Time to Revisit the Mainstream Theoretical Framework

There’s a great article in today’s Vancouver Sun hammering on the fact that all major mainstream economists failed to anticipate the economic crisis. Provocatively titled Economics 101: Everything you know is wrong, the article quotes James Galbraith’s indictment on the mainstream of the profession that originally appeared in a New York Times Magazine article: “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.” Ouch!

It’s about time that economists be held accountable for the forecasts they dish out so liberally. These forecasts come out of direct application of theoretical fundamentals of (most often) neoclassical economics and should be treated as hypotheses are in science. If your hypotheses don’t hold up, you revise the theory. What a novel idea!

The best part of the article comes at the end:

Did economists, then, miss the big bomb that blew up the economy?

“We missed the size of the bomb,” Beaudry said. [Prof. Paul Beaudry of UBC]

A couple of questions come to mind, then:

Can the bomb be defused before it does any lasting damage?

Should economists be allowed to handle explosives?

24 comments

  • I agree about neoclassical economics but it is notable that some prominent economists, including this year’s Nobel, Paul Krugman, have been making noises about this stuff for some time. Other econo-bloggers, Mark Thoma and Brad DeLong, have expressed similar concerns. I think Stiglitz also had some inkling. Nouriel Roubini is probably the most prominent bear a couple years back and was then deemed an outsider view, but has basically been proven right by 2008’s events.

    That said, economic models based on rational agents are precisely the wrong models with which to examine phenomena like bubbles. The economics of Keynes, and in particular, the post-Keynesian, Hyman Minsky, are much better suited to understanding what is currently going on. Stiglitz and Akerlof’s work on information asymmetries and market failure is also highly relevent though still within the boundaries of the mainstream.

    Most of the rest, like 98% of academic economics, is essentially irrelevant to policy and real-world problems. But hey, you gotta get tenure some how.

  • It’s true that some prominent economists had expressed concern prior to the meltdown. However, I am inclined to agree with the article’s assessment here:

    To be fair, there were economists and financial advisors out there waving red flags about the precarious nature of the economy. Alarms about the volatility of the derivatives market and the housing bubble had been sounded for so long — in some cases, for as long as a decade — that the public had begun to tune out.

    But when the dominoes began to fall, almost no one foresaw the depth of the problem and the speed at which it would spread.

    Also, Paul Baudry makes a good point:

    … while many economists saw trouble coming, many were looking in the wrong place. One view was that the trouble would start with the China-U.S. trade imbalance, when the real trouble was closer to home — in subprime mortgage loans, and in the incredibly complex bundling of those mortgages into collateralized debt obligations, or CDOs.

  • The history of science comes to mind. I’m thinking of that phenomenon that prevailing scientific views tend to reinforce existing epoch views in society, including religion, politics, geography. Hence 40 years ago addiction was a moral failure, and now it is seen as genetic. So if suddenly everyone thinks that wall street bankers are totally stupid and right wing politicians are both stupid and evil, then the underlying acceptance of free market theory will change. Then the readership, research chairs, prizes, grant funding will all shift to those rejecting said theory.

    I always though that socialism made sense in some fields and the free market made more sense in others. But one of the fields I always assumed the free market made more sense was finance. Wasn’t it Mitterand that botched up an attempt to nationalize banking? If banking isn’t well-suited for the free market, what does that say about other areas.

    Like, my list was logistics, building construction, and banking all belong better in the private sector. Now I’m starting to wonder about the other two.

  • Part of the problem was that the bubble produced an economy which vanilla economists (the 90%) thought vindicated the basic model.

    So it was near impossible to get any air-time arguing against the mainstream, sanguine interpretation because that interpretation was being bolstered by the bubble.

    A lot of this thinking is still lingering around and comes in the form of statements such as:

    “outside of the bubble we need to remember that the last 10 years delivered some of the best growth and unemployment rates on record so lets not revisit the public policy debate of the last three decades.”

    The problem is of course is that it was the bubble that played such a large role in inflating commodity prices and creating employment from wall st. to main st.

    That is, without the policies that caused the bubble we surely would not have had such “strong economic performance”.

    And it should be said that even some of the left became enchanted by the American model. When I started reading Marxist political economists arguing that the American model was one % Kosher and free from contradictions I knew for sure there was a bubble.

  • Good point Travis, that’s a serious sign of hubris and complacency. Another sure sign of a bubble is straight-line forecasts that things will continue improving into the future infinitely. Also the whole “there will never be another recession” thing. And the Milton Freidman epitaph; what did he do for the world? “look around you, he created all of this.”

  • words to describe the mainstream framework:

    Apologetic, irrational, scientifically rationalized bunk, mathematically irrationally deterministically pathetic, holistically swiss cheese like backwards debauchery, socially constructed professional tom foolery, the antithesis of economic reality put forth by a desperate pack of free market worshiping ultra surrealistic warlocks and witches. Artistic misrepresentors of unsupervised mathematical machine learning algorithmic worshiping wanna bees, politically denying culturally backwards self interested war mongering causing delusional dumb asses.

    I feel better!

  • Perhaps a wee bit overstated?

  • Undoubtedly a wee bit, lol.

  • It seems to me that the “mainstream” has been becoming ever more (neo-) Austrian, (neo-) institutionalist, (neo-) behaviouralist, game-theoretic, information-theoretic over the last 30 years, if trying not to jettison more of Walrasianism than was absolutely necessary. It seems to me that the present upheavals are at least as likely to mean the final consolidation of that trend as to lead to any dramatic shift of paradigm. Henceforth, path-dependent, increasing-returns, heuristic-agents models may well be to be the only models in town. I suspect this might not satisfy many neo- or post-Keynesian, original institutionalist, or Marxist economists. And it certainly wouldn’t mean a shift away from mathematical modeling. But I suspect it may well be the case. Yes, Keynes, aggregate demand, and fiscal stimulus may be respectable once again. But where that once meant a thorough upheaval in economic theory and the jerry-rigging of a whole new “branch” of economics, I’m not so sure it means anything for (the leading part of) contemporary theory today. Of course, if I’m right in this speculation, it may be time to start thinking about a whole new mode of criticism of economics – a criticism appropriate for an economics which is “autistic” no longer ….

  • Thanks Iglika and commenters for the discussion here. I hope that as elements of diverse perspectives are considered in these times, that we can avoid polarization based upon gaps in understanding. I came upon one such gap, unfortunately all-too-familiar in some activist circles, though surprising coming from an academic.

    The ‘gap’ was revealed in a comment made following a presentation of Susan George last month at U.of Ottawa, taped and posted here: http://casinocrash.org/?p=608 . The comment was presented as a ‘challenge’ to Susan George’s promotion of Keynesian alternatives, the commenter stating that Keynesian options wouldn’t have gained traction if there hadn’t been a ‘strong Communist Party’ movement in the early ’30’s which put the powers-that-be in a position of needing to make some substantial changes.

    The specific ‘gap’ which bothered me was the apparent lack of understanding of what the Communist strength of ’33 was based upon. Financial support from Moscow for western Communist groups was funded by complete oppression of the rural peasantry by Stalin. He institutionalized and expanded the sadism and brutality of Lenin’s Cheka which consolidated the ‘revolution’ in its early years by torturing and slaughtering any who opposed. Their ravages were indiscriminate of class, including poor illiterates who lived in thatched mud huts, didn’t want an old or new ‘soviet’ tsar, and wanted simply to retain some grain to keep from starving. There are more graves in the villages marking the 20’s and 30’s of Lenin’s and Stalin’s terrors than can be counted, and almost none of them of ‘the bourgeoisie’, this I know from personal experience. The wealth of the Soviet Union was built on the backs of subjugated peoples.

    So is Susan George’s ‘challenger’ saying that we need extremes of ideology and brutality in play so that middle ground can emerge? I don’t think so.

    Rather, I think the comment reflects a lack of understanding that seems to be prevalent in Canada amongst some leftists. It was also prevalent when displaced persons after WW2 made their way to Canada. For example, I had a few relatives, now dead, who survived the famine of ’32/’33 only to be taken by force as young people to Hitler’s labour camps. At the end of the war a couple were lucky enough to get to Canada, where they were met by Communist Party propagandists who told them they were lying about life in the Soviet Union. This nonsense was conducted on a grand scale, historian L. Luciuk chronicles it in his book “Searching For Place”.

    It’s one thing for outrageous nonsense to be bandied about in the past, yet quite another when it’s brought into current politics, particularly at a time when we really need to resist cold war mentality, which is being used again to prop up exploitative economics west and east, at the expense of the vast majority of human beings and the earth.

    It is frankly painful to see bright, well-meaning, and compassionate activists prevented from realizing the limits of their historical analysis, limits which if fully understood might help us all, including others in different places on the spectrum, break down old barriers and move towards useful alternatives.

    What kind of historical and political blindness could persuade candidates to run for the Leninists in Peterborough, Ontario in the federal election a few weeks ago, or the Communists in Ottawa? In a country filled with the diaspora of abuses perpetrated in these names, equivalent for many to the name of ‘Nazis’, one can only shake one’s head.

    I don’t think the powers-that-be are going to be ‘positioned’ into any real change by those who refuse to see the log in their own eye. If this country is going to get over old barriers the left is going to have to change too, not just the right.

    We need to articulate specifics beyond full market control and full state control, perhaps sector by sector, which I think people on this blog are doing well.
    thanks for listening,L

  • Leigh said:

    “So is Susan George’s ‘challenger’ saying that we need extremes of ideology and brutality in play so that middle ground can emerge?”

    No. I suspect that what “we” need are teeth of some kind (instead of beautiful souls) to force those who have no other reason to agree to _any_ kind of “left” (and I use the term broadly) demands.

    And the left doesn’t have those teeth.

    What makes you think any mainstream political party in Canada is going to agree to anything that smacks even remotely of socialism? Did you see the ridiculous red-baiting that was going on in the States? That was done against a _real_ bourgeois mouthpiece. Do you remember the panic that was flying thick and fast when Rae and the NDP won in Ontario? Every business was expecting Rae to play Lenin. And what happened? More tightening of the screws (granted, not as bad as, oh, say, Harris, did, but bad enough coming from what was then still something of a social democratic party).

    Maybe you’d better read a bit more history yourself, like the fact that the USSR was _hated_ by the big bourgeois nations who then _invaded_ it and did what they could (aided and abetted by bastards like Stalin) to harry it and bring it down ASAP when they couldn’t stamp it out by force of arms. “Containment” was the official term, no? What a nice liberal term for denying people even the attempt at freedom from exploitation.

    “What kind of historical and political blindness could persuade candidates to run for the Leninists in Peterborough, Ontario in the federal election a few weeks ago, or the Communists in Ottawa?”

    Oh, probably the same historical and political blindness that causes pwogwessives to vote Liberal and pat themselves on the back about how noble they are.

    “In a country filled with the diaspora of abuses perpetrated in these names, equivalent for many to the name of ‘Nazis’, one can only shake one’s head.”

    Oh, right. Mustn’t hurt people’s feelings, mustn’t we? Especially if people have money to donate to nice, respectable causes and parties, money which could easily have been made by relatives back before their countries’ respective revolutions caused those rich, blood-sucking bastards to grab their pilfered bootle and run like hell for a “freedom-loving” country like Canada.

    “I don’t think the powers-that-be are going to be ‘positioned’ into any real change by those who refuse to see the log in their own eye. If this country is going to get over old barriers the left is going to have to change too, not just the right.”

    Wow. I don’t think I’ve seen Third-Way liberalism summed up so succinctly.

  • I have always loved how the “left” in Canada, by which it is always meant what is left to the NDP in such conversations, is burdened with the responsibility to answer for Stalin and the Russian revolution. It is just so weird.

    It is like asking present day Canadian catholics to answer for the crusades, the slave trade and other sundry acts of genocide and repression. Or like asking present day Canadian liberals and conservatives (protagonists of capitalism) to answer for Hitler (supported as he was by the German bourgeoisie and industrialists, Catholic church, Luthern’s, homophobes anti-Semites and anti communists), Franco in Spain (supported by the church, monarchy and bourgeoisie), Benito Mussolini (church, Northern industrialists, Southern agrarian interests), Batista, Papa Doc, Pinochet in Chile, the Junta in Argentina, need I go on??

    Just imagine if I wrote “In a country filled with the diaspora of abuses perpetrated in these names, equivalent for many to the name of ‘Nazis’, one can only shake one’s head.”

    This is the classic argument ad Hitlerum:

    Hitler drove cars and invested in highways; Canadian conservatives drive cars and invest in highways: ipso facto Canadian conservatives are Nazis. How could Canadians elect Nazis?

    This is not really a productive formula for conversation: and that is said by someone who is not all that well known for fully productive contributions:)

  • wow, lots of misunderstandings and rants in the two comments above. perhaps because i was ranting somewhat in the post above. for that I apologize, but not for critiquing the fact that someone lauded the ‘communist strength of ’33’. If ‘the left’ depends on ‘teeth’ that are fed by the blood of others, then it has problems worse than those i’ve noted.

    A more accurate parallel, to those calling themselves Leninists and Communists in Canada today, would be people running for parties that called themselves Nazis after having re-translated the name amongst themselves to mean something else. Sure, I suppose it can be done, but not too bright a move.

  • Leigh said:

    “but not for critiquing the fact that someone lauded the ‘communist strength of ‘33′.”

    I’d be delighted to hear your opinion of how things might have turned out had there been no strong counterbalance to the right-wing bourgeois.

    “If ‘the left’ depends on ‘teeth’ that are fed by the blood of others, then it has problems worse than those i’ve noted.”

    And if it depends on beautiful souls, we’re even worse off.

    re. assholery comparing fascists and communists:

    “If an ignorant peasant or shopkeeper, understanding neither the origin nor the sense of the struggle between the proletariat and the bourgeoisie, discovers himself between the two fires, he will consider both belligerent camps with equal hatred. And who are all these democratic moralists? Ideologists of intermediary layers who have fallen, or are in fear of falling between the two fires. The chief traits of the prophets of this type are alienism to great historical movements, a hardened conservative mentality, smug narrowness, and a most primitive political cowardice. More than anything moralists wish that history should leave them in peace with their petty books, little magazines, subscribers, common sense, and moral copy books. But history does not leave them in peace. It cuffs them now from the left, now from the right. Clearly – revolution and reaction, Czarism and Bolshevism, communism and fascism, Stalinism and Trotskyism – are all twins. Whoever doubts this may feel the symmetrical skull bumps upon both the right and left sides of these very moralists.”

    http://www.marxists.org/archive/trotsky/1938/morals/morals.htm

  • also from your lofty hero’s same article, himself well-educated enough to disdain the ‘ignorant peasant’:

    “The “amoralism” of Lenin, that is, his rejection of supra-class morals, did not hinder him from remaining faithful to one and the same ideal throughout his whole life; from devoting his whole being to the cause of the oppressed; from displaying the highest conscientiousness in the sphere of ideas and the highest fearlessness in the sphere of action, from maintaining an attitude untainted by the least superiority to an “ordinary” worker, to a defenseless woman, to a child. Does it not seem that “amoralism” in the given case is only a pseudonym for higher human morality?”

    Lenin created the Cheka, Todd.

    Further, those ‘ignorant peasants’ had a far more ‘communitarian’ culture centuries before Trotsky or Marx existed. Might have been nice if some of their ‘neighbours’ had let them enjoy it.

    Now, perhaps we should let the progressive economists get on with their work.

  • “Further, those ‘ignorant peasants’ had a far more ‘communitarian’ culture centuries before Trotsky or Marx existed”

    Hey that is what Marx said!

    “Now, perhaps we should let the progressive economists get on with their work.”

    Deference to authority, it does get the trains running on time. But to where is the real question?

  • also from your lofty hero’s same article, himself well-educated enough to disdain the ‘ignorant peasant’:

    “The “amoralism” of Lenin, that is, his rejection of supra-class morals, did not hinder him from remaining faithful to one and the same ideal throughout his whole life; from devoting his whole being to the cause of the oppressed; from displaying the highest conscientiousness in the sphere of ideas and the highest fearlessness in the sphere of action, from maintaining an attitude untainted by the least superiority to an “ordinary” worker, to a defenseless woman, to a child. Does it not seem that “amoralism” in the given case is only a pseudonym for higher human morality?”

    Lenin created the Cheka, Todd. Do you have any idea what the Cheka did? It wasn’t very nice to oppressed peasants, including young women, who happened to differ from Lenin’s philosophy.

    I don’t buy the argument ‘at any cost’, especially when others carry that cost, and unwillingly.

    Now, I think at this point we ought to let the progressive economists continue in focus with their work. Maybe even help them along. Better than the alternatives, in my opinion.

  • Leigh said:

    “himself well-educated enough to disdain the ‘ignorant peasant’”

    Ignorance of any kind should be disdained, whether it comes from a peasant or an economist (at least the peasant has a good reason for his ignorance in context; what’s yours?).

    As for the crack about amorality, I think it proves my point about beautiful souls with lily-white hands. Such would rather feel good about themselves than (God forbid!) do anything beyond penning a nasty letter to the editor.

    “Lenin created the Cheka, Todd. Do you have any idea what the Cheka did?”

    Aside from crimes? Yes, helped root out bourgeois spies and fifth columnists among other things.

    (For all the CIA has done and still does, they’re working at the moment _against_ other, honestly, bad people; I can just tolerate that for the time being, given the circumstances. See my point?)

    The Cheka, like any institution charged with protecting a status quo, was a social group with its own complexities and contradictions generated in a what was still a class society. They weren’t spawned by Azathoth.

    “It wasn’t very nice to oppressed peasants, including young women, who happened to differ from Lenin’s philosophy.”

    Considering that Lenin was attacked at least twice that I know of, do you really think rape was all they were interested in? And do you think that those who happened _not_ to differ in philosophy from Lenin were equally suspect?

    Try to use some logic, not demonology.

    “I don’t buy the argument ‘at any cost’, especially when others carry that cost, and unwillingly.”

    And who’s making this argument? Looking back over it, all I’ve seen (besides the red-baiting) is that you’ve made remarks that suggest you don’t believe “the left” needs any special strength or persuasive power to get the powers-that-be to do something our side can agree on. You seem to have the belief that a mere change of ideas is all that’s needed, as if we only need to fix the broken idea machine the Liberals squirrelled away in the Parliament Buildings’ basement. I disagree with that because it shows a fundamental disregard for how ideas get enacted in the real world.

    “Now, I think at this point we ought to let the progressive economists continue in focus with their work.”

    Oh, I don’t think we’re making that much noise out in the hall, here. Someone can always stick a head out and ask us to knock it off. Besides, I’m really interested in just how deeply you can stuff your foot in your mouth with your moralising.

    (I promise: I’ll keep Travis off your ass if you’re feeling all double-teamed.)

  • Do we really have to rehearse the glorious revolution vs white army tsarist apologia cum cold war because someone, somewhere else had the temerity to articulate the thesis that Keynes’ ideas got traction because there was a left threat? That is a pretty well accepted thesis.

    I would go one further and suggest that given the depression, the success of war planning and the rise of the soviet union that something like Keynes’ ideas would have been the defacto policy paradigm without Keynes ever having lived. As Krugman notes Keynes’ ideas were suppressed in the US until well after the end of WWII. In Europe the socialists were strong precisely because they had played such a central role in the various national resistance movements against the Nazi occupation. Add it all up and social planning in one form or another was on the political agenda. Shonfeld’s classic Modern Capitalism provides useful comparative summary of all the different forms planning took.

    If we must rehearse the litany maybe we can all just go to our respective corners and read Darkness at Noon and the rejoinder Humanism and Terror and start a discussion group somewhere else. Or if people would like, I could host an open thread on my blog entitled Beyond Good and Evil.

  • Todd, believe it or not, then as now, there were Many Other behavioural practices and political options besides Soviet and Nazi extremes, And Besides ‘third way Liberalism’. In your first rant on this thread you omitted my clause, ‘perhaps on a sector by sector basis’. Others in this blog have mentioned post-Keynesians, post-Marxists, and a diverse spectrum of options that may actually be useful to read and consider. Marx was a brilliant and compassionate person in many respects, but he was also human, no? I think that over half a century after the Great Depression we need to free ourselves from the need to huddle in camps, and actually spend our time looking at specifics which may be useful now.

    Travis, are you aware that some people in the past who have espoused some Keynesian and post-Keynesian specific options have considered themselves ‘socialist’? ‘even’ Marxist? Are the labels the most important priority right now? It seems to me we need to break down some of the polarizations based on last century politics, in Canada at least in this moment in time.

  • and Travis, I made the point because the comment which was specifically ‘the Communist strength of ’33’ was made by a new professor at the University of Ottawa barely 4 weeks ago, as a ‘challenge’ to Susan George’s articulation of some very sensible and useful options and a statement that we didn’t want to revisit the way ‘socialism’ was enacted in the Soviet Union in the last century, which I happen to agree with.

    I also happen to think that in some circles in the Canadian left there has been far too much, dare I say ignorant, reading of what actually went on in ’33 in the Soviet Union, and that has hampered ‘the left’s’ ability to actually move out of some of its corners.

  • “Are the labels the most important priority right now?”

    Nope. And that it is why I have not been using them.

    “I also happen to think that in some circles in the Canadian left there has been far too much, dare I say ignorant, reading of what actually went on in ‘33 in the Soviet Union, and that has hampered ‘the left’s’ ability to actually move out of some of its corners.”

    Who knew forty unrepentant Canadian Stalinists could have such a profound effect on the body politic of the left? They would be happy to know…now if we only had a list we could start a re-education program.

    The thread is know open at rppe.

  • “Todd, believe it or not, then as now, there were Many Other behavioural practices and political options besides Soviet and Nazi extremes”

    Oh, I do believe it. But from what I’ve seen, they were just variants of capitalism, reformed, “kinder and gentler” (which wouldn’t have lasted past the first drop in profits).

    Depending on the situation, I don’t have a problem with progressive measures within the constraints of bourgeois relations; I do have a problem when someone starts yelling about “extremism” when I and others push, with good reason, to go beyond them.

    “Marx was a brilliant and compassionate person in many respects, but he was also human, no?”

    Yes.

    So?

    “I think that over half a century after the Great Depression we need to free ourselves from the need to huddle in camps”

    As I’ve said before: fresh thinking isn’t a problem here. Fresh thinking that ignores certain realities, AFAICT, is.

    “a statement that we didn’t want to revisit the way ’socialism’ was enacted in the Soviet Union in the last century, which I happen to agree with.”

    So do I (fancy that!).

    But the devil is in the detail, no? And I (and other commies) have nasty, suspicious natures.

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