Friday, February 27, 2009

The Systemic Failure of Economics

Wow! These guys have a point.

"The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold.

"We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets."

“In our view, economists, as with all scientists, have an ethical responsibility to communicate the limitations of their models and the potential misuses of their research. Currently, there is no ethical code for professional economic scientists. There should be one.”

“Given the established curriculum of economic programs, an economist would find it much more tractable to study adultery as a dynamic optimization problem of a representative husband, and derive the optimal time path of marital infidelity (and publish his exercise) rather than investigating financial flows in the banking sector within a network theory framework.”

HT: Steve Keen


Anonymous said...

The main job of economists is to give everyone false confidence that the market is understood, more or less predictable and different from last time. Occasionally Tim Colbatch writes about a fictional "The Economists' Club" in which his archetype economists argue over matters from their various schools of thought. It's one of the more insightful critiques I have seen. He should expand it into a book as there is more than enough nonsense in the world of economics to fill it.

WT said...

I could not agree more!

Anonymous said...

of course, Sinclair Davidson over at Catallaxy disgrees:

Anonymous said...

As an economist, I can say a lot of economists saw the problems of the credit crisis. If the moral element of Adam Smith is taken into account, some bankers over lent (immorally) and some people over borrowed. De-regulation was a good thing, what should have happened was to cap the maximium indivdiuals could borrow against income. Every member of staff moved out of growth/balanced and into cash in my department and I told students I'd done this and encouraged them to tell their families to think about it. I sold my rental house and most of my shares.
I won't sell my house as it is paid for and sales costs and rentals will eat into any profit buying on a drop might give me.
Is a depression assured, no, but the level of pump priming will be very inflationary to stop it.
And guess what, when the recession is over and huge debts are incurred, the Keynesian branch will be castigated for the debt to avoid depression and the neo-classical will become fashionable again.
Too often writer fail to see the two branches are as far apart as the left and right of politics. As the proponents tend to be left or right.
I'm centre right and that influences me to say as freer market as possible, with strong regulation. The CDO were a joke investment, instead of hammering economists go for the lawyers and bankers who formed and sold them. Plus the qualified accountants that bought them for the public sector, internally geared to that level.. gee they learnt a lot of risk analysis at Uni.
Perhaps it shows us encouraging a get rich fast, greedy and immoral workplace is the area we should concentrate on reversing. Well run, educated and trained workers, do useful high technology and high value added work shoudl be other goal. With some good economists workign on demand schemes, rather than predicting at a level of detail our science isn't good at.

mshaw2001 said...

Anon Economist is right that the economics profession can't be blamed for the incompetence and fraud involved in the dodgy lending. It can however be blamed for perpetuating the ideology that the market is efficient always and reputations will constrain behavior. This current crisis exposes more than just irresponsible lending and borrowing.
Economics as a discipline is culpable for not keeping up with the advances in the study of human psychology and excluding too many externalities. The economy cannot be responsibly studied in isolation of it's social, ecological and technological environments. Obviously not all economists failed on these - just the ones who have influence. Is it a matter of selection - economists are selected to explain and justify the plans of the decision makers or do they inform them.

Anonymous said...

economist Nouriel Roubini, who earned the title Dr Doom for predicting much of the financial catastrophe, warned that governments would shoulder all the debts of the financial institutions....and then the governments would also collapse.

Looks like Iceland, UK and many Pacific islands are at that point now.


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