The New Copernicans
It wasn’t that long ago in historical terms that Nicolaus Copernicus bucked the established western wisdom and asserted that the earth may in fact orbit the sun. He rightfully feared the retribution of the authorities and was careful to pay them tribute when he finally did publish shortly before his death. Although the evidence has been building for decades, only recently has academia began to get any traction in their criticism of neoclassical economics. This is, in my opinion, due to both their own temerity and to the failure of the fourth estate - the media - to do their homework.
The current economic meltdown is proving fertile ground for legitimate questions to be asked about the scientific rigour of the pseudo social science of economics.
In an article critical of the modelling used by the IEA in their World Energy Outlook 2008 released last week, Dr. Charles Hall fires another broadside at those who continue to lead us based on bad science:
Neoclassical economics and economists have reigned supreme despite their dismal track record of late, as evidenced by governments turning to the same economists who got us into the credit crisis situation to get us out. It used to work better: economies expanded simultaneously with an expansion of economic departments and economic theory. It looked like the theories worked, although since more and more oil was being pumped out of the ground perhaps any theory could ’seemingly’ work. Capitalism may be a giant Ponzi scheme once fueled by ever more investors and ever more oil at its base, but this has ceased, most likely forever (see here for a definition of Ponzi scheme). The economic theories became ever more analytically elegant as they got further and further from reality. Our most prestigious economics departments not only did not teach very much about oil or grain or other sources of real wealth but increasingly not even about money. Rather their focus was far too often complex econometric models using rather stupid starting assumptions (e.g. Nadeau, 2008). Acceptance of graduate students was increasingly taken based on their math skills rather than their ability to understand real commodity paths. Wall Street followed the lead of our major economists. As we have seen in other disciplines, such as ecology, there has been massive conflation of mathematical and analytical rigor with scientific rigor.
The basic theories of neoclassical economics break many conventional rules of science: for starters the boundaries are wrong, the laws of thermodynamics are not respected and the whole edifice is based on “sets of more or less plausible but entirely arbitrary assumptions” about the economy that were chosen based on an inappropriate physical analogy and that were analytically tractable (Leontief, 1981; Hall et al., 2001; Nadeau, 2008). In fact why should economics be a social science at all? Real economies are about the flow of real materials and the energy required for those flows and materials. Earlier economists (the physiocrats and the classical economists such as Adam Smith and David Ricardo) understood the physical base for wealth and made no such foolish assumptions, nor should we.
Instead of the kind of economics that dominates today what we need is a biophysical approach to our economic system, one that is based on real physical and biological production and distribution possibilities (Cleveland et al., 1984; Hall and Klitgaard 2006). We would do well to understand and guide this transition.
Here in New Zealand, it’s high time we question the accepted wisdom that our leaders claim will lead us to the promised land. The neoclassical economic model is failing us. It is based on some pretty poor assumptions and defies the laws and rigour of science. Before we throw the baby out with the bathwater, let us consider in what ways this ill conceived paradigm has served us. But let us also question every assumption on which it is based, and expose each to a fresh light of enquiry.
Like Copernicus 500 years ago, we need to pluck up the courage to take our view of the world to the next level. A level that is more sustainable, more egalitarian, more humane.
November 19th, 2008 at 12:59 pm
So Stern was peddling bunkum after all.
Quite right.
And remember the people who persecuted Copernicus was not the Catholic Church (which was a reluctant participant) but his fellow “natural philosophers” who were committed to the Aristotle model and attacked him for denying the consensus view.
November 19th, 2008 at 2:01 pm
Owen - Stern was peddling bunkum (ridiculous assumptions on discount rate/time value).
Frog - so many things wrong with Dr Hall’s article and your implicit call for a new form of economics.
Economics is simply the study of human behaviour in the production, distribution and consumption of goods and services. At its heart it is about human behaviour, which is why economist rever to markets being amoral -you may not like the behaviour but it is just holding a mirror up reflecting our actions.
You really need to go and read the under cover economist by tim harford (www.timharford.com) as a primer for understanding basic economic concepts and why you can’t escape this. From there you can move onto excellent other places like the becker-posner blog, where you have two nobel award winning economists debating different view points. Another good site is marginal revolution by tyler cowen and you should also go and have a look at the freakonomics blog at the New York Times.
You give me the sense that you got to Malthusianism and Marx in your studies and then stopped, missing out the developments of Keynes, Samuelson, Coase, Arrow, Freidman, Nash (who you can in part blame for the popularity of complex mathematical models - but they really are elegant and very beautiful , whilst at the same time fragile due to assumptions).
Also missing is Freidrich Hayek, who was known to criticise over reliance on mathematical models (something I agree) so a visit to the mises insitute should be of value to you http://www.mises.org.
Economics is a developing profession that is quite willing to learn from new information - I like the thought of following a line of empirical evidence and being able to challenge assumed facts - something Dr Hall seems not to like. I suspect his underlying problem is that there are no rigid rules that he can hold to - he likes things to be tidy unlike the messy complicated world that is reality and people.
Finally aristotle thought the sun went around the earth and it was his natural philosophy as pointed out by Owen that was the basis for the attack on copernicous.
So my question to you is where is your following of natural philosophy taking you?
November 19th, 2008 at 2:27 pm
Its really rich coming from the greens that they’ve finally found “science” to beat us over the head with when most of your members are anti-science luddites. They would believe in one or many forms of quackery, homepathy, megavitamin diets, that no-one landed one the moon, obesity = diabetes, transcendental energy, there are no chemicals in organic food, ghost, ESP, … the list is endless.
I believe the greens conspired just last year to stop quack remedies having to come under the same law as other drugs.
So please don’t preach to the objective converted and spend some time examining your own subjective prejudices that make you want to believe all of climate change dogma so badly.
November 19th, 2008 at 2:48 pm
If you’re interested, there’s a Symposium on Economic & Social Policy happening this weekend -
Saturday 22 November 2008
8.45am - 5.00pm, Lecture Theatre 1, Rutherford House, Pipitea Campus, VUW. (the Lambton Quay, beside-the-bus-terminal one)
Organised by Institute of Policy Studies, this is a free event, no registrations required; free tea & coffee provided, BYO lunch (now there’s true economists talking!)
Speakers include Geoff Bartram, Dennis Rose, Ganesh Nana & Kel Sanderson, Brian Easton, Bob Stephens, Michael Fletcher, John Yeabsley, quite a few of whom are academic economists at VUW; the rest are treasury wonks, or consultants of some sort to Government entities.
Not sure which hat Brian Easton prefers to be identified under!
I may trot down for some of this, if only to heckle because they are not discusing any sustainable options in economics (and put my feminist social policy & economics paper to work, finally!)
Where’s Prue Hyman on the schedule when you need her?
November 19th, 2008 at 3:35 pm
Katie - economics is the study of sustainability - something forgotten by many critics. Its the reason why economics is called the dismal science.
I recommend you have a look into some of the work of Posner on Law and economics. Also listening and note heckling might actually be a pareto improvement for everyone.
November 19th, 2008 at 3:59 pm
If economics is a study of sustainability then it would have to abhor some of the basic assumptions of what currently passes for economics.
Mises at least, took a view that could be regarded as sustainable. Unfortunately his voice was seldom heard in the greed is good, what’s in it for me uproar. Mises view corresponds far better with the laws of thermodynamics than the nonsense of Keynes and Friedman… the others aren’t familiar to me at all.
As for the time value used by Stern, you have your opinion. My opinion is that the cost of doing nothing is so large as to not be measurable in economic terms and it is wrong to expect solutions to magically appear. The time value of the money becomes almost irrelevant in such a context.
Three or more degrees of warming and we won’t have a civilization.
Money does not measure everything.
+++++++++++++++++++=
“most of your members are anti-science luddites”
Right… and I worked for NASA for a decade, including calibration of some of the cameras on the Mars Exploration Rover and development of the next generation signal chain for the Airborne Visible Infrared Spectrometer….
…AND I am a Green.
…and I don’t know ANY of my friends in this party who could be characterized as “luddites”.
Did you do special exercises to get your foot in so completely?
BJ
November 19th, 2008 at 3:59 pm
I’m not a fan of the Chicago School of economists, or pretty much anything published in the USA in the past 20 years.
They f*d our world.
Why read up on a failed paradigm?
November 19th, 2008 at 3:59 pm
I just don’t think that Mises would be regarded as a “neoclassical economist”.
BJ
November 19th, 2008 at 4:14 pm
Have to support BJ in saying that mises would not be regarded as neoclassical.
Katie - you might want to explore work from the London School of Economics as an alternative to the Chicago school - Robert Wade has a good book on regulatory economics which is well worth understanding (incentives matter even if you personally want to ignore them). The hard part about economics and markets is recognising that it is holding a mirror up showing what behaviour is - sometime we don’t like looking at what we see. So if you hop on a set of scales and don’t like the result, you can try an pass a law to say only weigh 55 kilos but that is not to change anything.
Bj - agree many different views on intertemporal time values - but Stern picked one most favourable to give the results he wanted (self- justification) without strong support for why this view was right. I support activity to reduce negative externalities (pollution) but I don’t think you should or even need to fudge the economics to get there. That path takes you into dodgy risk valuations which go to the heart of the current financial crises - that is everyone justified the numbers used to give them the results they wanted to see.
PS - money is just a medium for exchange is and we use it as a proxy for how much we value goods and services including art works, leisure time, clean air, fresh water and clear night sky. Again it is just a mirror.
November 19th, 2008 at 4:34 pm
Sorry Hayek - I’m with the scientists here, being one myself. The neoclassical economists use of the wrong mathematical and science models to “hold a mirror” up to the world do not make the models valid, no matter how good the math is. As I said in my post, we needn’t throw out the baby with the bath water, because a lot of good work has been done. Unfortunately, a great deal of work has been done on a foundation of sand and needs to be re-done. As Owen McShane said in a comment today - God created economists to make weathermen look good.
Economics can do better, and it is - we just need to acknowledge that people are subject to the laws of thermodynamics as well. Then maybe the high minded economic models will actually mirror what is happening in the world. Currently, they don’t.
The “economy” is a wholly owned subsidiary of the environment. Always has been, always will be and no economic theory will change that.
November 19th, 2008 at 4:47 pm
Frog - Economists have always considered the economy includes the environment, always have and always will. Other like to segregate out portions of the economy e.g. environment, capital, labour as individual forms of specific study, but economics is all encompassing. I wonder whether you consider a cost-benefit analyst to just consider financial costs and not something that also includes intangibles and social benefits/costs. This might explain why you see economics just as a subsidiary.
The assumptions used in any model/forecasts matter - on that point economists are like weather forecasters - on the best information we have at this point in time there is a probability of x outcome - this does not mean that why won’t happen.
Economists accept people are subject to thermodynamics - but do environmentalists accept that people are subject to incentives and are part of the environment?
November 19th, 2008 at 4:50 pm
Economists have always considered the economy includes the environment, always have and always will.
Which is why they have it BACKWARDS…. so often
Economics is a subset of ecology.
BJ
November 19th, 2008 at 4:59 pm
BJ - I suspect your just doing a wind up
Step through the looking glass - but then your an engineer and I suspect would like to redesign the looking glass - clearly flaws in the construction, poor quality silica etc etc. I find there is a closeness in the views of accountants, engineers (include scientists here) and economists but each thinks the other is missing a vital assumption or theory that makes there discipline superior.
But there is hope - some good engineers have gone on to become good economists
November 19th, 2008 at 5:02 pm
Truth
Von Mises doesn’t bother me at all, and as long as the Economist accepts the idea that there ain’t no such thing as a free lunch, we get along fine.
BJ
November 19th, 2008 at 5:15 pm
Easy - there are no free lunches and no $100 notes on the sidewalk
(not sure if your talking to economists if they don’t think this).
November 19th, 2008 at 5:39 pm
Bj,
so you dont get along with the likes of Hide and the national party then? but then again i suppose that the national party knows well the laws of scarcity, they just choose to place the payment at the hands of another, aka the citizen, more than can be said for Hide…
lol.
November 19th, 2008 at 6:25 pm
After you work out the part about it not being FREE then you have to work out the part about who pays.
The most common error I’ve found in that is that it isn’t us, its our kids…. or their kids who get stuck with the tab. That’s a common error usually made in favour of today’s wealthy. National and ACT together aren’t worth the powder to blow them to heck, (somewhat closer than hell), but the prince of insufficient light wouldn’t want ‘em even if we did. Their saving attributes are “not being Labour” and… hmmm… I can’t think of anything else
I AM a Green, though it isn’t always completely obvious
I have yet to write Mr English a letter about the LAQC and property. We will see how well he responds. Dr Cullen failed my final exam.
————–
I’d have to say that the run-of-the-mill “economist” in the USA up to about 4 months ago didn’t consider TANSTAAFL.
*I had a nasty run in with one of that ilk back when I was taking Economics 101. Thirty some years… the guy must be dead by now. I explained the applicable law to him and he told me flatly that it didn’t apply. I was too young and reckless to care about the consequences and the argument was just a little heated
Not sure what Friedman or Keynes thought either… (a consequence of my poor attitude in Eco 101), but I am sure that if that basic rule had been kept in mind the system wouldn’t be working up the courage to go over-the-falls again.
Yes… the market has every chance to slide a longish way further. The dollar however, is likely not going much lower. That will be for the $US and the Euro to do… relative to us. We still invest poorly, selling property to each other for ever inflating prices isn’t “investment” but it sure made a lot of bankers (in Oz) wealthier.
respectfully
BJ
November 19th, 2008 at 7:29 pm
Pierre Trudeau, that magnificent commentator on the humam condition, was heard to murmer during a cabinet meeting in Ottawa “If you laid every economist in the world end to end you’d still never reach a promise!”
I have yet to see or hear of him being proven wrong in this observation.
November 19th, 2008 at 8:22 pm
I see the world economic situation of the last 100 years like a pine tree (don’t laugh)
A radiata pine is a relatively fast growing tree, it puts all the energy into the growing tips and does not resprout shoots from older wood very well if at all, it must continue to grow larger or it will begin to die.
In the early stages of the Pines life it grows rapidly so long as water, nutrients, and sunlight are available, ie plenty of abundant resources.
As the tree gets older its growth begins to slow although its demand for resources is still high because of its shear mass.
Then the pine tree quite abruptly begins to decline.
This is because pine trees have to keep growing to survive, and they develop an enormous bulk towards the end of their life. Ironicaly it is the bulk and lofty height these trees attain that begins their demise.
The shear difficulty of sourcing and then transporting enough resources up to the growing tips at such a great height, means that the tree basically grows it self to death.
The tree simply meets the limits of the available resources to feed all of the huge branches of the canopy. There is no contingency plan as the tree cannot sprout from old wood so removing branches to encourage new growth has little effect. This is why a radiata pine has a maximum lifespan of approx 100 years.
Is it possible that the world economy has reached a similar point?
The hunger for resources to continue growth appears to be more than was once easily available and there appears to be no contingency plan other than perpetual economic growth, which clearly cannot continue.
Are there any alternatives? or is the whole thing going to die and come crashing down in the next storm?
I don’t profess to be as knowledgeable as most on this thread regarding economics, so go easy on me!
November 20th, 2008 at 9:10 am
Please, if you are going to quote me, please be accurate.
I did not say “God created economists to make weather forecasters look good.”
I DID say “Economic forecasting was invented to make weather forecasters look good.”
The economy is a chaotic system and is nor predictable although it is deterministic.
Similarly the weather is unpredictable but is deterministic.
And the same applies to the climate although cycles within it are predictable (like summer and winter) just as cycles within the weather are predictable (like night and day.)
This is why Sternm’ predictions were junk and this is why the IPCC does not make predictions or forecasts but only plots scenarios. Of course journalists and doomcaster ignore their careful choice of words and always talk about the IPCC predictions – which they don’t make!
November 20th, 2008 at 9:57 am
BJ - so your a freidmanite? given TANSTAAFL was one of his favoured responses. The concept of opoprtunity cost drives a lot of current economic thinking and the issues of intergenerational debt is a significant issue. Equity across generations is important - this is one reason why I oppose the Stern review, the discounting methodology actually results in hurting future generations.
Owen makes a good point about the chaotic aspect of the economy - this goes to the heart of work by Hayek and why he was accurate in predicting the collapse of socialism.
Shunda - if your reading this - your current line of reasoning follows the work of Thomas Malthus who is an important economist, but Malthus did not include technological innovation, specialisation and efficiency improvement through the use of markets to trade resources to those who value them the most.
I understand your studying psychology (correct me if I am wrong), as a primer on economics and a fun read, over the summer season you should read the undercover economist by Tim Harford (www.timharford.com) and the Nudge by richard thaler. Nudge is looking at behavioural economics which is proving to be an interesting cross over between economics and psychology (www.nudges.org). If you have trouble getting hold of a copy at your library - post a note and I’ll see if I can help you.
November 20th, 2008 at 10:17 am
Shunda,
You are right in your pine tree analogy except for one very powerful notion.
The pine tree is restained by a very narrow range of requirements to keep it alive (nuntrient, light, space, etc.) It is not adeptable in a very short period of time to change its requirements for life. It is not resourceful.
Human beings on the other hand are incredibly diverse and resourceful. We can change what we eat, drink, where we live, etc.
It is one of the reasons human are multiplying at a far too great a rate.
As a species we are infinitely adabtable to almost any situation using technology to overcome obstacles to survival.
Only one thing will wipe humans from this planet and that is a lack of co-operation and a lack of desire to plan for and instigate a better future. It realy has nothing to do with economics.
Just willpower to change. But whilst all would like to reach for the stars, most are mired in a malaise of conservatism to actually achieve anything.
I dont know how one changes the attitude of the human species to do better then they do now.
November 20th, 2008 at 11:25 am
>>Only one thing will wipe humans from this planet and that is a lack of co-operation and a lack of desire to plan for and instigate a better future.
>>
Or a natural disaster of epic proportion, or a ‘lifebreaker’ asteroid hit from space?
Mind you, those damned Klikiss could come back and do us all in as well!