bad economics

| No Comments | No TrackBacks

Economists with bad ideas wrecking things from Lynn Parramore and Jeff Madrick--whose new book Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World Parramore describes as "his latest challenge to the pernicious ideas that have captured the minds and clouded the judgment of huge numbers of orthodox economists and the legions who follow their advice:"

In this brisk and accessible volume, which should be on Econ 101 syllabi, Madrick outlines the wrong-headed propositions, fictitious models, shoddy research, and partisan agendas that have made a reexamination of the entire field long overdue, especially in the wake of the financial crisis of 2008. Madrick's book is part of a healthy movement to set the record straight and chart a new direction for an economics that can serve the whole of society and lead to sustainable growth.

Here are some choice bits from their exchange:

Lynn Parramore: Why does the invisible hand (the metaphor used by 18th-century economist Adam Smith to explain what he saw as the benefits of individuals in pursuit of their own interests) get top billing in your list of bad economic ideas? What value judgments come with this model of how the economy works?

Jeff Madrick: Adam Smith's invisible hand is really the hub of the wheel: the other ideas are all spokes. It argues that if we all follow our self-interest and the government stays out of the market--for instance, it should not regulate prices--then the interaction of buyers and sellers will result in the greatest prosperity for all.
The invisible hand ... is only an idea, if a beautiful one. It tells us how a market may work, not how it actually does work. Long after Adam Smith wrote about the invisible hand, as the economics profession became increasingly ideologically conservative, economists came to accept it as a rule, not a hypothesis.

LP: You mention several forces that keep economists committed to bad ideas, like the conformity required for professional success, the pretense that economics is a science akin to physics, and the addiction to simplistic models that do not account for the messiness of the real world. Given these forces, how can we move toward a better economics?

Crisis should have moved us to a better economics, and to some small extent it has. Economists have gone back to the drawing board. They are trying to write finance into their forecasting models, something they completely neglected before. They are a little more humble. But I would say not much. They still think they have a special knowledge that others don't. Thus, they turned the seven bad ideas of my book into rules of thumb rather than hypotheses that have to be adjusted to every new problem.

But it is easier to have a one-size-fits-all solution than to get down and dirty and recognize the limitations of universalist ideas. The notion of economics being akin to physics confers a certain kind of prestige, but it is also easier to measure contributions, even if they are wrong. These ideas are part of the sociology of academia, which badly needs reforming.

Speaking of which, The Economist mentions the need for reforming economics at business school, noting that "the critics say that there are three main things wrong with how economics is currently taught:"

First, the subject has been driven too much by neo-classical ideology, to the exclusion of other interpretations of the dismal science. Heterodox views should be taught alongside orthodoxy, the critics protest. Second, conventional teaching has led to economics becoming more mathematical over the past 30 years or so, which has further narrowed the range of interpretations that students are exposed to. Third, this statistical focus on theories such as the efficient-markets hypothesis meant that the economics profession did not see the last financial crisis coming, or have any answers to it when it hit. They suggest that more emphasis is needed on less statistically-driven areas of the discipline, such as economic history and psychology, as well as the economics of financial crises and banking panics.

No TrackBacks

TrackBack URL:

Leave a comment

About this Entry

This page contains a single entry by cognitivedissident published on October 16, 2014 9:35 AM.

long workdays and loneliness was the previous entry in this blog.

backdoors is the next entry in this blog.

Find recent content on the main index or look in the archives to find all content.

Monthly Archives


  • About
  • Contact
OpenID accepted here Learn more about OpenID
Powered by Movable Type 5.031