Apostasy in the Chicago school of economists

[ColoradoGuy]

Richard Posner, conservative judge and erstwhile legal economist in the Church of Milton Friedman, has embraced many of the theories of . . . John Maynard Keynes. You can read his interesting essay about his change in religion here (http://www.tnr.com/article/how-i-became-keynesian?page=0,0).

"If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes."

[Williebee]

"the two most delightful occupations open to those who do not have to earn their living [are] authorship and experimental farming."--John Maynard Keynes Not really relevant to the OP. I just found the quote in the story and thought it was interesting, and relevant to the 'Cooler. :)

[dgiharris]

We have learned since September that the present generation of economists has not figured out how the economy works. The vast majority of them were blindsided by the housing bubble and the ensuing banking crisis; and misjudged the gravity of the economic downturn that resulted; and were perplexed by the inability of orthodox monetary policy administered by the Federal Reserve to prevent such a steep downturn; and could not agree on what, if anything, the government should do to halt it and put the economy on the road to recovery. By now a majority of economists are in general agreement with the Obama administration's exceedingly Keynesian strategy for digging the economy out of its deep hole. Some say the government is not doing enough and is too cozy with the bankers, and others say that it is doing too much, heedless of long-term consequences. There is no professional consensus on the details of what should be done to arrest the downturn, speed recovery, and prevent (so far as possible) a recurrence. Not having believed that what has happened could happen, the profession had not thought carefully about what should be done if it did happen.

I find this quote to be very powerful.

As a former scientist, the thing that absolutely pisses me off to no end about all the economic experts is there inability to predict substaintially significant events like this housing crising, like the dotcom burst of the late 90s, etc.

Whenever they are on TV they start talking out of their asses with generalized specifics and regurgitation of current facts.

"Well, the Dow is up 100 points rebounding from last weeks slide when X happened...."

and at the end of all of that booty chatter they really don't tell you a damn thing.

I equate economists being unable to predict these big crisises to astronomers being unable to see the moon crashing into the Earth.

I'm being completely serious. If the theories are sound, if the logic is sound, then the trends and data should have led to an obvious result.

There were a few economists who were able to predict what was happening. I saw a report on MSNBC's "House of Cards".

There was a guy who dealt with some sort of securities/mutual funds thingamabob.

Anyways, he was looking at the data and the change in procedures/regulations vs historical precedents and he couldn't believe what he was seeing. He felt that the conclusions were so obvious that he must be missing something since 'everyone' wasn't reaching the same conclusions as he. So he took his data and logical deductions and visited SEVERAL of the big securities lenders and housing lenders etc. etc. and he double checked his data with them just to make sure that his data was accurate and it was. After confirming that the data and the new procedures/regulations were in fact correct, he then 'attempted' to walk them through his logical deductions but ALL of the firms refused to accept his conclusions.

He then got a team together and said, "If I'm right and the housing market is about to bust, how can I make money on it." The conclusion he reached was to invest in some type of fund/security that essentially bet against the housing market. He then got some money together and bet $60M against the market back in 2006.

And in 2007 he cashed out UP $600M just as the market was collapsing.

he was one of the few that actually used data and logical deduction. Everyone else seemed to be ignoring the data and just regurgitating whatever the talking head of the month was saying.

phew, long rant

Mel...

[rugcat]

The oft mentioned term used by many of today's economists, "consumer confidence," seems to be quite Keynesian, does it not?

[LaceWing]

VERY stimulating article, CG. I now wish I'd read Keyne's General Theory long ago.

One of my responses to the article is this: the dollar I spend on food is not the same kind of dollar I spend on books or house decor or gifts. And none of those dollars are the same kind as any of the dollars that I save or invest or loan or vote for.

Another response is that money is not just like water that flows through the plumbing of a social machine.

[blacbird]

Whenever they are on TV they start talking out of their asses with generalized specifics and regurgitation of current facts.

"Well, the Dow is up 100 points rebounding from last weeks slide when X happened...."

and at the end of all of that booty chatter they really don't tell you a damn thing.

Total agreement. I never ceased to be amused at the instant analysis of each day's up or down in the Dow, which you'll get both on TV and in print or internet news. Utter and total crap, driven, I suspect, simply by the requirement for X number of words at Y deadline.

As a "for-instance", the markets have gone down a little for two days now, following a several-day runup. According to the "pundits", this is due to, oh, maybe housing figures, or employment figures, or . . .

Schidt. It was due purely and simply to investors wanting to cement the previous days' gains into profit in the pocket. I predict a tick back up tomorrow, or Monday. And everybody is dreading October, because the Dow always goes down in October. Which gets to be a self-fulfilling prophecy. And also suggests that Michael Moore might not be entirely wrong about capitalism.

caw

[dgiharris]

Total agreement. I never ceased to be amused at the instant analysis of each day's up or down in the Dow, which you'll get both on TV and in print or internet news. Utter and total crap, driven, I suspect, simply by the requirement for X number of words at Y deadline.

You know what really amazes me. The 'crab syndrome' that seems to go on with economists.

There are a couple of economists that actually try to apply data, logical deductions, and actually try to predict based on math and science, in fact one of them predicted the crisis and there are clips of him on youtube on CNN arguing with Ben Stein about it...

Anyways, what amazes me is how the 'other' economists are so quick to rally together and proclaim the predictive economist a loon. It reeks of academia egocentricism.

...As a "for-instance", the markets have gone down a little for two days now, following a several-day runup. According to the "pundits", this is due to, oh, maybe housing figures, or employment figures, or . . .

Schidt. It was due purely and simply to investors wanting to cement the previous days' gains into profit in the pocket. I predict a tick back up tomorrow, or Monday. And everybody is dreading October, because the Dow always goes down in October. Which gets to be a self-fulfilling prophecy. And also suggests that Michael Moore might not be entirely wrong about capitalism.

I don't know what i'd do if an economist came on TV and actually tried to predict. It would be like seeing a unicorn.

Its so rare. I see them maybe a few times per year. Unicorns that is. I see predictive economists a little less.

Mel...

[Romantic Heretic]

There was an excellent article (http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=1) earlier this month in NYT about just this subject.

ColoradoGuy used the perfect word when he used 'apostasy'. For economics isn't a science, it's a religion.

[dclary]

Not really relevant to the OP. I just found the quote in the story and thought it was interesting, and relevant to the 'Cooler. :)

What I find hilarious about this quote is that both Jefferson and Washington enjoyed experimental farming far more than they did politics.

[SPMiller]

Well, I wouldn't go so far as to describe economics as a religion, but I don't think economists approach their task properly. It's much less science (observation of the natural world) than mathematics (rigorous reasoning about human-created systems). Because our economy didn't organically grow out of nothing. We crafted it.

[dclary]

I find this quote to be very powerful.

As a former scientist, the thing that absolutely pisses me off to no end about all the economic experts is there inability to predict substaintially significant events like this housing crising, like the dotcom burst of the late 90s, etc.

Whenever they are on TV they start talking out of their asses with generalized specifics and regurgitation of current facts.

"Well, the Dow is up 100 points rebounding from last weeks slide when X happened...."

and at the end of all of that booty chatter they really don't tell you a damn thing.

I equate economists being unable to predict these big crisises to astronomers being unable to see the moon crashing into the Earth.

I'm being completely serious. If the theories are sound, if the logic is sound, then the trends and data should have led to an obvious result.

There were a few economists who were able to predict what was happening. I saw a report on MSNBC's "House of Cards".

There was a guy who dealt with some sort of securities/mutual funds thingamabob.

Anyways, he was looking at the data and the change in procedures/regulations vs historical precedents and he couldn't believe what he was seeing. He felt that the conclusions were so obvious that he must be missing something since 'everyone' wasn't reaching the same conclusions as he. So he took his data and logical deductions and visited SEVERAL of the big securities lenders and housing lenders etc. etc. and he double checked his data with them just to make sure that his data was accurate and it was. After confirming that the data and the new procedures/regulations were in fact correct, he then 'attempted' to walk them through his logical deductions but ALL of the firms refused to accept his conclusions.

He then got a team together and said, "If I'm right and the housing market is about to bust, how can I make money on it." The conclusion he reached was to invest in some type of fund/security that essentially bet against the housing market. He then got some money together and bet $60M against the market back in 2006.

And in 2007 he cashed out UP $600M just as the market was collapsing.

he was one of the few that actually used data and logical deduction. Everyone else seemed to be ignoring the data and just regurgitating whatever the talking head of the month was saying.

phew, long rant

Mel...


Mel... predicting real estate futures is easy. Follow the price of gold. Big (smart) money only carries one hard asset, and it will either be land or metals. When gold starts falling significantly, you'll know the real estate market has corrected. Go back and look at when gold skyrocketed.

Go back to the eighties and look at what the real estate market did the last time gold skyrocketed.

It's elegant and simple, and never fails. Follow the money, make the money.

[clintl]

What I find hilarious about this quote is that both Jefferson and Washington enjoyed experimental farming far more than they did politics.

Most hemp farmers probably do.

[Don]

We have learned since September that the present generation of economists has not figured out how the economy works. The vast majority of them were blindsided by the housing bubble and the ensuing banking crisis; and misjudged the gravity of the economic downturn that resulted; and were perplexed by the inability of orthodox monetary policy administered by the Federal Reserve to prevent such a steep downturn; and could not agree on what, if anything, the government should do to halt it and put the economy on the road to recovery.
But as Mel points out, the vast majority is not all. There was a school of economics that saw this coming, that indeed saw the Great Depression coming, and was ignored. That school is primarily ignored because it shows that government can't fix the economy; it can only shove the distortions around and make things worse. Of course that school won't get any traction in Washington or in the popular press.
Keynes commends FDR for having destroyed agricultural stocks during the Great Depression.
There's one proof of the ridiculousness of Keynes' theories. In a time when people were starving, it was better to destroy agricultural supplies than to feed them to the people? This does "let them eat cake" one better, as in "let them starve!"
Correctly anticipating the rapid growth of living standards, moreover, Keynes predicted that within a century people's material wants would be satiated, and so per capita consumption would stop growing.
Another bit of foolishness, just to illustrate how far Keynes was off course.
He has wise words, which Alan Greenspan and Ben Bernanke could with profit have heeded earlier in this decade, about the need to raise interest rates to prick an asset-price bubble before it gets too large. Yet just a few pages earlier he remarked that "the remedy for a boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last.
So Keynes argued we should do something, unless we should do the exact opposite. Even this supposedly friendly look at Keynes does a pretty good job of exposing him as a Nostradamus.
Perpetual-boom thinking illustrates the left-leaning utopian strain in The General Theory.
Exactly. Keynes political agenda colored everything he ever said. There's a reason he's the darling of those who think central control of the economy is a good thing, and it has nothing to do with the success of his theories.

Although there are other heresies in The General Theory, along with puzzles, opacities, loose ends, confusions, errors, exaggerations, and anachronisms galore, they do not detract from the book's relevance to our present troubles.

This sounds like an exerpt from the wrap-up of any History Channel presentation on Nostradamus; "Although he didn't have a clue what he was talking about, using modern interpretation, we can pretend he knew something in retrospect."

Bah!

Oh... and those few who, as Mel pointed out, were NOT blindsided by the housing bubble and the ensuing banking crisis; who did NOT misjudge the gravity of the economic downturn that resulted; and were NOT perplexed by the inability of orthodox monetary policy administered by the Federal Reserve to prevent such a steep downturn; and COULD agree on what, if anything, the government should do to halt it and put the economy on the road to recovery?

They're the ones who listened, instead of to Keynes and Friedman, to this guy (http://mises.org/about/3248).

There's even a great online site (http://mises.org/) where you can find most of his writings, as well as writings by contemporary authors which expand on his theories.

[SPMiller]

Most hemp farmers probably do.How dare you imply Jefferson and Washington partook of the ganja!

(... Oh, wait. They probably did.)

[ColoradoGuy]

My Don-bait has succeeded -- nice post. Now where's Rob?

[Don]

My Don-bait has succeeded -- nice post. Now where's Rob?
That was great bait. Tasty, and easy to pick off the hook without biting it. Is Posner not capable of seeing all the holes he left open? :D

[ColoradoGuy]

That was great bait. Tasty, and easy to pick off the hook without biting it. Is Posner not capable of seeing all the holes he left open? :D
I think Posner is aware of many holes. He points out a few of them. My impression is that, on balance, Posner finds several of Keynes' key explanations for what has happened in macroeconomics to be more useful than the stuff that's been standard among Chicago Schoolers. I also agree with his point that economics, as currently practiced, has gotten caught up in a sort of pseudo-scientific mumbo-jumbo. Keynes is an antidote for that, even if you disagree with his conclusions.

[Don]

I think I see. Sorta like recommending sulferic acid as an antidote to Drano.

Come, Mr. Posner, and drink instead of the water of life. :)

[jennontheisland]

How dare you imply Jefferson and Washington partook of the ganja!

(... Oh, wait. They probably did.)

Need I remind you of the difference between hemp and marijuana? :tongue

[robeiae]

But as Mel points out, the vast majority is not all. There was a school of economics that saw this coming, that indeed saw the Great Depression coming, and was ignored. That school is primarily ignored because it shows that government can't fix the economy; it can only shove the distortions around and make things worse. Of course that school won't get any traction in Washington or in the popular press.
To be fair, Don, some members of that school are ALWAYS seeing disaster on the horizon, because of Federal involvement in the economy.

That's not to say they don't have a point; I think they certainly do. But you have to tread carefully, here: Austrian School economics has no crystal ball. Adherents can't see the future and they can't account for every variable to even make dependable projections into that future.

And the same is true of economists stuck in the traditional mold, which includes Keynesians.

Here's a simple rule: if an economist says "policy x will bring about result y," recognize that this is a guess, nothing more.

Economic theory that isn't talking about incentives--first and foremost--is dead. Economic theory that uses simple functions to describe economic phenomenon is dead. Economic theory that centers on supply and demand curves is dead. Economic theory that assumes perfect rationality is a useful assumption--with regard to real-world consequences--is dead. Economic theory that is based on any sort of equilibrium is dead.

Having said that, Keynesian economics is really more policy oriented, than anything else. Nonetheless, Hayek put Keynes to bed, or at least that's what should have happened, if more people understood Hayek.

But the reality is that the current economy is far too complex to allow any significant degree of long-term predictability from policy changes. It's complex, it's dynamic, and it's open. The incentives created by policy and consequences of policy are not always anticipated. And even when they are, they do not always lead to the expected choices.

Take a hard look at the mortgage crisis. I linked to Sowell's analysis in the "Recently Read Books" thread. Much of what he argues receives no real criticism, because no one has an answer. What happened here--in a nutshell--is that the incentives created by idealized policy led to the creation of exotic financial products, products that doomed Fannie, Freddie, and the industry as a whole. And those incentives weren't created overnight or even during the tenure of a single President. They were created across a wide-ranging period. And individually, many of these actions were accepted as "good things." Some of these actions were about increasing government involvement in the economy, some were about decreasing it. But all of them have one thing in common: the actions were taken with the expectation of achieving a result, with the hubris of believing that y would follow x as a matter of course.

I strongly urge everyone interested in economic theory to read Hayek--and Keynes--then delve into complexity economics. That's where we are headed. Because that's what an open, complex, dynamic system demands.

And in a nutshell, what complexity economics is telling us is that the economy operates according to algorithms, not functions. Mapping all the factors that impact the economy in this manner is no mean feat. And it's unlikely--imo--that any type of fully predictable system will emerge. Really, it's like evolution. Here's an excellent book to start with: http://www.amazon.com/Origin-Wealth-Evolution-Complexity-Economics/dp/157851777X

[SPMiller]

Need I remind you of the difference between hemp and marijuana? :tongueWhy did Washington separate hemp plants by sex, and why was he disappointed to have done it "too late"?

[GregB]

Nonetheless, Hayek put Keynes to bed, or at least that's what should have happened, if more people understood Hayek.


In my view, this is a perfect example of what's wrong with economics, and of the way it's used in the political and civic space. I'd suggest anyone who argues "Hayek put Keynes to bed" doesn't understand Keynes, or Hayek, or either one of them.

This is typical not just of internet pundits -- that would be pretty harmless -- but of both academic and professional economists, as well. Proponents of various "schools" routinely criticise the others and get it completely wrong. In some cases, they'll admit to never having read the subject of their criticisms. Prominent economists in all schools, in academics, government, and industry, are guilty of this.

(Hayek is routinely charged with arguing that central banks are always and soley responsible for causing boom-bust cycles by economists of mainstream schools of thought. Amusingly, he's often lauded by proponents of the Austrian School for same. In truth, he knew as well as Keynes that sometimes "bubbles happen," though he didn't ascribe them to anything as poetic as animal spirits.)

I'll reserve judgment on "complexity economics" until it makes a positive contribution to field in desperate need of them. I fear its insights, whatever they may be, will merely be used to bang a tired drum: "Do nothing -- we can't possibly comprehend the forces we're dealing with!!!"

[robeiae]

(Hayek is routinely charged with arguing that central banks are always and soley responsible for causing boom-bust cycles by economists of mainstream schools of thought. Amusingly, he's often lauded by proponents of the Austrian School for same. In truth, he knew as well as Keynes that sometimes "bubbles happen," though he didn't ascribe them to anything as poetic as animal spirits.)
For what it's worth, I agree with you here. As Don can tell you, I'm constantly giving him a hard time for the attempt by the Austrian School to make Hayek one of their own. He's not.

[ColoradoGuy]

One of Posner's points about Keynes is worth repeating: there is always a fair measure of uncertainty, and there's nothing we can do to fix it -- no theory or formula can account for that inherent irrationality.

[jennontheisland]

Why did Washington separate hemp plants by sex, and why was he disappointed to have done it "too late"?

Likely because he missed his chance for some primo bud. Which is different from the stuff they made jeans and sails out of.

Spliffing hairs is fun.

:tongue

[robeiae]

One of Posner's points about Keynes is worth repeating: there is always a fair measure of uncertainty, and there's nothing we can do to fix it -- no theory or formula can account for that inherent irrationality.
Yes, but a strictly Keynesian approach to monetary policy assumes that uncertainty is inconsequential.

And let's be clear: unemployment rates remain high.

[ColoradoGuy]

And let's be clear: unemployment rates remain high.
That will be the interesting thing to watch. What got Keynes going in the first place was trying to find an explanation for persistently high unemployment in Britain over a 15-year period. Our current big slump is barely a year old -- too soon to tell if the muddled, neither fish-nor-fowl bailout will help, I think. And, because it was such a mish-mash, all sides will claim vindication of their viewpoints no matter what happens.

[dgiharris]

But the reality is that the current economy is far too complex to allow any significant degree of long-term predictability from policy changes. It's complex, it's dynamic, and it's open. The incentives created by policy and consequences of policy are not always anticipated. And even when they are, they do not always lead to the expected choices.

Take a hard look at the mortgage crisis....

First, I will admit that my studies in economics are fairly limited, only a few courses at the 100 and 200 level.

I do agree with you, the economy is too complex to predict every single thing. But in my opinion, the MAJOR stuff that has happened to the economy has been fairly simple to predict. And that is the problem that I have with economists.

Take the dot.com bubble burst. What was so complex about understanding that the majority of those companies were doomed to fail?

You have a bunch of MBA kids fresh out of college running to Venture Capilist firms with these new ideas for a 'website', i.e. Pet.com.

These kids throw up all these charts about the # of pet owners in the US, lets say 50Million. Then they throw up some chart with the amount that pet owners spend per year, lets say $50 Billion. Then they say, "Hey Mr. VC. If we can get just 0.2% of that market then that is $100 Million per year, so Mr. VC. please giving us $60M to launch our company.

However, in all of these great power point presentations, no where is it shown EXACLTY how money is to be made. Just a bunch of hand waving.

What about inventories? What about turnover? Supply chain? Analysis of what the consumer thinks about the internet? What about analysis of the money that consumers in 1996+ were spending on the internet in relation to brick and mortar stores? Or the hundred other basic business 101 freaking things that are common knowledge?

So these hundred companies create these websites that produce little value, then open for an IPO and their stocks soar as they spend lots of money on 'commercials' and 'parties'. Of course, these companies have to keep going back to their VCs with hat-in-hand demanding more money and the VCs are only too happy to give it to them until the quarters role by and someone looks at the net losses and figures out that "holy shit, our revenues are complete and total dogshit."

All the while, economists are yammering on about the new frontier of the internet without doing any analysis on the ACTUAL money, services, cashflow, etc.

And lo and behold, the money pits are so big that the businesses built on top of them crash.

And then economists yammer about the complexity of the market place.

Sorry. I have to call bullshit.

It just reeks to me of bad science. sorry for the long post. To be continued

Mel...

[Don]

See, Mel, that's what comes of trying to apply common sense to the economy. Everybody knows that it's way too complex for any but a handful of people to understand, and there's really no relation between 2+2 equals 4 and the magic of macroeconomics.

After all, if there was a relation between 2+2 equals 4 and macroeconomics, "monetary policy" would be proven to be a cruel joke. OMG, the sky would fall if governments couldn't justify fiddling with interest rates and creating fiat money.

You can't possibly expect them to finance empires on a cash-only basis, can you?

Oh... and where'd all the cheap money come from that financed the dot-com bubble?

[clintl]

Mel, yes, that's a very good analysis of the dot-com bust. Essentially, a whole lot of people thought the Internet changed the rules of business, and they were all wrong.

[LaceWing]

Mel and Don: "Complex systems" has a very specific mathematical meaning. Notably, complex and complicated are not the same thing. Via the wiki article on complexity economics, I found a 1997 pdf (http://www.santafe.edu/research/publications/workingpapers/97-10-080.pdf) (9 pages) from the Santa Fe Institute. Lo and behold! It mentions Austrian economics as a component.

Rob, I've put Beinhocker's book on my list. Thanks for the rec, which led me to the Amazon reviews. I think it would be a very safe bet to say that CEOs and world leaders and credible social thinkers all have this in their personal libraries. I expect it will reward me with much to think about.

Hayek I'm not so sure about. Per my first exposure, via wiki, I'm led to consider that his thought was perhaps too much formed in reaction to the USSR's failed experiment. Not as interesting to me as Beinhocker.

[Romantic Heretic]

From my favorite book. (http://www.amazon.com/Doubters-Companion-Dictionary-Aggressive-Common/dp/0743236602/ref=sr_1_1?ie=UTF8&s=books&qid=1253909767&sr=8-1) ;)

ECONOMICS The romance of truth through measurement.

An understanding of the value of economics can best be established by using its own methods. Draw up a list of the large economic problems that have struck the West over the last quarter-century. Determine the dominant strand of advice offered in each case by the community of economists. Calculate how many times this advice was followed. (More often than not it was.) Finally, add up the number of times this advice solved the problem.

The answer appears to be zero. Consistent failure based on expert methodology suggests that the central assumptions must be faulty, rather in the way sophisticated calculations based on the assumption the world was flat tended to come out wrong. However, streams of economists are on record protesting that they weren't listened to enough. That the recommended interest rate or money supply or tariff policy was not followed to its absolute conclusion.

This "science" of economics seems to be built upon a non-scientific and non-mathematical assumption that economic forces are the expression of a natural truth. To interfere with them is to create an unnatural situation. The creation and enforcement of standards of production are, for example, viewed as an artificial limitation of reality. Even economists who favour these standards see them as necessary and justifiable deformation of economic truth.

Economic truth has replaced such earlier truths as an all-powerful God, and a natural Social Contract. Economics are the new religious core of public policy. But what evidence has been produced to prove this natural right to primacy over other values, methods and activities?

The answer usually given is that economic activity determines the success or failure of a society. It follows that economists are the priests whose necessary expertise will make it possible to maximize this activity. But economics is less a cause than an effect - of geographical and climactic necessity, family and wider social structures, the balance between freedom and order, the ability of society to unleash the imagination, and the weakness and strength of neighbours. If anything, the importance given to economics over the last quarter-century has interfered with prosperity. The more we concentrate on it, the less money we make.

I love that book. :D

[robeiae]

Mel and Don: "Complex systems" has a very specific mathematical meaning. Notably, complex and complicated are not the same thing. Via the wiki article on complexity economics, I found a 1997 pdf (http://www.santafe.edu/research/publications/workingpapers/97-10-080.pdf) (9 pages) from the Santa Fe Institute. Lo and behold! It mentions Austrian economics as a component.

Rob, I've put Beinhocker's book on my list. Thanks for the rec, which led me to the Amazon reviews. I think it would be a very safe bet to say that CEOs and world leaders and credible social thinkers all have this in their personal libraries. I expect it will reward me with much to think about.

Hayek I'm not so sure about. Per my first exposure, via wiki, I'm led to consider that his thought was perhaps too much formed in reaction to the USSR's failed experiment. Not as interesting to me as Beinhocker.
Beinhocker talks about the Sante Fe Institute in his book. Part of the story there is that a bunch of top economics thinkers joined some top thinkers in other sciences to look at the framework of economic theory. Long story short: the other scientists were stunned that the foundations of economic thought were so fundamentally flawed, but that the economists still proceeded--knowing of most of these flaws--as if their analysis was still sound.

As to Hayek, the reason why he gets singled out, why the Austrian School--and many others--desperately want to claim him is that his analysis demonstrates the inherent flaws of centralized planning, in all of its forms.

[robeiae]

From my favorite book. (http://www.amazon.com/Doubters-Companion-Dictionary-Aggressive-Common/dp/0743236602/ref=sr_1_1?ie=UTF8&s=books&qid=1253909767&sr=8-1) ;)



I love that book. :DThere are--imo--valid points in there. Finally. ;)

[ColoradoGuy]

Beinhocker talks about the Sante Fe Institute in his book. Part of the story there is that a bunch of top economics thinkers joined some top thinkers in other sciences to look at the framework of economic theory. Long story short: the other scientists were stunned that the foundations of economic thought were so fundamentally flawed, but that the economists still proceeded--knowing of most of these flaws--as if their analysis was still sound.
An acquaintance of mine has been at the Santa Fe Institute for many years (I also live just a few blocks away -- they have extremely cool public seminars). He works on Chaos Theory, plus a dash of economics. Seems like a good fit.

Regarding your larger point, it's something one sees in the harder sciences, too. Sometimes people devise a totally useless system to study simply because they can make measurements in it.

[LaceWing]

Saul looks like a really interesting thinker. First because "doubt" is just about my favorite word evah, but mostly because of how he's wanting to place economics within larger social theory. (I'm not a fan of seeing the human adventure as first and foremost a matter of trade and competition and all that -- what gets me up in the morning is not profit but curiousity.) A new edition of The Collapse of Globalization and The Reinvention of The World is about to be released.

Thanks for the rec, Heretic. Check out Dan Ariely on TED Talks. His blog is called Predictably Irrational.

[LaceWing]

An acquaintance of mine has been at the Santa Fe Institute for many years (I also live just a few blocks away -- they have extremely cool public seminars).

I am insanely jealous. Just thought you deserved to know that.

[LaceWing]

Beinhocker talks about the Sante Fe Institute in his book. Part of the story there is that a bunch of top economics thinkers joined some top thinkers in other sciences to look at the framework of economic theory. Long story short: the other scientists were stunned that the foundations of economic thought were so fundamentally flawed, but that the economists still proceeded--knowing of most of these flaws--as if their analysis was still sound.

As to Hayek, the reason why he gets singled out, why the Austrian School--and many others--desperately want to claim him is that his analysis demonstrates the inherent flaws of centralized planning, in all of its forms.

I came across an article on 3QD (sometime in the last two years, I think) about how physics formulas were retrofitted for the purposes of developing economic models. What?

I've got half a dozen books on chaos theory on my shelves, and with any exposure to the methods, imo it's a given that economics should be explored with such models.

Good to get your confirmation (as I read it) that Hayek today is secondary to leading edge econ, but valuable historically. I'll settle for whatever wiki has, for now.

[Don]

For what it's worth, I agree with you here. As Don can tell you, I'm constantly giving him a hard time for the attempt by the Austrian School to make Hayek one of their own. He's not.
He studied under Mises.

He founded the Austrian Institute for Business Cycle Research.

He did not become a part of the Chicago School of Economics although he was a professor at the University of Chicago.

Hayek is one of the most influential members of the Austrian School of economics, according to Wiki.

Hayek wrote an essay titled "Why I Am Not a Conservative." (Not really germane, just mentioned as a tweak. :D)

So he's close enough for me. Any fellow travelers who care to claim him as their own are of course welcome to do so.

[Ruv Draba]

One of Posner's points about Keynes is worth repeating: there is always a fair measure of uncertainty, and there's nothing we can do to fix it -- no theory or formula can account for that inherent irrationality.Because the chief use of economics is to inform decision-making, the study affects the studied. Part of the uncertainty is created by our ignorance; partly it's created by game-playing.

To me, betting to profit from greed and fear seems an easy game to play, if that's how we want to make our money.

I'm still not clear why we'd want to, though. Professional poker would seem more honest.

[Xelebes]

I'm for the Canadian School of Economics: The government has its place in economic policy, but that each tool made by it must be stable and expected to do it's designed task, to not do any appended task that anyone has reasoned it to do. That way, the function of the tool is known and is predictable so that when it fails, as it is most certain to do, another tool can be made with its bounds certain.

[dgiharris]

Beinhocker talks about the Sante Fe Institute in his book. Part of the story there is that a bunch of top economics thinkers joined some top thinkers in other sciences to look at the framework of economic theory. Long story short: the other scientists were stunned that the foundations of economic thought were so fundamentally flawed, but that the economists still proceeded--knowing of most of these flaws--as if their analysis was still sound.

This is the fact that subconsciously comes across to me whenever I see economists yammering on and on ad nassuem about nothing...

With all the mathematics that has been created, I just don't understand why it seems the field of economics is just so 'off' for lack of a better word.

Between the scientific method, historical examples, and advanced mathematics, it seems that the economists should have some 'basic' predictive powers-- like weatherman. Sure, perhaps they can't tell us what the economy will be like 5 yrs from now, but they should be able to see the Freaking Housing Market Hurricane coming or the Dot.com blizzard that is blanketing the entire northern hemisphere, etc. etc.

To me, it seems like the basic signs were/are there.

or put another way. How useful is your field when you can't see the obvious? I mean, how great of an astronomer are you when your first notice of an asteroid is when it crashes into the Earth?

Mel...

[robeiae]

This is the fact that subconsciously comes across to me whenever I see economists yammering on and on ad nassuem about nothing...

With all the mathematics that has been created, I just don't understand why it seems the field of economics is just so 'off' for lack of a better word.

Between the scientific method, historical examples, and advanced mathematics, it seems that the economists should have some 'basic' predictive powers-- like weatherman. Sure, perhaps they can't tell us what the economy will be like 5 yrs from now, but they should be able to see the Freaking Housing Market Hurricane coming or the Dot.com blizzard that is blanketing the entire northern hemisphere, etc. etc.

To me, it seems like the basic signs were/are there.

Mel...
Well--again--delve into what I pointed to, and then you'll understand the problems, here.

One example: there is no "cause and effect" in economics. Increasing supply does not "cause" demand to rise. There are too many other factors involved. And again, human agency is involved so there can be no certainty.

Another example: people are not perfectly rational and they do not have correct information at their disposal for every economic decision they make. Traditional economics assumes both of these things, in order to make the math work. Think about that. It's friggin' insane!

The scientific method is inconsequential, because there's nothing static at all about the economy. People's decisions change because of things that cannot be easily factored into an analysis.

Again, a large economy with free markets of varying degrees cannot be described/modeled/what have you by using functions. It won't work.

[SPMiller]

Any part of the economy doing unusually well for a relatively long period of time is bound for collapse sooner rather than later. That's the one hard and fast rule that to my knowledge has never been violated.

[Don]

What rob said.

Given the trillions of combinations available to hundreds of millions of people making millions of decisions, added to the unpredictability of those decisions, I'd say predicting weather is child's play next to attempting to control the economy.

The USSR died of terminal congestion. The economy was permanently stalled because everyone was standing in line for the toilet paper that the central planners didn't make enough of. :D

[Xelebes]

This is the fact that subconsciously comes across to me whenever I see economists yammering on and on ad nassuem about nothing...

With all the mathematics that has been created, I just don't understand why it seems the field of economics is just so 'off' for lack of a better word.

Between the scientific method, historical examples, and advanced mathematics, it seems that the economists should have some 'basic' predictive powers-- like weatherman. Sure, perhaps they can't tell us what the economy will be like 5 yrs from now, but they should be able to see the Freaking Housing Market Hurricane coming or the Dot.com blizzard that is blanketing the entire northern hemisphere, etc. etc.

To me, it seems like the basic signs were/are there.

or put another way. How useful is your field when you can't see the obvious? I mean, how great of an astronomer are you when your first notice of an asteroid is when it crashes into the Earth?

Mel...

One of the biggest problems with Economics that doesn't occur in physics is that there is a delay when they receive the data. The data has to be collected and then it has to be counted. They already use computers to do the groundwork, but even then there is a delay of a quarter-year to a year before you get the number. The only current number you have is stock index values.

Instead, economists have to rely on more whimsical data sets to get a more current assay on the state of the market - and they can be way out there, like taking the pulse of the price of prostitutes for example.

[Xelebes]

Well--again--delve into what I pointed to, and then you'll understand the problems, here.

One example: there is no "cause and effect" in economics. Increasing supply does not "cause" demand to rise. There are too many other factors involved. And again, human agency is involved so there can be no certainty.

Another example: people are not perfectly rational and they do not have correct information at their disposal for every economic decision they make. Traditional economics assumes both of these things, in order to make the math work. Think about that. It's friggin' insane!

The scientific method is inconsequential, because there's nothing static at all about the economy. People's decisions change because of things that cannot be easily factored into an analysis.

Again, a large economy with free markets of varying degrees cannot be described/modeled/what have you by using functions. It won't work.

The irrationality of economics is not so much the problem as it is with delayed data. The weather is just as irrational as the economy - the individual atoms of the air are just as fickle as people are in the economy.

The problem is the delay of data coming in. When the data you already have is already a month to a year old, it becomes very hard to predict when you don't have a good idea what is going on today. Weathermen get their data from thermometers, barometers and anemometers and they get their data instantaneously. Economists don't have that luxury.

[GregB]

Between the scientific method, historical examples, and advanced mathematics, it seems that the economists should have some 'basic' predictive powers-- like weatherman. Sure, perhaps they can't tell us what the economy will be like 5 yrs from now, but they should be able to see the Freaking Housing Market Hurricane coming or the Dot.com blizzard that is blanketing the entire northern hemisphere, etc. etc.


There's a huge body of scientific infrastructure that climatologists share. Economics doesn't have that. It's like one guy's using QM, another guy's using Newtonian thermodynamics, and the creepy Austrian in the corner is stuck on the phlogiston theory (sorry, couldn't help myself). They don't talk to each other, don't know what the other is up to, their theories are constructs that don't really match (or even reference) the data, and even when they do have timely data there's enough indeterminacy that none of their theories can be conclusively verified or falsified.

Economics is more philosophy than science, and I say that as someone who was trained as an economist. There's some math in it (at least some of it), but there's plenty of math in other branches of contemporary philosophy, too. That don't make it science. And as philosophy, it's ideological through and through, from the presuppositions to the conclusions. That's why most economists can't even -- in hindsight -- agree on what caused the current crisis, let alone predict that it was going to happen.

That said, many economists *did* predict the crisis. Maybe they weren't listened to because they were wrong the last ten times they made such a prediction, or because their prediction was based on a fundamentally incoherent theory, or whatever. Or maybe it's just a simple matter that "animal spirits" (irrational exuberance, greed, etc.) are a lot louder than a few eggheads muttering "The end is nigh!"

And, of course, for the working economist (or trader, or broker, or investor, or homebuyer...), the point isn't whether there's a bubble. There's always a "bubble," if by that you mean inflating values will eventually deflate. The question is when is it going to pop, and how quickly (and how much) is it going to deflate? The question is, it's 2005, should I buy a home now or wait until next year? Will prices be higher or lower in 12 months? Can I make plan this year if I do this deal? What's my commission if I make this trade?"

[robeiae]

The irrationality of economics is not so much the problem as it is with delayed data. The weather is just as irrational as the economy - the individual atoms of the air are just as fickle as people are in the economy.Yes, time is a huge problem as well. But no, that doesn't make the assumption of perfect rationality less of a problem.

[clintl]

Between the scientific method, historical examples, and advanced mathematics, it seems that the economists should have some 'basic' predictive powers-- like weatherman. Sure, perhaps they can't tell us what the economy will be like 5 yrs from now, but they should be able to see the Freaking Housing Market Hurricane coming or the Dot.com blizzard that is blanketing the entire northern hemisphere, etc. etc.



This is what bothers me about the Austrian school - they say it can't be done, and I think they're full of crap about that.

[Don]

Sure, perhaps they can't tell us what the economy will be like 5 yrs from now, but they should be able to see the Freaking Housing Market Hurricane coming or the Dot.com blizzard that is blanketing the entire northern hemisphere, etc. etc.

This is what bothers me about the Austrian school - they say it can't be done, and I think they're full of crap about that.
But there were plenty of Austrians who pointed out that the dot-com and housing bubbles were bound to burst. What they rightly state is that it can't be quantified - there are too many variables to predict detail. That does not preclude pointing out the trend.

Not being able to predict a hurricane's exact landfall is considerably different (and much more useful) than pretending there's no hurricane on the horizon at all.

Remember back a year ago, when the Austrians were warning of a coming hurricane, and everyone else was predicting fair skies ahead.

So I'd say the Austrian's "inability" to predict has proven more accurate than the model-based, "predictive" forms of economics.

[clintl]

The dot-com bust was a pretty easy one, once you figured out that a lot of these companies were spending a lot of money and not actually making any.

And housing bubbles always burst eventually.

So it's not like these were particularly hard prediction to make.

On the other hand, the Fed raising interesting rates in the early '80s to create a recession as a cure for inflation worked. We haven't had a significant inflation problem since then. Did they hit the unemployment numbers they were shooting for exactly? No, they overshot it a bit. But that's a very solid example of using monetary policy to successfully achieve an economic goal, and a worthwhile economic goal at that.

Yes, there are many, many variables, and the best you can get at the present time is an approximation of what will happen. But you can get in the ballpark, and with more data, you can keep improving the models. It's never going to be like physics, but probably not even ever as good as meteorology, even. But it's absurd that you can't make a model with some predictive ability.

[robeiae]

Yes, there are many, many variables, and the best you can get at the present time is an approximation of what will happen. But you can get in the ballpark, and with more data, you can keep improving the models. It's never going to be like physics, but probably not even ever as good as meteorology, even. But it's absurd that you can't make a model with some predictive ability.
No, it's not absurd at all. Why? No one has done it. Why? Because the models are predicated on FLAWED assumptions.

It's not rocket science. It's orders of magnitude harder...

[clintl]

Yes, it's orders of magnitude harder. That doesn't mean it can't be done.

[robeiae]

Yes, it's orders of magnitude harder. That doesn't mean it can't be done.
I'm not saying it absolutely can't be done. I'm saying it absolutely can't be done by using flawed assumptions and mathematical formulas that don't apply.

Economic theory needs to be completely retooled. It's needs to address reality, not a caricature of reality.

[LaceWing]

I get very interested in computational complexity for a while, and learned a few things about mathematical limits. Mainly, there are mathematical questions that are provably unsolvable, others that are provably linear and simple, and this nebulous in-between that mathematicians haven't been able to figure out how to handle.

I think chaotic problems are in the unsolvable realm. Which means that there is no definitive solution to its questions and there never will be; it will forever be impossible to write an equation for solving such problems.

But! That doesn't mean working with those questions has no use. We can use approximations, and ever more complex conjunctions of approximations, refining them repeatedly until we get models that are more and more useful.

An important aspect of that realm's limits is that in some cases we don't have a way to avoid rounding off numbers that are fed into the models. Just that will make any and all models imperfect.

When Rob points out the difference between functions and algorithms, listen up. It's an essential difference in how to measure the world.

[LaceWing]

Orders of magnitude are limit setting conditions. Those in-between questions (google P=NP) concern computational complexity's most interesting conundrums in which questions it poses can literally take longer than the lifetime of the universe to solve on the biggest, fastest computer you can imagine.

A mathematician who could figure out how to get around those limits could buy out Bill Gates.

[robeiae]

I get very interested in computational complexity for a while, and learned a few things about mathematical limits. Mainly, there are mathematical questions that are provably unsolvable, others that are provably linear and simple, and this nebulous in-between that mathematicians haven't been able to figure out how to handle.Well, if you go far enough, at some point Godel always shows up. Laughing, usually.


I think chaotic problems are in the unsolvable realm. Which means that there is no definitive solution to its questions and there never will be; it will forever be impossible to write an equation for solving such problems.

But! That doesn't mean working with those questions has no use. We can use approximations, and ever more complex conjunctions of approximations, refining them repeatedly until we get models that are more and more useful.
Right. But it takes some serious computing power to do this for the economy at large. If we were looking at a closed system, with under a hundred thousand players and with a defined number of resources and static rules governing the manifestation of such, we could probably model such an economy. But that's not all that helpful, because assuming that such a model has real significance in relation to the global economy is a stretch. Even if there is some agreement in the very short run--measured in like days--the divergence will be rapid, necessitating a re-modeling from the ground up at the same rate. And we're not gonna have the info to do that, most of the time, even if we had the computing power.

I've linked to Sugarscape (http://sugarscape.sourceforge.net/), before. Really, while it is useful for finding flaws and drawing some meta-type conclusions, it ultimately shows how far we are from any type of predicative economic science.

[SPMiller]

Just because some problems are solvable in NP-time at best doesn't mean we can't arrive at--as clintl said--"ballpark" figures. There exist decent heuristics for some such problems. Not all, but some. And I think we could develop some for economics, if we looked at it the right way.

But I'm not interested in economics, thanks.

[Ruv Draba]

The P=NP question is irrelevant except in general. By that I mean you can find plenty of polynomial solutions to big, important subspaces of NP-complete spaces. Example: scheduling problems are in general, NP-complete. Yet airlines, shipping companies, travel agents and personal assistants are able to solve these problems quickly and effectively in a limited way every day.

I think that there are four general issues with understanding the economy:

It's a chaotic system: small changes in problem description can produce big changes in expected behaviour;
It's a changing, open-ended system: rather than moving between well-bounded edges, its growing and changing as our technology, population and social structures do. It's wandering off the map of the known generationally and we're trying to invent 'laws' that govern as-yet unexplored terrain;
Economists are generally better philosophers than mathematicians. If you haven't read Steven Keen's book Debunking Economics: The Naked Emperor of the Social Sciences (http://www.mobipocket.com/en/eBooks/eBookDetails.asp?BookID=131405&Origine=4965) I commend it to you. Associated presentations can be found here (http://www.debunking-economics.com/); and
The economy is more a political science than a natural science because it studies how humanity exhibits greed, fear and lust for power under different circumstances. And here we get into a chicken-and-egg problem: models are developed to understand how things work so we can then exploit the models. Which of course, changes how things work and gives any model a limited shelf-life -- which is the last thing you want because the models are pretty fragile and assumption-ridden to start with.
If that sounds doomed, I think it's not. We have two things going for us: regulation (which helps control the economy's edges and the interaction of the parts), and the economy has finite bounds -- we just don't actually recognise where they are yet.

Geography and resources create bounds on population and commerce -- we can use technology to squeeze more out of these things, but not indefinitely. Communication and distance create bounds on transaction speeds and volumes. So J-curves can be gradually seen to be part of S-curves, which will be gradually seen to be cyclic, and some will eventually be recognised as decaying cycles.

Meanwhile though, ideology, assumption-blindness and mathematical idiocy still seem to rule. Any decent risk manager could tell us that chopping credit risk up fine and spreading it around doesn't actually decrease the total risk in the system, any more than powderising plutonium and spreading it round farmland actually decreases its toxicity -- it just increases the chance of systemic collapse later on, and makes it harder to isolate the contaminants.

[ColoradoGuy]

As a follow-up, here's an interesting interview (http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-eugene-fama.html) from John Cassidy of The New Yorker with Chicago stalwart Eugene Fama about the validity, in light of recent events, of efficient market theory. He's sticking to his guns. Money quote (so to speak):

Cassidy: "what about Paul Krugman’s recent piece in the New York Times Magazine, in which he attacked Chicago economics and the efficient markets hypothesis. What did you think of it?"

Fama: "My attitude is this: if you are getting attacked by Krugman, you must be doing something right.


Ouch. Those economists play rough.

[Slushie]

Economics is not my strength so I might be in over my head, but I'm going to try and swim.

Ruv touched on an interesting point (no. 4) that a model is part of the economic equation, not separate from what is being measured, as they are in physics and meteorology. What I'm thinking is, an economic prediction has to predict its own impact on the economy for the prediction to be of any value. How would a model predict itself? I guess it would have to include its level of exposure, any current reporting trends in the financial media, the odds they might report something contradictory to the current trend, the amount of risk they'd be willing to take to the economy by spreading news of an upcoming downturn. And, anyways, how much of a role does the media even play in the speculation on the stock market?

Say a reputable think-tank (oxymoron?) came out with a model in 2004 that predicted the housing bubble would deflate by 25% and unemployment would hit 15% and several large institutions would become insolvent. Then this model gets picked up by CNBC. We'd have those that would wave away that prediction as nay-saying, and we'd have those (investors, financial institutions) who might react to such a prediction by moving and restructuring their investments. So, that model had an impact on the economy, but the conditions it modeled on were changed by the model itself. The extent of this effect is variable (as I typed above) and part of the, I think, unreliability of any economic model that stretches itself beyond a statement like "the bubble will eventually burst and birth a recession with an increase in unemployment". Because, think about it, for a model to do any good then people need to hear about. For people to hear about it then it needs to be exposed in the media. Once that model is exposed by the media, the conditions are changed and the model becomes [even] less accurate. And, I think that trying to incorporate any concrete numbers into a model is nothing more than a crap shoot.

Does this make sense? I don't really know how to word this concept; my writing has sucked all day. Thanks for reading.

[Dommo]

I don't really believe that we'll be able to do any kind of truly accurate economic predictions. This is for a few reasons.

1. It's impossible to "know" the emotional state, level of information, and personality of every person involved in the economy. Without that it's extremely difficult to predict what the hell someone is going to do. Seriously you'd need like an FBI profile for every person on this planet. You need to know why someone is going to spend money, and you need to know when.
2. We need to be able to track economic information in real time, and be able to cross reference it with the stuff in part 1.
3. We need the computational horsepower to actually run a simulation on a scale that is comparable to a real economy, and includes as many factors as is humanly possible to include. Ideally this would be based on a real world location, so that comparisons could be made(e.g. you create a virtual version of Oklahoma City, then compare it to what the real one does economically).

My gut tells me it's impossible, or at the very least impractical to really have a "True" understanding of the economy.

[sulong]

I think people often confuse the words "prediction" and "anticipation". When dealing with behavior related sciences, the best that can be done is "anticipation".

Prediction is a road to nowhere in this arena.