[p2p-research] How Did Economists Get It So Wrong? - NYTimes.com

[Paul D. Fernhout]

An excerpt from:
http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?em=&pagewanted=all
"""
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. During the golden years, financial economists came to believe that
markets were inherently stable — indeed, that stocks and other assets were
always priced just right. There was nothing in the prevailing models
suggesting the possibility of the kind of collapse that happened last year.
Meanwhile, macroeconomists were divided in their views. But the main
division was between those who insisted that free-market economies never go
astray and those who believed that economies may stray now and then but that
any major deviations from the path of prosperity could and would be
corrected by the all-powerful Fed. Neither side was prepared to cope with an
economy that went off the rails despite the Fed’s best efforts.
   And in the wake of the crisis, the fault lines in the economics
profession have yawned wider than ever. Lucas says the Obama
administration’s stimulus plans are “schlock economics,” and his Chicago
colleague John Cochrane says they’re based on discredited “fairy tales.” In
response, Brad DeLong of the University of California, Berkeley, writes of
the “intellectual collapse” of the Chicago School, and I myself have written
that comments from Chicago economists are the product of a Dark Age of
macroeconomics in which hard-won knowledge has been forgotten.
   What happened to the economics profession? And where does it go from here?
   As I see it, the economics profession went astray because economists, as
a group, mistook beauty, clad in impressive-looking mathematics, for truth.
Until the Great Depression, most economists clung to a vision of capitalism
as a perfect or nearly perfect system. That vision wasn’t sustainable in the
face of mass unemployment, but as memories of the Depression faded,
economists fell back in love with the old, idealized vision of an economy in
which rational individuals interact in perfect markets, this time gussied up
with fancy equations. The renewed romance with the idealized market was, to
be sure, partly a response to shifting political winds, partly a response to
financial incentives. But while sabbaticals at the Hoover Institution and
job opportunities on Wall Street are nothing to sneeze at, the central cause
of the profession’s failure was the desire for an all-encompassing,
intellectually elegant approach that also gave economists a chance to show
off their mathematical prowess.
   Unfortunately, this romanticized and sanitized vision of the economy led
most economists to ignore all the things that can go wrong. They turned a
blind eye to the limitations of human rationality that often lead to bubbles
and busts; to the problems of institutions that run amok; to the
imperfections of markets — especially financial markets — that can cause the
economy’s operating system to undergo sudden, unpredictable crashes; and to
the dangers created when regulators don’t believe in regulation.
   It’s much harder to say where the economics profession goes from here.
But what’s almost certain is that economists will have to learn to live with
messiness. That is, they will have to acknowledge the importance of
irrational and often unpredictable behavior, face up to the often
idiosyncratic imperfections of markets and accept that an elegant economic
“theory of everything” is a long way off. In practical terms, this will
translate into more cautious policy advice — and a reduced willingness to
dismantle economic safeguards in the faith that markets will solve all problems.
"""

Example "free market" problems, just to put them in one place from stuff
I've said before:
* negative externalities like pollution or defense costs are not priced in
to products like oil (profits are privatized while costs are socialized).
* positive externalities like the value of healthy happy people living in
good communities is not subsidized in products like health care;
* systemic risk like nuclear war or economic collapse are not controlled for;
* free things are not sufficiently valued or subsidized, and those
contributing to a free commons are not supported and may even be actively
thwarted (like by extended copyrights or software patents or other chilling
effects);
* social institutions like compulsory schooling to prepare people for jobs
are designed to benefit employers, not the citizens (John Taylor Gatto);
* money tends to concentrate in fewer hands in a free market, which leads to
social and economic dysfunctions (even to the point of people starving
amidst plenty or no one having money to start new small businesses -- since
it generally takes money to make money, and money provides access to better
information and personal health and education and social networking);
* there is an incentive to corporatize various commons (land, ideas, water)
for profit-making, removing people's ability to take care of themselves;
* since war production is a profitable racket (Butler), there are incentives
to encourage build ups to global wars;
* those with the most economic power will tend to set standards (like
computer software or hardware interfaces) to benefit themselves, not the
general populace, and even when they do this in a neutral way, they often
may make bad decisions everyone else has to live with (IBM PC ISA bus
example missing a few pennies worth of resistors that would make it
self-configuring like Mac's NuBus);
* the promulgation of competition as a virtue even though it has destructive
potential in all sorts of ways (Alfie Kohn);
* excessive focus on short-term planning and short-term profits;
* excessive secrecy in companies and also chilling effects of excessive
control of information (patents, copyrights);
* companies caught breaking the law get to participate in restorative
justice, where individuals breaking the law get punitive justice.
* the creation of large wealthy amoral immortal legal entities yet made of
human components deemed persons despite no family ties nor a grounding in
human community traditions, and then letting these set policy, either
directly or through the capture of government regulatory groups and the
political process by concentrated wealthy owners (plutocracy).

The solutions are as straightforward as they are hard to implement. They all
relate to giving everyone a basic human right to draw from the economic
commons as well as be reimbursed for risk or damages the marketplace causes
them:
* a $200 per barrel-equivalent tax on fossil fuels (to make up for pollution
and security risks, and given back to the people directly as a basic income);
* a 94% progressive tax on income like after WWII;
* heavy regulation and fines for pollution;
* targeted social investments for positive externalities (including creation
of more free commonses like Wikipedia by peers);
* ending corporate personhood and cutting back on limited liability;
* a wealth tax on land, patents, copyright, and so on;
* a basic income (including universal health care) like Nixon almost passed;
* heavy R&D investment in renewable energy and advanced manufacturing like
3D printing;
* ensuring all charitably funded digital works are in the public domain; and
* the end of compulsory schooling designed for an 1850s economy (see John
Taylor Gatto).

And probably more stuff like that.
http://sociology.ucsc.edu/whorulesamerica/change/science_market.html

All could be done with a few strokes of the pen in Congress, and then our
society might heal itself in a few years. But, it may be a long time before
then, because they are pretty much all against "conventional wisdom" of
lowering taxes, increasing schooling, corporatizing the results of
state-funded research, and forcing people to work for ration units (see the
Triple Revolution memorandum of 1964).

So, we may just need to hit rock bottom first. :-(

 From the beginning of:
   "Mistakes Were Made (But Not by Me): Why We Justify Foolish Beliefs, Bad
Decisions, and Hurtful Acts"
   http://www.amazon.com/Mistakes-Were-Made-But-Not/dp/0151010986
"We are all capable of believing things which we know to be untrue, and
then, when we are finally proved wrong, impudently twisting the facts so as
to show that we were right. Intellectually, is possible to carry this
process for an indefinite time: the only check on it is that sooner or later
a false belief bumps up against solid reality, usually on a battlefield.
(George Orwell)"

And also from the beginning of there:
"""
A great nation is like a great man:
When he makes a mistake, he realizes it.
Having realized it, he admits it.
Having admitted it, he corrects it.
He considers those who point out his faults
as his most benevolent teachers.
He thinks of his enemy as the shadow that he himself casts.
"""

That book is well worth reading to understand the *psychological* process of 
what happened with economists and cognitive dissonance leading them to 
systematically misunderstand reality.

How can economists improve? Here is a central issue I raised last year in my
book:
   http://www.pdfernhout.net/post-scarcity-princeton.html
"""
Here is a sample meta-theoretical framework PU economists no doubt could
vastly improve on if they turned their minds to it. Consider three levels of
nested perspectives on the same economic reality -- physical items, decision
makers, and emergent properties of decision maker interactions. (Three
levels of being or consciousness is a common theme in philosophical
writings, usually rock, plant, and animal, or plant, animal, and human.)
   At a first level of perspective, the world we live in at any point in
time can be considered to have physical content like land or tools or fusion
reactors like the sun, energy flows like photons from the sun or electrons
from lightning or in circuits, informational patterns like web page content
or distributed language knowledge, and active regulating processes
(including triggers, amplifiers, and feedback loops) built on the previous
three types of things (physicality, energy flow, and informational patterns)
embodied in living creatures, bi-metallic strip thermostats, or computer
programs running on computer hardware.
   One can think of a second perspective on the first comprehensive one by
picking out only the decision makers like bi-metallic strips in thermostats,
computer programs running on computers, and personalities embodied in people
and maybe someday robots or supercomputers, and looking at their
characteristics as individual decision makers.
   One can then think of a third level of perspective on the second where
decision makers may invent theories about how to control each other using
various approaches like internet communication standards, ration unit tokens
like fiat dollars, physical kanban tokens, narratives in emails, and so on.
What the most useful theories are for controlling groups of decision makers
is an interesting question, but I will not explore it in depth. But I will
pointing out that complex system dynamics at this third level of perspective
can emerge whether control involves fiat dollars, "kanban" tokens,
centralized or distributed optimization based on perceived or predicted
demand patterns, human-to-human discussions, something else entirely, or a
diverse collection of all these things. And I will also point out that one
should never confuse the reality of the physical system being controlled for
the control signals (money, spoken words, kanban cards, internet packet
contents, etc.) being passed around in the control system.
   The above is somewhat inspired by "cybernetics".
     http://en.wikipedia.org/wiki/Cybernetics
So, I'd suggest, should the PU Economics Department faculty be kept on, the
department should be renamed the "Princeton University Cybernetics
Department" with there being an "historical economics" subsection all the
current economics faculty are assigned to, and one faculty member each from
the PU Department of Religion, the PU Department of History, and the PU
department of Mechanical and Aerospace Engineering be put in as an acting
team triumvirate leadership of the larger department. :-) As economics
faculty broaden their research, then they could move into other new
Cybernetics department sections. See also:
     "The Human Use Of Human Beings: Cybernetics And Society" by Norbert Wiener
   http://www.amazon.com/Human-Use-Beings-Cybernetics-Paperback/dp/0306803208
"""

Note that "stability", a term Paul Krugman uses in his essay, is a central
idea to much of cybernetics. So, as economists adopted a more cybernetic
world view, they would think more on an issue like that.

But, as a video previously linked by Ryan shows, technology like advanced
robotics is rapidly making modern scarcity-based economic thinking obsolete:
"Dexterous robot hand and arm with better-than-human hand-eye coordination"
http://www.hizook.com/blog/2009/08/03/high-speed-robot-hand-demonstrates-dexterity-and-skillful-manipulation

What Paul Krugman *misses* in his essay is how our social, economic,
educational, and political systems are completely out of sync with today's
technological possibilities (and needs) like from robotics, AI, 3D printing,
and advanced biotech.

We are left with these general trends amidst a likely jobless recovery:
* trying to make the market work with regulation, taxation, and a basic
income (and maybe even local currencies);
* people trying to get by with local subsistence (eventually aided by 3D
printers and solar panels);
* people giving to and drawing from a free commons (land, intellectual,
material, service) as a gift economy;
* more war/schooling/prisons to destroy abundance and create artificial
scarcity to make old market assumptions truer again.

Hopefully we won't get more war/schooling/prisons, but it is possible. From:
http://listcultures.org/pipermail/p2presearch_listcultures.org/2009-August/004216.html
"""
Jobs = (Demand + War + Schooling - Abundance)) / (Automation + Design)
Demand is limited (the best things in life are free or cheap).
War and compulsory schooling are evil.
Automation and Design are increasing.
Abundance is increasing faster than decay.
Given that, plot the curve of jobs. :-)
"""

Anyway, I still want to recognize and applaud Paul Krugman for making a lot
of progress with his own twelve-step recovery process, though I'd suggest he
still has a bit further to go: :-)
   "Confessions of a Recovering Economist*"
   http://www.paecon.net/PAEReview/issue21/Stanford21.htm
"""
[My name in Paul. :-)] I am an economist.  It is seventeen days since I last
uttered the phrase "supply and demand."  But the demon still lurks untamed,
within me.  Economics is an addiction. Every other addiction has a Twelve
Step program, laced with tough love and blunt self-honesty. Why not a Twelve
Step program for economists? God knows, we have done enough damage with our
arrogant, drunken prescriptions. Here's how each and every economist can
face up to their inner demons, and make their own small contribution to
setting things right.
   Step 1: Admit you have a problem. Like they say at the AA meetings, this
is half the solution. Where economists are concerned, however, it's easier
said than done. Getting a substance abuser to face the facts of their
addition is nothing compared to convincing an economist that they're hooked
on elegant but useless mathematical models, and authoritative but
destructive policy advice. Where economists are concerned, we're talking
denial with a capital 'D.' ...
Step 11: Make amends to those countries and people. Every Twelve Step
program requires the recovering addict to humbly commit to fix up their own
mess. Economists are no different. This is the time for recovering
economists to step to the front of the room and make personal pledges to
undo the damage that has been wrought in the name of supply and demand.
Commit to studying what's wrong with markets, as opposed to how beautifully
perfect they are. Work to empower rank-and-file folk, instead of dominating
them with your apparent but phony expertise. Start to imagine economic ideas
that could change the world, rather than invoking economic mumbo-jumbo to
justify inequality and explain why it's inevitable. ...
"""

Related to that last point:
   "The Mythology of Wealth"
   http://www.conceptualguerilla.com/?q=node/402
"""
Justifications for elites and social hierarchy goes all the way back to the
pharaohs. For 6000 years, society has organized itself into social classes.
The people who do the work are always in the lower classes. The harder and
nastier the work, the lower down in the social order you sink. The people
who don’t do this work must justify their position. They do it by
establishing their “worthiness”, and a variety of cultural devices have been
concocted over the millennia to accomplish this. The pharaohs, you may
recall, weren’t people at all. They were gods. Roman emperors likewise had
themselves deified, and before that Roman Senators justified their position
as “patricians”. Basically, “my great great granddaddy was a big shot,
therefore I should be too.” ...
   Old habits die hard. In fact, we still have a “leisure class”. As
capitalism has grown so has the wealth and privilege of our leisure class.
The old mythologies – gods, the “great chain of being” etc. – are no longer
available to justify the existence and perpetuation of our leisure class,
something our elites are definitely interested in perpetuating. What was
needed was a new “rational” world-view that justified the existence of
privileged elites.
  That rationalization came in the form of a brand new science known as
economics, which included a brand new mythology.
   According to the new mythology, human beings are economic competitors.
The “marketplace” is the new “Valhalla”, where “economic man” frolics. The
“market” we are told, contains its own “rationality”. It rewards the
efficient. It rewards that list of virtues George Will cites, like “thrift”,
“delayed gratification” and of course, “hard work”. Free competition in the
market place “rationally” selects the more “worthy” competitor. Thus, the
wealthy are the superior competitors who have “earned” their elite status.
If you haven’t succeeded it can only be because of your “inferiority”.
   Before debunking this whole ideology, a few observations are in order.
First of all, notice that the hierarchical social order is back. It has a
new veneer of “rationality”, but it is the same old ugly reality. Elites are
“better” than you. The non-elites who do the work have “earned” their
position, and are proper objects of scorn. Thus, we have a handful of haves,
worthy of admiration and respect, and a large class of industrial serfs who
own nothing but their bellies. The theory has changed, but the reality is
just the same. Not surprisingly, cheap-labor believers in the “rational”
hierarchy are hostile to democracy. In fact, they have decided that
democratic government is an enemy to “market efficiency”. What Thomas
Jefferson won through debunking the old forms of social hierarchy, today’s
cheap-labor conservative is busy taking back through his new “rational” form
of the same old shit. ...
"""

But the only way people would stand for it is with schooling:
   http://www.johntaylorgatto.com/underground/toc1.htm
"""
The secret of American schooling is that it doesn’t teach the way children
learn and it isn’t supposed to. It took seven years of reading and
reflection to finally figure out that mass schooling of the young by force
was a creation of the four great coal powers of the nineteenth century.
Nearly one hundred years later, on April 11, 1933, Max Mason, president of
the Rockefeller Foundation, announced to insiders that a comprehensive
national program was underway to allow, in Mason’s words, “the control of
human behavior.”
"""

So, all these issues are intertwined -- economics, schooling, technological
infrastructure, and so on. And finally, as George Orwell suggests, we see
the false beliefs of economics meeting reality on the battlefield (in this
case, mainly in the economy, but aspects of failure in the real battlefield
too in Iraq and Afghanistan). Maybe the economic beliefs were good enough
for post-WWII for a time when the USA dominated a lot of the world and
before increasing automation and better design, but the beliefs grow more
and more out of touch with the reality on the ground for many people in the
USA day by day.

Though with that said, there are many positive trends, anyway. For example,
renewable energy like wind and solar is increasing exponentially. :-) But,
in that sense, our physical economy is prospering despite our intellectual
economy (which has heavily subsidized fossil fuels and nuclear and ignored
external costs like defense and health issues).

--Paul Fernhout
http://www.pdfernhout.net/