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Guest Post: Is It Models Or The Economists? Statement By David Colander
Submitted by Chris Whalen of Institutional Risk Analytics
"You won't get gun control by disarming law-abiding citizens. There's only one way to get real gun control: disarm the thugs and the criminals, lock them up, and if you don't actually throw away the key, at least lose it for a long time... It's a nasty truth, but those who seek to inflict harm are not fazed by gun controllers. I happen to know this from personal experience."
Ronald Reagan, 1983
First, two housekeeping notes. IRA co-founder Christopher Whalen and Josh Rosner of Graham-Fisher & Co. are making a presentation to the New York Chapter of the Risk Management Association on Wednesday, September 23, 2009. Click the hyperlink for details: http://www.rmany.org/vcart/mtgreg.asp
On Friday of this week, Whalen will be participating in the twelfth annual International Banking Conference at the Federal Reserve Bank of Chicago. Our panel is Session VI: "How to Make Regulators and Government More Accountable: Regulatory Governance and Agency Design." We are looking forward to an interesting discussion with Edward J. Kane, Boston College Michael Klein, formerly with The World Bank, and Ross Levine, Brown University.
When we appeared before the House Science and Technology Committee last month, the final witness, David Colander of Middlebury College, was easily the most interesting speaker of the day. He addressed the financial crisis from the perspective of how models or really just one model has developed in the economics community due to a lack of diversity and rigor in basic economic research.
He also addressed the monopoly that these economists exercise on new research and publication, and thus tenure, in universities. Dr. Colander challenged the Committee to change the way in which the National Science Foundation allocates funds for grants to support economic research and suggested other reforms to the economics profession that would restore some semblance of scientific discipline to a community that is deeply involved with the formulation of national policy.
Dr. Colander's testimony is reproduced below with his permission. We included two footnotes in italics. His text plus other attachments are available in the full testimony on the committee web site.
Testimony of David Colander
Submitted to the Congress of the United States, House Science and Technology Committee
for the Hearing: "The Risks of Financial Modeling: VaR and the Economic Meltdown."
September 10, 2009
Introduction
One year ago, almost to the day, the U.S. economy had a financial heart attack, from which it is still recovering. That heart attack, like all heart attacks, was a shock, and it has caused much discussion about who is to blame, and how can we avoid such heart attacks in the future. In my view much of that discussion has been off point. To make an analogy to a physical heart attack, the US had a heart attack because it is the equivalent of a 450-pound man with serious ailments too numerous to list, who is trying to live as if he were still a 20 year old who can party 24-7. It doesn't take a rocket economist to know that that will likely lead to trouble. The questions I address in my testimony are: Why didn't rocket economists recognize that, and warn society about it? And: What changes can be made to see that it doesn't happen in the future?
Some non-economists have blamed the financial heart attack on economist's highly technical models. In my view the problem is not the models; the problem is the way economic models are used. All too often models are used in lieu of educated common sense, when in fact models should be used as an aid to educated common sense. When models replace common sense, they are a hindrance rather than a help.
Modeling the Economy as a Complex System
Using models within economics or within any other social science, is especially treacherous. That's because social science involves a higher degree of complexity than the natural sciences. 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. Economics can be thought of the physics with strategic atoms, who keep trying to foil any efforts to understand them and bring them under control. Strategic agents complicate modeling enormously; they make it impossible to have a perfect model since they increase the number of calculations one would have to make in order to solve the model beyond the calculations the fastest computer one can hypothesize could process in a finite amount of time.
Put simply, the formal study of complex systems is really, really, hard. Inevitably, complex systems exhibit path dependence, nested systems, multiple speed variables, sensitive dependence on initial conditions, and other non-linear dynamical properties. This means that at any moment in time, right when you thought you had a result, all hell can break loose. Formally studying complex systems requires rigorous training in the cutting edge of mathematics and statistics. It's not for neophytes.
This recognition that the economy is complex is not a new discovery. Earlier economists, such as John Stuart Mill, recognized the economy's complexity and were very modest in their claims about the usefulness of their models. They carefully presented their models as aids to a broader informed common sense. They built this modesty into their policy advice and told policy makers that the most we can expect from models is half-truths. To make sure that they did not claim too much for their scientific models, they divided the field of economics into two branches-one a scientific branch, which worked on formal models, and the other political economy, which was the branch of economics that addressed policy. Political economy was seen as an art which did not have the backing of science, but instead relied on the insights from models developed in the scientific branch supplemented by educated common sense to guide policy prescriptions.
In the early 1900s that two-part division broke down, and economists became a bit less modest in their claims for models, and more aggressive in their application of models directly to policy questions. The two branches were merged, and the result was a tragedy for both the science of economics and for the applied policy branch of economics.
It was a tragedy for the science of economics because it led economists away from developing a wide variety of models that would creatively explore the extraordinarily difficult questions that the complexity of the economy raised, questions for which new analytic and computational technology opened up new avenues of investigation. Instead, the economics profession spent much of its time dotting i's and crossing t's on what was called a Walrasian general equilibrium model which was more analytically tractable. As opposed to viewing the supply/demand model and its macroeconomic counterpart, the Walrasian general equilibrium model, as interesting models relevant for a few limited phenomena, but at best a stepping stone for a formal understanding of the economy, it enshrined both models, and acted as if it explained everything. Complexities were just assumed away not because it made sense to assume them away, but for tractability reasons. The result was a set of models that would not even pass a perfunctory common sense smell test being studied ad nauseam.
Some approaches working outside this Walrasian general equilibrium framework that I see as promising includes approaches using adaptive network analysis, agent based modeling, random graph theory, ultrametrics, combinatorial stochastic processes, cointegrated vector autoregression, and the general study of non-linear dynamic models.
Initially macroeconomics stayed separate from this broader unitary approach, and relied on a set of rough and ready models that had little scientific foundation. But in the 1980s, macroeconomics and finance fell into this "single model" approach. As that happened it caused economists to lose sight of the larger lesson that complexity conveys -that models in a complex system can be expected to continually break down. This adoption by macroeconomists of a single-model approach is one of the reasons why the economics profession failed to warn society about the financial crisis, and some parts of the profession assured society that such a crisis could not happen. Because they focused on that single model, economists simply did not study and plan for the inevitable breakdown of systems that one would expect in a complex system, because they had become so enamored with their model that they forgot to use it with common sense judgment.
Models and Macroeconomics
Let me be a bit more specific. The dominant model in macroeconomics is the dynamic stochastic general equilibrium (DSGE) model. This is a model that assumes there is a single globally rational representative agent with complete knowledge who is maximizing over the infinite future. In this model, by definition, there can be no strategic coordination problem-the most likely cause of the recent crisis-such problems are simply assumed away. Yet, this model has been the central focus of macro economists' research for the last thirty years.
Had the DSGE model been seen as an aid to common sense, it could have been a useful model. When early versions of this model first developed back in the early 1980s, it served the useful purpose of getting some intertemporal issues straight that earlier macroeconomic models had screwed up. But then, for a variety of sociological reasons that I don't have time to go into here, a majority of macroeconomists started believing that the DSGE model was useful not just as an aid to our understanding, but as the model of the macroeconomy. That doesn't say much for the common sense of rocket economists. As the DSGE model became dominant, important research on broader non-linear dynamic models of the economy that would have been more helpful in understanding how an economy would be likely to crash, and what government might do when faced with a crash, was not done.
Among well known economists, Robert Solow stands out in having warned about the use of DSGE models for policy. (See Solow, in Colander, 2007, pg 235.) He called them "rhetorical swindles." Other economists, such as Post Keynesians, and economic methodologists also warned about the use of these models. For a discussion of alternative approaches, see Colander, ed. (2007). So alternative approaches were being considered, and concern about the model was aired, but those voices were lost in the enthusiasm most of the macroeconomics community showed for these models.
Similar developments occurred with efficient market finance models, which make similar assumptions to DSGE models. When efficient market models first developed, they were useful; they led to technological advances in risk management and financial markets. But, as happened with macro, the users of these financial models forgot that models provide at best half truths; they stopped using models with common sense and judgment. The modelers knew that there was uncertainty and risk in these markets that when far beyond the risk assumed in the models. Simplification is the nature of modeling. But simplification means the models cannot be used directly, but must be used judgment and common sense, with a knowledge of the limitations of use that the simplifications require. Unfortunately, the warning labels on the models that should have been there in bold print-these models are based on assumptions that do not fit the real world, and thus the models should not be relied on too heavily-were not there. They should have been, which is why in the Dahlem Report we suggested that economic researchers who develop these models be subject to a code of ethics that requires them to warn society when economic models are being used for purposes for which they were not designed.
How did something so stupid happen in economics? It did not happen because economists are stupid; they are very bright. It happened because of incentives in the academic profession to advance lead researchers to dot i's and cross t's of existing models, rather than to explore a wide range of alternative models, or to focus their research on interpreting and seeing that models are used in policy with common sense. Common sense does not advance one very far within the economics profession. The over-reliance on a single model used without judgment is a serious problem that is built into the institutional structure of academia that produces economic researchers. That system trains show dogs, when what we need are hunting dogs.
The incorrect training starts in graduate school, where in their core courses students are primarily trained in analytic techniques useful for developing models, but not in how to use models creatively, or in how to use models with judgment to arrive at policy conclusions. For the most part policy issues are not even discussed in the entire core macroeconomics course. As students at a top graduate school said, "Monetary and fiscal policy are not abstract enough to be a question that would be answered in a macro course" and "We never talked about monetary or fiscal policy, although it might have been slipped in as a variable in one particular model." (Colander, 2007, pg 169).
Suggestions
Let me conclude with a brief discussion of two suggestions, which relate to issues under the jurisdiction of this committee, that might decrease the probability of such events happening in the future.
Include a wider range of peers in peer review
The first is a proposal that might help add a common sense check on models. Such a check is needed because, currently, the nature of internal-to-the-subfield peer review allows for an almost incestuous mutual reinforcement of researcher's views with no common sense filter on those views. The proposal is to include a wider range of peers in the reviewing process of NSF grants in the social sciences. For example, physicists, mathematician, statisticians, and even business and governmental representatives, could serve, along with economists, on reviewing committees for economics proposals. Such a broader peer review process would likely both encourage research on much wider range of models and would also encourage more creative work.
Increase the number of researchers trained to interpret models
The second is a proposal to increase the number of researchers trained in interpreting models rather than developing models by providing research grants to do that. In a sense, what I am suggesting is an applied science division of the National Science Foundation's social science component. This division would fund work on the usefulness of models, and would be responsible for adding the warning labels that should have been attached to the models.
This applied research would not be highly technical and would involve a quite different set of skills than the standard scientific research would require. It would require researchers who had an intricate consumer's knowledge of theory but not a producer's knowledge. In addition it would require a knowledge of institutions, methodology, previous literature, and a sensibility about how the system works. These are all skills that are currently not taught in graduate economics programs, but they are the skills that underlie judgment and common sense. By providing NSF grants for this work, the NSF would encourage the development of a group of economists who specialized in interpreting models and applying models to the real world. The development of such a group would go a long way toward placing the necessary warning labels on models, and make it less likely that fiascos like a financial crisis would happen again.
Questions? Comments? info@institutionalriskanalytics.com
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yo
Can we stop with the supposedly wise Ronald Reagan quotes, already?
Was 2008 not enough to convince people that blindly putting our faith in his "wisdom" worked out really badly?
We now know he was clinically demented. He was older than time. His IQ has been estimated at only about 105.
Nobody should be doing anything because of what Ronald Reagan said.
And what in that quote of Reagan's is false? Or is it that is just doesn't appeal to your liberal sensibilities? Who cares what his IQ was? Obama's I'm sure is quite high, yet he's completely incompetent.
Well, since we've tried his theory of "lock them all up" to the tune of 2+ million, and we still have more gun crime than all of Western Europe put together, i'd say that the whole premise of his statement is false.
There you go again
No we can't. Fuckface.
"Man is not free unless government is limited."
Ronald Reagan
Your estimate of his IQ is quite generous........3rd rate actor, 4th rate prez......sub par ideas.........
As one currently taking a 2nd BA in Economics. This is noteworthy. thanks for the post.
Read Dirk Bezemer's excellent paper on how an accounting perspective give better understanding, download from here http://mpra.ub.uni-muenchen.de/15892/
Fitch relased a good paper in 2006 or early 2007 about why they didn't give CPDOs a trippel A. They stated that as the maths and models got ever more complex, it was neccessary to aply the common sense test.
Can this please be condensed down to "sound bite" length using as many emotionally charged words as possible? Preferably with some words that rhyme.
send it to the jesse jackson soundbites
foundation for advanced economics studies....
you will recive back both a 15 second and 30 second
power packed condensation of your prolix
bullshit with enough rhymes to make into rap hit...
at the end of the 30 second speech you should be
able to incite riots in the street while with the
15 second version you will only get dancing.
guaranteed to work or your extorted campaign contribution
will be returned 100% after explaining to guido why
it failed.
try it today.
Academic economics is largely nonsense, and a waste of time due to the fact that most of it has no application in the real world despite claims to the contrary.
today's keynesian/monetarist clap trap is a
waste but classical economics has much to offer...
Babaj,
Agreed. Further, he refers to "common sense" as the primary method for making economic decisions for investors. And yet, he doesn't define that at all. Even more egregious is the fact that "common sense" can be (and is) based on something like Keynesian economics, which, while common sense to many, is just plain wrong -- and as a result, such 'common sense' is directly responsible for misunderstanding and/or causing economic problems (See: Greenspan, Bernanke, Geithner, Bush, Obama, etc...).
There are a few stories out today that ABSOLUTELY shock me and no one in the blog world has yet to comment on it….. I’m hoping to find someone who is as outraged as me by this news. In my opinion this is definitely in the top 5 outrages for 2009, and worthy of some expose.
The FDIC is going to borrow $$ from the healthy banks???? First off, healthy is a matter of opinion, and I can’t say with any conviction that there are any truly healthy US banks. JPM (???), that’s a derivative packed powder keg looking for a fuse…….
If the FDIC (Regulator) needs funds… that is a very significant problem and needs to be addressed for confidence reasons!! It is the 1st line of defense in the concept of “The Full Faith and Credit of the US Gov’t” when it comes to consumer protection and financial security. They are supposed to be protecting us from the very people that they propose to borrow from (and who still to this day receive taxpayer subsidies just to survive)?????
A few of the issues I have are:
1) Conflict of interest (The regulated extend credit to the regulators.. is that called a bribe in third world countries?)
2) Failure of FDIC to properly assess risk and price accordingly (Leaving the entire system now perilously at the doorstep of the American taxpayer)
3) Banks want to make money off of the failure they created (Interest spread on the $ they lend the FDIC. Which I’m sure someone will get a commission on)
4) Big banks should bear this entire expense as a fee/expense (not an interest bearing asset. In which they get to profit from their artificially low funding cost) for THEIR failed risk metrics. If it hurts their record profit…So be it.
5) If this was to be allowed to happen….. The banks should loan the money to the FDIC at a rate that is equal to or BELOW their cost of funds. After all the healthy banks are only healthy because you and me (and our children) have mortgaged our future to give that perception.
6) There is ZERO (let me repeat ZERO) risk to the banks in a FDIC loan. If the FDIC defaults then that means the bank is already gone. Therefore, NO risk premium is justifiable in ANY scenario that I could ever imagine. Once again I need to emphasize ZERO RISK!!!!!!!!!!!!!!
THIS IS AN ABSOLUTE OUTRAGE……IS THERE NO END TO THE CORRUPTION, RAPE, AND PILLAGE OF THE TAXPAYER BY THESE SHAMELESS INSTITUTIONS?
I’ve seen a lot to be outraged by in the last 2 years…. But, NONE as blatantly obscene as this. If this was to happen, I will pull all $ from my bank as I have now lost all trust in “The full faith and credit of the US Gov’t”.
I learned long ago…….Words are cheap and faith is blind!!
Regards,
A Concerned US Taxpayer
this article is one of those rare moments in zh journalism which shines as a singular and timeless contribution to intelligent discussion of important matters. what an oustanding article....
i remember being at odds with my economics professor/ta because of profound suspicions over the profession and over keynesianism which i could not articulate. the idea that essentially linear tools are applied to non-linear systems is one of those central criticisms which would have come in very handy in my critique. to whalen's list of analytical tools to be considered for better modeling i would include fractals....
not only did i sense that people were not automatons but that they did not always act rationally and that no model or theory could capture this tendency even if one introduced the notion of friction.
i like the solution for funding applied science to help evaluate the usefulness of models and their limits.
but best of all, the encouragement of diverse and more creative research and model production with a much more rigorous mathematical foundation sounds like a proposal i could support...
my one large criticism with whalen is his blanket statement that even with their vaunted models no one in the profession saw the crisis coming to which i respond hogwash....
many, though few, sounded alarms - some economists, some non-economists.....and it is the lessons of and views of these successful non-economists which should studied and incorporated into the evolution of economics...
i for one believe that true classical economics of the smith variety should be returned to dignity and the keynesianism reduced in stature....
the holy grail of keynesianism is stimulating demand....well maybe it doesn't need to be stimulated all the time and in some cases should absolutely be allowed to fag out to let the system heal....
Actually, this is perhaps one of the best description of models, and modelling in general, not just in the economic sphere, that I've read in a long time. Models, by their very definition, require simplification of the non-essential parts of the world relative to the goals of the model, but one of the central challenges that any data modeler faces is in being able to understand what is actually non-essential. I heartily concur with his assessment as well, that too many academic economists fail to learn the rigors of complexity theory, and because of this create models that are simplified to the point of uselessness.
but it's not just the non-essential elements
which have to be identified....the complex
elements are shunted aside because of complexity
and inconvenience...until that matter is resolved
models will tend to be lowest common denominator
if not useless.
why did the rocket scientists not warn us about it? LOL. one more time LOL.
some day, hopefully, there will be a website asking the same "question" about global warming. (again) LOL.
the issue is not our inability to recognize, but our ability to manage the inertia of our own existance. just resign to that, and let the good times roll. baby!
LOL.
An interesting piece but one which confuses political and market economics. Just as the Ronald Reagan quote exposes the statistically ridicolous belief that somehow the existence on almost untrammelled gun ownership is unassociated with high rates of death by shooting, so the author implies that a better understanding of models would somehow reduce bubbles in the economy. The economic bubbles exist because the economy rewards short term profitability. Given the choice of earning relatively small amounts in academia or large amounts producing models which justify VAR or HFT programmes or other mechanisms to create short term gains and personal wealth most invidiuals will opt for wealth.
People who cannot get guns can always get knives - or box cutters. There were just as many murders in ancient Rome as there are here.
the sophistry of your comment on firearms
and homicide rates was a tipoff that the rest of
your comments would suffer defects.
the author did not address his comments about
how to avoid bubbles nor was there any implication
of the sort in his address. the thesis of his presentation
was how to better identify and warn of economic
pathology. his argument is that better models
would provide better id and warning systems....
bubble prevention and management is an entirely
separate topic.
and no, bubbles do not exist because of perverse
preference for short term profitability, a canard
to which people have pointed for decades
and decades....we have had bubbles and no bubbles
under such a regime - it doesn't explain anything.
bubbles exist because too much money is channeled
into assets and is independent of reward systems
because money will overwhelm any impediments....
even someone with the title of vp of bubble
creation would have to have
money with which to blow bubbles....without it
there is no bubble regardless of incentive....
greed may play a role but short term profit
orientation has existed with and without bubbles....
Well put. Why "assume" wealth when you can get some of your own. Whoremasters.
Looks like the Kansas Supreme Court put the slap down on MERS... Does this really mean free houses for 'homeowners'?
JAS
http://livinglies.wordpress.com/2009/09/16/kansas-supreme-court-sets-pre...
Fractional reserve currency is just nonsense. It doesn't model the underlying assets. It makes no sense and adopting a bunch of stupid bad math on top of a fatally flawed underlying system just so a few people can legally counterfeit money has gone on long enough. It "business cycles" because it blows and distorts valuations so much as it runs. It's hyperactive and twitchy at the detriment of long term stability. It's just done. This will be the last great depression because nobody will tolerate it again.
Once a company makes it's IPO's it doesn't give a crap about it's stock or it's investors. It doesn't listen to it's stockholders just like the FED doesn't listen to it's congress. It's always abused always will be abused.
This is just the epitomy of stupidity. Discussing modeling when the very FIRST layer and step of the model is completely broken and the people that know it's broken do everything possible to hide the fact.
Some non-economists have blamed the financial heart attack on economist's highly technical models. In my view the problem is not the models; the problem is the way economic models are used. All too often models are used in lieu of educated common sense, when in fact models should be used as an aid to educated common sense. When models replace common sense, they are a hindrance rather than a help.
----------------------------------------------------
What now? Is it the models or isn't it the models. When models replace common sense and the result is a mess than the models are crap.
Greenspan: "That is the unquenchable capability of human beings when confronted with long periods of prosperity to presume that it will continue."
"Formally studying complex systems requires rigorous training in the cutting edge of mathematics and statistics. It's not for neophytes."
I STRONGLY disagree. The inventors of the Internet could never have guessed that 5-year olds could be more proficient than most adults. In that same vein technology is more user friendly and accessible than ever before.
Understanding the models is easy. Building the models is hard, but it is not prohibitive. We are in a period very much like the turn of the century (or even the Renaissance) when amateur scientists were able to devise innovative solutions.
I will never accept an academic or politician telling me something is too complicated.
I don't have any models or big computers. I saw this coming and have been writing about for years. If the economists got out into the real world the would have seen it too.
I travel a bit and always have asked about local RE. In 2005 and 2006 that 450 pound man who had heart disease was walking around every part of our country.
In FL people were buying condos with no money down looking to make a buck. 100+ financing was available to anyone with a pen in their hand. Same in Vegas.
Atlanta was just as bad. North of the City they were giving money away to buy RE. Prices are now down 50% and there are still no buyers.
Metro NY/D.C. went on a high end building spree. The sheet rock palaces that are left on the market now have devalued all housing. Still no buyers here either. Take a look at Greenwich, CT. RE. You can't sell a high end home today.
Cali. was a joke. "smart guys" like Ben Stein were writing that SoCal RE would never go down and that wealth was being created at a biblical pace. Who wouldn't listen to Ben Stein?
Wherever I went RE brokers were just lying. How many units sold etc. were all a pack of lies. A common tread across the country was cheap Agency mortgages coupled with PMI that got the financing up to (or above) 100%. The Agents were selling properties with financing. It was part of the spiel. "I can sell you this one and you will end up with money in your pocket!" How could one say no.
It was obvious to me that Fannie and Freddie were going to hit a wall with their book of 'enhanced' mortgages. In December of 07 I was on tv and said that they would both go broke in less than one year. (made me persona non grata at Fox).
I am not a smart guy. I just went into the field and kicked some cans, maybe the economist should rely less on the models and more on the real world. They would not have missed it. That sick fat man was very hard to miss.
Common sense is missing in all aspects of modern life.
I could list hundreds of examples, starting with rewarding welfare recipients to have more children and work fewer hours - while punishing those that try to break away, to the most ecent with people lining up their children for 2 shots of a vaccine that is completely untested in children, offers low protection and has more mercury/squallene than is "safe" for a 250 pound man. All for a disease that is barely more dangerous than the common flu.
But, I won't.
Suffice it to say that human nature and psychology is the chaos variable that no model will ever be able to accurately predict. Then add the Law of Unintended Consequences and watch the "accuracy" dissolve.
Academia exists to keep Academia relevant. Truly doesn't matter what discipline, they sell their "greatness," by producing studies that show them as great. Common sense has NO place in our modern education system.
the problem is not the models, which are absurd
the problem is not the economists, who are whores
the problem is at the top: corrupt monetary authorities
A central bank that fuels asset bubbles is a corrupt central bank. Our great leader went so far as to declare that, not only are bubbles only identifiable in hindsight (UFB!), but that it is not the job of a central bank to prevent bubbles. And he got away with saying this!
Asset bubbles destroy economies for long periods of time, the most severe bubbles actually bankrupting empires and governments, leading to social upheaval and wars. If there is any one way in which a central bank can add value to an economy it is by preventing asset bubbles from forming.
Our central bank, however, (the private Fed, Inc.) did the exact opposite. They've been a diabolical wall street-enriching wrecking ball in the US economy, fueling bubbles that by definition render markets absurd. And it is on the back of this organized crime that quants and quacks seek and acquire credit for the credit-ponzi boom that with 100% certainty busts.
We had an opportunity to straighten this bullshit out as the truth whacked the world over the head this past year. Instead, we've granted the real villians everything including the kitchen sink; hence the obscene absurd manipulated farce we find the markets to be today.
It's horrible. These assholes belong in prison.
Economists haven't got a clue about anything. Their profession pilfered a bunch of equations from 19th century physics and obfuscated the hell out of them into meaningless rubbish with the assistance of bogus mathetmatics and voodoo statistics.
By using tools of science & engineering (math & stats), these goddamn assclowns somehow managed to bamboozle people who should know better into treating them as the equal of legitimate scientists. But economists are NOT scientists, they do not adhere to the scientific method at all, instead belonging in the category of pseudoscience alongside practicioners of astrology, raki, palm-reading, homeopathy and every other piece of superstitious bullshit. Economists are little more than modern day equivalents of the chief priests of old, serving political masters who tout their ideology as a religion / belief system (fractional reserve system).
The fact that there is a Nobel prize for economics is nothing short of a direct insult to legitimate scientists and engineers the world over. These morons have far too much influence in society which is a major contributing factor to us being so deep in the shit.
There is only one aspect of 'economics' that has any credibility at all and that's neuro-economics. Gather a bunch of test subjects and monitor their brain activity using functional NMRI as they make economic decisions. That has a little use, but here's the thing, it's not economics, it's neuroscience with an economic flavour.
Bearded bozos sitting in offices coming up with paper models to explain market behaviour, without any actual on-the-ground experimentation/validation, are just a waste of space and should not be taken seriously for even a second.
The longer that I live the more I become convinced that the agricultural revolution was the worst thing that ever happened to our species. Economic models have about as much relevance as the cave paintings in southern France. We live in a fictional reality, and all the while the people that profit from the status quo insist that it is non fiction. What a farce. The way we live is an abomination. If we all treated each other as we would want to be treated we could have heaven on earth, and instead we have.... this.
Krugman already had a great article in the Times on the problem with economics. Most notably the "Rational Expectations" school of economics.
http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html
Also, for those who were wondering - It seems there is a strong correlation with the creation of the federal reserve, move from the gold standard, and reduction in duration and frequency of recessions.
Take it for what you will
http://img242.imageshack.us/img242/6320/recession2.jpg
http://img504.imageshack.us/img504/9512/recession.jpg
Keynsian economists have the problem with their models.
Austrian economists have been pretty accurate in assessing the economy. Why aren't the Austians more prominent?
You guessed it --- Congress and the President don't like to be reminded of the wisdom of Bastiat and Mises that their meddling and planning efforts only make things worse in the long run. Also, plain old hubris gets in the way. Those in power always want to believe they can run things better than millions of people acting through voluntary cooperation.
Why does every Austrian have some conspiracy theory up their sleeve to explain why they aren't included in any serious discussions on economics?
Austrians have not been pretty accurate in assessing the economy at all and gives us little/no answers for addressing problems that do occur. It assumes no price stickiness, no cognitive biases, no market imperfections. It's essentially rational expectations and game theory without the fancy equations. Or at the very least it assumes that the free-market would remedy these problems.
It suggests that the federal reserve causes booms and busts - but there were booms and busts before the federal reserve existed, and they were longer, and more frequent. The long depression is proof of this. Excess money creation can and will happen in any type of society which uses a fractional reserve system.
BTW: You realize that Keynesianism has not been in vogue for many years in Washington (except to be the scape-goat explanation for profligate and wasteful spending). Neo-Keyensian models have done exceptionally well at charting the unfolding and response to the reaction of this current crisis. Are they perfect? No. But they're sure of a hell a lot better than Rational Expectations models, and offer more answers than Austrians.
Austrians do explain Investment cycles reasonably well, but do not explain why a reduction in investment spending leads to an overall drop in demand. The reason being, is that people demand more cash but demand less goods - and we have a general glut of supply. Thus the obvious response is to increase the amount of cash available (the money supply) even as production slows. People will accumulate the amount of cash they desire, and begin to spend again.
Anyway, I think Krugman said it best when he said models should be used to clarify thought, not as the ultimate decision maker.
I personally like Andrew Lo's Adaptive Market Theory, neo-Keyensian theory, and behavioral finance for understanding the broader economy and how agents interact. The cognitive biases inherent in humans is fascinating. Shiller and Akerlof have a lot to say in their book Animal Spirits, and Economists like DeLong and Krugman are now looking at the work of Hymen Minsky for understanding how over-leveraging by different classes of agents can cause watershed moments and asset price crashes.