Friday, September 30, 2011

Steve Keen — 1,000,000 economists can be wrong

Not only did the global financial crisis catch the vast majority of economists completely unawares, they instead expected tranquil and even buoyant times just as the biggest economic crisis since the Great Depression began. My favourite such observation is from the OECD‘s Economic Outlook for June 2007—in which the Chief Economist suggested that, “the current economic situation is in many ways better than what we have experienced in years . . . Our central forecast remains indeed quite benign.” But there are countless other such utterly wrong prognostications about the economy, from the profession that is supposed to be the font of wisdom on the economy.

Those “in the know” understand that this is not an isolated failing. The Neoclassical model that dominates economics today is riven with logical and empirical fallacies. If economics were a real science, it would have long ago been overthrown and replaced by something more realistic.

Yet at least 90% of academic economists believe in this model, as do almost all economists working in government and private industry. Left to their own devices, they will continue thinking that this model does describe the economy as the real economy falls deeper and deeper into a crisis, even though their model says that this can’t even happen.

Since economics has failed to clean out its own intellectual stable, it will be the public that finally forces reform upon it – as once-supporters like Anatole Kaletsky of The Times calls for “a revolution in economic thought” and George Soros funds an Institute for New Economic Thinking. With luck, in a decade or two, a more realistic approach to economics might emerge. But in the meantime, here’s a simple guide for the public: Anything the vast majority of economists believe is likely to be wrong.

Steve takes on the myth that free trade is necessarily efficient.

...Since capital is destroyed when trade is liberalised, the watertight argument that trade necessarily improves material welfare springs a leak. If economics were a real science, this real-world complication to Ricardo’s argument would be considered, but it has never been seriously addressed.

These and many other failings that explain why, when Dani Rodrik took a careful look at the empirical record of trade liberalisation, he found that it had frequently reduced material welfare rather than increasing it. Writing back in 2001, he summarised his findings for Foreign Policy magazine with the statement that:

“Advocates of global economic integration hold out utopian visions of the prosperity that developing countries will reap if they open their borders to commerce and capital. This hollow promise diverts poor nations’ attention and resources from the key domestic innovations needed to spur economic growth.”

As an economist who has specialised in dissecting the empirical claims for the role of free trade, Rodrik has the might of the majority of the profession against him. As noted above, that’s a good rule of thumb that Rodrik is right.


Anti said...

This is where efficient markets come into play. If markets are sufficiently efficient, then aggregate demand shocks shouldn't be easy to predict.

This isn't necessarily a knock on economics, but reflects an inability of economists to predict the sorts of "random" events, economic and otherwise, that no one can necessarily predict.

googleheim said...

@ Matt and Tom :

Did you notice the extreme upsurge in Small business lending ? Is it only here in Texas and NY ? I mean 0% small business cards are way back now.

That would alert Mike Norman to a potentially big spending quarter for this year.

@ Tom's post here :

"it would have long ago been overthrown and replaced by something more realistic"

I like the imaginative version, even Austrian side, because the realistic side is like everyone work in the fields or somekind of commune based work program.

googleheim said...

OK the part about Free trade is interesting - Obama just signed free trade with Panama to reward them for using the U$D which means they lost their sovereignty.

Next is Colombia for becoming sooo close to the U$A - and now they are also using the U$D !

There is no game plan right now for helping these countries stay sovereign, instead the U$A is pushing the U$D, loss of sovereignty, free trade, and what else ?

Mexico is falling apart but will they take on the U$D and fall apart into a deeper abyss ?

Looks like the EU may be falling apart but while Mexico is falling apart too, the U$A is secretly building up it's free trade block in Latin America while not taking on the real issues which keep these countries sovereign.

U$D not the world currency ? think again.

This is much to the chagrin of deficit terrorists.

Matt Franko said...

Talking to the guy who runs my bank branch a while back, he was saying that their area of highest growth was SBA loans to small businesses that were doing business with the governments. Lending against signed govt invoices while the vendors are waiting to get paid.

At the Federal level, due to various "cash flow" issues, govt has been "slow pay" for some time now and it has been getting worse. Even many medical practices are small business, they provide Medicare services, submit a claim and wait to get paid. they cannot wait forever as they have payroll and rent, etc... so they take their invoices to the bank.

Its a great deal for the banks. they only lend 90% and that 90% is guaranteed by the SBA and they are charging 6-7%. So banks have a built in 10% cushion, and a DOUBLE Federal guaranty, as they have the SBA guaranty, and the invoice is "money good" in the first place as it is payable by the Federal govt... not bad! Double risk free lending at 6-7%! .... Good work if you can get it!

this is all that is going on, dont be deceived that there is some other more broad phenom going on. None of this would even be necessary if the govts just payed their bills in a timely fashion...