Posts Tagged ‘economists’

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Special mention

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Justin Wolfers has assembled some serious information. But, in my view, he has offered a less-than-serious explanation of that information.

The information is pretty straightforward: references to economists in the New York Times have grown over time and far outnumber mentions of members of other academic disciplines, including historians, psychologists, sociologists, anthropologists, and demographers. (The same is true, as it turns out, of the number of mentions in the Congressional Record.)

I have no reason to dispute the numbers. And they make sense to me—from my own reading of the Times over many decades and the fact that, “if you are running a government agency, a think tank, a media outlet or a major corporation, and don’t have your own pet economist on the payroll, you’re the exception” (to which I would only add, major university).

Wolfers’s explanation is, however, much less serious:

This economist is drawn to conclude that if our relative success is not due to supply, then it must be demand, which means that our popularity reflects the discerning tastes of our audience in the marketplace of ideas.

What I think we need to grapple with is the economizing tendency of bourgeois society. What I mean by that is the idea that, within contemporary society, all major individual and social questions are increasingly subject to an economic logic. Should I stay in school? What kind of job should I look for? How do we organize our households? Can we eliminate poverty? Should we lower the retirement age and expand Social Security benefits? And so on and so forth.

Given the way our society is currently organized, the answers to those questions are generally viewed through an economic lens and couched in an economic language. It’s a lens and language (borrowed mostly from mainstream economics) of incentives, tradeoffs, scarcity, costs and benefits, equilibrium, and so on. It’s a discourse according to which a system based on individual decisions, private property, and markets is considered sacrosanct. And it’s a project that seeks to economize—to subject to an economic calculation—all major individual and social issues.

If that’s true, is it any wonder that economists find themselves at the top of the heap?

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One story that can be told about today’s announcement is the Royal Swedish Academy of Sciences’ own explanation: that French economist Jean Tirole has been awarded the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2014 because he “has clarified how to understand and regulate industries with a few powerful firms.”

The other story is: Tirole has shown how much the real world of capitalism—industries that are dominated by a few firms that have extensive market power, which can charge prices much higher than costs and block the entry of other firms—differs from the fantasy taught in countless introductory courses in economics: a world of perfectly competitive firms, which have no negative effects on society and which therefore don’t need to be regulated.

In addition, Tirole (in “Intrinsic and Extrinsic Motivation,” an article with Roland Bénabou, published in the Review of Economic Studies) has challenged a central tenet of neoclassical economics, that individuals always respond positively to managerial supervision and incentives. He has demonstrated, instead, that both close supervision and monetary rewards can often times backfire, especially in the long run: they can undermine intrinsic motivations, thus explaining why workers find behavioral punishments and rewards both alienating and dehumanizing.

Last year, the Academy tried to have it both ways, offering the Prize to both Eugene Fama and Robert Schiller. This year, the message is both clearer and yet unspoken: the neoclassical model of perfect competition and individual incentives bears no relation to the kinds of capitalism that exist anywhere in the world.

And the policy implication: we’ll all be better off if we take over the large firms and let workers run them for society’s benefit.

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Mainstream economics has been a disaster, especially since the crash of 2007-08. It wasn’t able to predict the onset of the crisis. It didn’t even include the possibility of such a crisis. And it certainly hasn’t been a reliable guide to getting out of the crisis.

And yet economist after economist has been stepping forward—even on the liberal side of things—to try to convince us that things are pretty much OK in the land of mainstream economics.

Just the other day, Paul Krugman tried to convince us that, leaving aside the failure to predict the crisis or even envisioning the possibility of a crisis occurring, mainstream models “did a pretty good job of predicting how things would play out in the aftermath.” The problem, for Krugman, all comes down to the “bad behavior” of some economists who have been more interested in defending partisan turf than in getting things right.

Now, Mark Thoma wants to argue that the macroeconomic models—including the “dynamic stochastic general equilibrium” models that have become the stock-in-trade of mainstream macroeconomics for the past couple of decades—are just fine. The problem, as Thoma sees it, is not with the theory or the models but with the questions economists have been asking.

What neither Krugman nor Thoma wants to admit is those very same models—hydraulic IS-LM in the case of Krugman, the rational expectations, dynamic optimizing, and representative agents of DSGE—actually direct the behavior of economists and delimit the questions they can ask. Those models are so many theoretical lenses on the world, which determine how the economists who use them interpret the world.

I understand: Krugman and Thoma desperately want to keep the precious baby. But that also means we’re stuck with the increasingly dirty bathwater.

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You know the story: Xi and his San tribe are “living well off the land.” They are happy because of their belief that the gods have provided plenty of everything, and no one among them has any wants. One day, a Coca-Cola bottle is thrown out of an airplane and falls to Earth unbroken. But the bottle eventually causes unhappiness within the tribe, leading the elders to believe it’s an “evil thing” which the gods were “absent-minded” to send them. Xi then travels to  the edge of the world and throws the bottle off the cliff. He then returns to his tribe and receives a warm welcome from his family.

I wonder if Paul Krugman expects to receive a warm welcome from the economics family after throwing the prediction bottle over the cliff.

Hardly anyone predicted the 2008 crisis, but that in itself is arguably excusable in a complicated world. More damning was the widespread conviction among economists that such a crisis couldn’t happen. Underlying this complacency was the dominance of an idealized vision of capitalism, in which individuals are always rational and markets always function perfectly.

I actually agree with Krugman on this point. Economic prediction is, in fact, impossible and the really crazy feature of mainstream economic models is the fact that endogenous crises simply can’t occur. Exogenous factors, sure, but nothing internal to the models can lead to a crash. Their idealized vision of capitalism, absent an external event (such as a credit crunch or an increase in the price of oil), simply leads to a full-employment, price-stable equilibrium.

But, wait, doesn’t the entire edifice fall when—on its own terms—the ability to correct predict is dispensed with? The whole rationale of giving up realistic assumptions about the economic system has been the ability to accurately and correctly predict the movements of the economy. That’s the mantle of predictive science that has been used, since at least the mid-1950s, to expunge all other economic theories and approaches from the discipline.

Mainstream economists can’t have it both ways: to celebrate their models for their predictive ability and then to dispense with prediction when, as in 2007-08 (just as in 1929), their models clearly failed. We need something better.

As for their track record since the crisis broke out, well, they haven’t fared much better—at least to judge by where we stand right now. Krugman, for his part, wants to stick with the hydraulic mechanisms of the textbook economic models, which “did a pretty good job of predicting how things would play out in the aftermath,” and declare that “too many influential” economists must be crazy.

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The Rethinking Economics conference starts this morning in New York City.

Here’s a link [pdf] to the schedule. The live-stream can be found here.

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Fringeli has a suggestion in the comments section on Phillip Inman’s article:

“In the Bavarian town of Lindau, where 18 Nobel-winning economists gathered last week along with 450 graduate economics students from around the world..”

close the building, set it on fire and the world would be all better off…