There have been many reasons offered for why the economics business wandered off into the tall grass including the notions that economists are just guys with little dicks who hate the rest of the world, or that they have been hopelessly corrupted by their patrons in the FIRE (finance, insurance, and real estate) businesses. I have several dozen institutional reasons including the fact that to get ahead in USA economics, one simply MUST do a tour of duty with a Federal Reserve Bank or another central bank internationally--don't want anyone wandering off THAT reservation, ya know.
But if I had to point to the main intellectual flaw in economics as it is currently practiced, I would have to say it is the arrogant assumption that human behavior can be mathematically modeled. The primary reason I believe this is so is because I was there when it became hip to be a math nerd in the economics departments.
The University of Minnesota in those days had a psychology department that was very full of itself. Their reputation rested on a widely used (and insanely profitable) evaluation tool called the Minnesota Multiphasic Personality Inventory (MMPI.) This test was designed around a fascinating statistical tool called regression analysis. When the MMPI was first being authored, the regression analysis was done by an army of bored grad students using slide rules.
By the time I got there, UMinnesota had acquired the ability to do regression analysis on an IBM 360--the shiny new toy in the bowels of the social sciences building. And man were folks pumped. I was pumped--I took four quarters of statistics mostly because I got to access the 360 for a $5 per quarter lab fee--an incredible bargain considering how much I used it.
But as the reality of statistical analysis sunk in, I went from "What an incredible tool!" to "What a dangerous tool in the hands of liars!" to "This is a horribly misleading tool because it validates or invalidates bullshit and profound insights with equal ease." Of course, this latter conclusion was really just variation xxxx on the nature of tools--after all you can build a cathedral or casino with essentially the same tools.
Of course, since tools are tools, the most interesting questions are not about which statistical method is more powerful (after all, regression analysis is built into Excel) the big problems of social inquiry still revolve around asking good questions. And at that point in problem-solving, economics must rely on the sorts of insights shown by Veblen, Keynes, Gabraith, Heilbroner, etc. And so the statistical tools I thought would inform my life sit idle in my Office suite. I am happy to know they are there but in truth, they aren't much help in answering the question "What DO we do when the oil runs out" and other serious questions.
Wrecking Lives Across the Globe
First, Fire the Economists
By DEAN BAKER April 14, 2011
Last month, the International Monetary Fund's Independent Evaluation Office issued a remarkable report. The report quite clearly blamed the IMF for failing to recognize the factors leading up to the worst economic crisis since the Great Depression and to provide warning to its members so that preventive actions could be taken.
The report noted that several prominent economists had clearly warned of the dangers facing the world economy prior to the collapse that began in 2007. One of these economists was Raghuram Rajan, who was actually the chief economist at the IMF when he gave a clear warning of growing financial fragility back in 2005. Yet these warnings were for all practical purposes ignored when it came to the IMF's official reports and recommendations to member countries.
The IMF deserves credit for allowing an independent evaluation of its performance in the years leading up to the crisis. It would be great if the Fed, the Treasury, the Securities and Exchange Commission and other regulatory bodies allowed for similarly independent evaluations of their own failings. Nonetheless, readers can be very confident that nothing at the IMF will fundamentally change because of this report.
The first reason for confidence in the enduring power of the status quo is that the report never clearly lays out what the basis of the crisis was. This is important because the basic facts show the incredible level of incompetence of the IMF in failing to recognize the dynamics of the crisis. moreAs the IMF struggles to regain a little intellectual legitimacy...
Lofty Rhetoric, Hollow Policies
The Ghost of Keynes at the IMF?
By MARK WEISBROT April 19, 2011
As the International Monetary Fund (IMF) and World Bank gathered in Washington for their annual Spring Meetings, there was more talk about how much the IMF has changed. IMF Managing Director Dominique Strauss-Kahn quoted John Maynard Keynes in his speech on Wednesday at the Brookings Institution:
"The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes."
In his Opening Address to the Fall Meetings last year he went further, making a point about the increase in public debt in the high-income countries that should be required reading for U.S. business journalists:
"But make no mistake: this increase of 35 percentage points [in the public debt of the high-income countries ] is mostly due to low growth, to expenditure linked to the rescue of the financial sector, to lack of revenue because of the economic downturn. Only about one-tenth comes directly from the stimulus. So the lesson is clear: the biggest threat to fiscal sustainability is low growth."
Of course, there have been some significant changes in the IMF in recent years, mostly in the area of research, where the Fund has acknowledged that controls on capital inflows are a legitimate tool for governments to use. There has been some limited lending without conditions. And although the IMF included "pro-cyclical" conditions – i.e. macroeconomic policies that worsened the downturn – in most of its agreements during the world recession, on the optimistic side, it reversed course in many cases as the downturn deepened.
But unfortunately the IMF's practice still does not match its rhetoric or even, increasingly, its own research. In Greece, Ireland, Spain, Portugal, Latvia and other countries, the Fund is still involved in the implementation of "pro-cyclical" policies that will keep these countries from recovering for a long time. For Greece, Ireland, and Latvia, for example, it will be 9-10 years before they reach their pre-crisis levels of GDP.
There is absolutely no excuse for this, from an economic point of view. Any policies that require this kind of extended period of unemployment and stagnation are by definition wrong. If this is what they need to ensure debt repayment, then the country is better off defaulting on its debt. Argentina was faced with an unsustainable debt burden and defaulted at the end of 2001. The economy shrank for just one quarter and then grew 63 percent over the next six years, recovering its pre-crisis level of GDP in less than three years. moreFortunately, there are economic historians who are keeping track of this intellectual embarrassment.
Charles Ferguson’s Inside Job forces us to fundamentally rethink the connections between economics and policy making. This entangled relation runs along a number of dimension. First there is the performativity of economics: in which ways do economic theories shape the ideas of policy makers and hence the policies they enact (i.e. the Donald MacKenzie story)? Are economists and their rational market hypothesis, CAPM models and what have you responsible for the deregulation that led to the recent financial turmoil? If so, how should economics and its relation to policy making be reorganized institutionally? Second, is it at all possible to be politically and ideologically value-free as an economist? If so, how do we distinguish a value-free economist or economic theory from value-laden ones? If not, should economists always state their ideological points of view in the first disclaimer-footnote of their papers? Are there other ways to sufficiently disentangle ideology from science? Third, should economists be allowed to be paid by the private sector for their academic work? Do we need an economic code of ethics or some other kind of formal arrangement to distinguish more clearly between academic credibility and financial gain?
Luckily, we economists need not figure this out all by ourselves. In fact, the last few years have seen a surge of books discussing the role of science in the contemporary for-profit world. Gaye Tuchman’s Wannabe U(2009) tells the story of the middle ranked university that aspires to become an elite university in an age of auditing and ranking in which universities are run by business men in business suits. Yet, although the undertone is clearly critical, Wannabe U first of all is a careful and engaging ethnographic reconstruction of the archetypical Western university that had to transform itself in the 1990s from a public institution to a private enterprise. Moreover, it reads like a novel.
The different contributions to Harold Kincaid, John Dupré and Alison Wylie’s Value-Free Science? (2007) discuss the topic from a philosophical and theoretical point of view. The basic message is that the old fact-value distinction cannot be maintained. To some extent, that is an almost trivial point. The more important argument, therefore, is that although at some level we all know that the fact-value distinction cannot be maintained, we constantly act as if it does. That, the authors argue, is a fault of contemporary society that needs to be cured. Scientists should make clear how facts and values mingle in their work, politicians should not be allowed to rely on “objective facts,” and moral convictions should never be argued to be based on values alone. Yet, convincing as the book is, it is somewhat unfortunate that the authors do not translate their calls for action into concrete measures. moreBut the big name economists still have a LOT to answer for.
Capitalism's Crisis Within, and How Larry Summers Still Doesn't Get It
Janine R. WedelAuthor, "Shadow Elite" Posted: 04/21/11 08:19 AM ET
It's strange to think that, while attending a recent conference of some of the most illustrious names in economics and finance, the talk of the 2008 market implosion actually transported me back to eastern Europe in the years before and soon after communism fell.
When listening to the many ways that economic dogma has diverged from economic reality, it began to seem as if capitalism, like communism, was a system that had rotted from within. The conference, held in the iconic setting of Bretton Woods, New Hampshire, was organized by the Institute for New Economic Thinking. INET is backed by billionaire financier and philanthropist George Soros, someone with intimate knowledge of communism and its many corruptions. The message from some at INET seemed to be, if capitalism is to thrive, it needs to be saved from itself and its most ideologically-hardened practitioners.
Among those practitioners are the free market economists at prestigious universities and institutions whose predictions have been so wildly off the mark, and the financial wizards who espouse the ideals of capitalism but have actually twisted and compromised those ideals at trading desks and boardrooms across the world. As they sold the conventional wisdom that a rising tide lifts all boats, the reality is that most of us have been pushed under water by a wave of surging income and wealth inequality.
Princeton economic historian Harold James believes that trust in economic predictions has been broken, and it's not hard to see why. In the free market utopia, markets are supposed to allocate efficiently, self-correct, and bring ever greater prosperity to all, if only regulators would get out of the way of rational financial actors. But just as in that other, now-discredited utopian system (communism), the ideology and the reality had little connection to each other. What we have seen in the disaster of the past few years is that getting out of the way allowed a small fraction of the elite to get very rich by making extremely risky bets. In my view, they used what I call shadow, or unregistered, lobbyists to shape and keep government policies to their liking. And when their luck turned, these "free marketeers" sought and got government help. So much for "getting out of the way." And welcome to the era of moral hazard, a threat which, Soros said, now "looms larger than ever before." more