the dismal (non-)science

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In his Edge essay "Economics Is Not Natural Science," Douglas Rushkoff writes that "It doesn't take a genius or a scientist to understand how the rules of the economic game as it is currently played reflect neither human values nor the laws of physics:"

In their ongoing effort to define and the defend the functioning of the market through science and systems theory, some of today's brightest thinkers have, perhaps inadvertently, promoted a mythology about commerce, culture, and competition. And it is a mythology as false, dangerous, and ultimately deadly as any religion.

Rushkoff goes on to assert that "the pull of the market" is "tilting the ideas of many of today's best minds toward the agenda of the highest bidder" by creating economic incentives to promote corporate-friendly ideas. He concludes that our economic model is "broken," and suggests that "[i]t's time to stop pretending it describes our world." This dovetails nicely with Paul Krugman's essay "How Did Economists Get It So Wrong?" from The NYT Magazine:

Few economists saw our current crisis coming, but this predictive failure was the least of the field's problems. More important was the profession's blindness to the very possibility of catastrophic failures in a market economy. [...] There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year.

Krugman posits that macroeconomics is in a "state of disarray" partly as a result of the disconnection between the largely Keynesian pragmatic "saltwater" views from coastal economists and the more theoretical "freshwater" economists who tend to be "neoclassical purists." The problem with the dominant beautiful-theory ideas of freshwater monetarism is that "there was no room in the prevailing models for such things as bubbles and banking-system collapse:"

In short, the belief in efficient financial markets blinded many if not most economists to the emergence of the biggest financial bubble in history. And efficient-market theory also played a significant role in inflating that bubble in the first place.

An idea's beauty may be intellectually seductive, but ignoring the parts of reality that don't fit had led economists--and the economy--into a minefield:

When it comes to the all-too-human problem of recessions and depressions, economists need to abandon the neat but wrong solution of assuming that everyone is rational and markets work perfectly. The vision that emerges as the profession rethinks its foundations may not be all that clear; it certainly won't be neat; but we can hope that it will have the virtue of being at least partly right.

Brad DeLong excerpts a number of comments about Krugman's piece, and Krugman himself has some more thoughts here and here in addition to these remarks about the intellectual isolation of freshwater economics:

It's a sad story. And the even sadder thing is that it's very unlikely that anything will change: freshwater macro will get even more insular, and its devotees will wonder why nobody in the real world of policy and action pays any attention to what they say.

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This page contains a single entry by cognitivedissident published on September 16, 2009 9:11 PM.

good idea, poor execution was the previous entry in this blog.

In celebration of Dan Brown's latest book... is the next entry in this blog.

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