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

[Ryan Lanham]

Was literally reading the article when yours came across the screen.
Remarkable argument.  The gods of economics hurling the biggest thunderbolts
academics can throw.

Ryan

On Sat, Sep 5, 2009 at 4:26 PM, Paul D. Fernhout <
pdfernhout at kurtz-fernhout.com> wrote:

> 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/
>
>
>
>
>
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>



-- 
Ryan Lanham
rlanham1963 at gmail.com
Facebook: Ryan_Lanham
P.O. Box 633
Grand Cayman, KY1-1303
Cayman Islands
(345) 916-1712
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