Monday, November 03, 2008
Galbraith on Mainstream Economics
I was struck yesterday by an excerpt from an interview with economist James Galbraith:But there are at least 15,000 professional economists in this country, and you're saying only two or three of them foresaw the mortgage crisis?
Ten or 12 would be closer than two or three.
What does that say about the field of economics, which claims to be a science?
It's an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.
Which is why the field of heterodox economics has done so much better at predictions. Just look at how prescient The New Industrial State turned out to be . . .
Why is this post accompanied by a picture of Tony Kornheiser?
Megan: I am of two minds about this same article. On the one hand, New Keynesiam has undoubtedly failed, and it is the theoretical framework taught in almost all macro econ departments, including U Chicago. It is as wrong as the Flat Earthers. However, I don't expect any Nobel Prizes to be rescinded, or any academic macroeconomists to lose their jobs.
Galbraith's brand of Progressive Economics is similarly wrong. It is possible that both Progressive economics and Orthodox macroeconomics is wrong.
Honestly, the ones who come out the best in all of this (so far) have been Hayek and Mises.
-winterspeak
What does that say about the field of economics, which claims to be a science?
The sooner economists acknowledge that they practice not a variant of physics, but a form of applied psychology, the better for everyone. It can still be a science of sorts, just not as hard as some would like to pretend.
I'm surprised so few economists saw this coming; I'm not an economist and I can't claim to have predicted the massive fallout, but when I got approved by Countrywide for a NINA 5/1 ARM in 2003, I thought they were nuts. My wife and I spend quite a bit of time wondering how they could afford to hand out money like they did. I was glad to get it, though; the local banks wouldn't touch me.
Of course, all future Nobel Prizes are going to go to BO's economic advisors who are going to demonstrate how a country can tax itself to prosperity........then again, I'm not holding my breath on that one.
I am still waiting to hear some predictions (postdictions?) about the economic past: the present crisis, which according to Megan defies explanation. Until something coherent emerges about that, I am inclined to view sarcasm about other economists as interesting as shooting fish in a barrel.
I'm still of the opinion that it's a problem of scale -- the gains of Wal-Mart scale were not worth the costs to small communities and small businesses. Even if the numbers fit economic models; the models were too crude.
But I'm not an economist, I'm a simple citizen living in a community. And i don't buy plates at Wal-Mart, I buy them from the local potter, in protest. I think the Wal-Mart economy and the housing bubble have a lot in common. But I'm not an economist, I'm just a simple-minded citizen who invests in small companies and creates jobs.
James Galbraith is wrong on two points:
- Many more than 10 or 12 of us saw the some of the crisis coming.
- None of us foresaw the whole crisis.
I have no idea if he is right or wrong about what theoretical framework economists teach. I only know that some of them seem to prefer to teach the precisely wrong rather than the roughly right.
"It is as wrong as the Flat Earthers": but there were no Flat Earthers; the belief that there were is a peculiarly American delusion fostered by Washington Irving. Mind you, there is no science of macroeconomics either.
Mankiw would be right, IF heterodox economics placed as large an emphasis on predictions as neoclassical ones do. The methodenstreit wasnt about who could predict the future better, and the methodological basis of much neoclassical economics is the 1953 Friedman article that claims predictions are not only important, but the main thing through which to evaluate theories.
Not that this means that the sort of populist post-keynesianism is right, but that it means less to them that they failed to predict this than it does to the orthodoxy.
Personally, I've always been a new institutionalist, so we're becoming so popular that we are almost becoming the new orthodoxy.
So are you telling me that all 15,000 professional economists published forecasts of the immediate future. That's a remarkable claim, and I bet it is not true.
How do you separate the impact of the oil shock, the credit crisis, and the almost certain election of a Social Democrat on current market conditions?
Milton Friedman made a career of preaching the dangers of a Fed that tried to micro-manage the economy. That keeping interest rates low for a protracted period will generate bubbles. But that was ignored. Is that the vault of the model? If people tell you that smoking in the long run will cause you serious health problems, but in the short run you continue to smoke because the negative result is perceived as too distant, is that the fault of the doctor's who warned you. If they get the timing of your demise wrong does that invalidate their warnings?
Firms did not act in their own best long term interests. Was it a search for power? I don't think so. The potential short term profits, and the compensation systems, were too tempting for many to resist. Internal checks were overwhelmed with the view that a window of opportunity for outlandish short term profits was possible. Regulatory systems, heavily influenced by Democratic desires for social engineering over prudent oversight, removed safety checks.
Models have a hard time working when a large segment of the population is trying to commit organizational suicide. For some reason, too many firms viewed the potential short term profits as much greater then the net present value of the future cash flows of the organization. I assume this was false for the organization, but very true for some of the members of the organization.
I was told once that if you think a market is not functioning who are simply not seeing what the market is actually trading.
Markets make mistakes. No real economic model assumes that markets are perfectly working organizations that can not fail. But the assumption is that markets are much better at correcting and moving forward. Markets are more adaptable to change then heavily regulated markets.
As Milton Friedman would argue, by the time the press and politicians have identified a problem, free markets are working to solve it.
As Gary Becker might argue, individuals frequently make mistakes, but markets, the sum of all those individual decisions, will always want to move toward efficient outcomes. Free markets let people make mistakes, let people experiment, and will sometimes have setbacks. But free markets will correct and people learn from their mistakes.
Social Democrats like Senator Obama view Capitalism as inherently flawed, filled with inequities that the power of government most correct. But history shows us that such choices lead to fewer economic opportunities and less advancement for the lower classes.
So before you claim the death of economics, or that most economist teach nonsense (I would agree if we were talking about Krugman), please think of the alternatives and maintain a longer time perspective.
And at one forecast per year, Galbraith reads an average of 41 professional forecasts each and every day. Sure.
In the land of the blind, the one-eyed man is king.
Hail to the king, baby.
I'm still of the opinion that it's a problem of scale -- the gains of Wal-Mart scale were not worth the costs to small communities and small businesses. Even if the numbers fit economic models; the models were too crude.
But I'm not an economist, I'm a simple citizen living in a community. And i don't buy plates at Wal-Mart, I buy them from the local potter, in protest. I think the Wal-Mart economy and the housing bubble have a lot in common. But I'm not an economist, I'm just a simple-minded citizen who invests in small companies and creates jobs
I don't understand what the banking crisis has to do with WalMart. Did I miss something?
I was told once that if you think a market is not functioning who are simply not seeing what the market is actually trading.
I was once told that if you don't see the hand of God in everything that happens, you're simply not seeing His plan.
Economics is not a science, it's a religion.