Tag Archives: Economics

Old economics is based on false ‘laws of physics’ – new economics can save us

By Kate Raworth – In the 1870s, a handful of aspiring economists hoped to make economics a science as reputable as physics. Awed by Newton’s insights on the physical laws of motion – laws that so elegantly describe the trajectory of falling apples and orbiting moons – they sought to create an economic theory that matched his legacy. And so pioneering economists such as William Stanley Jevons and Léon Walras drew their diagrams in clear imitation of Newton’s style and, inspired by the way that gravity pulls a falling object to rest, wrote enthusiastically of the role played by market forces and mechanisms in pulling an economy into equilibrium.

Their mechanical metaphor sounds authoritative, but it was ill-chosen from the start – a fact that has been widely acknowledged since the astonishing fragility and contagion of global financial markets was exposed by the 2008 crash.

The most pernicious legacy of this fake physics has been to entice generations of economists into a misguided search for economic laws of motion that dictate the path of development. People and money are not as obedient as gravity, so no such laws exist. Yet their false discoveries have been used to justify growth-first policymaking. more> https://goo.gl/hbL9yx

Economists Get Too Much Credit — and Blame

By Victoria Bateman – Now, with the threat of deglobalization hanging over us, economists stand on the sidelines, feeling ignored.

This recent turn of events might leave us wondering: Do economists have the power and influence required to affect political and policy outcomes, or is it politics that determines which strains of economics are cherry-picked and ultimately championed?

Were John Maynard Keynes alive today, he would no doubt argue that the global financial crisis, Brexit and the election of Donald Trump are all a result of a failed free-market economic agenda, resulting in rising inequality and a slowdown in economic growth, leaving the general public reeling. Economists would be squarely in the dock.

As far as that great rival to Keynesian thinking, Milton Friedman, was concerned, it is the public’s experiences and not the writings of economists that drive economic and policy revolutions. more> https://goo.gl/4J5c2x

Economics is fundamentally flawed

By David Spencer – Economics should be in crisis. But in reality it is not. Rather, economics remains largely the same as it was before the financial crisis – in effect, it remains just as problematic now as in the past. This is an issue not just for economics but for society as a whole, given the enduring power and influence of the discipline on policy and public life.

To think of economics in terms of forecasting is to limit its nature and scope. Economics ought to be about explanation. It should be able to make sense of the world beyond forecasts of the future. It is not clear that as it exists now, economics is able to understand the world in its present form. To this extent, it cannot help understand the frequency and depth of crises.

As things stand, there is little chance that economics will open up to the ideas and methods of other disciplines. Instead, the discipline has embraced a project of “economic imperialism” seeking to colonize other social sciences. Genuine interdisciplinary debate has lost out in this process. more> https://goo.gl/xDk2Mv

Michael Hudson Names the Pathogens in Our Economic Thinking

BOOK REVIEW

J is for Junk Economics, Author: Michael Hudson.

By Alexander Reed Kelly – “I know that’s [a] technical word but to create a way of looking at the economy of making national income statistics that make it appear as if Goldman Sachs is productive. As if Donald Trump is productive. To make it appear that people who take money from the rest of the economy without working, without really providing any service [are] actually contributing to [Gross National Product] and to economic growth.”

“Well under Thatcherism or Clintonism or whatever you want to call it, the idea is to turn the sidewalks over to the monopolists financed by Wall Street, to all of a sudden begin charging and the result is to make America a high cost economy. So, that when people like Donald Trump come in and say we’re going to make America great again, what he means is competitive again. But how can you make it competitive if you make Americans pay so much more in healthcare, as much in healthcare as an Asian would earn in an entire year. If you gave Americans all of their food and clothing and everything they buy and [sell] for nothing, they still couldn’t compete because of all of the costs that other countries pay for through the government; government healthcare, government spending, government roads.” more> https://goo.gl/oLat2t

The Radical Remaking of Economics

BOOK REVIEW

The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics, Author: Eric Beinhocker.
More Heat Than Light, Author: Phil Mirowski.
Masters of the Universe, Author: Daniel Stedman.
The Social Conquest of Earth, Author: Edward O Wilson.

By David S. Wilson – The rise and dominance of neoclassical theory and its political cousin neoliberalism is a fascinating bit of intellectual history.

My cartoonish summary would be that a group of very clever people in the late 19th century (Marie-Esprit-Léon Walras, William Stanley Jevons FRS, Carl Menger, Vilfredo Federico Damaso Pareto) wanted for very legitimate reasons to introduce mathematics and rigor into economics. But the tools they had at the time – primarily static equilibrium methods – were simply the wrong tools for the job. But they couldn’t have realized that at the time, and wrong tools were better than no tools, so their work set off a multi-decade creative burst of developing mathematical theories of the economy as an equilibrium system and shifting economics out of the philosophy department and into the new domain of social science.

But as the neoclassical models became more elaborate they also became more detached from reality, and unfortunately the profession began to reward mathematical virtuosity more than empirical validity.

The key challenge is whether we can use these new tools and ideas to describe the economy as it really is – a glorious mess of real human behavior, social networks, cultures, institutions, politics, and innovation – rather than the sterile idealized account of neoclassical theory.

We know from economic history that the economy is an incredibly dynamic system, from the explosion of growth unleashed by the industrial revolution, to the booms and busts of financial crises, to the co-evolution of technologies and institutions. This doesn’t look much like an equilibrium system, and traditional economics has struggled to explain these phenomena. more> https://goo.gl/jfwdPb

Economists Should Stop Defending Milton Friedman’s Pseudo-science

By George H. Blackford – It seemed quite clear to me back in 1967, and it still seems quite clear to me today, that it is the purview of engineering, not science, to catalog the circumstances under which a theory works and does not work and to estimates the errors in the predictions of theories along with the cost involved in using one approach or another.  The purview of science, as I saw it then and still see it today, is to understand and explain the subject matter of a scientific discipline.

This cannot be done by simply cataloging when a theory works and the magnitude of errors when it does not, and yet Friedman’s engineering view of science has stood at the very core of mainstream economics for well over sixty years.

The degree to which Friedman’s arguments are totally oblivious to the central role played by assumptions in scientific inquiry is indicated by his delineation of this role as he sees it ..

There is not even a hint of acknowledgement in this passage of the fact that a scientific theory is, in fact, the embodiment of its assumptions. There can be no theory without assumptions since it is the assumptions embodied in a theory that provide, by way of reason and logic, the implications by which the subject matter of a scientific discipline can beunderstood and explained. more> http://goo.gl/dbe0Ac

Economic Theory Is Dead. Here’s What Will Replace It.

BOOK REVIEW

Economics Rules: The Rights and Wrongs of the Dismal Science, Author: Dani Rodrik.
Nudge: Improving Decisions About Health, Wealth, and Happiness, Authors: Richard H. Thaler and Cass R. Sunstein.
Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions, Author: Dan Ariely.
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, Authors: George A. Akerlof and Robert J. Shiller.
Phishing for Phools: The Economics of Manipulation and Deception, Authors: George A. Akerlof and Robert J. Shiller.
The Darwin Economy: Liberty, Competition, and the Common Good, Author: Robert H. Frank.

By David S. Wilson – Einstein observed that “It is the theory that decides what we can observe.”

The world is so complex that we cannot possibly attend to everything, so a theory—broadly defined as a way of interpreting the world around us—is required to tell us what to pay attention to and what to ignore. Without a theory, we are literally blind. If we up the amount of information that must be processed, then the need for theory to cure blindness becomes even greater.

Models designed to understand particular topics are good as far as they go, but collectively they are like a jigsaw puzzle with a million pieces still in its box. An overarching theory is required to assemble the puzzle. That’s how evolutionary theory functions in the biological sciences. The economics profession doesn’t need something like that. It needs that. The same theory that unifies the study of all living processes can unify the study of our own species, including our economic systems. more> http://goo.gl/20UO8b

People don’t trust economists anymore

By Allison Schrager – It wasn’t always this way. Plenty of government administrations have made bad economic choices, but on balance, policy makers embraced the advice of economists—to promote trade, to run budget surpluses when the economy is booming, to adopt incentives to promote and subsidize work. But now many of these ideas, considered generally successful up until recently, have fallen out of favor with politicians as well as the public.

The most obvious reason for the recent populist resurgence is that things are terrible.

Economists promised free, unregulated markets would mean more growth—and then the Great Recession happened. Most economists support free trade but minimized the fact that, just like any policy shift, more trade would create winners and losers in the short run. In developed countries like the US, jobs in manufacturing are disappearing and wages are stagnant.

The economics profession may deserve to lose some trust. Net-net, there may be more winners than losers from trade, but that doesn’t lessen the burden economic that households on the losing side have had to carry; we indeed may have minimized those costs. Economic theory predicts technology will bring more productivity and prosperity, but instead of making vague promises about the future, economists could be doing more to figure out how to make the transition less painful for people in jobs threatened by technology.

Meanwhile, the public keeps losing confidence. more> http://goo.gl/oB0xRW

Society Cannot Function Without Moral Bonds

BOOK REVIEW

Theory of Moral Sentiments, Author: Adam Smith.
Wealth of Nations, Author: Adam Smith.
Descent of Man, Author: Charles Darwin.

By Geoffrey Hodgson – Adam Smith regarded individuals as driven by moral motives as well as self-interest. This is most clear in his Theory of Moral Sentiments, but ideas of justice and morality also pervade his Wealth of Nations.

It took economics a while to get rid of this argument. In two classic works published in 1871, William Stanley Jevons and Carl Menger placed individual self-interest at the foundation of economics. Three years later, Léon Walras built neoclassical general equilibrium analysis upon a similar assumption. For the next 100 years or more, self-interested, utility-maximizing, “economic man” was the centerpiece of mainstream economic theory.

There is now an enormous body of empirical research confirming that humans have cooperative as well as self-interested dispositions.

Morality means “doing the right thing.” It entails notions of justice that can over-ride our preferences or interests. Moral judgments are by their nature inescapable.

Morality differs fundamentally from matters of mere convenience, convention or conformism. Moral feelings are enhanced by learned cultural norms and rules. Morality is a group phenomenon involving deliberative, emotionally-driven and purportedly inescapable rules that apply to a community. more> http://goo.gl/bU8JeX

We’re Not as Selfish as Economists Think We Are

BOOK REVIEW

The Age of Consent: A Manifesto for a New World Order, Author: George Monbiot.
Captive State: The Corporate Takeover of Britain, Author: George Monbiot.
Poisoned Arrows, Author: George Monbiot.
Amazon Watershed, Author: George Monbiot.
No Man’s Land, Author: George Monbiot.
Feral: Searching for Enchantment on the ­Frontiers of Rewilding, Author: George Monbiot.

By George Monbiot – The revelation that humanity’s dominant characteristic is, er, humanity will come as no surprise to those who have followed recent developments in behavioral and social sciences. People, these findings suggest, are basically and inherently nice.

Chimpanzees, the authors note, behave more like the homo economicus of neoliberal mythology than people do.

Humans, by contrast, are ultra-social: possessed of an enhanced capacity for empathy, an unparalleled sensitivity to the needs of others, a unique level of concern about their welfare, and an ability to create moral norms that generalize and enforce these tendencies.

So why do we retain such a dim view of human nature?

Partly, perhaps, for historical reasons. Philosophers from Hobbes to Rousseau, Malthus to Schopenhauer, whose understanding of human evolution was limited to the Book of Genesis, produced persuasive, influential and catastrophically mistaken accounts of “the state of nature” (our innate, ancestral characteristics).

Their speculations on this subject should long ago have been parked on a high shelf marked “historical curiosities.” But somehow they still seem to exert a grip on our minds. more> http://goo.gl/uBI2iW