I agree with this story from the Globe and Mail. Economics is a domain of
culture not a science. Science is a domain of advanced cultures. Economics
is an earlier domain to science, in the evolution of culture. Organized
Knowledge along a method [science] comes after there is some form of market
negotiation in a society, not before. The idea that math, [the equivalent
to the visual sense as music is to the aural sense,] is exclusive to the
domain of science is also a theoretical mistake and limiting it to the
domain of science is nonsensical. Math is a general tool of all of the
domains as is music.
I agree with Basen's comments about the origins of the "Nobel" economics
prize and about Smith being horrified by modern economics. I find it
interesting that I may have read more Adam Smith, and other economists, than
an economics major. Maybe not interesting but appalled. We have our
dummies in music as well but we call them savants.
Of course the problem of history is worse in math, than economics, where all
kinds of social theories about the hierarchy of cultures is based in whether
they have numbers and advanced math as we do today. For example, the
amazing construction and architectural advancements of the Inka people [in
not much more than 100 years] is ignored because they didn't have numbers
but used knots on a string for their calculations. What is not known is
that Europe used Roman Numerals until they stole the current numbers from
the Moorish universities they found after they kicked the "infidels" out of
Europe. The general concept of zero in Europe is post-Columbian. The
Mayans invented it for themselves much earlier and developed it as an answer
to a need rather than stealing it from someone else's books.
The most interesting paradox for me in all of this is that the Swedish
government bankers choose economists who hate governments and make a form of
religious idolatry of the market. Sargent and company made off like pirates
with over a million of the Swedish people's money. That sort of makes a
case for Government being too dumb to survive. And aren't the Swede's
Socialist? The American Indian founders of Socialism would have never made
such a collaborator's mistake.
IMHO no one can have an advanced society without an advancement concept of
the domains of culture that give a society balance and wisdom. Instead
these folks today function like the US government that refuses to concede
balance and negotiate in a government that has checks and requires balance
and negotiation as the first act of governing. What we have today is a
frozen Alpha model, plus Corsican vendetta, from wolves and the social
pathology that social scientists call "clan-think."
REH
PS Thanks to Steve for sending this excellent article from Canada.
Adam Smith is considered the founding father of modern economics.
Economics has met the enemy, and it is economics
ira basen
>From Saturday's Globe and Mail
Published Saturday, Oct. 15, 2011 6:00AM EDT
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.
The students' timing is notable: It was the spring of 2000, when the world
was still basking in the glow of "the Great Moderation," when for most of a
decade Western economies had been enjoying a prolonged period of moderate
but fairly steady growth.
Some economists were daring to think the unthinkable - that their
understanding of how advanced capitalist economies worked had become so
sophisticated that they might finally have succeeded in smoothing out the
destructive gyrations of capitalism's boom-and-bust cycle. ("The central
problem of depression prevention has been solved," declared another Nobel
laureate, Robert Lucas of the University of Chicago, in 2003 - five years
before the greatest economic collapse in more than half a century.)
The students' petition sparked a lively debate. The French minister of
education established a committee on economic education. Economics students
across Europe and North America began meeting and circulating petitions of
their own, even as defenders of the status quo denounced the movement as a
Trotskyite conspiracy. By September, the first issue of the Post-Autistic
Economic Newsletter was published in Britain.
As The Independent summarized the students' message: "If there is a daily
prayer for the global economy, it should be, 'Deliver us from abstraction.'"
It seems that entreaty went unheard through most of the discipline before
the economic crisis, not to mention in the offices of hedge funds and the
Stockholm Nobel selection committee. But is it ringing louder now? And how
did economics become so abstract in the first place?
The great classical economists of the late 18th and early 19th centuries had
no problem connecting to the real world - the Industrial Revolution had
unleashed profound social and economic changes, and they were trying to make
sense of what they were seeing. Yet Adam Smith, who is considered the
founding father of modern economics, would have had trouble understanding
the meaning of the word "economist."
What is today known as economics arose out of two larger intellectual
traditions that have since been largely abandoned. One is political economy,
which is based on the simple idea that economic outcomes are often
determined largely by political factors (as well as vice versa). But when
political-economy courses first started appearing in Canadian universities
in the 1870s, it was still viewed as a small offshoot of a far more
important topic: moral philosophy.
In The Wealth of Nations (1776), Adam Smith famously argued that the pursuit
of enlightened self-interest by individuals and companies could benefit
society as a whole. His notion of the market's "invisible hand" laid the
groundwork for much of modern neoclassical and neo-liberal, laissez-faire
economics. But unlike today's free marketers, Smith didn't believe that the
morality of the market was appropriate for society at large. Honesty,
discipline, thrift and co-operation, not consumption and unbridled
self-interest, were the keys to happiness and social cohesion. Smith's
vision was a capitalist economy in a society governed by non-capitalist
morality.
But by the end of the 19th century, the new field of economics no longer
concerned itself with moral philosophy, and less and less with political
economy. What was coming to dominate was a conviction that markets could be
trusted to produce the most efficient allocation of scarce resources, that
individuals would always seek to maximize their utility in an economically
rational way, and that all of this would ultimately lead to some kind of
overall equilibrium of prices, wages, supply and demand.
Political economy was less vital because government intervention disrupted
the path to equilibrium and should therefore be avoided except in
exceptional circumstances. And as for morality, economics would concern
itself with the behaviour of rational, self-interested, utility-maximizing
Homo economicus. What he did outside the confines of the marketplace would
be someone else's field of study.
As those notions took hold, a new idea emerged that would have surprised and
probably horrified Adam Smith - that economics, divorced from the study of
morality and politics, could be considered a science. By the beginning of
the 20th century, economists were looking for theorems and models that could
help to explain the universe. One historian described them as suffering from
"physics envy." Although they were dealing with the behaviour of humans, not
atoms and particles, they came to believe they could accurately predict the
trajectory of human decision-making in the marketplace.
In their desire to have their field be recognized as a science, economists
increasingly decided to speak the language of science. From Smith's
innovations through John Maynard Keynes's work in the 1930s, economics was
argued in words. Now, it would go by the numbers.
The turning point came in 1947, when Paul Samuelson's classic book
Foundations of Economic Analysis for the first time presented economics as a
branch of applied mathematics. Without "the invigorating kiss of
mathematical method," Samuelson maintained, economists had been practising
"mental gymnastics of a particularly depraved type," like "highly trained
athletes who never run a race." After Samuelson, no economist could ever
afford to make that mistake.
And that may have been the greatest mistake of all: In a post-crisis, 2009
essay in The New York Times Magazine, Princeton economist and Nobel laureate
Paul Krugman wrote, "The central cause of the profession's failure was the
desire for an all-encompassing, intellectually elegant approach that gave
economists a chance to show off their mathematical prowess."
Of course, nothing says science like a Nobel Prize. Prizes in chemistry,
physics and medicine were first awarded in 1901, long before anyone would
have thought that economics could or should be included. But by the late
1960s, the central bank of Sweden was determined to change that, and when
the Nobel family objected, the bank agreed to put up the money itself,
making it the only one of the prizes to be funded by taxpayers.
Officially, then, it is known as the Sveriges Riksbank Prize in Economic
Sciences in Memory of Alfred Nobel - but that title is rarely used. On
Monday morning, Prof. Sargent and Princeton University Prof. Sims were
widely reported to have won the Nobel Prize in Economics.
The confusion is understandable, and deliberate, according to Philip
Mirowski, an economic historian at the University of Notre Dame. "It's part
of the PR trick," Prof. Mirowski argues. Awarding the economics prize
immediately after the prizes for physics, chemistry and medicine helps to
place economics on the same level as those other natural sciences.
The prize also has helped to transform one particular ideology into economic
orthodoxy. Prof. Mirowski, who is co-writing a book on the history of the
economics prize, notes that throughout the 1970s and 1980s, economists whose
work supported neoclassical, pro-market, laissez-faire ideas won a
disproportionate number of those honours, as well as support from the
increasing numbers of well-funded think tanks and foundations that cleaved
to the same lines. People who rejected those ideas, or were skeptical of the
natural sciences model, were quickly marginalized, and their road to
academic advancement often blocked.
The result was a homogenization of economic thought that Prof. Mirowski
believes "has been pretty deleterious for economics on the whole."
The road to hell is paved with good intentions, rational expectations and
efficient markets
Many critics of neo-classical economics argue that it has a powerful
pro-market bias that's provided an intellectual justification for
politicians ideologically disposed to reduce government involvement in the
economy.
The rational-expectations model, for example, assumes that consumers and
producers all inform themselves with all available data, understand how the
world around them operates and will therefore respond to the same stimulus
in essentially the same way. That allows economists to mathematically
forecast how these "representative" consumers and producers would behave.
During a recession, say, a well-meaning government might want to enhance
benefits for the unemployed. Prof. Sargent, for one, would caution against
that, because a "rational" unemployed worker might then calculate that it's
better to reject a lower-paying job. He's blamed much of the chronically
high unemployment in some European countries on the presence of an army of
voluntarily unemployed workers, and spoken out against the Obama
administration's recent efforts to extend unemployment benefits.
Indeed, under the rational-expectations model, most market interventions by
governments and central banks wind up looking counterproductive.
Meanwhile, the efficient-markets hypothesis, developed by University of
Chicago economist Eugene Fama in the 1970s, has dominated thinking about
financial markets. It posits that the prices of stocks and other financial
assets are always "efficient" because they accurately reflect all the
available information about economic fundamentals.
By this reasoning, there can be no speculative price bubbles or busts in the
stock or housing markets, and speculators with evil intentions cannot
successfully manipulate markets. Conveniently, since markets are
self-stabilizing, there's no need for government regulation of them.
Critics point out that both these theories tend to ignore what John Maynard
Keynes called the "animal spirits" - playing down human irrationality,
inefficiency, venality and ignorance. Those are qualities that are hard to
plug into a mathematical equation that purports to model human behaviour.
These models also have failed to take into account the profound changes
wrought by globalization, and the growing importance of banks, hedge funds
and other financial institutions. Yet they have successfully provided a
"scientific" cover for an anti-regulatory political agenda that is popular
on Wall Street and in some Washington political circles.
Inside jobs: Pay no attention to that banker behind the curtain
The Great Depression of the 1930s led many economists of the day to question
some of their discipline's most fundamental assumptions and produced a
decades-long heyday for Keynesian economics. So far, the Great Recession has
led to less of a fundamental shift.
Notre Dame's Prof. Mirowski believes that more rethinking is necessary.
"Everyone thought the banks would have to change their behaviour, but they
got bailed out and nothing changed. The economics profession has also been
bailed out because it is so highly interlinked with the financial
profession, so of course they don't change. Why would they change?"
Indeed, economics may be the dismal science, but there is nothing dismal
about the payoffs for those at the top of the heap serving as advisers and
consultants and sitting on various boards. Unlike some disciplines,
economics has no guidelines governing conflict of interest and disclosure.
In 2010, the Academy Award-winning documentary Inside Job exposed several
disturbing examples of academic economists calling for deregulation while
working for financial-services companies. And in a study of 19 prominent
financial economists, published last year by the Political Economy Research
Institute at the University of Massachusetts Amherst, 13 were found to own
stock or sit on the boards of private financial institutions, but in only
four cases were those affiliations revealed when they testified or wrote
op-eds concerning financial regulation.
This year, the American Economics Association agreed to set up a committee
to investigate whether economists should develop ethical guidelines similar
to those already in place for sociologists, psychologists, statisticians and
anthropologists.
But there appears to be little enthusiasm for the idea among mainstream
economists. Prof. Lucas of the University of Chicago, in an interview with
The New York Times, objected: "What disciplines economics, like any science,
is whether your work can be replicated. It either stands up or it doesn't.
Your motivations and whatnot are secondary."
Several billion pennies for their thoughts
The critics, however, are more numerous and considerably better financed
than the French students a decade ago. In October, 2009, billionaire
financier George Soros said that "the current paradigm has failed." He
resolved to help save economics from itself. He pledged $50-million toward
the establishment of the New York-based Institute for New Economic Thinking
(INET), with a mandate to promote changes in economic theory and practice
through conferences, grants and campaigns for graduate and undergraduate
education reforms.
Perry Mehrling, a professor of economics at New York's Columbia University,
is the chair of the curriculum task force at INET. He says his graduate
students at Columbia are growing increasingly frustrated by at the tendency
to define the discipline by its tools instead of its subject matter - like
the students in Paris a decade ago, they find little relationship between
the mathematical models in class and the world outside the door.
Prof. Mehrling believes that economics education has become far too insular.
Never mind cross-disciplinary study - even courses in economic history and
the history of economic thought have all but disappeared, so students spend
almost no time reading Smith, Keynes or other past masters.
"It's not just that we're not listening to sociologists," Prof. Mehrling
laments. "We're not even listening to economists."
He says he has no problem with teaching efficient-markets and
rational-expectations theories, but as hypothesis, not catechism. "I object
to the idea that these are articles of faith and if you don't accept them,
you are not a member of the tribe. These things need to be questioned and we
need a broader conversation."
The challenge, as Columbia University economist Joseph Stiglitz said at the
opening conference of INET, is that "we need better theories of persistent
deviations from rationality."
Some of those theories are coming from the rapidly growing field of
behavioural economics, which borrows insights about human motivation from
cognitive psychology: A paper titled The Hubris Hypothesis of Corporate
Takeovers, for example, examines how the egos of ambitious chief executive
officers can lead them to pursue takeovers, even when all available evidence
suggests that the move could be a disaster.
It is not yet clear how such new approaches can evolve into workable models,
but they hint at what a post-autistic economics might look like.
Prof. Mehrling is cautiously optimistic. "There's a recognition that things
we thought were true aren't necessarily true," he argues, "and the world is
more complicated and interesting than we thought - so all bets are off, and
that's exciting intellectually."
Change comes slowly in academia. The few jobs that are available don't
generally go to people who challenge orthodoxy. But over the next decade, as
the post-crash crop of economics students make their impact felt in
government, business and schools, the lessons learned may well seep into the
mainstream.
Theories based on assumptions of rationality, efficiency and equilibrium in
the marketplace are likely to be treated with a great deal more skepticism.
Homo economicus is a lot more anxious, irrational, unpredictable and complex
than most economists believed. And, as Adam Smith recognized, he has a moral
and ethical dimension that should not be ignored.
Today, the Post-Autistic Economic Network continues to publish its
newsletter, now known as the Real-World Economic Review. It remains a thorn
in the side of mainstream economics. In an editorial in January, 2010, the
editors called for major economics organizations to censure those economists
who "through their teachings, pronouncements and policy recommendations
facilitated the global financial collapse" and pointed to the "continuing
moral crisis within the economics profession."
It is unlikely that Prof. Sargent will acknowledge any of this when he
travels to Stockholm to accept his (sort of) Nobel Prize in December. Nor is
he likely to speak about what role, if any, his models really might have
played in "wrecking the world."
But he did make one concession in his interview with the Nobel website this
week: "Many of the practical problems are ahead of where the models are," he
admitted. "That's life."
Ira Basen is a radio producer, journalist and educator based in Toronto.
C 2011 The Globe and Mail Inc. All Rights Reserved.
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