Three symptoms of the sorry state of economics

2 December, 2015 at 16:46 | Posted in Economics | 3 Comments

1. The best-selling economic book explains Sumo, but not economics.

Freakonomics has sold more than 4 million copies making it one of the best-selling economic books in history. 57464026It tells us, for example, that Sumo wrestlers are likely to throw matches when their opponent is in danger of losing status with a loss. Freakonomics is, however, silent on monetary or fiscal policy. This is not negative statement about the book or the authors, but it is a negative statement on the field. Where is the best-selling book that correctly explains how to grow the economy?

2. Nobel Prize winner Professor Harry Markowitz does not use his own theory.

Professor Harry Markowitz won his Nobel Prize for a theory on how to make investments. When investors decide to buy stocks or bonds, for example, Professor Markowitz’s theory argues the optimal mix requires examination not only of historic risk and return, but also the correlation (or co-variance) between returns.

Does Professor Markowitz use his theory when he buys stocks and bonds? No. He splits his money 50-50. He is quoted as saying, “I should have computed the historical co-variances” but through psychological introspection he instead just split his money equally into stocks and bonds.

3. Nobel Prize winners Professor Myron Scholes and Robert C. Merton did use their own theory and almost blew up the world.

Q: What is worse than an economist who doesn’t use his Nobel prize winning theory?
A: Economists who do use their theory (and almost collapse the world economy).

Professor Myron S. Scholes and Robert C. Merton won the Nobel Prize in 1997. Both men were principals in the hedge fund Long-Term Capital Management (LTCM). Soon after their Nobel Prizes, LTCM went bust …

Economics is a lost field. More than 200 years after Adam Smith wrote the Wealth of Nations, economics has no answer to the most important economic questions. Fields go through periods of growth and periods of stasis; I believe we are in a period of prolonged stasis in that we do not know more than we did 10 or 100 years ago.

Terry Burnham

 

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  1. One entirely sufficient reason for the shutdown of economics
    Comment on ‘Three symptoms of the sorry state of economics’
    .
    Terry Burnham resumes “Economics is a lost field. More than 200 years after Adam Smith wrote the Wealth of Nations, economics has no answer to the most important economic questions.” (See intro)
    .
    The conclusion is correct but drawn from weird symptoms. The fact that Merton/Scholes have bankrupted LTCM does not tell anything about the state of theoretical economics, just like a plane crash does not tell anything about the state of theoretical physics.
    .
    The real and ultimate reason why economics is indeed a lost field is that the profit theory is false since Adam Smith. After more than 200 years economists do not understand the pivotal phenomenon of their subject matter.* And this means that employment theory, distribution theory, growth theory, and all the rest are provably false. Because of this, the representative economist gives false answers to the most important economic questions. No Walrasian, Keynesian, Marxian, or Austrian economic policy advice has a sound theoretical foundation.
    .
    “As Joan Robinson said, our essential object in economics is ‘to understand how the economic system works’; … we know little more now about ‘how the economy works,’ or about the modus operandi of the invisible hand than we knew in 1790, after Adam Smith completed the last revision of The Wealth of Nations.” (Clower, 1999, p. 401)
    .
    Economics is a failed science. And there is no hope that those economists who are responsible for the ‘sorry state of economics’ will ever get out of the self-made cul-de-sac (2013).
    .
    Economics is a lost field and both orthodox and heterodox economists are lost scientists. As Joan Robinson put it “Scrap the lot and start again.” And — most important — make sure that those Walrasian, Keynesian, Marxian, or Austrian diletantes and know-nothings are left behind the curve for good.
    .
    Egmont Kakarot-Handtke
    .
    References
    Clower, R. W. (1999). Post-Keynes Monetary and Financial Theory. Journal of Post
    Keynesian Economics, 21(3): 399–414. URL http://www.jstor.org/stable/4538639.
    Kakarot-Handtke, E. (2013). Confused Confusers: How to Stop Thinking Like
    an Economist and Start Thinking Like a Scientist. SSRN Working Paper Series,
    2207598: 1–16. URL http://ssrn.com/abstract=2207598
    .
    * See ‘Profit and the collective failure of economists’
    http://axecorg.blogspot.com/2015/11/profit-and-collective-failure-of.html

  2. Burnham says economics as a field is in “stasis”, which seems to be an ironic euphemism for stagnant, given the importance of the term, stasis, as a label for a traditional method of economic theorists of 50 or 100 years ago.
    .
    The truth, I fear, is much worse than a merely degenerate research program gone sterile. The truth is that many prominent economists are actively engaged in agnatology — that is, the deliberate production of ignorance.
    .
    Some readers here may dismiss my comment as symptomatic of a conspiracy theorist or a crank. While I do think some economists deliberately dissemble on behalf of political movements and parties, I am referring to something else entirely: a shared commitment to research method and agenda with the foreseeable consequence of knowing and learning less than nothing about the workings of the actual economy. Less than nothing!

    Freakonomics — Burnham’s first example — is a good example of how supremely clever people can convince themselves that ignorance is expertise.
    .
    It is hard to see any way to redeem people so determined to perversely feed theirs and our ignorance.

  3. The demand for continuous growth is absolute in liberal economy. The demand for continuous growth is universal and absolute. We are going through stasis simply on a demographic basis. When the babyboomers started to retire a few years ago, they naturally lowered their consumption. This stasis will continue until this large generation who got kids late and few kids start to die, when they lower their consumption even further, when the real crunch comes. We are in for decades long winter before the real crash.

    You can trace every “natural” statement in modern economics to religious scholars who once postulated the same principles as “gods will” or “devine order”. Religion and economics are closely intertwined, go forth and procreate is also a religious statement, but as I observe above, it is also a macroeconomic statement.

    We sure have come a long way when most of our dominating theories of economics can be traced back to the dark ages.


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