5

Economists, defend thyselves!

I remember vividly my first day taking a class on Soviet politics in college. The class began in August, 1991. The Soviet Union was collapsing before our eyes. By the end of the semester, it would be gone. That first day, my professor walked into the room carrying a copy of the $60 textbook on Soviet politics I had just purchased. Then, he promptly threw it in the trash can and said, "we won't be needing that anymore."

I imagine quite a few economics professors must be doing the same thing about now. Economist Paul Kedrosky, the "infectious greed" blogger, points out a new research paper that proclaims a systemic failure of economists:

The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public... It is obvious, even to the casual observer that these models fail to account for the actual evolution of the real-world economy.... In our hour of greatest need, societies around the world are left to grope in the dark without a theory.

I'd say that about sums it up. Of course, who gives a rat about theories when you don't have a paycheck or a 401-K. But having a little more information before the sky fell might've been nice. The report says economists ought to have an ethical code -- that they have a responsibility to tell people about the limitations and potential abuses of their models.

Keep in mind, this report comes from a group of (mostly) economists from around the world. Some of the economists I met at an economic blogging forum last week still believe the old boom-and-bust economic models explain what has happened here. But this report says let's not forget about the crazy new investment vehicles that prompted this particular boom, and the unprecedented interconnectedness of the financial system. Traditional theories don't take those things into account.

Kedrosky, who was at the conference last week, sums up the report by saying, "In short, we economists suck."

Come on, Paul, that's not true. I just won't be buying any economic textbooks for a good, long while.

Log in to post5 Comments

Throughout college and graduate school, I liked to tell the following joke: "Economics is a science; economists have successfully predicted nine of the past five recessions."

Despite (or because of) training in mathematical ecology, economic models never made sense to me. The assumptions seemed ecologically unsound. Yet why would economists cling to their models if they didn't work?

Give the number of economists who have lately said they are surprised by the severity of the recession coupled with predictions that things will get better this year (or next at the latest), I've formed the opinion that economists are in the business of telling people what they want to hear. There will always be a place for such people.

Maybe I should have gone into economics. Right now, I wouldn't mind the security of always having a job no matter how often I was wrong.

This bundling of debt into derivatives and the formation and selling of credit default swaps, was the economic model that failed. It failed because it allowed way more credit to be available than actual assets to cover it. Same scenario that led to the crash of 1929.

As to those people complaining about how this all surprised them, it all goes back to understanding general economics. I'm no economist, but I avidly read publications like Forbes, Money and the Wall Street Journal. I also listen to Marketplace faithfully. I took what I learned and pulled everything out of equities in January 2008. Thank you Marketplace for all your great programs. Some of us were actually listening to you!

This article has a gloomy bad premise... as if no one saw this coming. I think the economists did fine. We just did not listen. Perhaps a comprehensive theory on excessive debt was missing, but who thought spending more than we earn would be okay forever?

Let me explain. All the way back to Adam Smith economists have told us that booms follow busts. Supply is low and demand is high gives high prices. That leads to increases in production even as demand is satisfied. Eventually prices fall. Right now prices are falling.

The markets boomed from the 80's through 14,000 Dow in 2007. It couldn't go up forever. The biggest booms are followed by the biggest busts. Check 1929 for an example.

The whole process of boom and bust is magnified when leverage is involved. In 1929 people bought stocks on margin because they thought prices would only go up. In recent times people borrowed big bucks because they thought property values could only go up. The bust hurts a lot because people are not incurring loss against money they had in play, but also against money they borrowed!

Did we really need an noble prize winning economist to tell us that prices do not go up forever, and that leverage can help on the way up but really hurts on the way down?

At a recent conference on housing, an economist that was presenting information during the dinner program explained the "trends in the market place". As a result his chart showed continued growth in the U.S. population (births plus immigration minus deaths = population growth). I asked him if his model took into consideration regulations that Congress and State Legislatures enact. He stated that the "Moody Model" only takes into consideration trends in the market place and that is what economist study, the trends. I stated that that model is wrong because it should also must included laws and regulation that will have a possible impact. My point is that economist had failed to see the success of regulation that deports immigrants that are not here legally and therefore it is the intent of many State and Federal agencies to reduce their population. Many studies by Harvard, Pew & Goldwater intitutions show that there are about 12 million undocumented persons in the U.S. and that many are leaving the country either by force or by their own will. As they are leaving the country, they are vacating the homes that they rented or purchased and taking family members with them.
If they take just one spouse, or child or partner, then our population may decrease by 24 million! As a result, the economists have not figure this out yet and the impact of them leaving. Their models show historic growth of the US population and they need to study the impact of 24 million people leaving. Many have left already from Arizona and that has contributed to the high foreclsure rate and the high vacancy rate of rentals. By ICE records alone, they have captured and deported approximately 130,000 from Arizona.

The States of California, Nevada, Arizona, Florida and North Carolina lead the nation in vacancy rates and foreclosures and they are also the States that lead the nation in anti immigration regulations.

We will not be able resolve our current economic mess untill we take a serious look at our current immigration regulations and allow for hard working familes to remain and deport the hard core criminals.

Otherwise, our economy will continue to decline as DEMAND for products and services decline as our population declines by 24 million.

Good points. An improved census would provide the data required to even do that analysis...

With Generous Support From...