economists' main models of cause and effect: How can we expect people to respond to changes in prices, for example, or interest rates? According to the laureates' theories, they'll do whatever's most beneficial to them, and they'll do it every time. They don't need governments to instruct them; they figure it out for themselves. Economists call this the “rational expectations” model. And it's not just an abstraction: Bankers and policy-makers apply these formulae in the real world, so bad models lead to bad policy.

Which is perhaps why, by the end of that interview on Monday, Prof. Sargent was adopting a more realistic tone: “We experiment with our models,” he explained, “before we wreck the world.”

Rational-expectations theory and its corollary, the efficient-market hypothesis, have been central to mainstream economics for more than 40 years. And while they may not have “wrecked the world,” some critics argue these models have blinded economists to reality: Certain the universe was unfolding as it should, they failed both to anticipate the financial crisis of 2008 and to chart an effective path to recovery.

The economic crisis has produced a crisis in the study of economics – a growing realization that if the field is going to offer meaningful solutions, greater attention must be paid to what is happening in university lecture halls and seminar rooms.

While the protesters occupying Wall Street are not carrying signs denouncing rational-expectations and efficient-market modelling, perhaps they should be.

They wouldn't be the first young dissenters to call economics to account. In June of 2000, a small group of elite graduate students at some of France's most prestigious universities declared war on the economic establishment. This was an unlikely group of student radicals, whose degrees could be expected to lead them to lucrative careers in finance, business or government if they didn't rock the boat. Instead, they protested – not about tuition or workloads, but that too much of what they studied bore no relation to what was happening outside the classroom walls.

They launched an online petition demanding greater realism in economics teaching, less reliance on mathematics “as an end in itself” and more space for approaches beyond the dominant neoclassical model, including input from other disciplines, such as psychology, history and sociology. Their conclusion was that economics had become an “autistic science,” lost in “imaginary worlds.” They called their movement Autisme-economie.

5 comments:

umbrarchist said...

The economics profession has wrecked the world by ignoring reality.

I can believe that the majority of economists are so dumb it never occurred to them get demand side depreciation data.  But I can't believe that Raymond Goldsmith is the only one to think of it in 1952.  Defective algebra since WWII.  Brilliant!

That phony Nobel Prize in economics is financed by the bank of Sweden not the Nobel inheritance.  How much money do banks make on car loans?

nanakwame said...

1800 scholars were correct - the knowledge base of specific sciences were connected. Economy is an art form and that it is all based on living mathematics and group psychos. Today w/o hard sciences it is a joke. All good economies talks entropy now. The problem we have is that the thinkers of the 1800 was anti-cleric. Contemporaneous conservative and neo-liberal have promoted an almost techie-cleric. And promote some sort of absolute, this at a time when "science" should be critiqued strenuously. All at the same time that Einstein's theories are pragmatically proven 40 years later.

Temple3 said...

This "traditional model" exists in other academic disciplines as well. It is in "education," "history," and most of the social sciences. Oddly enough, academics and scholars have been illuminating the inherent flaws in this model for centuries. Whether you're an Africentrist, Marxist, environmentalist, reformist, Muslim, homosexual, feminist or womanist, or whatever terms you use to define your ideological bent, you've probably found the fatal flaw in this framework and its methodology. One of the interesting things about the ADHERENTS to this framework is that, to my mind at least, they seem to be the first to dismiss the RATIONALITY of others. In other words, the rich and powerful are always rational economic actors, but the poor are only sometimes rational -- and they are actually pathological, irrational, and biologically beyond rationality or redemption. 

It is a bizarre thing until you hear neo-conservatives or even proto-conservatives prattle on and on and welfare, race, and dependence. Ask them a probing question or 2 about Africa or the Caribbean and it is inevitable that their heads spin right off...but their mouths don't stop. 

Really nice find CNU. 

Tom said...

Rational Expectations and its offshoots are a weaponized version of the "Best of all possible worlds" horseshit that Voltaire  tried to destroy in Candide.

John Kurman said...

Kahneman has a new book out "Thinking Fast and Slow".  http://www2.lse.ac.uk/publicEvents/events/2011/20111115t1830vOT.aspx

I've put it on reserve through the comrade-librarian at the local socialist book collective. Prospect theory, if it is ever generalized, will really clear the stink off of economics. A semi-review: http://www.wired.com/wiredscience/2011/10/the-science-of-irrationality/

I especially like this: "Mr. Kahneman recounts how one eminent American philosopher, after
hearing about the work, quickly turned away, saying, “I am not
interested in the psychology of stupidity.”' Why not? That's the free market all over. It's the biggest dinosaur with the tiniest brain you've ever seen. ('ceptin' those economics perfessers at the U of Chicago).

Also recommend "Myth of the Rational Market".