Sylvia Nasar's superb book on mathematician John Nash ('A Beautiful Mind') was the basis for an excellent movie and provided an extraordinary insight into game theory as well. However, her latest book Grand Pursuit: The Story of Economic Genius, gives way too much credit to a bunch of over-valued wonks who've actually contributed very little to society. But this may be an understandable misperception given that Ms. Nasar is herself an economist.
One of the grossest characterizations is that economics is a "science", say like physics. This is total hogwash. About a year ago (April 26, 2010) a letter of mine published in The Financial Times drew attention to the abysmal failure of modern macro-economics (touted as a “science”) to predict the 2008 market meltdown and financial crisis. I pointedly noted that economics omitted too many “externalities” which included aspects like environmental costs and resources, as well as lacking any consistent empirical basis analogous to physics.
One respondent, a Sanjay Bissessur (April 29, FT) made an effort to critique my earlier letter – but he fell flat and ended up merely exposing a lack of physics knowledge. For example, he complained that physics’ failure to forge a unified field theory parallels economists’ failure to predict the 2008 credit-mortgage crisis. In fact, as I pointed out in a subsequent response, though quantum theory and relativity haven’t been formally unified they’ve made accurate predictions in their respective domains of inquiry. Thus, the threshold for theory success is what a given theory specifically predicts from its particular domain, not whether it can be “unified”. Bisseur’s error was in picking at a failure of unification, but then I never said the failure of modern economics to predict the credit crisis was a failure of unification (e.g. to integrate micro-economics and macro-economics) but a failure of macro-economics overall.
In the particular case of the failure in predicting the credit crisis and meltdown, academic economics erred by assuming a putatively poorly regulated system was capable of sustaining massive risk entrenched in obscure, poorly understood credit derivatives created by Wall Street “quants” , most of whom had forsaken bright careers in science or mathematics to invent these devious financial instruments for investment banks. The assumption saw all the hinges come loose when the credit default swaps were immersed in securities purported to be safe, since they were given AAA ratings by credit agencies like Moody’s and Standard and Poor’s. Thus, the failure was predicated on a three-way collapse of the paradigm: 1) commercial banks taking on the risk of investment banks by leveraging their assets to preposterous ratios (sometimes as high as 33:1), 2) credit derivatives designed using the Gaussian Copula Formula which enabled them to be sliced, and spread throughout ordinary securities such as collateralized mortgage obligations, and 3) a failure of the credit rating agencies to take proper note of (2) and in effect, be blinded while assigning bond ratings the securities didn’t deserve.
By contrast, physics as a true science, not a faux one, succeeded remarkably well in its individual theories. The well-known muon experiments, for example, validated the predictions of time dilation (e.g. that moving clocks run slower) from special relativity, while quantum mechanics has successfully predicted the energy levels and spectral line series for the hydrogen atom.
Most telling and insightful to me was an article, ‘Why Economists Still Stubbornly stick to Their Guns’. FT, April 16-17, p. 7). The author, John Kay, noted:
“In economics, the academic realm ought to be the home of pluralist discourse but the growth of peer review and journal publication has undermined this. University economists…are now under relentless pressure to conform to a narrow, established paradigm.”
As I noted in two comprehensive earlier blogs:
1) http://brane-space.blogspot.com/2011/06/modern-economics-its-evil-basis-pareto.html
2) http://brane-space.blogspot.com/2011/06/modern-economics-its-evil-basis-pareto_13.html
The high priests of modern Economic theory base their foolish paradigm and political program on the "Pareto Distribution" and a belief called “Pareto optimality or Pareto efficiency.” Pareto optimality isn't scientific because it is not defined in a way that can be falsified. In other words, “Pareto optimality” is a belief like “Christ died for our sins” is a belief — neither can be falsified.
However, when one examines carefully the effects, one can conclude that at least any Economics based on Pareto optimality or the distribution is fraudulent. Understand the Pareto, and you grok why the richest always get more tax cuts they don't need (e.g. because their dollars are deemed to have "higher Pareto efficiency") and why Social Security benefits must be cut (e.g. people receiving the monies from Social Security aren't productive nor do they usually partake in stock markets).
And the "piece-de-resistance" of this asinine economics (as per Libertarian Martin Feldstein's calculations based on Pareto Efficiency or optimality) is that if a health insurance Company pays $2,000 toward a colonoscopy (while the patient's reservation price is $1, 500, i.e. the maximum she'd pay on her own) then it makes more sense to PAY HER $1,499 NOT to get the colonoscopy, than to let her get the test and consume valuable specialist time and resources via $2,000 subsidy!
Thus, one can fully embrace Jay Hanson't take that:
"Economists proselytize for their religious beliefs like Christian missionaries proselytize for theirs. The belief that “Pareto optimality” actually occurs in the real world is the linchpin of economics. If one accepts that “Pareto optimality” is true, then contemporary economic models are true by definition. "
But then, this isn't any real economics, but what I call ersatz economics or maybe better, "Potemkin" economics. Build a spurious straw man (straw "house" of cards) and sell it to every manjack as the real thing - and which everyone must, must believe in! But the last true genuine economist, before the perpetual mind-fuck of Pareto crept in, was likely Adam Smith.
Interestingly, the capitalist Smith - in his 'Inquiry into the Wealth Of Nations' - evoked a more rational attitude when he noted there are:
"needs in a civilized society that a barbaric one refuses to address."
He also pointedly stated (Vol. II, p. 648):
"What improves the circumstances of the greater part can never be regarded as an inconvenience to the whole "
Smith recognized, unlike the modern high priests like Glen Hubbard (who devised Bush's Zombie tax cuts that still infiltrate the land past their expiration date), Martin Feldstein, and Milton Friedmann, that any economics that is devised to create more inequity can't be sustained. Eventually, as Lenin predicted in his essay on Imperialism, it must consume its seed corn and also its raison d'etre.
One of the grossest characterizations is that economics is a "science", say like physics. This is total hogwash. About a year ago (April 26, 2010) a letter of mine published in The Financial Times drew attention to the abysmal failure of modern macro-economics (touted as a “science”) to predict the 2008 market meltdown and financial crisis. I pointedly noted that economics omitted too many “externalities” which included aspects like environmental costs and resources, as well as lacking any consistent empirical basis analogous to physics.
One respondent, a Sanjay Bissessur (April 29, FT) made an effort to critique my earlier letter – but he fell flat and ended up merely exposing a lack of physics knowledge. For example, he complained that physics’ failure to forge a unified field theory parallels economists’ failure to predict the 2008 credit-mortgage crisis. In fact, as I pointed out in a subsequent response, though quantum theory and relativity haven’t been formally unified they’ve made accurate predictions in their respective domains of inquiry. Thus, the threshold for theory success is what a given theory specifically predicts from its particular domain, not whether it can be “unified”. Bisseur’s error was in picking at a failure of unification, but then I never said the failure of modern economics to predict the credit crisis was a failure of unification (e.g. to integrate micro-economics and macro-economics) but a failure of macro-economics overall.
In the particular case of the failure in predicting the credit crisis and meltdown, academic economics erred by assuming a putatively poorly regulated system was capable of sustaining massive risk entrenched in obscure, poorly understood credit derivatives created by Wall Street “quants” , most of whom had forsaken bright careers in science or mathematics to invent these devious financial instruments for investment banks. The assumption saw all the hinges come loose when the credit default swaps were immersed in securities purported to be safe, since they were given AAA ratings by credit agencies like Moody’s and Standard and Poor’s. Thus, the failure was predicated on a three-way collapse of the paradigm: 1) commercial banks taking on the risk of investment banks by leveraging their assets to preposterous ratios (sometimes as high as 33:1), 2) credit derivatives designed using the Gaussian Copula Formula which enabled them to be sliced, and spread throughout ordinary securities such as collateralized mortgage obligations, and 3) a failure of the credit rating agencies to take proper note of (2) and in effect, be blinded while assigning bond ratings the securities didn’t deserve.
By contrast, physics as a true science, not a faux one, succeeded remarkably well in its individual theories. The well-known muon experiments, for example, validated the predictions of time dilation (e.g. that moving clocks run slower) from special relativity, while quantum mechanics has successfully predicted the energy levels and spectral line series for the hydrogen atom.
Most telling and insightful to me was an article, ‘Why Economists Still Stubbornly stick to Their Guns’. FT, April 16-17, p. 7). The author, John Kay, noted:
“In economics, the academic realm ought to be the home of pluralist discourse but the growth of peer review and journal publication has undermined this. University economists…are now under relentless pressure to conform to a narrow, established paradigm.”
As I noted in two comprehensive earlier blogs:
1) http://brane-space.blogspot.com/2011/06/modern-economics-its-evil-basis-pareto.html
2) http://brane-space.blogspot.com/2011/06/modern-economics-its-evil-basis-pareto_13.html
The high priests of modern Economic theory base their foolish paradigm and political program on the "Pareto Distribution" and a belief called “Pareto optimality or Pareto efficiency.” Pareto optimality isn't scientific because it is not defined in a way that can be falsified. In other words, “Pareto optimality” is a belief like “Christ died for our sins” is a belief — neither can be falsified.
However, when one examines carefully the effects, one can conclude that at least any Economics based on Pareto optimality or the distribution is fraudulent. Understand the Pareto, and you grok why the richest always get more tax cuts they don't need (e.g. because their dollars are deemed to have "higher Pareto efficiency") and why Social Security benefits must be cut (e.g. people receiving the monies from Social Security aren't productive nor do they usually partake in stock markets).
And the "piece-de-resistance" of this asinine economics (as per Libertarian Martin Feldstein's calculations based on Pareto Efficiency or optimality) is that if a health insurance Company pays $2,000 toward a colonoscopy (while the patient's reservation price is $1, 500, i.e. the maximum she'd pay on her own) then it makes more sense to PAY HER $1,499 NOT to get the colonoscopy, than to let her get the test and consume valuable specialist time and resources via $2,000 subsidy!
Thus, one can fully embrace Jay Hanson't take that:
"Economists proselytize for their religious beliefs like Christian missionaries proselytize for theirs. The belief that “Pareto optimality” actually occurs in the real world is the linchpin of economics. If one accepts that “Pareto optimality” is true, then contemporary economic models are true by definition. "
But then, this isn't any real economics, but what I call ersatz economics or maybe better, "Potemkin" economics. Build a spurious straw man (straw "house" of cards) and sell it to every manjack as the real thing - and which everyone must, must believe in! But the last true genuine economist, before the perpetual mind-fuck of Pareto crept in, was likely Adam Smith.
Interestingly, the capitalist Smith - in his 'Inquiry into the Wealth Of Nations' - evoked a more rational attitude when he noted there are:
"needs in a civilized society that a barbaric one refuses to address."
He also pointedly stated (Vol. II, p. 648):
"What improves the circumstances of the greater part can never be regarded as an inconvenience to the whole "
Smith recognized, unlike the modern high priests like Glen Hubbard (who devised Bush's Zombie tax cuts that still infiltrate the land past their expiration date), Martin Feldstein, and Milton Friedmann, that any economics that is devised to create more inequity can't be sustained. Eventually, as Lenin predicted in his essay on Imperialism, it must consume its seed corn and also its raison d'etre.
Echoing Smith, Charles Reich poignantly notes in his book, Opposing the System, Crown Books, p. 103:
"When society itself comes to be modeled on economic and organizational principles, all of the forces that bind people together are torn apart in the struggle for survival. Community is destroyed because we are no longer 'in this together' because everyone is a threat to everyone else. "
In such a capitalist-driven, consumerist organizational economic model, wherein the resource “pie” for the non-wealthy elite grows ever smaller, the young are threats to us oldsters, as we are threats to them, as neighbor is to neighbor. It can't be otherwise. This capitalist model has seen fit, in other words, to destroy our areas of commonality and common cause, replacing neutral civic space with demeaning commercial space and commercialist, market values.Reich then describes the visceral 'dog-eat-dog', endless economic warfare that ensues between people in the never ending quest to 'make it' and not be left behind. A tragic game wherein every one, every man, woman and child has a 'market value' and all abiding principles, social or moral, are reduced to economics. Alas, the cost resides in devastated marriages, families and communities.
Thus, in returning to Sylvia Nasar after this lengthy digression, it is odd she could write such codswallop (op. cit.) as:
"Economists must be doing something right, because the lives of nine-tenths of humanity have changed more in the century in which modern economics was born than in the 20 centuries before."
Not so fast! The change wasn't due so much to "modern economics" - though they might be deluded enough to believe so, but because during that century she references the planet went from the ebbing energy intensity and inefficiency of whale oil (used almost everywhere, from lighting to fuel, to heating) to the energy jolt delivered by OIL, as in petroleum! People need to read A Thousand Barrels a Day, which covers the energy transition nicely and what it meant for energy utility and lifting the human race to another level. The key catalyst in all this is EROEI or "energy returned on energy invested". In the case of oil, one could - fifty years ago - get back the equivalent of 30 barrels of oil for every barrel needed to do the drilling to extract it. Thus EROEI = 30:1. Today that is down to about 8:1 but still better than the 1/2:1 in the waning days of whale oil!
Meanwhile, TIME essayist Rana Forhoohar compounds this misperception by writing ('When the Dismal Science was Brilliant', Sept. 12, p. 18):
"While more than a billion people still live in poverty, it's safe to say the majority of humanity now enjoys levels of prosperity and choice - in food, living conditions and employment - undreamed of by the typical laborer in 19th century England"
But again, this is because the energy foundations for the two civilizations are different. 19th century England still depended largely on whale oil, a poor, tiny sister compared to mighty oil and its prodigious bang for the buck. The reason so many are so much better off today is 95% due to the discovery of oil resources, and 5% due to the labor and ingenuity employed in extracting, refining and distributing them for wider use.
At the same time- to test this claim - we shall see that as the Oil runs out, or features oil quality with much lower EROEI (see diagram) in the coming years, life quality will degrade across the board - irrespective of whatever new economic thinking or theories arise. We are already getting a taste of it now, with ever lower GDPs, more unemployment in the developed world, and costlier resources - reflected in higher priced commodities. Ultimately, there will come a time we revert to the lowest ratio of EROEI and billions die, simply because there will not be the energy basis or intensity to support the life sustenance needs of billions, their calories or their offspring. Indeed, there won't even be enough energy to get clean water, if we contaminate what we have now, that's all that''ll be left.
Most people don't understand or grasp in the slightest that we enjoy our computers, i-pads, X-boxes, ipods, HDTVs, food choices, autos, air conditioning etc. only at the behest and availability of relatively cheap oil. Once those EROEIs hit 1:1 or less the jig is up and we will see the first indicators with $250/bl. oil and $7.50 a gallon gasoline. Then food will be too expensive for even middle class people, and energy costs (say $150 or so a month now) will reach highs that will force most people to do without.....a/c or heating.
In this sense, the modern Economic high priest is no different from the "wizard of OZ" hiding behind the curtain and telling any spectators, "Pay No attention to the man behind that curtain!"
Ah, but we who know better, do! And so should Ms. Nasar and Ms. Foroohar.
Meanwhile, all the casual reader needs to know is that the American economics factory and schools continue to perform a vital role in maintaining - via myth and balderdash- this unique system of corporate socialism, American style. Economists instead are assigned the task of dispensing unproven dogmas that permit business to operate independent of damaging political manipulation. (While making politicians the whores of business by virtue of our bribery system). They accomplished this task by means of their faux message of “laissez faire", based on a fictitious conception of a society composed of competing individuals. In fact, we inhabit a controlled economy where meeting needs is less important than confecting "wants", via vast corporate monopolies that answer to no one. (As a note: most multi-nationals are now more powerful than most nation states! No wonder citizens can expect zero help from their governments against these predators.)
Robert Nelson informs us that the goal of the economics profession is to prevent the American public from achieving a correct understanding the American economic system, thereby throwing a “mantele of protection over corporate government”. In this take, he is absolutely correct!
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