Wednesday, January 4, 2017

Robert Skidelsky: Economists versus the Economy

Here is an interesting article on Project Syndicate by Professor Robert Skidelsky. Is he saying that markets are a complex system (see Jim Rickards comment below) and that economists tend to try and over simplify things with standard economic models (which may be why they miss seeing a major crisis coming)? I'll let readers decide for themselves what message he conveys in this article. Below are a few selected excerpts.


"Let’s be honest: no one knows what is happening in the world economy today. Recovery from the collapse of 2008 has been unexpectedly slow. Are we on the road to full health or mired in “secular stagnation”? Is globalization coming or going?

Policymakers don’t know what to do. They press the usual (and unusual) levers and nothing happens. Quantitative easing was supposed to bring inflation “back to target.” It didn’t. Fiscal contraction was supposed to restore confidence. It didn’t. Earlier this month, Mark Carney, Governor of the Bank of England, delivered a speech called “The Specter of Monetarism.” Of course, monetarism was supposed to save us from the specter of Keynesianism!

"This takes us back to John Stuart Mill, the great nineteenth-century economist and philosopher, who believed that nobody can be a good economist if he or she is just an economist. To be sure, most academic disciplines have become highly specialized since Mill’s day; and, since the collapse of theology, no field of study has aimed to understand the human condition as a whole. But no branch of human inquiry has cut itself off from the whole – and from the other social sciences – more than economics."

"If you believe that economies are like machines, you are likely to view economic problems as essentially mathematical problems. The efficient state of the economy, general equilibrium, is a solution to a system of simultaneous equations. Deviations from equilibrium are “frictions,” mere “bumps in the road”; barring them, outcomes are pre-determined and optimal. Unfortunately, the frictions that disrupt the machine’s smooth operation are human beings. One can understand why economists trained in this way were seduced by financial models that implied that banks had virtually eliminated risk.

Good economists have always understood that this method has severe limitations. They use their discipline as a kind of mental hygiene to protect against the grossest errors in thinking. John Maynard Keynes warned his students against trying to “precise everything away.” There is no formal model in his great book The General Theory of Employment, Interest, and Money. He chose to leave the mathematical formalization to others, because he wanted his readers (fellow economists, not the general public) to catch the “intuition” of what he was saying."

"What unites the great economists, and many other good ones, is a broad education and outlook. This gives them access to many different ways of understanding the economy. The giants of earlier generations knew a lot of things besides economics."

Please click here to read this full article on Project Syndicate

(bold emphasis above is mine)

Added note: I mentioned this article to Jim Rickards to get his thoughts on it. He offered this reply:

"He's not going so far as to say markets are a complex system, but he is saying existing mathematical models are obsolete. He seems to be arguing for non-mathematical approaches including psychology, history and law. I agree with that completely, but there is room for math as long as the model accurately corresponds to the real world."  ---- Jim Rickards

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