Economics Has a Surprising Mental Disorder

[xchrom]

http://www.alternet.org/economy/economics-and-gender



The typical mainstream economist is about as good at making predictions as a monkey reading tea leaves. Exhibit A: The financial crisis, which only a few economists outside the mainstream saw coming, despite oceans of papers, prognostications and plumb academic assignments.

The question is, why?

Researcher Vinca Bigo decided to investigate, and found a surprising explanation: the profession of economics is suffering from a collective mental disorder, causing practitioners to project their pathologies onto the rest of us. Which is very costly for you and me.

Let’s explore.

Pathological Math

In a fascinating paper, Bigo hones in on the fact that economists are in love with mathematical models, despite the glaring fact that they often don’t work in their field. The problem starts when researchers base their models on arbitrary and often ridiculous assumptions about how people and institutions behave, which leads to conclusions that are airily detached from reality. The complexities of the real world then come along to blow up those fancy models, rendering them all but useless. Yet this never stops the mainstream economist, who just goes on to make more models.

Now, this wouldn’t be so bad if these phantasms didn’t lead to policies that affect your pocketbook. But they do. According to the predictions of mainstream (often called “neoclassical”) economists, the 2007-'08 financial crisis wasn’t supposed to happen. I bet it felt pretty real to you, didn’t it? When asked by Congress why he was unable to warn Americans among the coming sh*tstorm, Alan Greenspan offered an uncharacteristic admission: the model he had used to assess the economy for decades was not worth a hill of beans.

[unblock]

1. interesting read!

of course, part of the problem is that many "mainstream economists" aren't strictly economists at all, they're *political* economists. they come with a political angle or agenda.

the classical mathematical model is a convenient way to rationalize a panglossian view of the world, which dovetails nicely with a laissez-faire/anarchic political view. if they want businesses to get away with whatever they can get away with, then a model that lets them say that "the market" leads to all sorts of positive outcomes is politically perfect.

nevermind that the classical model ignores many complexities, such as externalities, power dynamics, information discrepancies, and so on. moreover, even then, those supporting the status quo invariably ignore that the classical model relies heavily on vigorous competition, even as they use the model to justify a decrease in competition (mergers, e.g.).

[xchrom]

2. +1

it is an interesting read -- and combines a number of different things.

[JHB]

3. I may have seen pieces of this in college...

...as a major in another math-intensive field (astronomy) talking shop with econ majors at social gatherings.

They'd describe some part of their theory, like how the market would act in a self-correcting rational fashion, and I would ask "OK, I understand that as the theoretical ideal, but how do you factor in real-world complications?" The answer was invariably "no, no, you don't understand. That's how it works!" Sometimes I pushed on and got what sounded to me like circular arguments and assumptions that seemed more like assertions than something developed from data.

I used to just chalk it up to them being eager undergrads who hadn't had to deal with real work in their field yet (and, ultimately, at these gatherings I was more interested in looking for dates than getting into the nitty-gritty with people who set off my arrogantprick-o-meter), but over time, I've wondered if those bad first impressions were a symptom of something more than overconfident self-proclaimed know-it-alls. If economics wasn't being affected by a form of Lysenkoism.

In his blog over the past few months, Paul Krugman has written of how in some economics circles appear to be completely ignorant of old work on some of the questions faced today because it was never taught to them -- it was too Keynesian for the people running the curricula.

It's one of those areas that I know I don't know it with enough depth to have confidence in my perceptions, but what I've perceived so far doesn't speak well of the sort of economics accepted in circles of power.

[laundry_queen]

6. I agree.

I haven't taken a ton of econ courses, but I've taken a few (my major is accounting not economics). They seem to be unable to understand that their models ONLY work in a vacuum. I'm not sure if it's because I'm in Canada, but thankfully they do teach a lot of Keynesian stuff at my school. However, I almost hate learning about it, because it makes for such a glaring contrast in how the current system is run and just how totally fucked up and WRONG it is.

[Benton D Struckcheon]

4. They ignore Keynes, simply.

Keynes' central insight was simple: in a world of complete uncertainty, investments are made only under the condition that the person who makes that investment has a reasonable expectation of getting his money back on demand (liquidity) and of course, of making a profit.
What disappears in a crisis is that first criteria. That's when maximum uncertainty sets in, and everyone just closes up their wallets and sits on them. The only way to get them to open their wallets again is to stimulate enough demand that liquidity becomes, once again, something the investor can rely on. The private economy then gets moving again.
Keynes correctly described his theories as moderately conservative: it's not like he was Marx or something. But the way the neoclassical folks and the ones who follow them act, you'd think he was.
The worst is Taleb, who thinks Keynes didn't account for a world of complete uncertainty, when that was in fact his starting assumption. If ever there was a case of ideology getting in the way of truth, Taleb is it.

[JHB]

5. More than ignore, it seems.

Conservatives practically demonize Keynes because the actions required to reduce that uncertainty are part of the "activist government" they despise, and by attacking Keynes they attack the intellectual framework for it. That effect appears to have carried over on the academic side.

[hunter]

7. Our "market economy" is a religion; it's just that simple.

In science the way one manipulates numbers in a model doesn't change the nature of the universe itself.

Look a physics. Relativity still existed before Einstein came along to describe it. We were not living in a Newtonian universe before that.

The earth has never been "the center of the universe" whatever humans happened to believe at the time.

No matter the mathematical models we create to describe our universe, the universe is not going to change to accommodate them.

Economic theory isn't like that.

Congress could pass a law to change the speed of light, or set pi=3, but the universe doesn't care. If we try to live by the laws of Congress and ignore the laws of nature, then nature will kill us. We can't legislate "zero gravity zones" and do away with elevators in buildings, or wings on airplanes. Step into an elevator shaft without an elevator, fall, and die. The wings come off your airplane, fall, die. Your pi=3 engines explode? Die.

To an outsider observing our current economic system it is clear that only a small percentage of economic activity is actually "productive," in the sense of making this world a richer place, not just for humans, but for the overall cultural and biological diversity of life itself, and not just human culture and biology either. Wolves have a culture. Whales have a culture. Condors have a culture.

But most of the things economists call "productive" are actually exploitive. There is "profit" to be made by destroying the natural environment and increasing the overall misery of cultural populations such as ourselves.

There's nothing "productive" about that exploitive sort of profit.

There's so many ways religions can fuck us up. How many gay people have our religions discarded? Alan Turing? Far, far, beyond that, and into the depths of hellish sorts of despair .

How many rich cultures and environments have our religions destroyed?

What do we know? Somewhere in North America maybe there was a plant that cured some common form of cancer. The indigenous people knew about it, knew how to use it. Then the Europeans invaded, killed off the indigenous people and their culture, and slash-and-burn destroyed the forest where the rare plant grew.

We are much poorer today for that.