Needed: a new economic paradigm........by Joseph Stiglitz

[marmar]

via MichaelMoore.com:



August 20th, 2010 12:52 PM
Needed: a new economic paradigm

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By Joseph Stiglitz / Financial Times


The blame game continues over who is responsible for the worst recession since the Great Depression – the financiers who did such a bad job of managing risk or the regulators who failed to stop them. But the economics profession bears more than a little culpability. It provided the models that gave comfort to regulators that markets could be self-regulated; that they were efficient and self-correcting. The efficient markets hypothesis – the notion that market prices fully revealed all the relevant information – ruled the day. Today, not only is our economy in a shambles but so too is the economic paradigm that predominated in the years before the crisis – or at least it should be.

It is hard for non-economists to understand how peculiar the predominant macroeconomic models were. Many assumed demand had to equal supply – and that meant there could be no unemployment. (Right now a lot of people are just enjoying an extra dose of leisure; why they are unhappy is a matter for psychiatry, not economics.) Many used “representative agent models” – all individuals were assumed to be identical, and this meant there could be no meaningful financial markets (who would be lending money to whom?). Information asymmetries, the cornerstone of modern economics, also had no place: they could arise only if individuals suffered from acute schizophrenia, an assumption incompatible with another of the favoured assumptions, full rationality.

Bad models lead to bad policy: central banks, for instance, focused on the small economic inefficiencies arising from inflation, to the exclusion of the far, far greater inefficiencies arising from dysfunctional financial markets and asset price bubbles. After all, their models said that financial markets were always efficient. Remarkably, standard macroeconomic models did not even incorporate adequate analyses of banks. No wonder former Federal Reserve chairman Alan Greenspan, in his famous mea culpa, could express his surprise that banks did not do a better job at risk management. The real surprise was his surprise: even a cursory look at the perverse incentives confronting banks and their managers would have predicted short-sighted behaviour with excessive risk-taking.

The standard models should be graded on their predictive ability – and especially their ability to predict in circumstances that matter. Increasing the accuracy of forecast in normal times (knowing whether the economy will grow at 2.4 per cent or 2.5 per cent) is far less important than knowing the risk of a major recession. In this the models failed miserably, and the predictions of policymakers based on them have, by now, totally undermined their credibility. Policymakers did not see the crisis coming, said its effects were contained after the bubble burst, and thought the consequences would be far more short-lived and less severe than they have been. ...........(more)

The complete piece is at: http://www.michaelmoore.com/words/must-read/needed-new-economic-paradigm

[Warpy]

1. Policy makers could have found all they needed

on DU in the Economy Forum and daily Stock Market Watch threads.

Anyone in a policy making position who didn't know this was coming and how it would play out needs to be fired because it's damned sure he doesn't have a clue how to fix it.

[droidamus2]

2. Always wondered

I took both Micro- and Macro- economics classes in college and though the theory was extensively explained I always felt there were a lot of assumptions about human nature, availability of resources and such that weren't necessarily true. One minor one was that when comsumers make decisions on what they will consume, given good information, they will make the 'best' decision on what to purchase. There was really no mention of advertising and the whole idea of the Madison Avenue people convincing you that you need to purchase something or a more expensive brand that you don't really need. That idea also does not take into granted the different educational, social background and intelligence of different consumers and the ability to influence their decisions. Another one was that when demand is much more than supply other producers will step in to take advantage of the demand. The problem here is that idea is based on the idea that the resources needed to produce the product are still available at a workable price to the new companies entering the market. Without some kind of Government control a corporation or group of corporations will do everything they can to control the necessary resources so as to keep competitors out of the market and thus allow them to raise prices when demand is higher than supply. Obviously I am no economist and I am sure somebody with a deeper understanding of the 'science' would tell me I have it all wrong but that's the way I saw it.

[unblock]

3. you've got it spot on and there are many such assumptions

standard economic theory is careful not to say that everyone IS rational, merely that they they act economically AS IF they were rational. that allows the possibility that people are all kinds of wacky, so long as if, on the whole, they make purchases in the same amounts that they would have had they been sane.

the whole theory is b.s., it's simply a framework for digging your feet in and saying that there must be an explanation, look harder. so if someone starts charging big bucks for useless rocks, there must be something about it that's rational. ah, it's entertainment! people paid to have "pet rocks" and that was rational, or at least had they been rational, they would have bought tons of "pet rocks". what idiocy! even if you though pet rocks were wonderfully comical idea, why actually buy one? economists refused to state the obvious, that people can be so manipulated by their desire to be part of a trend as to willingly part with hard-earned cash in exchange for a rock, so they called it entertainment instead.

same goes for gambling. people are supposed to be risk-averse, meaning they'd never take an even-money bet. in fact, they would pay to avoid it. yet people do it all the time. so they call it entertainment rather than risk-seeking, because that would blow an assumption they need. couldn't possibly be that people are irrational, or worse, risk-seeking. or that the model is wrong, or inadequte.

the truth is that most people fundamentally are risk-seeking. the overwhelming majority of the most successful people out there, and thereby the role models for many, put all their eggs in one basket. they made fortune by avoiding diversification and putting a highly imprudent proporting of their money into the company they work for. people truly seeking to avoid risk would recognize that they have a very large exposure to the company they work for any would put their remaining money in other companies; in fact, in other industries entirely.

yet bill gates kept a ton of his money in microsoft. he should have sold a ton of his stake decades ago and invested in non-tech companies. but he sought risk, as in fact investors wanted him to. now why would investors want their company run by someone who can't properly diversify his own portfolio? because rationality and risk-aversion aren't actually what investors want in a ceo. yet economist insist that rationality and risk-aversion are everywhere.

[Odin2005]

5. IMO most Economics is ideological pseudoscientific nonsense.

They start with an ideological assumption and then look for "proof". You can find "proof" for anything if you look hard enough because of confirmation bias, even though events have shown the nonsense to be false. if standard economic doctrine were true advertisers would not exist. people are not rational utility maximizers, they do not even "act as if they were rational actors". The Rational Homo economicus is merely elite-serving ideology.

Most economists are the modern equivalents of the court political philosophers of old, justifying the oppression exacted by their lord.

[SlipperySlope]

10. Bad assumptions are common, sticking to them not so much.

Economics wants to be seen as a science.

Incorrect assumptions are common in the sciences. Think of physics calculations that begin with "assuming there is no friction or air resistance" and then go on from there. A difference is that physicists tend to stay aware they have made simplifying assumptions and their calculations can't completely apply to the real world, while economists build these models with false assumptions and then believe the models.

An example from our recent debacle; the large rating firms were assigning AAA ratings to financial instruments based on their economic models. Those models assumed it was *impossible* for housing prices to fall nationwide. This assumption was made despite actual precedent where housing prices had fallen nationwide.

Like they say in computer science; GIGO.

[AdHocSolver]

4. The economists argue theory to hide the fact that the economy played out ...

...exactly the way the Powers That Be wanted it to play out.

The finger pointing is designed to cover up the fact that Wall Street, the bankers, and the regulators were working seamlessly together to bring about the boom and bust cycles in the stock market and real estate markets to enable them to profit from their Ponzi schemes.

If you spend time trying to make sense out of what 90 percent of the economists spout you will never understand anything about the economy.

NAFTA, the repeal of the Glass-Steagall Act, the manipulation of the money supply were, like the reduction in taxes for the wealthy, all designed to transfer the assets of the middle class to the top one percent through their control of the corporations. No mistakes were made on their part. Greenspan's maintaining artificially low interest rates was designed to encourage people to gamble in the stock market and to buy real estate priced way above what they could afford (your mortgage payments, with our balloon mortgage, will be so low).

The GDP, "global markets", "free trade", the numerous "incomprehensible" graphs, and their ilk are junk food for the brain. They are designed to cause mental constipation, and have worked to the advantage of the wealthy elite beyond their wildest expectations.

The main problem with the U.S. economy is the fact that just about everything we buy is imported. Almost every dollar we spend goes to other countries, less what the corporations keep for profits, rather than to provide income (jobs) for Americans. We cannot reduce the trade deficit by increasing exports, because this approach will never provide enough JOBS for Americans.

The only way to save the U.S. economy is to limit imports from slave wage countries by implementing tariffs and import duties on products from those countries to make it possible for American companies who want to provide jobs here the ability to do so profitably. The other action needed is to revise the tax code to eliminate the ability of the corporations and the wealthy to evade taxes through offshore tax havens.

This is all you need to know to understand what is happening with the U.S. economy. Anything else is obfuscation. The Powers That Be want you to confuse your mind with all kinds of stupid, irrelevant nonsense.

[Odin2005]

6. +1,000,000,000,000,000,000

:applause:

[riderinthestorm]

8. + 2 brazillion. nt

[laughingliberal]

7. K & R nt

[BadGimp]

9. I wish he could talk in simpler terms but...

After my own feeble translation attempt, I have to concur with him.

A subject I am concerned about (among many) is the Conservative thieves attempt to avoid allowing the Us Treasury to pay back the Social Security funds borrowed by GWBush JR and other administrations, to finance their reckless spending on tax cuts for the rich, wars and spending to finance the corporate protection racket we have in this country. I remember vividly how before the 2000 Selection, the GOP viscously attacked Gore for his ties to Occidental Petroleum among other lines of attack. Then immediately after Bush was placed in office by the Supreemes,allocated $106,000,000 to fund military protection of Occidental Petrolem's oil pipelines in Columbia I believe. The rebels there were having a field day f&#)ing with OP by blowing up the lines at will.

Oh well...