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Economists Are Trained to Ignore the Real World
As I have repeatedly noted, mainstream economists and financial
advisors have been using faulty and unrealistic models for years. See this, this, this, this, this and this.
And I have pointed out numerous times that economists and advisors have a financial incentive to use faulty models. For example, I pointed out last month:
The decision to use faulty models was an economic and political choice, because it benefited the economists and those who hired them.
For
example, the elites get wealthy during booms and they get wealthy
during busts. Therefore, the boom-and-bust cycle benefits them
enormously, as they can trade both ways.Specifically, as Simon Johnson, William K. Black and others point out,
the big boys make bucketloads of money during the booms using
fraudulent schemes and knowing that many borrowers will default. Then,
during the bust, they know the government will bail them out, and they will be able to buy up competitors for cheap and consolidate power. They may also bet against the same products they are selling during the boom (more here), knowing that they'll make a killing when it busts.But economists have pretended there is no such thing as a bubble. Indeed, BIS slammed the Fed and other central banks for blowing bubbles and then using "gimmicks and palliatives" afterwards.
It
is not like economists weren't warning about booms and busts. Nobel
prize winner Hayek and others were, but were ignored because it was
"inconvenient" to discuss this "impolite" issue.Likewise, the entire Federal Reserve model is faulty, benefiting the banks themselves but not the public.
However, as Huffington Post notes:
The
Federal Reserve, through its extensive network of consultants, visiting
scholars, alumni and staff economists, so thoroughly dominates the
field of economics that real criticism of the central bank has become a
career liability for members of the profession, an investigation by the
Huffington Post has found.
This dominance helps explain how,
even after the Fed failed to foresee the greatest economic collapse
since the Great Depression, the central bank has largely escaped
criticism from academic economists. In the Fed's thrall, the economists
missed it, too.
"The Fed has a lock on the economics world,"
says Joshua Rosner, a Wall Street analyst who correctly called the
meltdown. "There is no room for other views, which I guess is why
economists got it so wrong."The
problems of a massive debt overhang were also thoroughly documented by
Minsky, but mainstream economists pretended that debt doesn't matter.And - even now - mainstream economists are STILL willfully ignoring things like massive leverage, hoping that the economy can be pumped back up to super-leveraged house-of-cards levels.
As the Wall Street Journal article notes:
As they did in the two revolutions in economic thought of the past century, economists are rediscovering relevant work.
It
is only "rediscovered" because it was out of favor, and it was only out
of favor because it was seen as unnecessarily crimping profits by, for
example, arguing for more moderation during boom times.The powers-that-be do not like economists who say "Boys, if you don't slow down, that bubble is going to get too big and pop right in your face". They don't want to
hear that they can't make endless money using crazy levels of leverage
and 30-to-1 levels of fractional reserve banking, and credit
derivatives. And of course, they don't want to hear that the Federal Reserve is a big part of the problem.Indeed, the Journal and the economists it quotes seem to be in no hurry whatsoever to change things:
The
quest is bringing financial economists -- long viewed by some as a
curiosity mostly relevant to Wall Street -- together with
macroeconomists. Some believe a viable solution will emerge within a
couple of years; others say it could take decades.
Saturday, PhD economist Michael Hudson made the same point (hat tip to Leo Kolivakis):
I
think that the question that needs to be asked is how the discipline
was untracked and trivialized from its classical flowering? How did it
become marginalized and trivialized, taking for granted the social
structures and dynamics that should be the substance and focal point of
its analysis?...To answer this question,
my book describes the "intellectual engineering" that has turned the
economics discipline into a public relations exercise for the rentier
classes criticized by the classical economists: landlords, bankers and
monopolists. It was largely to counter criticisms of their unearned
income and wealth, after all, that the post-classical reaction aimed to
limit the conceptual "toolbox" of economists to become so unrealistic,
narrow-minded and self-serving to the status quo. It has ended up as an
intellectual ploy to distract attention away from the financial and
property dynamics that are polarizing our world between debtors and
creditors, property owners and renters, while steering politics from
democracy to oligarchy...[As one Nobel prize winning
economist stated,] "In pointing out the consequences of a set of
abstract assumptions, one need not be committed unduly as to the
relation between reality and these assumptions."This
attitude did not deter him from drawing policy conclusions affecting
the material world in which real people live. These conclusions are
diametrically opposed to the empirically successful protectionism by
which Britain, the United States and Germany rose to industrial
supremacy.Typical of this now widespread attitude is the
textbook Microeconomics by William Vickery, winner of the 1997 Nobel
Economics Prize:"Economic
theory proper, indeed, is nothing more than a system of logical
relations between certain sets of assumptions and the conclusions
derived from them... The validity of a theory proper does not depend on
the correspondence or lack of it between the assumptions of the theory
or its conclusions and observations in the real world. A theory as an
internally consistent system is valid if the conclusions follow
logically from its premises, and the fact that neither the premises nor
theconclusions correspond to reality may show that the theory is not
very useful, but does not invalidate it. In any pure theory, all
propositions are essentially tautological, in the sense that the
results are implicit in the assumptions made."Such
disdain for empirical verification is not found in the physical
sciences. Its popularity in the social sciences is sponsored by vested
interests. There is always self-interest behind methodological madness.
That is because success requires heavy subsidies from special
interests, who benefit from an erroneous, misleading or deceptive
economic logic. Why promote unrealistic abstractions, after all, if not
to distract attention from reforms aimed at creating rules that oblige
people actually to earn their income rather than simply extracting it
from the rest of the economy?
As I have previously
written, mainstream economists and financial advisors who promote
flawed models are not necessarily bad people:
I
am not necessarily saying that mainstream economists were intentionally
wrong, or that they lied because it led to promotions or pleased their
Wall Street, Fed or academic bosses.But it is harder to fight
the current and swim upstream then to go with the flow, and with so
many rewards for doing so, there is a strong unconscious bias towards
believing the prevailing myths. Just like regulators who are too close
to their wards often come to adopt their views, many economists
suffered "intellectual capture" by being too closely allied with Wall
Street and the Fed.As Upton Sinclair said:
It is difficult to get a man to understand something, when his salary depends upon his not understanding it.
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Why would University Profs. understand the real world when they live in a campus biosphere?
"The University trained thinker is like an animal that has his food brought to his cage. The independent thinker gets his food in the wild."
Arthur Schopenhauer
I think the Minsky moment is upon us.
Mainstream, as in Neoclassical economics has little or no relevance to the real world.
To believe that a social science can be "quantified" is to believe that the world as we know it adheres to (usually relatively simple) mathematical equations and suppositions.
Now if that ain't naive...
Keynes or someone similar once said that nothing was more difficult than getting a man to understand something that his livelihood depends on him not understanding; e.g.labor economists and the minimum wage.
upton sinclair
Economists need to explain one thing only; the Central Bank monopoly on the issuance of and pricing of money. Bring back transparent, fully backed, government issued coin and cut out the middle man. Additionally, open up the market to competition through private mints. End this nonsense. End the Fed.
Imagine the epic fail of the more pernicious scoundrels if we revert to precious metal coinage.I really wish we would.
Now, in response to that statement the whores in service to Baal will issue forth with "good reasons" why we should continue to be raped by the bankers from the lowest pits of Hell.The FED is evil.And I mean that formally, in the strictest sense.
modern economics is a wall street invention to justify centralized planning (fed-cia) and dishonest money (non-gold based frn).........many have documented this fact....
william vickery is an arrogant asshole
when you can't dazzle them with brilliance baffle them with bullshit....
honest to god people, if you think that modern economics was invented to discover the truth, you are a complete fucktard and further bolster my points from a couple of days ago that american boobery is the biggest bubble on the planet....
Economist are just "Crystal Ball Gazers" that lack common sense. With most things in life, if it can't be fully and easily explained on one sheet of 81/2 by 11 paper (in a 12 font) then it's too complex and will burn you in the end.
"Mr. McGuire: I want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, sir, I am.
Mr. McGuire: Plastics." - The Graduate (1967)
http://www.youtube.com/watch?v=PSxihhBzCjk
Just one word: Networks.
the only thing worse than peak oil
is peak morality
Peak Oil - 1973
Peak Oil - 1980
Peak Oil whenever a new generation has never heard the term. A new generation to believe Oil industry bullshit.
I hope you really don't think cheap, dependable oil and gas will be around forever. There is plenty of oil left in the ground, but it isn't going to be cheap or dependable.
I work in the industry and I can assure you the 6% yoy decline in production from the giant fields isn't 'bullshit'.
GW,
Thanks for commenting. Those of you who want to read more on this subject, should read this testimony from David Colander which was submitted to Congress in early September:
The Failure of Economists to Account for Complexity
This is an excellent summary, well worth reading.
It is impossible to adequately account for infinite variability, yet we continue to try. Homo Sapiens.
http://freedomguerrilla.com
"The reason why social science is so complex is that the basic unit in social science, which economists call agents, are strategic, whereas the basic unit of the natural sciences are not."
HaHa. The physicists are the masters at reducing complex reality to useless models and then extrapolating endless nonsense from them.
Does the earth travel the fourth dimension from yesterday to tomorrow, or does tomorrow become yesterday because the earth rotates? Time is a consequence of motion, not the basis for it. Much of modern physics is based on that misconception.
Particles are nodes in the network and crashing them into each other is as informative about physical reality as crashing cars into one another explains the automobile.
http://freespace.virgin.net/ch.thompson1/People/CarverMead.htm
Yeahhhh.... Physics is useless.
Guess that planes useless. Guess that Nuclear power plant is useless. Guess that car you drive is useless. Guess space travel is useless. Guess plastic is useless. Guess solar power is useless....
What's useless is people trashing what they don't know.
Time is not a consequence of motion, time is a consequence of PERCEPTION. But that's just another useless opinion.
"Yeahhhh.... Physics is useless."
I guess you didn't read the link.
"Time is not a consequence of motion, time is a consequence of PERCEPTION."
So it's just perception that I'm pushing fifty.
time isnt
Economists Are Trained to Ignore the Real World
Trained and "PAID" to Ignore the Real World. They are Satans grand coven of prostitutes and whores in bed with their priest.
I agree but would offer a few thoughts. I think mainstream education is more at fault than mainstream media. I studied economics in college and as I continue to learn in the "real world" it is over abundantly clear that our college system teaching economics is both incompentent and complicit in perpetuating the falsehoods of U.S. taught economics. Many economists with PHD's teaching the new practitioners truly believe the falsehoods they teach. They are the incompentent as someone that achieves a PHD level should have developed a more astute perception of reality. The conspiracy however is those that have achieved a more asture perception but for whatever reason have chosen to ignore it and continue a delisional view of reality. I would have to say that more fall into the incompetent than conspiratory category which serves the conspirators well. There is no better salesman than the one that truly believes the products they sell.
The reality is that the banking system of fractional reserve banking that allows banks to lend the same money that they hold as readily available for the depositor is the root cause of this fraudulent system. They have developed a "compelling" story for why this is "good". But in reality they are bouncing checks every day. If you have $100 in the bank and you write two different individuals checks for $100 dollars you have committed a criminal offense by most standards and the banks will charge you an outrageous fee to honor both checks. Yet the fractional reserve banking system is built around embracing using the float (difference in payment timing). They say that if at any point they need less than 10% of deposits to meet immediate funding demands they can loan out the other 90% and still tell you that all your money is there and available to spend.
How is that any different than bouncing checks?
As we have reached the tipping point of consumer leverage, there really is no realistic way that the consumer can take on any more debt the realities of deleveraging are going to increase consumer awareness of the banks business model. At some point consumers are going to reject banks "right" to print money by counting the same money for multiple obligations. This has already happened in a limited fashion amoungst the most informed. Like all trends they start small and at some point gain the strength of a snowball rolling downhill. The snowball is started and it is rolling downhill. The only question is when will it reach critical mass that it starts rolling at increasing speed and thereby increasing size at an increasing rate. When this happens people will start to use multiple banks, favor local over national banks, and demand more from Washington. My best guess is it will become a market changing force in 36-48 months at the latest and 6-8 months at the soonest.
I find it most interesting those that profess to be prudent and not take out too much debt. I congratulate them but must remind them that without the irrational debt accumulation of the irresponsible our economy would have suffered much lower growth rates and the result is many fewer jobs and those jobs that did exist would have paid much less. So one should be careful when admonishing the debtor serfs for they are responsible for keeping our economy chugging even if it is unsustainable.
Best wishes for the holdidays and thanks to all contributors to ZeroHedge. Please remember to post a comment to a well populated message board with links to a relevant ZeroHedge article. That is how I found this incredible site and the power of information is truly revolutionary.
Well. Maybe I should take my econ degree off my resume.
Another timely Upton quote (capitalism and religion were his mortal enemies):
Pretty much correct there, Rusty. Upton Sinclair also said: “The private control of credit is the modern form of slavery”.
The "season" provides the perfect petri dish for the 7 Deadly Sins, plus a few to spare.