That is the title of a new paper in the latest issue of Critical Review, by Colander, Goldberg, Haas, Juselius, Kirman, Lux, and Sloth. The article is not yet online, but the abstract is here:
Economists not only failed to anticipate the financial crisis; they may have contributed to it–with risk and derivatives models that, through spurious precision and untested theoretical assumptions, encouraged policy makers and market participants to see more stability and risk sharing than was actually present. Moreover, once the crisis occurred, it was met with incomprehension by most economists because of models that, on the one hand, downplay the possibility that economic actors may exhibit highly interactive behavior; and, on the other, assume that any homogeneity will involve economic actors sharing the economist’s own putatively correct model of the economy, so that error can stem only from an exogenous shock. The financial crisis presents both an ethical and an intellectual challenge to economics, and an opportunity to reform its study by grounding it more solidly in reality.
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This is absolutely right. Hopefully, people will give the Austrians a chance before they decide that economics is inherently useless.
awesome
Economics is inherently useful – like medicine.
But…
Like medicine “in practice” – it’s an art.
People will always make mistakes…
For too many economists, “exogenous shock” is defined as “reality.”
“People will always make mistakes…”
Yeah, mainstream economists always (only) make mistakes.
Years ago, I approached the dean of my school’s dept of economics looking for support in an effort to establish a free market economics forum within the department. He leaned back in his chair, gave a wry smile and said, “we’re pretty much all big spenders here.”
I thank him in retrospect, as I ended up switching my major from economics to engineering and have since enjoyed a less frustrating academic and professional career than I’m certain I would have experienced otherwise.
The failure of the MS economists is a massive ethical failure as much as anything. The economists have built themselves a self-profiting guild, not a science, upon pseudo-scientific math games — and most of them damn well knew it. They have done everything they can to avoid critical analysis and self-reflection, intentionally blinding themselves to massive, well-known and obvious anomalies in their guild-building math-game paradigm.
There really should be shame among the economists, but I don’t think many of them are capable of it. Their loyalty is to the guild, and science or explanatory success be damned.
Colander et al write:
“The financial crisis presents both an ethical and an intellectual challenge to economics”
Mises said it the best: “For the aim of science is not to explain reality, but rather to vindicate ideals.â€
Economics did NOT lose! It came second, just like the Germans in WW2! We’re ALL winners, but we don’t have prizes for everyone. Governments get votes by ensuring that there are no losers, so get with the political program.
Economic Wisdom
Wednesday, July 8, 2009
Which Is Greater, The Financial Crisis Or The Ideological Crisis?
“The financial crisis presents both an ethical and an intellectual challenge to economics, and an opportunity to reform its study by grounding it more solidly in reality.”
The financial crisis is really only a subplot of the greater ideological crisis! And yes the ideological crisis presents both an ethical and intellectual challenge to economics.
The ideology that is about to die, either a sudden or a long painful death, is the illusion of moral authority. All ego-driven intervention and interpretation are the agents of that crippling disease.
One important point to note: the ethical and intellectual challenge to the economics profession necessitates the investigation of the divine economy theory!
Economists didn’t lose just the Keynesians.
Free Market Economists of the Austrian school had it right on the money.
Evidence:
Austrian: Peter Schiff getting laughed at on CNBC by correctly predicting the Financial Meltdown and Housing Bubble Pop.
Keynesian: Paul Krugman getting a Nobel prize while at the same time advocating for low Fed instrest rates to stimulate the Housing bubble and providing the Moral Hazard that lead to the Financial Meltdown.
What we really need are some new college textbooks not written by Keynesians and Neo-Keynesians but by real Free Market Austrians.
I’m getting ready to take Intro Macro this fall and I loathed when I saw the text is Mankiw’s Macro book, which dismisses the entire Austrian argument in one paragraph. Although it should be fun challenging the prof over and over again thanks to what I learn here at Mises and Econtalk.
Greg: “The economists have built themselves a self-profiting guild, not a science”
Interesting perspective. Would you say they are like philosophy departments? Philosophy has its own language that ensures laypeople can’t understand what they’re talking about. Philosophy never has to subject itself to the humiliating experience of being compared to the real world, nor does it need to produce anything useful.
Kling, over at EconLib, said all it takes to be a successful economist is to rationalize what politicians already want to do.
Why do all of Bruce Koerber‘s comments have a dateline and headline?
Sorry, off-topic.
That’s the problem. The blame is always laid on some inexplicable/mysterious ‘exogenous’ factors, and never the fault of their ‘mathonomics’ garbage. If it’s not some ‘animal spirits’ and the free market, then it’s the weather, new sun spots or butterflies in Mongolia…
It seems to me the high priests who infest the MS economics depts today are not much more than a mutant breed of the ancient shamans, whose services were enlisted by the state to try to decipher the will of the heavens in order for it to hoodwink the masses.
One big difference then and now though: old-time shamans who got their oracle readings wrong had their heads promptly lopped off; modern shamans are merely required to invent new snake oils.
Fundamentalist, it was the endless formal “normal puzzles” generated by philosophic mistakes of academic philosophy, and the careers made pursuing those, which helped to open my eyes to what has happened in economics. Of course, seeing what is and has happened in philosophy came in part through studying Wittgenstein, reading Kuhn, and being taught by the philosopher of science and Wittgenstein scholar Larry Wright. You see how mistakes generate formal puzzles, and how formal puzzles generate endless journal publications and Ph.D. dissertations.
And of course, there is a direct parallel between the work of Wittgenstein and Hayek on the contrast between the “God’s eye view” formal constructions of “phil of language” and general equilibrium — and genuine understanding and explanation of natural languages and real world economic order.
Fundamentalist wrote:
“Would you say [economic departments] are like philosophy departments? Philosophy has its own language that ensures laypeople can’t understand what they’re talking about. Philosophy never has to subject itself to the humiliating experience of being compared to the real world, nor does it need to produce anything useful.”
RWW,
They are blog entries.
Full article available here:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1355882
Greg, Very interesting! Thanks!
Hey greg:
appreciate the comments, very enlightening. curious as to what precisely you meant by:
“You see how mistakes generate formal puzzles, and how formal puzzles generate endless journal publications and Ph.D. dissertations.”
Just trying to wrap my mind around it and wonder if you could provide an example. thanks a lot.
Hi.The risk models might have failed to assess the relaity.One of the factors that led to the crisis is “Moral Hazards”.I mean asymmetric information for the two parties concerned.
. The crisis reveals that the risk analysts have not cared to test the results of the models against multiple scenario assumptions. The actual realities and risks were ignored by these credit rating agencies. That raises the question on how researchers typically estimate financial distress models. Mark Zmijewski (1984) says that researchers rely on non- random samples. Estimating models on such nonrandom samples can result in biased parameters, if appropriate estimation techniques are not used. New product development process by financial actors must be backed by principled conduct and human values. The consequence of this crisis is far reaching and it raises a host of other questions of which the most important is how financial system can be developed in a people friendly, sustainable manner that fosters human solidarity and trust. Any search for an optimal policy mix need to address the question of morality of the market.
One thing that was sadly forgotten during the crisis is implications of human development paradigm. The actors in the financial industry merely acted as ‘economic man’, solely motivated by the desire to maximize profit. The crisis of global capitalism demonstrates what Ivan Illich says “material development beyond a certain point does not bring human happiness; it causes frustration and eventual decayâ€. Amartya Sen (1998) says the transformation of society through economic development would be incomplete without upgrading the moral standards .The human development paradigm embraces the entire society, not just the economy. Human development implies enlargement of people’s choices. Mere expansion of income may not enlarge other choices. There are many human choices that extend far beyond economic well-being, knowledge, health, clean environment, political freedom. Reforming health care system is a moral imperative in the United States and polls showed public support for health care reform. Despite the high quality of health care available in the United States, not all Americans have access to health care. No formal commitment to universal access except a partially inclusive Medicare program (1965). Majority of the poor are uninsured. Can we morally deny adequate health care because of an inability to pay? Echoing the president’s call for action Americans today worry that healthcare will worsen if the government doesn’t act. A majority of the Americans continue to support a government health care option and strongly feel government must guarantee health coverage to all. (New York Times, Aug 16th, 2009)
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