The Economist Has No Clothes
Tuesday, April 8th, 2008 - 2:37pm
I was emailed this fascinating article and thought it would be worth a share.
Scientific America wrote:
The 19th-century creators of neoclassical economics—the theory that now serves as the basis for coordinating activities in the global market system—are credited with transforming their field into a scientific discipline. But what is not widely known is that these now legendary economists—William Stanley Jevons, Léon Walras, Maria Edgeworth and Vilfredo Pareto—developed their theories by adapting equations from 19th-century physics that eventually became obsolete. Unfortunately, it is clear that neoclassical economics has also become outdated. The theory is based on unscientific assumptions that are hindering the implementation of viable economic solutions for global warming and other menacing environmental problems.
I thought this was a jab at that other publication.
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Me too.
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Are those assumptions listed still used in economics today? I mean, I've always been skeptical of the scientific merits of economics, but if that's true, it's worse than I could've possibly imagined.
"The trouble with fighting for human freedom is that one spends most of one's time defending scoundrels. For it is against scoundrels that oppressive laws are first aimed, and oppression must be stopped at the beginning if it is to be stopped at all."
Economics is somewhat like medicine. It is science-y, but is more art then science. There are different schools of thought, and they use information and ideas from other disciplines to work (medicine on biology/etc., economics on finance/etc.) Of course, some folks will insist that economics is a hard science.
Economics has immense insight into human behavior on the micro side, and can make surprisingly reliable models on the macro side. However, a lot of folks use the word "economics" who really don't know what they are talking about. Reading most politicians (and a lot of media) on economics is like chatting about stem cell research with a junior high biology student.
"And the circle has been charged through the power of unphysics, which are physics so stupid they erase normal ones from your mind." -Wields-Rulebook-Heavily at rpg.net
This sentence belies him as another would be central planner. First we have to get rid of the folks who disagree, then our "Department of National Greenhouse Gas Reduction" can tell you all what you will do to fulfill their idea of fixing the problem. Folks like this are who crammed ethanol down the collective throats of America, and so far, that seems to be doing more harm than good.
The market has already started to deal with these problems. Green is chic' now. The Prius was selling like hotcakes before the tax breaks. Folks are trying to build nuclear power plants.
Somewhere along the line, economics went from being a study of markets and incentives (understand and nudge), to a socialist style central planning tool (decide which regulatory baton to beat everyone with).
"And the circle has been charged through the power of unphysics, which are physics so stupid they erase normal ones from your mind." -Wields-Rulebook-Heavily at rpg.net
It's high time that we evolve the concept of capitalism. People tend to forget that 200 years before Adam Smith and his Invisible Hand came on the scene, the mercantile system ruled with its quaint notions of capital and trade. Capitalism developed in response to the limitations of merchantilism.
Today, 200 years after Adam Smith, we need a system of economics that addresses the limitations of capitalism: mainly that it doesn't properly price natural resources or environmental damages and that it assumes infinite resources and growth.
The "market" isn't doing anything to deal with those problems, because there isn't any cost associated with greenhouse gases. If CO2 and other GHGs were capped and traded, THEN the market would properly assign them a cost, which would spur companies to reduce their emissions.
Ethanol is a political abomination born from the ridiculous farm subsidies we still hand out in this country. It has nothing to do with the market. The research consensus is that, at best, ethanol production is GHG and energy neutral and, at worst, a polluter and energy consumer.
Firstly, Economics is the study of finite resources and does not assume infinite resources and growth. There are economists who study the affect of "environmentalism" on the market. People spend their lives researching externalities such as environmental damages from firms.
I am sorry that people want economics to be social work, it isn't. Economics doesn't hinder "real solutions" to GLOBAL WARMING cue South Park "We didn't listen!!!!"
For instance, there are 108 beads in a Catholic rosary and there are 108 stitches in a baseball. When I learned that, I gave Jesus a chance. ~Ron Shelton, Bull Durham, 1988
Is it just me or is Environmentalism turning into a cult? With the BBC being caught altering a story to make it more friendly to an eco fascist, to articles like this treating it not like a science but like a deity.
For instance, there are 108 beads in a Catholic rosary and there are 108 stitches in a baseball. When I learned that, I gave Jesus a chance. ~Ron Shelton, Bull Durham, 1988
Exactly. Environmentalism is not a deity, it is the boogey man!
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No, it's just that the fringe groups are being used to discredit the mainstream movement. Environmentalists typically have as their radical, crackpot agenda the following:
Preservation of wilderness and recreational areas via the National Park system, and private investment;
acknowledgement of and reasonable attempts to protect species from habitat destruction;
regulation and cleanup of hazardous wastes;
encouragement of sustainable farming and industrial practices;
and encouragement of personal conservation of energy and other resources.
That's not radical. What *is* radical is the storyline that comes from large energy, mining, industrial and agribusiness concerns that environmentalists are intent on banning people from the outdoors, that they want to burn down houses and put us back in the 19th century, that they value cows and chickens more than people. That stuff is just propaganda.
Environmentalists are not radical nutbars - but some *few* radical nutbars espouse extreme views and actions that are used to paint all environmentalists. The radical agenda is on the side of the noisemakers, not the people who would rather not see Yellowstone overrun with snowmobiles or wolves hunted to extinction.
Extremism in the defense of liberty *is* a vice. It has been since the first Crown Loyalist was tarred, feathered and set afire, and it's no better now. It corrupts first the individual, then ultimately the institution it defends.
You're lumping a whole lot of different groups in there together. There are people, including some Christians, for whom environmentalism has religious dimensions. There are others who view it through the lens of public health. Others who see it as a way to preserve areas for recreation. Others who look at it as pure threat to the infrastructure. As far as I can tell, the cultists are a pretty small part of the movement.
I just run into a lot of people, everyday, that if they say "It helps the environment" then the conversation ends. Keep in mind that I'm on a college campus and deal with radicals all the time.
For instance, there are 108 beads in a Catholic rosary and there are 108 stitches in a baseball. When I learned that, I gave Jesus a chance. ~Ron Shelton, Bull Durham, 1988
Listening to the radio this morning, I caught a Nepalese monarchist stating that democracy was just the first step in a slippery slope that inevitably ends in Maoist communism, the loss of individuality, and the death of all that is holy. This "environmentalism as cult" talk strikes me very similarly.
There is only an up or down--up to a man's age-old dream, the ultimate in individual freedom consistent with law and order--or down to the ant heap totalitarianism,... those who would trade our freedom for security have embarked on this downward course.
Well, there's the problem. College students aren't known for taking the long view or seeing the big picture. If anything, one of the difficult aspects of pushing any environmental program is the diversity in views on the subject within environmentalist side.
Only because "the market" isn't involved. Perhaps the biggest offenders are power plants. Regulation makes power plant building/upgrading/etc. horribly expensive and impractical.
Where the market is involved in power production, I see a company here in town that is growing like gangbusters making solar panels. The electric folks twenty miles south have a windmill farm you can see from the highway. There are new applications submitted by private companies for nuclear plant construction.
Cap and trades have their own problems and abuses. They don't generally reduce emissions, they usually just relocate and concentrate them.
On top of that, we'd hamstring ourselves while we're already reeling (energy prices would skyrocket further). Folks seem to forget that you really can't fine/tax a corporation. Fining an oil company or an energy company translates to increased rates to their customers to pay the fine. Which will of course be addressed in further regulation, which will lower profits, which will drive folks out of the business, which will raise prices, ...
The answer to a regulation created problem isn't always more regulation. Washington keeps trying to bet on the winning horse, when they need to relax and enjoy the race.
"And the circle has been charged through the power of unphysics, which are physics so stupid they erase normal ones from your mind." -Wields-Rulebook-Heavily at rpg.net
It comes from professors and researchers as well. I have zero interest in environmental economics, I'm perfectly happy continuing to study capital markets and flows for the rest of my life. My political philosophy is turning into "Just leave me alone, please" to both sides.
For instance, there are 108 beads in a Catholic rosary and there are 108 stitches in a baseball. When I learned that, I gave Jesus a chance. ~Ron Shelton, Bull Durham, 1988
Heh, you say that like there isn't horrible radicalization in the capital markets ... although I guess the finance folks eat that more than the economists.
College campuses really are their own little worlds, aren't they?
"And the circle has been charged through the power of unphysics, which are physics so stupid they erase normal ones from your mind." -Wields-Rulebook-Heavily at rpg.net
Being in school also I get what you mean. People changing their lifestyles or making statements when they lack real logic and rationale for doing so. Instead of doing all those little stupid things and saying "It helps the environment" how about walk to school, bike or take the bus or more importantly stop yelling at me leave me the hell alone. I get it allot at work too where people say stuff like "NO NO paper... I'll save a tree instead" I then think about my friends who spent last summer planting thousands and thousands of trees and shake my head. I usually throw a couple of paper bags in the garbage in protest.
edit: This obviously has also entered the capitalist side on preying on our guilts. One of the wines we sell has the guilt approach of saying they will plant a tree for each bottle purchased and it comes in a eco friendly recyclable plastic bottle. Thats nice and all they want to plant a tree but what type where and at what stage of development would be interesting considering from my friends example it takes a whole 2 seconds to plant a sapling and they would get paid 7-10 cents to do so. I doubt people buying the wine would be so excited with that example.
Well technically they can all finish the race or win under the right circumstances. Why should geothermal, solar or wind "lose" to nuclear, hydrogen fuel cells or ethanol?
Ethanol may have been a bad thing to jump on initially, but there are promising advances that can diminish the dangers significantly. There are a few companies that are working on ways of producing more ethanol from corn husks and the other byproducts of corn harvesting.
I think people are erroneously looking for that horse to finish. The problem is the only ones entering the race are sled dogs. Yet given enough sled dogs, you can out easily class the single horse.
Being fangoriously devoured by a gelatinous monster.
Laffer Curve supporters
Free Market economics supporters
Deregulation will solve all ills supporters
Seems like the same people belong to all those cults though.
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“The only function of economic forecasting is to make astrology look respectable.” John K Galbraith
Modern economics seems to rely on quite a few assumptions which are either simplistic (which is needed to handle them of course) or just wrong.
When it comes to micro-economics I would believe the whole concept of rational self-interest which governs both liberal thinking and through that most scientific economics are, if not wrong, at least misunderstood. Which resonate through the whole theoretical foundation. The same could be said for many other assumptions used.
This is of course not true for all aspects of economics, and even if flawed, its the best models we have. Beside, there is a great deal of disagreement between economists too about the behaviour in the system, so its not like all assumptions are just taken for granted, even if they are used because its the only way to make the models simple enough to make sense and be usable in real-life applications.
While economics are not hindering environmentalism or social work and whatever people care about, misunderstood economics keep showing consequences in mismanaged strategies in Africa, Asia etc.
It especially becomes funny when the different schools of economics try to defend their wrong conclusions as god given truths, but I guess that's how it will always be in all these types of science, whether its economics, politics etc. Hell, even if more exact sciences that is often how it works. It probably says as much about human nature than any liberal og neoclassic assumptions.
Perhaps the idea of rational self-interest should be re-examined in light of more recent (ie, 20th century and later) work on the evolution of social systems. Maybe the motivation of the individual is not the best template for predicting the actions of the group.
Extremism in the defense of liberty *is* a vice. It has been since the first Crown Loyalist was tarred, feathered and set afire, and it's no better now. It corrupts first the individual, then ultimately the institution it defends.
I think the problem is that the rationale models is basic economics and when you get deeper in your studies asymmetric information starts to come into play. Problem is something like Micro/Macro first year kinda ends before you start challenging it and some people never go past that. This becomes apparent when you realize A huge amount of marketing isn't informing you of the quality of their product but just planting that un-rationale seed of when your holding the two brands side by side you choose the one with the commercial that appealed to you.
Actually, I'm taking a class this semester that is experimental economics and we are studying rational self-interests. Only in low level economics do we assume that people are rational. Once you get into the graduate level, we throw that out the window. And when I say, I'm taking the class, I am running the experiments for my professor so she can conduct her research.
We have models designed that show that people are not always rational. Microeconomics has gotten very good at predicting actions of the group. Is it perfect? No. But some of the models are very good.
In high level economics we use multiple variables, it's not like your undergraduate courses that we would only use on variable or maybe two.
For instance, there are 108 beads in a Catholic rosary and there are 108 stitches in a baseball. When I learned that, I gave Jesus a chance. ~Ron Shelton, Bull Durham, 1988
I dont think anyone is assuming that you dont have better and more accurate models, my knowlegde of economics are only very basic through my education, so I dont even want to try discussing the finer details
One of the issues could be, that humans might actually be rational most of the time, but being rational self-interested can result in behavoiur we hardly expect from traditional rational behaviour.
E.g. is giving money to poor people in Africa to make you feel good about yourself rational self-interest? Or the biological/evoloutionary inspired theories of altruism being based rational calculations. Short version: "If I risk my life saving someone, maybe others will admire me" (with the biological argument being, "Ill get more sex if people admire me, and thus my genes will maybe spread"), which thus end up being, what one would see as altruistic actions for rational self-interest reasons (although, rational at a very subconscious level).
Or in macroeconomics, many economists seems to be in denial when it comes to the strategies some East Asian countries had succes with the last 3-5 decades, since it doesnt fit into the world view they want to have. Im sure some economists who arent as public got a lot more nuanced views on these matters, but at the same time, unfortunately, you could argue that those economists are not as often the ones influencing politics.
Medicine is largely science based though. Remember: the core of science is formulating hypotheses to explain a given phenomena, and then running repeatable experiments to confirm the hypothesis and then accept, adjust or discard it depending on the result. We can do that a whole lot in medicine when it comes to developing drugs and whatnot (obviously not all the time, as doing control groups with placebo surgery to see if surgery *really* helps would be pretty immoral.), but the same can't be said of economics. At least not on the macro scale. It's impossible to perform repeatable experiments on a national level, so the models are going to be untested and the predictions only slightly better than reading tea leaves.
"The trouble with fighting for human freedom is that one spends most of one's time defending scoundrels. For it is against scoundrels that oppressive laws are first aimed, and oppression must be stopped at the beginning if it is to be stopped at all."
Perhaps it is just my perception, but I seems to me that economics is especially susceptible to the herd mentality when it comes to explanations and predictions. 9 months ago, any economist who was predicting recession was relegated to the lunatic fringe. Now, anyone who doesn't is regarded as a Polyanna. I can accept that it may be as complicated as predicting the weather, but in order for economics to be utile, it must have better predictive abilities than sticking our heads out the window to know it's raining.
There is only an up or down--up to a man's age-old dream, the ultimate in individual freedom consistent with law and order--or down to the ant heap totalitarianism,... those who would trade our freedom for security have embarked on this downward course.
Thanks, Ulairi, that's interesting.
Extremism in the defense of liberty *is* a vice. It has been since the first Crown Loyalist was tarred, feathered and set afire, and it's no better now. It corrupts first the individual, then ultimately the institution it defends.
I disagree with that anyonewho predicited a recession was relegated to the lunatic fringe. Roubini is always predicitng a recession and he is not on the lunatic fringe.
Economists have been very good at expalining what's happened with the east asian tigers. Most economists do not make good TV and are often called upon when a journalist is trying to make a political point.
For instance, there are 108 beads in a Catholic rosary and there are 108 stitches in a baseball. When I learned that, I gave Jesus a chance. ~Ron Shelton, Bull Durham, 1988
Yeah, but post-hoc analysis is easy. The real test is in making good predictions.
"The trouble with fighting for human freedom is that one spends most of one's time defending scoundrels. For it is against scoundrels that oppressive laws are first aimed, and oppression must be stopped at the beginning if it is to be stopped at all."