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On intellectual failure & economic crisis

Written By: - Date published: 10:30 am, January 27th, 2010 - 56 comments
Categories: Deep stuff, economy, education - Tags:

Before they were swept along by the latest incarnation of US Right anti-intellectualism, National used to have some smart people. One of the last to go was Simon Upton. You might not always or even often agree with the man but at least he is informed and has the capacity to engage in serious debate beyond fallacious slogans, which is more than can be said for any Nat today.

Anyhow, Upton reports he has been reading Robert Skidelsky’s Keynes – The Return of the Master, which gives a Keynesian analysis of the causes of the economic crisis and the solutions. He makes some very important points:

“the crash has exposed an intellectual failure long ago identified by Keynes: the fallibility of the efficient markets hypothesis as a reliable tool for modelling all economic behaviour. Financial tools designed to cope with manageable risks have been hubristically extended to the management of irreducible uncertainties. Far from limiting risks, they have magnified them. The conflation of uncertainty with risk has exposed the limits of laissez faire.”

“Skidelsky questions the unmitigated benignity of globalisation. Keynes considered that globalisation ran political risks that should at least call for caution on the part of policy makers.

The issues have changed since the 1930s. Today it is the health and environmental safety of long supply chains that raises consumer concerns.

One thing is clear. When uncertainty engulfs markets and the trust on which billions of transactions rely evaporates.”

“He wants a restructuring of the way economics is taught. Modern economics has masked radical uncertainty with sophisticated, but ultimately fallible, mathematics. He invokes Keynes’ injunction that economics is a moral rather than a natural science. Economics must be imbibed in the company of history, moral philosophy, sociology and politics.

He insists that macroeconomics must be protected from the encroachment of the methods and habits of microeconomics. The claim here is that we can’t construct our understanding of the macro picture – the world of peoples, governments and cultures – from a model of rational expectations held at the micro level. The macro world is one of conventional or herd instincts that, left unchecked, can lead to disaster.”

I agree with the last points vehemently. At university, budding economists can graduate without having had any real instruction on alternatives to neoclassicism or the social and political context in which economics takes place. Mainstream economics has forgotten that the economy is for people and of people. Instead, it sees people as factors in its beautiful equations that look nice but it reduces all human nature to a ‘rational’ quest for more (more money, more stuff, more, more, more) – real humans are too messy to fit neatly into the equations. Because of that it so often fails to correctly predict actual human behaviour.

56 comments on “On intellectual failure & economic crisis ”

  1. Sam 1

    Thanks for that Marty, might have to track that book down!

  2. Peter 2

    Yeah, a good post. I have always read Simon Upton for the same reason – he does think, and he is prepared to engage intellectually. Although he did fail with his design of the science system (fragmented crown research institutes) and his health reforms are best left unmentioned.

  3. I always had respect for Upton. He negotiated our entry into Kyoto. He was a good example of the classic thinking tory. You could disagree with him but you could be guaranteed a point by point debate and a coherent justification for his position.

    There is no one in the current government who has that same quality. All we have is a bunch of PR driven yes men who are brutalising the country with their lack of understanding and their beligerence.

    Oh for a couple of Uptons on the Government Benches.

  4. RascallyRabbit 4

    Thanks for the post Marty

    As an ECON grad myself I always struggled with the dismal science – what was being taught as gospel so often didn’t fit in with what you saw in the ‘real world’.

    I felt that the maths element always had a much better fit in Finance – which I also dabbled in – in that it could more accurately (though once again not completely) explain real-world phenomena.

    I can also recommend Niall Ferguson’s: The Ascent of Money which does a great job of explaining contemporary economic conditions in a historical context – something sorely missing from the modern business school graduate I feel.

    I must have a look at Skidelsky’s book, thanks.

    • Bored 4.1

      RR, Help is at hand to relieve the dry boredom of econometrics, agree with your comments. A few books….Nialls OK from the pro capital pro imperial angle, so long as you have that awareness of his views hes a good read.

      You might want for a dry witty read to delve into Galbraith (Great Crash of 1929 described all the current symptoms and events, only the names and dates needed changing…).

      Mazowers Dark Continent is also really good to get some context on the politics behind globalisation (looking at it more as a recurrent theme over a century or more).

  5. Bored 5

    Good post Marty. It has never ceased to amaze me the number of bloggers who plunge straight into the detail and remain firmly entrenched in narrow dogma based arguments. It’s all about broad context.

    Keynes was able to utilize his broad classical education in which history took some prominence, along with cultural, literary and linguistic depth. Rather than describe him as an intellectual heavyweight we might better understand that the products of our universities are so focused on narrow method that they possess neither the knowledge nor tools to be described as intellectuals at all.

    Rather those graduates of the business schools are better described as corporate Jesuits, technocrats to whom narrow focus on method within proscribed boundaries is the sum total of their capacity to think. Best not look to these economists for any clarity of thinking when they are presented with issues outside of their frame of reference.

    • “Keynes was able to utilize his broad classical education in which history took some prominence, along with cultural, literary and linguistic depth”

      Keynes training was in maths and stats. In fact the first book he wrote was a “Treatise on Probability”.

      • snoozer 5.1.1

        Paul. Yes, that was his speciality but in those days when you went to high school and university you got an education, not a training in a narrow field.

        The fact that you don’t know that shows how much has changed.

        • Paul Walker 5.1.1.1

          So what subjects did Keynes study then?

          • snoozer 5.1.1.1.1

            Educated at Eton, Keynes won a scholarship in classics and mathematics at King’s College, Cambridge. Interested in literature and philosophy, Keynes was invited to join the Apostles, a small, secret society of dons and undergraduates who met to discuss ethical and political issues. The group included Lytton Strachey, Leonard Woolf, E. M. Forster and Bertrand Russell. His friendship with Woolf and Russell brought him into contact with leaders of the Fabian Society, including Sidney Webb, Beatrice Webb and George Bernard Shaw.

            http://www.spartacus.schoolnet.co.uk/TUkeynes.htm

            still so smug?

            • Paul Walker 5.1.1.1.1.1

              Google is a wonderful thing.

              • snoozer

                yeah it is. maybe you should have informed yourself first rather than making a dick of yourself with the smug ignorance so typical of neoclassicists.

            • Paul Walker 5.1.1.1.1.2

              “yeah it is. maybe you should have informed yourself first rather than making a dick of yourself with the smug ignorance so typical of neoclassicists.”

              What exactly is a neoclassicist?

          • Bored 5.1.1.1.2

            You are correct in a narrow way. Keynes also had a classical education prior to university, was a member of the influential Bloomsbury set, was very au fait with culture, associated with literary characters such as Lytton Strachey and married a ballerina. Not your standard economist. He also knew history when he saw it, he was at Versailles and was highly critical.

  6. SHG 6

    Upton’s departure from domestic politics was National’s, and the country’s, loss. Health in particular has really missed him.

  7. “At university, budding economists can graduate without having had any real instruction on alternatives to neoclassicism or the social and political context in which economics takes place. Mainstream economics has forgotten that the economy is for people and of people. Instead, it sees people as factors in its beautiful equations that look nice but it reduces all human nature to a ‘rational’ quest for more (more money, more stuff, more, more, more) real humans are too messy to fit neatly into the equations. Because of that it so often fails to correctly predict actual human behaviour.”

    Still proving you know nothing about economics Marty. Most of modern econ works from a basis of neoclassical idea and non-neoclassical ideas. Since the 1970s increasingly econ has being extending the neoclassical model. Areas like game theory, contract economics, experimental economics, behavioural economics, new institutional economics, law and economics etc are now standard stuff.

    Also the maths used in most economics is basic. If you don’t believe me go to the math department at any university and show them the high powered maths being used in econ, you will be laughed out of the room. There are a few areas in econ and finance where serious maths get used, but few economists are involved in these areas and those that are researching in universities.

    The “‘rational’ quest” in economics is a quest for utility, that is, happiness, satisfaction, jolly – as a professor of mine called it. A nice comment I once read that sums up this idea was “Policy wonks in Washington want Americans to die rich. Economists want them to die happy.”

    • Bored 7.1

      Not being an economist I am not qualified to judge whether Marty knows anything about economics. I am more interested the question of how much economists really know about everything else?

    • Bill 7.2

      “show them the high powered maths”

      That’s a reference to the quoted text which runs….”Modern economics has masked radical uncertainty with sophisticated, but ultimately fallible, mathematics.”…innit?

      Sophisticated does not mean high powered. Doesn’t even mean particularly intelligent. Cunning covers it best in my book…smoke and mirrors, dishonesty….also spring to mind.

      Neo-liberal economists = charlatans running sophisticated con job.

      Except, nah. It’s not that sophisticated really when small minded opportunists… who just happen to be intellectually and morally bankrupt… jump on a bandwagon to form a symbiotic relationship with military thugs to force self serving economic programmes at the point of a gun as in Chile and elsewhere.

      Is it?

    • snoozer 7.3

      So, how come economists fail to predict human behaviour?

      Because although you say you’re aware of human behaviourial drivers other than money, you always end up ignoring them in your maths-based theories because they aren’t countable.

      • Paul Walker 7.3.1

        “So, how come economists fail to predict human behaviour?”

        What evidence is there that they do? The experimental economics results, for example, look ok on predicting behaviour.

        “Because although you say you’re aware of human behaviourial drivers other than money, you always end up ignoring them in your maths-based theories because they aren’t countable.”

        The standard approach is to assume people maximise utility, not money. In fact income is part of the constraints of the problem not part of the objective function. Also the standard theory assumes there is a preference relation for which the utility function gives a ordinal ranking not a cardinal one.

        • BLiP 7.3.1.1

          What’s the formula for the Haiti situation – how much does misery cost?

        • snoozer 7.3.1.2

          “The standard approach is to assume people maximise utility, not money”

          yes but you always end up substituting dollar values for utility because you can’t count happiness.

          • Paul Walker 7.3.1.2.1

            No. You don’t maximise money.

            • snoozer 7.3.1.2.1.1

              I didn’t say money, I said dollar values. Obviously, that will mostly involve purchasing goods and services, rather than holding cash.

              It’s sad that you have such a blind adherence to your faith that you won’t even comtemplate its manifest faults.

              • But the assumption is that people (consumers) maximise utility. More correctly the assumption is that consumers maximise a preference relation. Under certain assumptions this preference relation can be represented by a utility function, and thus the maximisation of utility.

              • snoozer

                “the assumption is that people (consumers) maximise utility.”

                yes. In fact, it’s pretty much a tautology that people will always chose the choice that they think will maximise their perceived gains minus perceived losses. That in itself tells us nothing, it must hold true for every decision.

                Now, what we really want to know is how people will act in a given situation and this is what economics tries to tell us but because the non-monetary factors of gain and loss are uncountable and completely subjective neoclassicism just ignores them and counts only the money.

                That means that economics completely fails to predict that (for instance) people would prefer http://www.thestandard.org.nz/getting-emotional-about-economics , ceteris paribus, to have an income of $50,000 when everyone else’s is $25,000 than to have an income of $100,000 when everyone else’s is $250,000.

                Your equations only allow you to predict that the person will always chose to maximise ultility by choosing the higher income option. And I know yo’ll say they don’t but the reality is you will always count the money because you can’t count the value of being relatively wealthy.

              • “yes. In fact, it’s pretty much a tautology that people will always chose the choice that they think will maximise their perceived gains minus perceived losses.”

                Actually the assumption is they maximise utility subject to the constraint that what ever they purchase costs no more than the income they have. Even if “perceived gains minus perceived losses.” was the objective function you still have to take the income constraint into account.

                “That in itself tells us nothing, it must hold true for every decision.”

                No. People could, for example, choose randomly.

                “That means that economics completely fails to predict that (for instance) people would prefer http://www.thestandard.org.nz/getting-emotional-about-economics , ceteris paribus, to have an income of $50,000 when everyone else’s is $25,000 than to have an income of $100,000 when everyone else’s is $250,000.”

                An answer would depend on the utility function (or preference relation).

                “Your equations only allow you to predict that the person will always chose to maximise ultility by choosing the higher income option.”

                But again it depend on the utility function. If people get utility from relative income then you would get the result that people would prefer the 50 to 25 situation.

              • snoozer

                “”That in itself tells us nothing, it must hold true for every decision.’

                No. People could, for example, choose randomly.”

                Paul, please don’t tell me you have that weak an understanding of decision-making.

                Obviously if a person chooses to choose randomly that that must be their perceived utlity-optimising choice. If it weren’t they would have chosen some other way.

                They might not get the result that optimises utility but the question is which decision optimises perceived utility at the time it is made. And that must always be the decision that is made. That is inherent and it gives no information on which choices will actually be made in any situation.

                “If people get utility from relative income then you would get the result that people would prefer the 50 to 25 situation”

                And they obviously do but the point is that economists would never predict that utility because they are obsessed with countable utility. Its easy to make an euqation to explain a decison post facto but the problem is that economics claims its theories are be predictive, like a science.

              • “””That in itself tells us nothing, it must hold true for every decision.’

                No. People could, for example, choose randomly.’

                Paul, please don’t tell me you have that weak an understanding of decision-making.

                Obviously if a person chooses to choose randomly that that must be their perceived utlity-optimising choice. If it weren’t they would have chosen some other way.”

                Only if they are choosing rationally. Why must they? You are assuming rational decision making.

                “They might not get the result that optimises utility but the question is which decision optimises perceived utility at the time it is made. And that must always be the decision that is made. That is inherent and it gives no information on which choices will actually be made in any situation.”

                But if the observed behaviour violate GARP then there would be no utility function that rationalises that behaviour. So we could see choices that don’t come from utility maximisation.

                “If people get utility from relative income then you would get the result that people would prefer the 50 to 25 situation’

                “And they obviously do but the point is that economists would never predict that utility because they are obsessed with countable utility. Its easy to make an euqation to explain a decison post facto but the problem is that economics claims its theories are be predictive, like a science.”

                As I don’t know what your mean by “countable utility” I’m not sure what your point is. But if you mean that utility is cardinal, say, can be measured by real numbers with all the properties of real numbers, then no, that’s wrong. Economists assume ordinal rankings, that is, only order counts.

        • Draco T Bastard 7.3.1.3

          What evidence is there that they do? The experimental economics results, for example, look ok on predicting behaviour.

          And yet not a single neo-liberal economist predicted the present recession. This should give you the idea that the theory you’re working with is a failure. Instead you come up with this BS defending it.

    • NickS 7.4

      Personally I’d prefer it if economists would finally hammer and refine economics into a science, rather than the bastard offspring of finance and humanities it presently appears to be. Well, more akin to ecology, rather than the usual exemplar* of science that is taken as physics.

      *Don’t get me started, bloody philosophers.

      • SHG 7.4.1

        “They call it Social Science to distinguish it from real science”

      • blacksand 7.4.2

        therein lies the rub eh;

        ‘ecology’ is the study of the house (oikos)
        ‘economy’ is knowledge of the house.

        ecologists are interested in looking at how the house works. Economists reckon they’ve got it figured; the work involved in economics seems to be coming up with convoluted explanations for why reality doesn’t seem to fit economics (not the other way around…).

    • With respect, whilst it is true that, in one sense, there is some pluralism in Economics in universities, it is also the case that the Marshallian, Jevonian, or Walrasian tradition (depending on nyour preferences) is dominant in terms of teaching content and publications, I am sure Austrian School adherents will disagree, as will others in the various sub-sets of debate, but I think that the assertion is fair. The interesting thing is how that tradition is being challenged by, amongst others, behavioural and institutional approaches – the dominant tradition seeks to incorporate that challenge, the challenge seeks to reconfigure the dominant tradition. That dominance has also resulted in an increasing focus on positivist, technical analysis within the paradigm, hence the priority given to quantitative approaches. The overalol effect has been, I think, to makie much formal Economics irrelevant to real-world problems, which in part explains why academic economics has such a low profile in NZ.

    • Clarke 7.6

      “Many problems arise from the lack of humility about the Efficient Market Hypothesis. It is, at best, an incomplete and highly conditional model that compares unfavourably to Middle Ages medical and religious superstitions.”

      – Satyajit Das

      So Paul – if this shiny new economic thought that you’re espousing is so wonderful, how come its powers of prediction are so poor?

      • Paul Walker 7.6.1

        Exactly what evidence is there that its predictions are poor?

        As Bill Easterly said, with regard to the EMT, in response to Queen Elizabeth’s question: why economists did not predict the crisis.

        “First, Your Majesty, economists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it. The most important part of the much-maligned Efficient Markets Hypothesis (EMH) is that nobody can systematically beat the stock market. Which implies nobody can predict a market crash, because if you could, then you would obviously beat the market. This applies also to other asset markets like housing prices. If you think it is useless to be told you cannot predict the market, then you should change your Palace investment advisor. This knowledge will protect you from a lot of investment scams like Mr. Madoff’s and will also provoke a serious discussion of how to protect your Royal Wealth against risk in an uncertain world.”

        • Bored 7.6.1.1

          Glad you mentioned Madoff. Living proof that the economists and their purist theories have it wrong. The worlds biggest financial market managed to “lose” $50 billion which nobody seems to be able to find to Madoffs swindle….of course he did all this by himself with nobody noticing it was a huge Ponzi scheme, least of all those rational market players on Wall St themselves. Unless of course they were all in on it too, or running their own parallel rorts. There is a lot of rational self interest on Wall St but it fails to correspond with the theoretical smokescreen.

        • mcflock 7.6.1.2

          In other words “we’re without use, other than that it’s a public service to remind people that we’re without use”. Not in itself a particularly ignoble purpose.

          But it contradicts your previous one:two:
          January 27, 2010 at 1:51 pm ”
          “So, how come economists fail to predict human behaviour?’

          What evidence is there that they do? The experimental economics results, for example, look ok on predicting behaviour.

          Personally, my reaction was “if economists wish to maximise global happiness, then they’re obviously cocking up somewhere, probably in the predictive phase”. But now you’re saying that prediction of the human market behaviour is impossible.

  8. randal 8

    modern econmics is founded on the basis of double entry bookkeeping and compound interest and is solely focussed on grabbing as much of the earths scarce resources as possible with no other considerations whatsoever.
    that means no environmental or social resistance to the desire of individuals to amass goods and services and make others subservient to commercial might.
    simple really.
    oops and kill anyone who resists.
    nearly forgot that bit.

  9. BLiP 9

    Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.

    Kenneth Boulding

    • Quoth the Raven 9.1

      Keynes was one then because he believed in the possibility of a post-scarcity society. In fact he thought it could be brought about in a single generation.

      • BLiP 9.1.1

        While I prefer Keynes to Friedman I confess to being rather unread in economics and usually stay away from these debates (except to wind up the trolls) – however, can I recommend E F Schumacher’s “Small Is Beautiful”.

        It is clear, therefore, that Buddhist economics must be very different from the economics of modern materialism, since the Buddhist sees the essence of civilisation not in a multiplication of wants but in the purification of human character. Character, at the same time, is formed primarily by a man’s work. And work, properly conducted in conditions of human dignity and freedom, blesses those who do it and equally their products.

        . . . sums it all up for me. Until we start stop measuring or worth in dollars and cents, the more the economists will flail about like black spectres around a cauldron.

      • Draco T Bastard 9.1.2

        There’s a difference between eternal growth and the “end of scarcity”. As I’ve said many times, NZ’s productivity far surpasses what is needed to support all of it’s population in reasonable comfort with very little work. Instead we have the vast majority working hard and only going to an early grave, a fairly significant proportion living in poverty and less than 1% living the high-life.

        • Quoth the Raven 9.1.2.1

          I don’t think you get the term “post-scarcity society” – read the wiki page Post scarcity. Economic growth would be an irrelevant concept in a post scarcity society, but it would take an immense amount of economic growth to get anywhere it. In fact economics itself would be irrelevant in a post-scarcity society.

    • A comment made before endogenous growth theory.

  10. prism 10

    Interesting Marty, and I can understand it. Its too easy to step back and say oh I’m not an economist and give up thinking about it. You’re a great help.

  11. rainman 11

    For those who are interested, there is a podcast on this at http://www2.lse.ac.uk/publicEvents/events/2009/20090826t1517z001.aspx

    Actually, there are quite a few LSE podcasts worth listening to, if you have the time.

  12. Keynes was half right. The market doest work to optimise supply and demand.
    But he didnt explain why.

  13. prism 13

    I think that a craze could be started of having an economist doll. When the ordinary person has a problem, it would be interesting to press the button and get some random economic prediction or announcement.

    Seeing economists sound like talking parrots it would be amusing to have a semi-human version. There would be a spongy part somewhere so you could stick pins in your economist doll when taken by feelings of aggravation over the unfortunate tendencies of governments and their economic advisers to spend a lot of time and money creating mayhem and then wanting more tax to pay for it.

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