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Grasping Reality with Both Hands
Paul Krugmnan:The Instability of Moderation - NYTimes.com: Brad DeLong writes of how our perception of history has changed in the wake of the Great Recession. We used to pity our grandfathers, who lacked both the knowledge and the compassion to fight the Great Depression effectively; now we see ourselves repeating all the old mistakes. I share his sentiments.
But watching the failure of policy over the past three years, I find myself believing, more and more, that this failure has deep roots – that we were in some sense doomed to go through this. Specifically, I now suspect that the kind of moderate economic policy regime Brad and I both support – a regime that by and large lets markets work, but in which the government is ready both to rein in excesses and fight slumps – is inherently unstable. It's something that can last for a generation or so, but not much longer.
By "unstable" I don't just mean Minsky-type financial instability, although that's part of it. Equally crucial are the regime's intellectual and political instability.
Intellectual instability:
The brand of economics I use in my daily work – the brand that I still consider by far the most reasonable approach out there – was largely established by Paul Samuelson back in 1948, when he published the first edition of his classic textbook. It's an approach that combines the grand tradition of microeconomics, with its emphasis on how the invisible hand leads to generally desirable outcomes, with Keynesian macroeconomics, which emphasizes the way the economy can develop magneto trouble, requiring policy intervention. In the Samuelsonian synthesis, one must count on the government to ensure more or less full employment; only once that can be taken as given do the usual virtues of free markets come to the fore.
It's a deeply reasonable approach – but it's also intellectually unstable. For it requires some strategic inconsistency in how you think about the economy. When you're doing micro, you assume rational individuals and rapidly clearing markets; when you're doing macro, frictions and ad hoc behavioral assumptions are essential.
So what? Inconsistency in the pursuit of useful guidance is no vice. The map is not the territory, and it's OK to use different kinds of maps depending on what you're trying to accomplish: if you're driving, a road map suffices, if you're going hiking, you really need a topo.
But economists were bound to push at the dividing line between micro and macro – which in practice has meant trying to make macro more like micro, basing more and more of it on optimization and market-clearing. And if the attempts to provide "microfoundations" fell short? Well, given human propensities, plus the law of diminishing disciples, it was probably inevitable that a substantial part of the economics profession would simply assume away the realities of the business cycle, because they didn't fit the models.
The result was what I've called the Dark Age of macroeconomics, in which large numbers of economists literally knew nothing of the hard-won insights of the 30s and 40s – and, of course, went into spasms of rage when their ignorance was pointed out.
Political instability:
It's possible to be both a conservative and a Keynesian; after all, Keynes himself described his work as "moderately conservative in its implications." But in practice, conservatives have always tended to view the assertion that government has any useful role in the economy as the thin edge of a socialist wedge. When William Buckley wrote God and Man at Yale, one of his key complaints was that the Yale faculty taught – horrors! – Keynesian economics.
I've always considered monetarism to be, in effect, an attempt to assuage conservative political prejudices without denying macroeconomic realities. What Friedman was saying was, in effect, yes, we need policy to stabilize the economy – but we can make that policy technical and largely mechanical, we can cordon it off from everything else. Just tell the central bank to stabilize M2, and aside from that, let freedom ring!
When monetarism failed – fighting words, but you know, it really did - it was replaced by the cult of the independent central bank. Put a bunch of bankerly men in charge of the monetary base, insulate them from political pressure, and let them deal with the business cycle; meanwhile, everything else can be conducted on free-market principles.
And this worked for a while – roughly speaking from 1985 to 2007, the era of the Great Moderation. It worked in part because the political insulation of central banks also gave them more than a bit of intellectual insulation, too. If we're living in a Dark Age of macroeconomics, central banks have been its monasteries, hoarding and studying the ancient texts lost to the rest of the world. Even as the real business cycle people took over the professional journals, to the point where it became very hard to publish models in which monetary policy, let alone fiscal policy, matters, the research departments of the Fed system continued to study counter-cyclical policy in a relatively realistic way.
Financial instability:
Last but not least, the very success of central-bank-led stabilization, combined with financial deregulation – itself a by-product of the revival of free-market fundamentalism – set the stage for a crisis too big for the central bankers to handle. This is Minskyism: the long period of relative stability led to greater risk-taking, greater leverage, and, finally, a huge deleveraging shock. And Milton Friedman was wrong: in the face of a really big shock, which pushes the economy into a liquidity trap, the central bank can't prevent a depression.
And by the time that big shock arrived, the descent into an intellectual Dark Age combined with the rejection of policy activism on political grounds had left us unable to agree on a wider response.
In the end, then, the era of the Samuelsonian synthesis was, I fear, doomed to come to a nasty end. And the result is the wreckage we see all around us.
We could go the other way--we could make micro about myopia: about psychological, behavioral, and institutional myopia. Then micro and macro would fit together in a stable whole, and the research frontier would be all about proper institution design.
Anderson:
"But isn't that a reason to want to keep pursuing intelligent, honest, respectful dialog with people you disagree with"
Mr. Thomson, I don't know you and can't gauge your sincerity. You certainly do sound like a troll however.
Krugman's economic opponents have not wanted any dialogue with the "Samuelsonian" economists. They have treated Krugman et al. as morons and frauds. They despised anyone who thought that Keynes was a great economist
And now, faced with the breakdown of their models, the failure of their attempt to believe that a national economy works like a household economy, they are not conceding that there is something to learn from the Krugmans and DeLongs. Not at all. They are retreating into a dream castle of illusion.
Steve Bannister:
Rob :
Shorter Mark Thomson: Why does Krugman have to be so shrill?
Because, Rob, and Mark, many economists and the political climate are dangerously wrong for the health of the macro-economy.
Better shrill opposition than lemmings approaching a cliff since they will take all down with them. What this conversation exposes is a true schism in the economics profession, and large difference from much of the public discourse. The shrill component has history on its side. Most refuse to study, let alone accept, the history.
dr2chase:
@Mark -- concern troll much?
As a profession that has pretensions to a scientific inclination, data and mathematics ought to trump politeness. And the first time, you try politely, of course. Krugman's got the data, he's made predictions about this slump, he's been proven correct, and he justifies his predictions with "his" theory. That's good enough for me.
The so-called "fresh-water crowd" cannot come up with water-holding explanations for the crash and slump, never mind that their predictions for our economy have failed to be fulfilled (I've got a fixed-rate mortgage, I'm waiting for this hyperinflation they've been predicting). May I suggest, politely, that their understanding of economics has (as we say in my business) "upside potential"? If they cannot explain what happened, and fail to correctly predict what will happen, what good, exactly, are they?
Note that the entire field of microeconomics relies on some assumptions that are at best approximately correct. "Keeping up with the Joneses" implies dependent utility functions implies no proof of general welfare maximization -- just for example.
Proof fails, you're in the land of faith, not theorems. Perfect information and rationality -- not only does that sound like a poor model for most of the people I know, it's been proven that (for example) it is possible to construct CDO bundles for which deriving useful information about their value requires solving a member of a famous family of computationally hard problems (strictly speaking, the hardness of said hard problem is "faith-based", but that is because legions of computer scientists have been taking a crack at solving it, and all have failed).
Maynard Handley:
"the kind of moderate economic policy regime Brad and I both support – a regime that by and large lets markets work, but in which the government is ready both to rein in excesses and fight slumps – is inherently unstable. It's something that can last for a generation or so, but not much longer."
OK, Brad, better late than never.
How about, however, that you take the next step and start understanding the corollary: I don't care how technically justified it is --- if the government's response to the failure of big finance is to shovel money at the rich while ignoring the poor, that's ALSO going to lead to nasty nasty consequences.
Otherwise Paul is going to be writing another column in fifteen years bemoaning how America in the 2010's learned nothing from the growth of fascist parties all over Europe in the 1930's.
Omega Centauri:
"Otherwise Paul is going to be writing another column in fifteen years bemoaning how America in the 2010's learned nothing from the growth of fascist parties all over Europe in the 1930's."
Well stated Maynard. When I start running on about what the optics of the policy may be doing, thats what I'm getting at.
hartal :
Phyllis Deane, 1989:
"While the prevailing orthodoxy conformed to what was generally thought of as Keynesian economics--as it did for most of the 1950s and 1960s--the standard undergraduate introductory text expounded the fundamental principles of the discipline in two compartments. Part I typically described a macro-economic model inspired by Keynes's General Theory. Part II presented neo-classical micro-economic theory leading to the traditional conclusion that, in freely competitive markets, the operations of the price system tend over the long run to maximize aggregate output. This sat uneasily with the Keynesian message that in an uncertain world, effective demand tends to fall short of the level required to bring all available labour and capital into productive use."
There was another attempt to square the circle. How could one square a sanctification of the micro-economic logic of markets with a macro-economic recognition of unemployment equilibrium? Simply by insinuating that the unemployed are genetically incapable of the the productivity levels demanded in a high tech economy. That is, they are too expensive and there is nothing the market can do about it.
James Rytting:
Prof. Krugman's gives economic Ideas a hegelianesque life of their own, which to an extent they have. However, as always, one gets a feeling that the theme is a way to dodge issues of class and power.
Intellectual trends, especially those closely wedded to ideology, such as economics, it appears to me, are frequently, although not always, rationalizations of attempts by dominant groups to impose their goals on society and extirpate others.
Here, the post war objective (because of labor and social movements during WWII and to a lesser extent Vietnam) was not to disprove the "Samuelson synthesis" through learned syllogisms, but to undermine politically those groups -- labor unions, civil rights organizations, and fractions of academia and democratic party -- who pushed the Fed to make full employment a primary goal; that meant, by-the-by, undermining the legitimacy of a theory in which full employment is necessary for a stable macroeconomy.
However, underneath it all was the drive of corporations, and coteries of privileged individuals that own and enrich themselves through them, to regain the power and control they formerly enjoyed and believe themselves presently entitled.
Turning to Prof. DeLong's comment with that in mind, it would follow that plans for institutional design requires more than overcoming myopia, namely, a long struggle, against vicious, self-righteous opposition.
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Yahoo! Finance
In his new documentary Inside Job, filmmaker Charles Ferguson spoke to some of the biggest names from Wall Street to Washington to academia to get a first hand account of what caused the 2008 financial meltdown and how the financial system reach its breaking point.
Ferguson points to 20 years of deregulation, rampant greed (a la Gordon Gekko) and cronyism. This cronyism is in large part due to a revolving door between not only Wall Street and Washington, but also the incestuous relationship between Wall Street, Washington and academia.
The conflicts of interest that arise when academics take on roles outside of education are largely unspoken, but a very big problem. "The academic economics discipline has been very heavily penetrated by the financial services industry," Ferguson tells Aaron in the accompanying clip. "Many prominent academics now actually make the majority of their money from the financial services industry, not from teaching or research. [This fact] has definitely compromised the research work and the policy advice that we get from academia."
Example after example of this revolving door between Academia and Wall Street and academia and Washington are brought to light in Inside Job. Ferguson showcases this unspoken problem by actually interviewing a number of academics with ties to the government and/or financial sector. To wit:
- Martin Feldstein is currently the George F. Baker Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research. While holding advisory positions in both the Reagan and GWB administration he also served on the board of both AIG and AIG Financial Products from 1988-2009.
- Glenn Hubbard is currently the Dean of the Columbia Business School. Hubbard was Chief Economic Advisor during the Bush Administration, currently on the board of Met Life and previously on the board of Capmark.
- Frederic Mishkin is currently a professor of finance and economics at the Columbia Business School. From 2006-2008 he was a member of the Federal Reserve Board. Also in 2006, he was paid $124,000 by the Icelandic Chamber of Commerce to write a report on Iceland's financial sector.
Academics at 20 Paces
This last example is probably the most notable in Inside Job. Mishkin became combative and seemingly uncomfortable at some of Ferguson's questions – especially regarding the report commissioned by Iceland's Chamber of Commerce.After the premiere of the film this month, Mishkin wrote a piece in the Financial Times accusing Ferguson of ambush journalism.
"In July 2009, I agreed to be interviewed on camera for a film that was presented to me as a thoughtful examination of the factors leading up to the 2008 global economic collapse," Mishkin writes. "About five minutes after the microphone was clipped to my lapel, however, it became clear that my role in the film was predetermined - and I would not be wearing a white hat."
Feguson tells Aaron there is little truth to what Mishkin contends. "I conducted an interview with professor Mishkin that lasted over an hour and touched on many subjects. I certainly did ask him his views on the crisis, but it did turn out that professor Mishkin did have a number of things to conceal and he became very uncomfortable during the interview."
Since our interview, Ferguson wrote a response to Mishkin in the FT. "Professor Frederic Mishkin misrepresents both his own activities, including his interview for my film, and the widespread conflicts of interest which have distorted academic economics and its role in the financial crisis," Ferguson writes. "The only reason we now know of Prof Mishkin's payment for the Iceland report is that he was later forced to disclose it when he was appointed to the U.S. Federal Reserve Board."
Feguson is astonished by the lack of regulation demanding financial disclosure of all academics and is now pushing for it. "At a minimum, federal law should require public disclosure of all outside income that is in any way related to professors' publishing and policy advocacy," he writes. "It may be desirable to go even further, and to limit the total size of outside income that potentially generates conflicts of interest."
It should be noted that Ferguson himself has ties to academia. He spent many years as a visiting scholar at M.I.T. and U.C. Berkley.
Inside Job is currently playing in theatres nationwide.
A Yahoo! User:
Criminals do not tend to investigate themselves, file charges against themselves or sentence themselves to prison. Hence nothing has been done.
Truth Detective:
BRAVO! Unless you are an American, on the congressional gravy train, a finer reform could not be devised. Everyone should push the President to implement these changes via executive order, until the Congress polices itself; which will never happen. Please refer to this re-posting & forward to the White House. Thanks to the honest Americans who are able to still see the greatness of our system:
The time has come to get past the democrat/republican blame game.
Congressional Reform Act of 2010. We need to get a Senator to introduce this bill in the US Senate and a Representative to introduce a similar bill in the US House. These people will become American heroes
1. Term Limits. 12 years only, one of the possible options below.. A. Two Six-year Senate terms B. Six Two-year House terms C. One Six-year Senate term and three Two-Year House terms
2. No Tenure / No Pension. A Congressman collects a salary while in office and receives no pay when they are out of office.
3. Congress (past, present & future) participates in Social security. All funds in the Congressional retirement fund move to the Social Security system immediately. All future funds flow into the Social Security system, and Congress participates with the American people.
4. Congress can purchase their own retirement plan, just as all Americans do.
5. Congress will no longer vote themselves a pay raise. Congressional pay will rise by the lower of CPI or 3%.
6. Congress loses their current health care system and participates in the same health care system as the American people.
7. Congress must equally abide by all laws they impose on the American people.
8. All contracts with past and present Congressmen are void effective 1/1/11.
The American people did not make these contracts with Congressmen. Congressmen made all these contracts for themselves. Serving in Congress is an honor, not a career. The Founding Fathers envisioned citizen legislators, serve your term(s), then go home and back to work.
If you agree with the above, pass it on. If not, don't. This is America, you have choices\
Stephen:
Academics have been shills for the bogus arguments supporting globalization for decades. This enabled congress to sell out the American middle class in return for huge bribes from corporations who wanted tax breaks to move their operations to slave wage countries and bring products into the US market tariff free.
A Yahoo! User
Unfortunately, experience and connections beget experience and connections, and everyone wants someone in the post with both experience and connections. Thus the revolving door.
Academics get by making money in the financial services industry because it serves as "real-time research". And (yes, the truth hurts...) how difficult would it be to criminalize the money center bank executives when all of their skullduggery was blessed by the ratings agencies and guaranteed by Fannie Mae and Freddie Mac at the insistence of the Democrats in Congress and over the negligence of GW Bush's head of the SEC? The banks should have been split up and required to hire new management. Given we didn't do that we are doing the next best thing which is ousting as many people as we can from elected government.
Al
Feguson is astonished by the lack of regulation demanding financial disclosure of all academics "
It should have been obvious, since Big capital, and its 35000 lobbyists, writes the bills for their politcal cronies in Washington, and the state level, which often times is not read by the politician...
Who says we live in a democracy? And now, corporatations, aka capitalist elites aka rich and super rich, can throw unlimited money (bribes) at this process so... It will definitely not get any better, that is certain.
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"Our God Is Money": Economics Isn't a Dismal Science-It's an Ersatz Religion
"Are you an Austrian?" I was asked recently, in the polite tones reserved for asking if I were, say, Jewish or Muslim or Christian.
I'd been asked the question while discussing macro-economic policy in the United States-
-actually, "discussing" doesn't quite capture what I'd been doing:
I'd been lambasting the Neo-Keynesian drivel of spend!-spend!-spend!, which I deplore-"They're like drunk sailors with the national credit-card-trawling for good blow and cheap whores in a Tijuana back alley!"-
-while at the same time ridiculing the Monetarists' obsession with money supply-"Money-supply fetishists are just like foot fetishists-only twice as creepy, and only half as reasonable!"-
-all the while insisting that in this Global Depression, savings had to be the priority-austerity the only policy prescription that made any kind of sense.
"Are you an Austrian?" came the question.
"I'm an agnostic," I answered flippantly-but then instantly realized that my answer went to the heart of the problem with economics.
It's no great insight to say that economics-the so-called "dismal science"-has had a dismal track-record in terms of predicting macro-economic events over the last forty-odd years.
And as for the last couple of years? Sheesh-a monkey throwing darts would have done a better job of predicting how the macro-economic picture would play out.
Very few people have been asking why this is so. Very few people have been asking why economics has failed so spectacularly at predicting the Global Financial Crisis, and very few people have asked why economics cannot seem to solve the Global Depression we are currently experiencing.
This is an important question-especially if we are collectively putting so much of our faith in economists and their dismal science, as the sherpas who will lead us out of this current mess that we're in, and back up to the mountain top.
First of all, what is economics?
The dictionary definition is, economics concerns itself with the study of the production, consumption and transfer of wealth-everything from accounting to finance to macro-economics.
Now, I have no truck with micro-economics, generally speaking; accounting and finance. All good to me, within certain limitations. When I speak here of economics, I'm referring to macro-economics.
What does economics do, as a discipline?
The answer is obvious: Economics tries to predict the future.
Lots of sciences try to predict the future-and they succeed, too, without much controversy.
For instance, physics and chemistry claim that, if gasoline is mixed with air inside an enclosed cylinder, and then ignited, the force will drive a piston which will drive a crankshaft which will drive a car.
Lo and behold, several hundred million cars drive around the planet, amply fulfilling physics' and chemistry's predictions. Score for them.
But what about economics?
Well, economics claims it is a science-yet for all its "scientific" models, economics found itself in 2007 with its hands up against the wall and its collective pants down around its ankles, when it utterly failed to predict the Global Financial Crisis, and the subsequent Global Depression.
Actually, there were a number of non-economists whose predictions were far more accurate than any paid economists'. But all those eccy Ph.D.'s with all the academic trimmings? They got the big ol' raspberry, when the Global Financial Crisis hit.
In fact, economics definitively showed itself to be a failed science much earlier: Back in 1998, the spectacular failure of Long Term Capital Management showed them up to be fools.
LTCM-run by legendary trader John Meriwether-was a hedge-fund that used "scientific" trading methods developed by Myron Scholes, Robert Merton and Fischer Black, who invented options pricing. In fact, Scholes and Merton won the Nobel Prize in economics for their work-in fact, Scholes and Merton worked at LTCM, applying their "scientific" methods to LTCM's trading strategies.
Talk about the best and the brightest! Meriwether opened his shop in 1994 with these two Big Brains running the engine room, along with a host of other Big-Brains-in-Training-and what happened?
In less than four years, Long Term Capital Management blew up. A "once in a billion years event" happened in less than four years-which means that either LTCM was the unluckiest outfit in the world . . . or maybe economics and finance isn't a science.
Why be coy: Economics isn't a science-it never has been. It can't be-because its subject matter is people: And people aren't predictable.
Circumstances being equal, water will freeze at 0°C, and will boil at 100°C-every time, time after time, no matter what.
But people? You can never predict when they'll freeze you out, or boil over in rage.
That hasn't stopped economics from pretending to be a science. That's why the discipline has spent the last 60 years importing math and physics wholesale: So as to create a veneer of scientific certainty and respectability.
So if economics isn't a science, then what is it?
Well: What human activity pretends to higher knowledge of a super-human power that controls human lives and destinies? What human enterprise tries to convince other human beings that they-and only they-know what will happen next? What group of human beings claim that their secret knowledge uniquely allows them to know what will happen-and so therefore, you must listen to all that they say, and never ever question their commands, decrees or pronouncements, no matter how foolish?
Easy: Priests. Priests in the service of a religion.
Ancient Mayan priests used their knowledge of the stars and the planets to not merely predict the future-they used that knowledge to control the populace, and therefore get their own way.
That is exactly what economics has been doing, as of late: Claiming knowledge of the future, and claiming unique access to a higher truth-unavailable to the ordinary man and woman-so as to get the populace to do their bidding.
Just like religions, economics uses esoteric knowledge and language to discriminate between its acolytes and the unlearnéd, the elect and the unwashed.
Just like religions, economics builds sophisticated-seeming theoretical structures, that seem to explain reality.
They don't, of course: The mathematical models economist spend all their time building are simply not up to the task of faithfully reproducing the macro-economic reality, and thereby predicting it.
Why? Because there are so many variables that human invention simply cannot cover them all. Human invention cannot predict all the moves in a game of chess-and chess only has six classes of pieces moving on a mere 64 squares.
Imagine something like a world's economy: How many classes of pieces? How many squares? How many moves? How many variables?
Heavens!
Yet economics-ridiculously-claims it has models which can predict the future-but what's even more ridiculous, there are many who believe them.
Just like all successful religions, economics is very good at convincing people that it is the One True Path to Wisdom-and not just unsophisticated or uneducated people: Actually, as all good con-men know, the easiest people to fool are sophisticated, intelligent, educated people. It's precisely their sophistication, intelligence and education which makes them arrogant, makes them think they can't be fooled: They think they're too smart to be fooled.
So of course, they're fooled most of all.
Just like all religions, economics is used to explain away the actions of its more powerful adherents, and to protect the interests of its most powerful patrons.
What did economists and the other clergy of economics claim, in the Fall of 2008? "If we don't save the banks, we are all doomed!!!"
That was of course not true: If the banks had not been bailed out, they would have gone into bankruptcy, the stock holders would have been wiped out, the bond holders would have gotten a haircut (or a buzzcut, rather)-but life would have gone on.
In fact, the financial sector today would be healthier, if the Too Big To Fail banks had been allowed to fail, and then restructured along Sweden '92 lines.
But not one economist in any position of influence advocated the bankruptcy and restructuring of the Too Big To Fail banks. Some actually advocated a "hold your nose and get it over with" approach to the TBTF banks-
-which is unsurprising: Establishment religions are not in place to change a society, but to maintain a society. Establishment religions benefit those in power by maintaining the status quo-their job is to make sure the populace never questions the status quo, no matter how wide the gap between the stated principles on the one hand, and what is actually done on the other.
The fact that the TBTF banks were not allowed to fail-and instead were bailed out to the detriment of the economy as a whole, but to the benefit of a small, well-positioned minority-goes to show what the establishment religion of economics is used for: To shore up the interests of those in power, to the detriment of the society as a whole.
Not only that, the Religion of Economics is used to explain away blatantly hypocritical measures as part of The Grand Design.
"It's a bad solution, but what are we gonna do? Let the banks fail? That will bring about a market collapse! The end of the free market! So we gotta hold our noses and get it over with.": How many, many times did we all hear economists say this, about saving the TBTF banks? That it was systemically necessary to save the banks.
Are those the words of someone who truly believes in the "creative destruction" that is supposed to be such an integral part of the free markets?
No: They're the words of a priest of the establishment religion, protecting the interests of his masters.
Just like all powerful religions, economics has different sects and denominations.
Marxism used to be a creditable example: It was one more cult in the menagerie of economics. But this particular sect was discredited by the collapse of the Soviet Union and the Warsaw Pact nations. The gross and blatant failure of Marxism made it impossible to argue that it was a viable macro-economic policy option-so its fiercest followers were driven underground. (But they're still out there, by the way: Like Gnostic Christians, waiting for their chance to come back out.)
Marxism is an obvious example of economics-as-religion-but I would argue that all schools of macro-economic thinking are no different from Marxism. The reason is because, like Marxism, all the schools of macro-economic thinking come at their subject from an a priori perspective.
Thus, Austrians are no different from Keynesians, or Neo-Keynesians, or Monetarists, or Modern Monetary Theorists, and these all have absolutely no difference from Marxism: They all come from theoretically arrived at principles, which are then applied to the empirical data. If the data does not fit the theory, then the data is dismissed, and discounted as not germane to the problem at hand.
This dismissal is where the various schools of economic thought get in trouble: That which they dismiss is usually the brick wall they find themselves crashing into.
Neo-Keynesians are arguing spend!-spend!-spend! on stimulus and whatnot, up to and including war as a possible solution to the fall in GDP. The more insane among this crowd, like Paul Krugman, argue that the Obama stimulus package was not enough-it had to be bigger.
Neo-Keynesians don't realize that no stimulus will ever be big enough-but if they have their druthers, they'll bankrupt a nation.
Monetarists, like Ben Bernanke and his Lollipop Gang at the Federal Reserve, argue that increasing the money supply will create inflation-which will mean the economy is getting back on track.
Monetarists don't realize that they're committing several logical flaws, principal among them being the post hoc ergo propter hoc logical fallacy, with regards to inflation. If they have their druthers, they'll drive the nation into hyperinflation.
Austrians argue that the government should cut spending and raise taxes, so as to balance the budget-and magically, the economy will improve, with no loss of GDP.
Austrians are smoking something-and whatever it is, it's powerful. So I want some.
Just like all religions, the various sects and denominations confer membership to its believers. They invite you to belong.
Notice how economists of a particular school rarely question the fundamental orthodoxies of their sect. Sure, little spats here and there over minor, peripheral issues within their denomination. But about the big pillars of their order? Nary a quibble, nary a peep, nary a doubt.
In fact, debate within the various churches is so small-bore and trivial, that you quickly realize that the quibbles aren't about economics: The quibbles are jockeying for position within the school of economic thought. Like peacocks, showing off their useless plummage? Like that.
The one thing all the sects of the Religion of Economics all agree upon is growth: All agree that an economy must grow every year-year after year-no excuses-no matter what.
This is where economics fails most of all.
Of course, perpetual growth is ridiculous: Nothing can grow every year without fail. Nothing should be forced to grow year after year. Trees need to be pruned, growth consolidated.
Nevertheless, the current leadership of the American, European and Asian economies are all under the delusion of the same orthodoxy-growth!-growth!-growth!
The American economic leadership in particular is a slave to this economic orthodoxy. But as I argued in The Short-Sightedness You Get From Staring At A Single Number, deliberately and systematically turning all your macro-economic efforts towards inflating the Gross Domestic Product inevitably leads to distortions in the overall economy.
Growth, in and of itself, is not a metric of anything-and it can easily be perverted. Much of the debt accrued by the U.S. Federal government over the last 30 years-and the last ten in particular-was used to goose the economy to levels of growth that were unsustainable, and which have led to the situation we currently find ourselves in.
And what is the situation we currently find ourselves in?
The United States government and the American people spend more money than they bring in. They have been doing this for going on 40 years-and now the bill has finally come due.
That's America's problem-it's really not more complicated than that.
My solution to this problem? "Cut spending and raise taxes, so as to balance the budget. With a balanced budget, begin building a solid economy on a solid economic foundation."
This apparently makes me an Austrian-Monetarists and Neo-Keynesians dismiss me, of course. They assume that, like all Austrians, I believe that cutting spending, raising taxes and closing the budget deficit will magically spur growth in GDP.
Actually, I don't.
See, I'm not an Austrian. Not only that, I do not commune at the church of economics. Call me a son-of-a-bitch if you must, but don't ever call me an economist.
Rather, I'm a pragmatist: At this time, the best thing to do in order to maintain long-term social stability is to cut spending, raise taxes, close the budget deficit, and have negative growth for three or four years.
In other words, stop trying to avoid the Global Depression, and fully dive into it. Avoid Japan's fate of Lost Decades. Let the markets really do their creative destruction. Let the debt overhang be wiped out via bankruptcies. Let the chips fall where they may-let the whole unstable house of cards crash to the ground-just get it over with, once and for all.
Of course, this will never happen. The orthodoxies of economics won't allow it.
Herd Redirection:
Right now 'Experts' are our Gods, whether they are experts on economics, politics, religion...
That will change, as the people lose 'faith'.
IMO, everything (economic policy, gov't intervention, etc.) should be determined according to trial and error. But first we have to reset the system.
Exposing the oligarchy one psycho at a time.
hbjork1:
I agree with walkure>
The story does not have to "be the same". Having had the opportunity to watch the American body politic through WWII and the decades since I think the populace is starting to "sober up" in terms of their expectations. The grief isn't over yet and I am seeing some little signs that the inflation that will offend a lot of people, including me, is starting. There will be demonstrations and political rancor but the public is beginning to be interested in what kind of people they are electing. We will be more tired, even exhausted by the combination of deflation of income and inflation of costs and increase in random theft. But, IMO the "movie star" model in politics will go out and the conservative ethical model will become more popular. Those dramatically seeking attention will gradually give it up as they discover that no one is paying attention to that anymore.
Yep, it will take 2 or 3 years. A lot of honest people will have been somewhat cheated but the population will eventually support ethical governance. For those who don't understand "ethical governence" that means penalties for fraud at all levels, including public office. And there will be no real revolution because, when all is said and done, we do have a representative government even though it is a large land mass with big differences in climate and approaches to living. Approach to exhaustion will be the pacifier. Except for Canada, there will be no place that the middle American can go and be reasonably at home.
Folks who want perspective on the push toward WWII should read "Paris 1919"(Six Months that Changed the World) by Margaret MacMillian. Not a hard read but a heafty book with detailed accounts of the people and events. It details how the various deciders got to where they were and some indication of how the alignments of WWII were established 20 years later.
Best I can do. Time to park my keyboard and watch to see how it all turns out.
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Gerald Epstein:Conflicts of Interest and the Financial Crisis: It's Also the Economics Profession, Stupid!, by Gerald Epstein: Even the Queen of England could see that the economics profession messed up big time in the lead up to the financial meltdown. On a visit to the London School of Economics in 2009 she asked why economists' failed to foresee the crisis. After a "serious" study, a group of eminent economists' said economists had a "failure of imagination", suggesting, perhaps, the need for more envisioning courses in Economics PhD programs. ...A more sensible answer begins with the observation that most of the economics profession was utilizing the wrong theories - theories based on efficient markets and rational expectations – rather than the much more informative ideas based on Keynes, Minsky, and those of my colleague James Crotty, among others (see the discussion at the Institute for New Economic Thinking) who see financial markets as inherently unstable and bankers in need of serious constraints.But, until now, there has been way too little focus on the answer actually given by the Professor to whom the Queen originally directed her question. He reports: "…she asked me: 'How come nobody could foresee it?' I think the main answer is that people were doing what they were paid to do, and behaved according to their incentives, but in many cases they were being paid to do the wrong things from society's perspective." (Guardian, 26 July, 2009 )And as we like to remind our students, economists are people too. ...While one cannot be sure these payments affect views on financial theory and regulation, they certainly create a conflict of interest. Yet, ... economists almost never reveal their financial associations when they make public pronouncements on issues such as financial regulation. Jessica Carrick-Hagenbarth and I did a study of 19 prominent academic financial economists who were members of two influential groups that have played a key role in the financial reform and regulation debate in the U.S. Of the 19 academic economists in these groups, 70% advised, owned significant stock in or were on the board of private financial institutions. But you wouldn't know by looking at their self-identification in media appearances, policy work or academic papers.Examining their media appearances and academic papers between 2005 and 2009 in which they discussed financial reform, we found these economists rarely, if ever, revealed their ties to private financial firms, preferring instead to identify only their prestigious academic affiliations. The only economist who routinely identified his private financial affiliations is one who was trying to sell a financial product. These economists thus leave the impression that, in discussing issues of financial reform, they are speaking only from the perspective of "objective", "scientific" economics while they might have more material matters at stake.The American Economics Association, has no rules to discourage, much less prevent, this behavior (see the excellent work of George DeMartino). ... The American Sociological Association ... urges sociologists to disclose financial connections "that may have the appearance or potential for a conflict of interest….in public speeches and writing"). Economists should adopt this approach.Even more importantly, more of us economists who are not faced with such conflicts should step up and get involved in the financial reform fight which is heating up over the implementation of the Dodd-Frank Act. Send in comments on key rule making, such as the Volcker Rule; join SAFER or other groups fighting for reform. We must act as a counter-weight to these self-serving economists who will continue to oppose serious financial reform as they drape themselves in the cloak of economic science.No argument with the call for important financial ties to be disclosed, but I think this is a bigger problem.
Winslow R.:
"The American Economics Association, has no rules to discourage, much less prevent, this behavior.."
So we have a perfect case study. It sounds like the AEA has been captured just as our government has been captured?
Are these economists getting paid enough to have their names run through the mud as are Obama and Congress?
http://www.vanderbilt.edu/AEA/AboutAEA/board.htm
All it takes is minimum $300 to get the campaign started. Start a non profit fund and I'll donate.
Mark's Fund to Change the World of Economics :)
Think you could get them up to speed with email?
"* Does not include email addresses; only postal addresses."
Terms We reserve the right to request pre-payment. Pre-payment must accompany first-time orders. If an existing account is past due (over 30 days from invoice date), pre-payment will be required on future orders. Necessary billing adjustments will be made after completion of order. Our customer is the party contracting the order; the invoice is due and payable within 30 days of the invoice date. Orders cancelled after completion will be billed $300.00 plus shipping charges to cover running cost and handling charges.
anne:
Mark Thoma:
http://select.nytimes.com/2005/12/19/opinion/19krugman.html
December 19, 2005
Tankers on the Take By PAUL KRUGMAN
Not long ago Peter Ferrara, a senior policy adviser at the Institute for Policy Innovation, seemed on the verge of becoming a conservative icon. Before the Bush administration's sales pitch for Social Security privatization fell flat, admiring articles about the Bush plan's genesis often gave Mr. Ferrara credit for starting the privatization movement back in 1979.
Now Mr. Ferrara has become a different sort of icon. BusinessWeek Online reports that both Mr. Ferrara and Doug Bandow, a senior fellow at the Cato Institute, were paid by the ubiquitous Jack Abramoff to write "op-ed articles favorable to the positions of some of Abramoff's clients."
Now, I never had any illusions about intellectual integrity in the world of right-wing think tanks. It has been clear for a long time that so-called analysts at many of these think tanks are, in effect, paid to support selected policies and politicians. But it never occurred to me that the pay-for-play schemes were so blatant.
In fact, most deals between lobbyists and conservative intellectuals probably aren't that blatant. For the most part, people employed by right-wing think tanks don't have to be specifically paid to support certain positions, because they understand that supporting those positions comes with the job. Senior fellows at Cato don't decide, after reconsidering the issue, that Social Security shouldn't be privatized. Policy analysts at the Heritage Foundation don't take another look at the data and realize that farmers and small-business owners have nothing to gain from estate tax repeal.
But it turns out that implicit deals between think tanks and the interests that finance them are sometimes, perhaps often, supplemented with explicit payments for punditry....
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Newsweek
The failure of the economics profession to address our deeper problems theoretically is mirrored by the failure of other sciences on a more practical level. To wit: America's best minds are still heading to Wall Street to an unnerving, even pathological degree-further evidence that finance remains the dominant sector of the economy. The evolution of the financial sector's trading and banking practices into arcane rocket science in recent decades had a lot to do with…rocket scientists. After the end of the Cold War and the collapse of the Soviet Union in late 1991, top physicists and engineers and other major-league brains weren't needed as much. With the advent of the "peace dividend" (read: Pentagon cuts), many of them headed for Wall Street and became "quants." This trend brought two new, big things to Wall Street: a whole-new level of intellectual horsepower-the upper reaches of the IQ scale-and a new layer of important players who had no reason to doubt that markets worked as formulaically as the weapons systems they had once puttered over. That's partly how "structured finance," derivatives, and other products have grown so complex that not only regulators but even Wall Street CEOs can no longer understand them.
Yet this trend in turn can't change without a reordering of what economists call "incentives." Pay scales on Wall Street continue to outstrip those in other professions outrageously. The Obama administration and Congress have done little legislatively or through use of the bully pulpit to try to reorient compensation practices so that perhaps some of our greatest minds won't go into useless financial engineering but instead will begin to consider real engineering again. Wall Street execs have been whining for two years that to reduce pay incentives and bonuses would cost the firms their best talent. The government's response should be YES! That's precisely the idea. Finance was once a means to an end: the growth of the real economy. Banking once served industry and services. Now finance has become the end, and the real economy is subservient to financial services (it's no surprise that after the crisis, over-the-counter derivatives trading quickly climbed back up to more than $600 trillion). "At some point in our recent past, finance lost contact with its raison d'être," European Central Bank chief Jean Claude Trichet said earlier this year. "Finance developed a life of its own…Finance became self-referential." As long as this pathological state of affairs persists, questions of global growth and social welfare will continue to depend on Wall Street and the enduring fallacies of free-market finance.Recently, the National Science Foundation sent out a query asking economists and social scientists to draw up "grand challenge questions that are both foundational and transformative"-a request that one recipient, Andrew Lo, a highly regarded financial economist at MIT, says is a first in his experience. But one problem is that the economics profession "has gotten much more intolerant of divergence from orthodoxy," says Philip Mirowski, an economic historian at Notre Dame. "The range in which dissent happens is so narrow. In a sense they still cannot imagine the system can operate to undermine itself. That is not a position that is allowed anywhere in the economics profession. The field got rid of methodological self-criticism. This Great Moderation stuff was just arrogance, hubris." Indeed, the joke on economists, says one of them, Rob Johnson, is that they create simplistic models that depend on people behaving as rational actors motivated by self-interest, yet "they have a blind spot regarding themselves." The way they squabble mulishly to defend now-indefensible positions is itself evidence of how flawed those rational-actor models are.
New thinkers say they are still having trouble breaking in. Among the new NSF grant awardees is J. Doyne Farmer, a physicist at the Santa Fe Institute who is trying to bring the idea of complexity back into economics by making use of advanced computing power to map human economic behavior the way weather or climate change is tracked. But Farmer says he got his $450,000 grant for a three-year study of systemic risks in markets only after a sympathetic NSF case officer overruled negative assessments by "neoclassical economists" who reject any model that doesn't tend toward general equilibrium. "The established view just holds this stuff back," Farmer says. "One of the dangerous cultural patterns that economics has fallen into is an excessive emphasis on theorem proof for its own sake rather than what gives you scientific results. That's led to a disdain for computer simulation." Johnson, who is director of the new Institute for New Economic Thinking funded by George Soros, says: "You do see some new thinking, but it doesn't get traction in terms of policy. It's a symptom of how far right society has gone."
The great names in the profession have not necessarily helped. The top economists in the Obama administration-Summers; Christina Romer, the just-departed chair of the Council of Economic Advisers; and her replacement, Austan Goolsbee-are all part of the orthodoxy. Critics say Summers should know as well as anyone how the old thinking has been outstripped. As a Harvard professor, Summers wrote after the 1987 stock-market crash that it was impossible to believe any longer that prices moved in rational response to fundamentals. He even cautiously advocated a tax on financial transactions. Yet Summers, one of the world's most astute economists, later abandoned these positions in favor of Greenspan's view that markets will take care of themselves. And in the current era, Summers and the rest of the Obama team seem to have underestimated the depth and systemic nature of the economic crisis. Stimulus spending was timid (in deference to political antipathy to big government), mortgage workouts meager, and financial reform minimalist. The administration maintains it did as much as it could under the political constraints, but others disagree. "The financial-reform bill and other changes in the regulatory landscape are more incremental," says MIT's Lo. "It's a reaction to the most immediate set of events as opposed to a more profound rethinking about the underlying causes of the crisis."
A little history is in order here: it was largely because the field of economics came to be dominated by "neoclassical" thought-or the idea that markets are rational and can reach "equilibrium" on their own-that so-called financial innovation on Wall Street was allowed to run amok in recent decades. That led directly to the crisis of 2007–09. No matter how crazy or complex the products got, the theory was that, with little government oversight, the inherent stability of markets would keep things from getting too out of hand. It was in large part because of this way of thinking that government intervention of any kind in the markets, including regulation, came to be seen as a kind of heresy, especially after the Soviet Union collapsed and command economies and "statism" were thoroughly discredited.
The new financial-reform law has changed that to some degree, but it still leaves most of the major decisions about government oversight to the same regulators who failed last time. We are still, to a large extent, flying blind in conceptual terms. Just as the Great Depression demonstrated to John Maynard Keynes and his followers that markets often behaved badly-leading to the Keynesian reinvention of economics in the '30s-this present crisis drove home the truth, or should have anyway, that rational models of markets don't work well because there are too many unknowns. People most often don't behave as rational actors. There is no real equilibrium in the real world. Above all, market economies are capable of destroying themselves. This is especially true in the world of finance, which has always worked according to different rules than other sectors of the economy and is much more prone to panics and manias. In 1983, a young Stanford economist named Ben Bernanke published the first of a series of papers on the causes of the Great Depression. The financial system, Bernanke said, was not unlike the nation's electrical grid. One malfunctioning transformer can bring down the whole system. "I've never had a laissez-faire view of the financial markets," Bernanke told me, "because they're prone to failure." Even Friedrich Hayek, the godfather of 20th-century laissez-faire thinking, believed that financial markets were more subject "to bouts of instability," says one of his biographers, Bruce Caldwell of Duke University, a self-described libertarian scholar.
Yet amid the free-market triumphalism of the post–Cold War era, all this hard-won wisdom about the differences in finance was forgotten or ignored. To policymakers in Washington, it seemed silly and nitpicky to treat finance as a different animal. The dominant thinkers were the "rational expectations" economists of the Chicago school who simply assumed capital flows, no matter how open, would be stable.
We now know differently. But the question remains: how should we think about our outsized financial sector now, and how can it be made to serve the larger economy-rather than the other way around? Shouldn't we have learned our lesson from the Great Recession, just as economists did after the Great Depression? Should there not be a new economics that develops fresh concepts reordering the balance between markets and governments, accepting the necessity of both? The great economist Paul Samuelson used to say, paraphrasing the physicist Max Planck, that "economics progresses one funeral at a time." It was necessary for the old lions to pass on, in other words, before new seminal thinking took hold. But we may not have time to wait upon funerals. Policy is driving relentlessly ahead, and the economics profession and other sciences have been left far behind.
Hirsh is the author of the newly published Capital Offense: How Washington's Wise Men Turned America's Future Over to Wall Street.
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...It is important to realize that the crisis in which we find ourselves is not just a market failure but also a regulatory failure, and even more importantly, a failure of the prevailing dogma about financial markets. I have in mind the Efficient Market Hypothesis and Rational Expectation Theory. These economic theories guided, or more exactly misguided, both the regulators and the financial engineers who designed the derivatives and other synthetic financial instruments and quantitative risk management systems which have played such an important part in the collapse. To gain a proper understanding of the current situation and how we got to where we are, we need to go back to basics and re-examine the foundation of economic theory.
I have developed an alternative theory about financial markets which asserts that financial markets do not necessarily tend toward equilibrium; they can just as easily produce asset bubbles. Nor are markets capable of correcting their own excesses. Keeping asset bubbles within bounds have to be an objective of public policy. I propounded this theory in my first book, "The Alchemy of Finance," in 1987. It was generally dismissed at the time, but the current financial crisis has proven, not necessarily its validity, but certainly its superiority to the prevailing dogma.
Let me briefly recapitulate my theory for those who are not familiar with it. It can be summed up in two propositions. First, financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. This is the principle of fallibility. The degree of distortion may vary from time to time. Sometimes it's quite insignificant, at other times it is quite pronounced. When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.
Second, financial markets do not play a purely passive role; they can also affect the so-called fundamentals they are supposed to reflect. These two functions that financial markets perform work in opposite directions. In the passive or cognitive function, the fundamentals are supposed to determine market prices. In the active or manipulative function market, prices find ways of influencing the fundamentals. When both functions operate at the same time, they interfere with each other. The supposedly independent variable of one function is the dependent variable of the other, so that neither function has a truly independent variable. As a result, neither market prices nor the underlying reality is fully determined. Both suffer from an element of uncertainty that cannot be quantified. I call the interaction between the two functions reflexivity. Frank Knight recognized and explicated this element of unquantifiable uncertainty in a book published in 1921, but the Efficient Market Hypothesis and Rational Expectation Theory have deliberately ignored it. That is what made them so misleading.
Reflexivity sets up a feedback loop between market valuations and the so-called fundamentals which are being valued. The feedback can be either positive or negative. Negative feedback brings market prices and the underlying reality closer together. In other words, negative feedback is self-correcting. It can go on forever, and if the underlying reality remains unchanged, it may eventually lead to an equilibrium in which market prices accurately reflect the fundamentals. By contrast, a positive feedback is self-reinforcing. It cannot go on forever because eventually, market prices would become so far removed from reality that market participants would have to recognize them as unrealistic. When that tipping point is reached, the process becomes self-reinforcing in the opposite direction. That is how financial markets produce boom-bust phenomena or bubbles. Bubbles are not the only manifestations of reflexivity, but they are the most spectacular.
In my interpretation equilibrium, which is the central case in economic theory, turns out to be a limiting case where negative feedback is carried to its ultimate limit. Positive feedback has been largely assumed away by the prevailing dogma, and it deserves a lot more attention.
I have developed a rudimentary theory of bubbles along these lines. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced. Eventually, market expectations become so far removed from reality that people are forced to recognize that a misconception is involved.
A twilight period ensues during which doubts grow and more and more people lose faith, but the prevailing trend is sustained by inertia. As Chuck Prince, former head of Citigroup, said, "As long as the music is playing, you've got to get up and dance. We are still dancing." Eventually a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction.
Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions. Disillusionment turns into panic, reaching its climax in a financial crisis.
The simplest case of a purely financial bubble can be found in real estate. The trend that precipitates it is the availability of credit; the misconception that continues to recur in various forms is that the value of the collateral is independent of the availability of credit. As a matter of fact, the relationship is reflexive. When credit becomes cheaper, activity picks up and real estate values rise. There are fewer defaults, credit performance improves, and lending standards are relaxed. So at the height of the boom, the amount of credit outstanding is at its peak, and a reversal precipitates false liquidation, depressing real estate values.
The bubble that led to the current financial crisis is much more complicated. The collapse of the subprime bubble in 2007 set off a chain reaction, much as an ordinary bomb sets off a nuclear explosion. I call it a superbubble. It has developed over a longer period of time, and it is composed of a number of simpler bubbles. What makes the superbubble so interesting is the role that the smaller bubbles have played in its development.
The prevailing trend in the superbubble was the ever-increasing use of credit and leverage. The prevailing misconception was the belief that financial markets are self-correcting and should be left to their own devices. President Reagan called it the "magic of the marketplace," and I call it market fundamentalism. It became the dominant creed in the 1980s. Since market fundamentalism was based on false premises, its adoption led to a series of financial crises. Each time, the authorities intervened, merged away, or otherwise took care of the failing financial institutions, and applied monetary and fiscal stimuli to protect the economy. These measures reinforced the prevailing trend of ever-increasing credit and leverage, and as long as they worked, they also reinforced the prevailing misconception that markets can be safely left to their own devices. The intervention of the authorities is generally recognized as creating amoral hazard; more accurately it served as a successful test of a false belief, thereby inflating the superbubble even further.
It should be emphasized that my theories of bubbles cannot predict whether a test will be successful or not. This holds for ordinary bubbles as well as the superbubble. For instance, I thought the emerging market crisis of 1997-98 would constitute the tipping point for the superbubble, but I was wrong. The authorities managed to save the system and the superbubble continued growing. That made the bust that eventually came in 2007-8 all the more devastating.
What are the implications of my theory for the regulation of the financial system?
First and foremost, since markets are bubble-prone, the financial authorities have to accept responsibility for preventing bubbles from growing too big. Alan Greenspan and other regulators have expressly refused to accept that responsibility. If markets can't recognize bubbles, Greenspan argued, neither can regulators - and he was right. Nevertheless, the financial authorities have to accept the assignment, knowing full well that they will not be able to meet it without making mistakes. They will, however, have the benefit of receiving feedback from the markets, which will tell them whether they have done too much or too little. They can then correct their mistakes.
Second, in order to control asset bubbles it is not enough to control the money supply; you must also control the availability of credit. This cannot be done by using only monetary tools; you must also use credit controls. The best-known tools are margin requirements and minimum capital requirements. Currently, they are fixed irrespective of the market's mood, because markets are not supposed to have moods. Yet they do, and the financial authorities need to vary margin and minimum capital requirements in order to control asset bubbles.
Regulators may also have to invent new tools or revive others that have fallen into disuse. For instance, in my early days in finance, many years ago, central banks used to instruct commercial banks to limit their lending to a particular sector of the economy, such as real estate or consumer loans, because they felt that the sector was overheating. Market fundamentalists consider that kind of intervention unacceptable, but they are wrong. When our central banks used to do it, we had no financial crises to speak of. The Chinese authorities do it today, and they have much better control over their banking system. The deposits that Chinese commercial banks have to maintain at the People's Bank of China were increased 17 times during the boom, and when the authorities reversed course, the banks obeyed them with alacrity.
Third, since markets are potentially unstable, there are systemic risks in addition to the risks affecting individual market participants. Participants may ignore these systemic risks in the belief that they can always dispose of their positions, but regulators cannot ignore them because if too many participants are on the same side, positions cannot be liquidated without causing a discontinuity or a collapse. They have to monitor the positions of participants in order to detect potential imbalances. That means that the positions of all major market participants, including hedge funds and sovereign wealth funds, need to be monitored. The drafters of the Basel Accords made a mistake when they gave securities held by banks substantially lower risk ratings than regular loans: they ignored the systemic risks attached to concentrated positions in securities. This was an important factor aggravating the crisis. It has to be corrected by raising the risk ratings of securities held by banks. That will probably discourage loans, which is not such a bad thing.
Fourth, derivatives and synthetic financial instruments perform many useful functions, but they also carry hidden dangers. For instance, the securitization of mortgages was supposed to reduce risk through geographical diversification. In fact, it introduced a new risk by separating the interest of the agents from the interest of the owners. Regulators need to fully understand how these instruments work before they allow them to be used, and they ought to impose restrictions guard against those hidden dangers. For instance, agents packaging mortgages into securities ought to be obliged to retain sufficient ownership to guard against the agency problem.
Credit-default swaps (C.D.S.) are particularly dangerous. They allow people to buy insurance on the survival of a company or a country while handing them a license to kill. C.D.S. ought to be available to buyers only to the extent that they have a legitimate insurable interest. Generally speaking, derivatives ought to be registered with a regulatory agency just as regular securities have to be registered with the S.E.C. or its equivalent. Derivatives traded on exchanges would be registered as a class; those traded over-the-counter would have to be registered individually. This would provide a powerful inducement to use exchange traded derivatives whenever possible.
Finally, we must recognize that financial markets evolve in a one-directional, nonreversible manner. The financial authorities, in carrying out their duty of preventing the system from collapsing, have extended an implicit guarantee to all institutions that are "too big to fail." Now they cannot credibly withdraw that guarantee. Therefore, they must impose regulations that will ensure that the guarantee will not be invoked. Too-big-to-fail banks must use less leverage and accept various restrictions on how they invest the depositors' money. Deposits should not be used to finance proprietary trading. But regulators have to go even further. They must regulate the compensation packages of proprietary traders to ensure that risks and rewards are properly aligned. This may push proprietary traders out of banks, into hedge funds where they properly belong. Just as oil tankers are compartmentalized in order to keep them stable, there ought to be firewalls between different markets. It is probably impractical to separate investment banking from commercial banking as the Glass-Steagall Act of 1933 did. But there have to be internal compartments keeping proprietary trading in various markets separate from each other. Some banks that have come to occupy quasi-monopolistic positions may have to be broken up.
While I have a high degree of conviction on these five points, there are many questions to which my theory does not provide an unequivocal answer. For instance, is a high degree of liquidity always desirable? To what extent should securities be marked to market? Many answers that followed automatically from the Efficient Market Hypothesis need to be re-examined.
It is clear that the reforms currently under consideration do not fully satisfy the five points I have made, but I want to emphasize that these five points apply only in the long run. As Mervyn King explained, the authorities had to do in the short run the exact opposite of what was required in the long run. And as I said earlier, the financial crisis is far from over. We have just ended Act II. The euro has taken center stage, and Germany has become the lead actor. The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficiencies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation. But I prefer to discuss this subject in Germany, which is the lead actor, and I plan to do so at the Humboldt University in Berlin on June 23. I hope you will forgive me if I avoid the subject until then.
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June 8, 2010 The Baseline Scenario
Patrick McGeehan at the New York Times recently wrote about a New York Fed study finding that studying economics makes you a Republican. The headline conclusion is that the more economics classes you take, the more likely you are to be a Republican. Majoring in economics or business is also more likely to make you a Republican. (See Table 2 in the original paper.) The study is based on thousands of observations of undergraduates at four large universities over three decades, so it is focused on undergraduate-level economics.
Studying economics also affects your position on several public policy issues. Of seven issues, economics courses were significantly associated with the five following positions (Table 6):
- Tariffs are bad.
- Trade deficits are not so bad.
- The government should not cap oil prices in response to a supply shock.
- Raising the minimum wage increase unemployment for low-wage workers.
- Income distribution should not be more equal.
These are all pro-free market, anti-government intervention positions.
What I thought was particularly interesting, however, was that on some issues people who study undergraduate economics are more doctrinaire free marketers than professional economists. Table 5 compares the undergraduates responses to those of a survey of people with a Ph.D. in economics. The Ph.D. economists were more likely than economics majors to hold the textbook position on tariffs or the minimum wage. However, they were also more likely than economics majors (or, frankly, any majors) to think that income inequality should be reduced and that government spending should not be reduced, and they were somewhat less worried about federal budget deficits.
This is something I've mentioned in passing often. I think that basic economics, the way it is taught today, tends to give people reflexive pro-free market, anti-government positions - positions that are not held by people with a deeper exposure to economic thinking. When your understanding of government finances is based on reading the newspaper, it's somewhat eye-opening to come to college and learn that free markets lead to maximum societal welfare and taxes impose a deadweight loss on society - the pictures are so simple and compelling. That's why a little bit of economics makes you more likely to be a Republican.
But when you learn more about principal-agent problems, information asymmetries, and so on, you learn that those simple pictures are simplistic to the point of being misleading. That's why Joseph Stiglitz argues in Freefall that understanding economics is crucial to understanding why free markets often lead to suboptimal outcomes. The problem isn't knowledge per se; it's a little bit of knowledge.
James I've a modestly educated friend whose passion is to lower the tax rates on the top 1% of income earners of which I am one. I argue that we at the top ought to pay more back into the system for the privilege of having had the opportunity to earn such a handsome living. A more vibrant, healthy, middle class is vital to political stability…..yet, disinformation turns poor people into rich people sympathizers, while the well off continue to view these disinformed voters for what they are…suckers.
saucymugwump
In other words, your friend is selfish and self-centered. I know someone - I won't call him a friend - who thinks that that Social Security is the worst law ever passed. He thinks that way because he is a business owner who resents paying FICA for his employees. He thinks he is a damn genius because his business is successful. He cannot understand that luck played a large part in it, as it does for all businesses.
Disinformation converts poor people into sympathizers for the wealthy pretty much exclusively in the USA and maybe the UK. Ben Franklin had a lot to do with that, with many people today confusing the teachings of Franklin with Jesus.
Bribes:
I doubt the friend is necessarily selfish and self-centered. That's the beauty of this type of free-market ideology. It means you can promote the general good by promoting the good of those already (very) well off. And if you're in that top 1%, it means having your cake and eating it, too.
Also, not only does luck play a role in any successful business, but the society that person lives in is also central. This includes not only the legal system, police, roads, supply chains, etc., but also the fact that we have workers who have decent wages.
Off the top of my head, society's investment in workers means a more stable, law-abiding, educated, tolerant business environment. This creates savings in training, security, information access, access, transportation, etc. It creates an environment in which certain businesses can exist in the first place.
All these come from a well-educated middle class and government investment in society. It also supplies a place for him to spend his hard-earned money, which would otherwise not be available.
Jestak
The point about undergrad econ majors being more doctrinaire than grad students or PhDs is one I find very believable; it certainly fits my own experience. When I finished my BA in economics, I was a very hard-core free marketeer. After a few years of grad school, even in the very pro-free market program at UCLA, my positions had moderated quite a bit.
Matt
This is SO true. I can't even say how many times I've had a conversation with a (snide!) economic conservative who felt secure their views were provably superior, only to find out that basically their knowledge included only a memory of that little black dead weight loss triangle from Econ 0A (yes that's a 0).
One thing you don't bring up which I think is important is that the way economics is taught is part of the problem. What's emphasized seems to me driven largely by the irrational ideological views of the Chicago style economics that has dominated the field for 50 years.
If everyone uses Mankiw's book, it should be unsurprising, even though it includes a basic intro to many of the concepts that lead professional economists to not hold those falsely based right-wing opinions, that the main message students take from it and their professors is a simplistic anti-government, anti-tax message.
The actual study of economics leads one to understand that Chicago style free market bleating is not science but simply religion serving corporate interests. The only economists worth reading are Veblen, Keynes and Galbraith. Unfortunately, students get no further than what is said about them by academic charlatans spouting careerist drivel.
groo
nothing much new under the sun; investigating the literature myself a couple of year ago, I found two studies:
1) Do Economists Make Bad Citizens? (1996) and 2) ECONOMISTS FREE RIDE, DOES ANYONE ELSE? (1981) (Google the sources, if interested)
From conclusions in (1)
First, all parties concede that economics training encourages the view that people are motivated primarily by self-interest.
Second, there is clear evidence that this view leads people to expect others to defect in social dilemmas (Marwell and Ames, 1981).
Third, there is also clear evidence that when people expect their partners to defect in social dilemmas, they are overwhelmingly likely to defect themselves (Frank, Gilovich and Regan, 1993, p. 167).
The logical implications of these three points appear to place a heavy burden of proof on those who insist that economics training does not inhibit cooperation.
From conclusions in (2)
… Comparisons with the economics graduate students is very difficult. More than one-third of the economists either refused to answer the question regarding what is fair, or gave very complex, uncodable responses. It seems, that the meaning of 'fairness' in this context was somewhat alien for this group. Those who did respond were much more likely to say that little or no contribution was 'fair'. In addition, the economics graduate students were about half as likely as other subjects to indicate that they were 'concerned with fairness' in making their investment decision. …
This second conclusion leads me to the suspicion, that lying about your intentions is internalized early on.
One of the many points, which leads to my overall conclusion, that economics not a science. More like a 'toolkit of pretension and obscuration'.
############### My personal conclusion at that time was, that e.g. the Post-Autistic Econmics movement was a necessity, and that the current lot of economists is -mostly- more a burden than a relief to mankind.
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March 8, 2010 | naked capitalism
Yves,
These and other comments make me think of the Sweden's particular responsibility with regard to the global financial crisis. Assar Lindbeck was nominated for the Dynamite award for these reasons:
"Assar Lindbeck is a Swedish neoliberal, right-wing economist, relatively unknown internationally. He is however the head schemer behind the so called Nobel prize in economics. The Nobel prize in economics is one of the main factors behind the almost total conversion of the economics profession (and in fact of world public opinion) to market fundamentalism. Assar Lindbeck therefore deserves a place beside better known economists such as Lawrence Summers and Robert Lucas."
(I have met Lindbeck once at a seminar when we debated the pros and cons of a constitution for the EU, but that is another, very marginal, story).
Alfred Nobel did not include economics in his 1895 list of prices to be awarded. The "Nobel Price in Economics" is a recent invention that many believe infringes on Nobel's "IP rights". For a critical view on the price in economics and arguments why it should be abandoned: http://rwer.wordpress.com/2010/02/12/on-the-%E2%80%98nobel-prize-in-economics%E2%80%99-and-the-monopoly-of-neoclassical-theory-at-university-departments-of-economics-3/
So, to the extent that "belief" in economics as a pure, stand alone, discipline of science has been reinforced with the promotion of its disciples by bestowing them with Nobel prizes, Sweden has a special part of the blame. It is ironic that this should be the case since Sweden is the country where politics and economics are widely regarded as the two sides of the same coin.
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Price:$20.45 & eligible for FREE Super Saver ShippingWhy are we in such a financial mess today? There are lots of proximate causes: over-leverage, global imbalances, bad financial technology that lead to widespread underestimation of risk.
But these are all symptoms. Until we isolate and tackle fundamental causes, we will fail to extirpate the disease. ECONned is the first book to examine the unquestioned role of economists as policy-makers, and how they helped create an unmitigated economic disaster.
Here, Yves Smith looks at how economists in key policy positions put doctrine before hard evidence, ignoring the deteriorating conditions and rising dangers that eventually led them, and us, off the cliff and into financial meltdown. Intelligently written for the layman, Smith takes us on a terrifying investigation of the financial realm over the last twenty-five years of misrepresentations, naive interpretations of economic conditions, rationalizations of bad outcomes, and rejection of clear signs of growing instability.
In eConned, author Yves Smith reveals:
- why the measures taken by the Obama Administration are mere palliatives and are unlikely to pave the way for a solid recovery
- how economists have come to play a profoundly anti-democratic role in policy
- how financial models and concepts that were discredited more than thirty years ago are still widely used by banks, regulators, and investors
- how management and employees of major financial firms looted them, enriching themselves and leaving the mess to taxpayers
- how financial regulation enabled predatory behavior by Wall Street towards investors
- how economics has no theory of financial systems, yet economists fearlessly prescribe how to manage them
I have been a huge fan of author Yves Smith's Naked Capitalism blog for years now, and this book is a major triumph, putting in one place and fully developing the major themes that Smith has explored on her blog over the course of the recent financial crisis. While this might appear to be well-plowed territory, Smith tells it as an economics story that is really a story of a failed democracy.
The linchpin of her work is the ascendant power of Wall Street over Main Street during the Greenspan era and now the Bernanke era. Complicit with politicians, financial regulators, and the revolving door of government service, the big Wall Street firms and banks have, according to Smith, seized the political process to serve their narrow, financial interests instead of those interests that serve a well-functioning polity.
However, despite the seemingly inflammatory thesis, this book is no rant. Smith, an industry insider, is one of the smartest and expert observers of the flawed process that we now have, and the book is loaded with incisive explanations that pull it all together for the average reader in clear and at times thrilling language.
In the broadest sense, this is a moral tract as much as an economics and political one. The moral outrage, while controlled and polite, is palpable on every page. In essence, this is a deeply informed book that does what economics and political tracts almost never do: it tugs at the heart as well as at the mind.
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Repeating my introduction to the original post: "Gavin Kennedy continues his battle to eradicate misconceptions about Adam Smith":More of Adam Smith's Views of State Activity, by Gavin Kennedy: Scott Sumner ... writes a lively Blog, The Money Illusion ("A slightly off-center perspective on monetary problems") here:
"Adam Smith did favor laissez-faire""Mark Thoma recently linked to a Gavin Kennedy post that argued Adam Smith did not favor laissez-faire. I don't agree. The evidence cited was a one page list of government interventions that Smith favored. The US, by contrast, has enough government interventions to fill a New York City phone book, if not a small library. And the US is regarded by the Europeans as "unbridled capitalism." Even Hong Kong intervenes in far more ways than Adam Smith contemplated. Of course Smith was not an anarchist, he did favor some government intervention in the economy. But relative to any real world economy, his policies views were extremely laissez-faire."
"I see this as a common cognitive bias. The Gavin Kennedy list posted by Thoma certainly looks impressive, but when you think more deeply about the issue it is a trivial set of policies. I'm reminded of what happens when I discuss Singapore, which usually ranks number two in the world in lists of economic freedom. People will often respond by telling me about all the ways the Singapore government intervenes. My response is "so what?" They could intervene in a 1000 different ways and still be vastly more laissez-faire than the US government. Laissez-faire is a relative concept, and always has been. I've read The Wealth of Nations, and Adam Smith is clearly a pragmatic libertarian."
Comment "The evidence cited was a one-page list of government interventions that Smith favored."
Yes, that's why Viner listed the numerous examples of government interventions. They amount to a lot more than can be summarised a single page and the compromise notions that Smith was laissez-faire in the meaning of the term.
Smith never used the phrase 'laissez-faire'. His association with the idea was an invention in the 19th century and was widely promoted by modern economists from the mid-1950s. About this time Smith was also widely promoted as the author of the notion of there being "an invisible hand" in the market. Both inventions are false.
We can agree that Smith was pragmatic about policies but whether he was a pragmatic libertarian remains problematical.
It's not clear why the items in the list from Smith's Wealth Of Nations and his Lectures on Jurisprudence are "trivial" in ... Sumner's opinion, other than when he looks around the incomparably richer 21st-century United States than were the 13 British colonies in 1776 when Smith was writing.
There were hundreds of miles of inter-city roads in need of construction and repair; scores of harbours that needed to be built and dredged; thousands of bridges in need of construction; hundreds of towns that need to be paved and have street lighting in place; thousands of 'little school' constructed and staffed with state-registered teachers; scores of palliative care hospitals established for those afflicted with 'loathsome diseases'; scores of depots for stamping clothes with government quality marks; a network of post-offices established and organised; and likewise for all the other activities that Smith envisaged should be funded and managed by the state.
In practice this took near on a century to be introduced in Britain. Set against the size of commercial society in 18th-century Britain, the state sector was not 'trivial' in any meaningful sense. Nor is it today. On one thing we surely can agree: neither 18th-century Britain with its colonies in North America was not a laissez-faire economy nor are the 21st-century territories that descended from them.
Adam Smith was not a laissez-faire ideologue.
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Economics of Contempt explains why economist John Cochrane should not be allowed to talk about finance. (Bonus coverage: EofC's previous piece on John Taylor)
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January 20, 2010 The Baseline Scenario
This guest post was contributed by Dan Geldon, a fellow at the Roosevelt Institute. He is a former counsel at the Congressional Oversight Panel and a graduate of Harvard Law School.
Over the past year, there has been much discussion about how the financial crisis exposed weaknesses in free-market theory. What has attracted less discussion is the extent to which the high priests of free-market theory themselves destroyed meaningful contracts and other bedrocks of functioning markets and, in the process, created the conditions for the theory's weaknesses to emerge.
The story begins before Wall Street's capture of Washington in the 1980s and 1990s and the deregulatory push that began around the same time. In many ways, it started in 1944.
In that year, Frederich von Hayek published The Road to Serfdom, putting forward many of the ideas behind the pro-market, anti-regulatory economic view that swept through America and the rest of the world in the decades that followed. Von Hayek's basic argument was that freedom to contract and to conduct business without government meddling allowed for free choice, allocated resources efficiently, facilitated economic growth, and made us all a little richer. Milton Friedman built on Hayek, creating an ideology that resonated with conservatives and ultimately became the prevailing economic view in Washington.
While many have noted how information asymmetry, moral hazard, and agency costs reveal glaring holes in free-market theory and contributed to the current crisis, few have focused on the extent to which the supposed heirs to von Hayek and Friedman directly and purposefully created market distortions and, in the process, destroyed the assumptions of free-market theory.
In other words, the same interests that claim the mantle of von Hayek and Friedman pulled the threads from the free-market system and exposed the theory's greatest weaknesses.
In the years leading up to the crisis, the proliferation of fine print, complex products, and hidden costs and dangers – and the push against government regulations over them – exemplified the larger pattern. While touting complexity as a form of innovation and railing against every attempt at government interference, supposedly pro-market forces used that complexity to clog the gears of free market machinery and to reduce competition and maximize profit.
When consumer credit contracts are buried in so much legalese that even experts can't understand all the terms – I heard one former CEO of a top financial company admit privately that his lawyers couldn't explain various mortgage terms and conditions - how can anyone believe the mortgage contract represents meaningful free choice? What consumer is able to weigh the benefits and costs of individual financial product features buried in the fine print and decide what to take and what to leave?
The corporate assault on comprehensible contracts is important because contract law has been the bedrock of capitalism for a long as there has been capitalism. By enabling free choice, meaningful contracts maximize economic efficiency. The assumption behind von Hayek and other theorists is that robust contract law facilitates a vibrant economic system and minimizes the need for government intervention in the economy. But that went out the window when von Hayek's theory itself was used to manipulate contracts. Now that products and fine print have become so perverted and incomprehensible, how can anyone expect contracts to steer the market in economically efficient ways?
We now know that the problem of complex contracts did not just harm consumers. Municipalities across the country were lured into buying toxic derivatives and institutional investors were routinely abused at the hands of complex products. Stories about Wall Street's math wizards purposefully cramming dangerous and confusing products down the throats of the unsuspecting are commonplace and legendary.
The world has changed in fundamental ways thanks to computers and complexity can have value, but the world as we now know it has made traditional economic assumptions that assume real choice and real contracts irrelevant. All that's left is the hollow façade of choice when your broker shows you where to sign or when you click "accept" after quickly scrolling through incoherent legalese. And we all are forced to accept this even though we know that the large majority of these products – and the actual deals around them - just aren't that complicated. The only thing that's complicated are the fine print and the economically valueless tricks and traps hidden in the legalese.
Some conservatives are quick to blame the fine print on litigation and trial lawyers. But that just doesn't explain all the complexity that has come to define Wall Street. Talk to a CEO of a major credit card issuer privately, and they will admit that "stealth pricing" was purposefully innovated to maximize profit by making contracts difficult to understand and compare. The proliferation of opacity and the lack of competition in the industry are not an accident.
The industry has not only manipulated contract language to prevent real agreement (or what contract lawyers call "meetings of the mind"), but it also massively increased its negotiating leverage with counterparties by making it so onerous to walk away from boilerplate and incomprehensible terms and conditions. It's not easy to negotiate with the other side of a 1-800 number, nor is it easy to go toe-to-toe with an industry that can and does get away with tricking and trapping even supposedly sophisticated investors.
And if you think all that were enough, many of the same conservative economists and lobbyists have fought tooth and nail behind the scenes to preserve implicit government guarantees created by the bailouts – guarantees that allow large banks to access capital more cheaply than the smaller banks left struggling to compete. While touting pro-market values and railing against "big government" attempts to break up the big banks, they are directly and purposefully allowing for market distortions. And those distortions help explain the massive consolidation we're seeing in the industry, the dwindling of real competition, and the proliferation of faceless conglomerates with infinite leverage over the drafting of terms and conditions.
What's really galling though isn't that supposed free-market advocates are so hell-bent on distorting the market wherever necessary to inflate profit. What's worse is the extent to which the same interests successfully advocated the rules that allowed this to happen under the well-worn guise of–you guessed it–freedom to contract and freedom to choose. That is, through their well-financed and well-oiled lobbyist teams, they facilitated the destruction of the freedom to contract and free choice while pretending to do the opposite. They killed the free market in the name of saving it.
The greatest lesson from the crisis that we haven't yet learned is that "industry interests" and "free-market interests" are not the same. In fact, they are more like oil and water, as the industry profits most in the absence of true market competition. And so it should be no surprise that Wall Street has devoted itself to making contracts indecipherable, building boundless negotiating leverage and fighting for favorable breaks and regulation at every turn. What should be a surprise is that the same scoundrels that killed our markets (and also, mind you, wrecked the global economy and demanded taxpayer bailouts) have so ably sold themselves as natural heirs to von Hayek and Friedman - and that so many of us have let them.
By Dan Geldon
- Pacr
I agree with the point that 'industry' interests and 'free market interests' are not one and the same. I have yet to meet a CEO who truly believes in free markets: the extent with which they go to avoid the spread of information is a simple example of their opposition.
Yet this does not suddenly exonerate the free market crowd. Their model is flawed for exactly the reasons that CEO's oppose it: Friedman and Hayek's concept cannot exist. The real world is riven through with asymmetries, uncertainties, and inequalities that will always prevent its realization. The free market is an unattainable dream, an ideal, and not a representation of the real world. It belongs in academia. Meanwhile: out here in the jungle, Hayek's ideal is simply a weapon used by those who 'have' to tilt the game against those who 'have not'. It is like communism: an idea perverted into an ideology. So blame the CEO's all you want. But blame the ideologues too.
- jake chase
The real problem is government and monopoly capitalism conspiring together. Hayek warned against this. Those blaming him should read his book more carefully. Friedman is another case entirely, pretty much a charlatan.
- Roger
While Hayek's name on his birth certificate had the aristocratic participle 'von' it became illegal to use this in his native Austria in 1919 – and as a classical liberal with little affection for ancien regime fripperies he never used it himself when he published his books or made public appearances.
However 'his' wikipedia entry has the von so unless I obsessive-compulsively devote myself to removing them I suppose he is now going to be for ever posthumously re-ennobled.
- notabanker
This post is an unsurprisingly accurate overview of the financial jungle. Can we now see a fix for the situation?
Enough is enough! Why can't we see our country's government protecting we citizens from these super carpet-baggers? Freedom is for all people, not freedom to exploit financial trickery.
May I assume Dan also has a fix in mind? Let us see it. I am familiar with the problem, what I want is the solution.
- Ted K
If you take the number of people who read this blog in a year, and compare it to how many people listen to and watch Glen Beck in a month, the problem of the typical voter's comprehension and cognizance of reality becomes agonizingly clear. Most people do not even know, or could define what the problem (the problem as Mr. Geldon defines above) is. A large percentage of them aren't even literate enough to read the average post on this site, much less explain it to you. All they know is taxes. "My taxes went up, my taxes went down".
Coakley ran her campaign like a brain dead 5th grader, with campaign management like a brain dead 5th grader on weed. But she probably would have voted better on the issues than Brown will. Instead people voted for the person who could quote nonsense slogans and brag that he had a pick-up truck. George Bush might drive around a pick-up truck also, it doesn't mean you should vote for him.
- Russ
I believe that this tyranny of racketeers was always the intention right from the start, and that no one has abused the original "ideals" of the likes of Hayek and Friedman.
If there was any doubt about their original evil, Friedman's willful complicity in mass murder in Chile puts it to rest once and for all. Indeed, he thought Pinochet was too cautious.
Hernando de Soto is good on the destruction of markets and the rule of law itself through the systematic disintegration of anything which could legitmately be called a contract.
We currently live under Hobbesian conditions, and everyone outside the power structure is free to defend himself.
- Roger
As someone whose ideological journey has taken him through both libertarianism and most of the major varieties of socialism I can state that the only time I was truly a starry-eyed utopian was when I was a free-marketeer.
When they are not contaminated by the cult of Ayn Rand (whose whole life and work represents a spookily inverted mirror image of the Stalinism she fled Russia from) you do occasionally find libertarians who'll admit this – I remember hearing David (son of Milton) Friedman describing his own anarcho-capitalism as really best suited to a society of omniscient immortals.
Having said this I would put Hayek in a rather different league to Friedman and his Chicago-school acolytes – as a mitteleuropean refugee he had a far sounder view of the limits of all political activity than the jeunesse doree who came to dominate the American right.
For this reason Road to Serfdom is a bad example as it is primarily a negative work analysing why it is that socialism makes us less wealthy and less free rather than a utopian capitalist manifesto like Friedman's Free to Choose.
Even in his more positive works Hayek doesn't vulgarly celebrate the liberating powers of capitalism like Friedman (or for that matter Marx) does – rather all things considered he finds it the least bad way for imperfect human beings to organise their economies.
I've moved on a long way left since I last read Hayek but I still feel I could profit from a re-reading of some of his works – not sure I'd say the same about Friedman, Nozick, Rothbard et al.
- tippygolden
"In the years leading up to the crisis, the proliferation of fine print, complex products, and hidden costs and dangers – and the push against government regulations over them – exemplified the larger pattern."
The irony here is the volume of regulation to enforce contractual obligations under cover of government enforcement of "deregulation."
I can't think of an organisation (for example social units or the botanical world) without an underlying order or regulation.
Deregulation is unnatural. Put another way, it is natural for living things to have ordering principles.
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Jan 10, 2010 | 17 comments
Also in the HES/AEA session I organized in Atlanta was a paper by David Colander and Casey Rothschild entitled, "Sins of the Sons of Samuelson: Vision, Economic Pedagogy, and the Zigzag Wadnerings of Complex Dynamics," available at this link.
They argue that Samuelson was aware of complex dynamics and how math models could simplify insights in Marshall and others that had been expressed only in the "zigzag wanderings" of literary expression. They blame the "sons of Samuelson" for turning the push to math models, certainly led by Samuelson, into a mindless dogma that oversimplified economics and misled many in many different ways.
They proposed how to change intro textbooks to open students' minds to complexity (and Rothschild will be joining Colander as a coauthor in future editions of his popular intro textbook).
Rajiv Sethi has just posted on Samuelson's own interest in nonlinear dynamics, citing my mentioning a paper by Samuelson on Mark Thoma's blog, with Thoma linking to the Sethi piece. Sethi discusses the nonlinear version of Samuelson's multiplier-accelerator model, which appeared in the same year (1939) as his much more famous linear version. Sethi notes that I had brought this up on Thoma's blog only two weeks prior to Samuelson's death.
As a matter of fact I cite that paper by Samuelson in the paper I presented in the session at Atlanta, "Chaos Theory Before Lorenz," available on my website and also having appeared recently in print in a special issue of Nonlinear Dynamics, Psychology, and Life Sciences, honoring the late Edward Lorenz, the MIT climatologist who was reputed to have "discovered chaos on a coffee break" back in 1961. He was the person who coined the term "buttefly effect."
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