The trouble with economists

by Aaron Wherry

Stephen Harper, Sept. 15, 2008“My own belief is if we were going to have some sort of big crash or recession, we probably would have had it by now.”

Stephen Harper, Sept. 26, 2008“The only way there is going to be a recession is if they’re elected, and that’s why they’re not going to be elected.”

Paul Krugman, SundayFew economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy… As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth …  the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess. Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.




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The trouble with economists

  1. Certainly by Sept 14 2008 many economists were talking about the economic situation in more dire tones. My investment advisor was talking up his favourite economist prognosis in June, advising me to sell and divest. Harper may be a not alone in denying that the depth of problems wasn't to what it eventually became, but his lies down the line are what is more unsettling. He truly thought that he could skate through an election without having to face it, and then when re-elected he thought he could downplay it and then turn it into a weapon against his rivals.

    • My economics teacher once told me that the good politicians lie about the economy. If they start saying that it's either going into recession or out of control growth then people are going to react to that news in a way that's going to exacerbate the problem.

      The good politicians will keep saying that the economy is going on normally.

  2. "the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth"

    Ode on a Grecian Derivative

    Thou lately ravish'd bride of arrogance,
    Thou foster-child of Smugness and false Math,
    Viciousness' cat'lyst, who couldst thus enhance
    The market's guilt, and launch the Day of Wrath;
    What apprehension lurks within thy code
    Of bankers or investors, or of both,
    On Wall Street or within the TSE?
    What toxic assets these? What neg'tive growth?
    What mad pursuit? What struggle to unload?
    What stark comeuppance? What harsh obloquy?

    Shrewd Ponzi schemes are sweet, but those unshrewd
    Are sweeter; therefore, SIV's, rock on,
    Not to the rational brain, but, since we're screwed,
    Renew the promise of a foreclosed loan . . .

  3. "the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth"

    Ode on a Grecian Derivative

    Thou lately ravish'd bride of arrogance,
    Thou foster-child of Smugness and false Math,
    Viciousness' cat'lyst, who couldst thus enhance
    The market's guilt, and launch the Day of Wrath;
    What apprehension lurks within thy code
    Of bankers or investors, or of both,
    On Wall Street or within the TSE?
    What toxic assets these? What neg'tive growth?
    What mad pursuit? What struggle to unload?
    What stark comeuppance? What harsh obloquy?

  4. As much as I'd love to say this is a "gotcha" moment for Stephen Harper, it's not. Our regulations, while not perfect, held up far better than those governing the economists Krugman is talking about. Our economists, while still swayed by the so-called financial innovation coming out of America based on these beautiful mathematical models, didn't act on them with anywhere near the same force as our American counterparts – no houses of cards with mortgage-backed securities here.

    Besides, as dan in van points out, by Sept 2008, pretty much all economists were expecting a collapse, the only question was how large it was going to be. Harper's economic failure was his inability to realize (or at least admit) that when the global economy takes a major hit, a country so dependent on export and trade, especially with the epicenter of the collapse, the US, is going to take a hit as well, even if it didn't screw up directly. It wasn't beautiful math that led Harper astray, it was a combination of political stubbornness and a lack of common sense!

  5. Boy, Aaron, juxtaposing Stephen Harper with a Nobel Laureate … be fair. Juxtapose Harper with say Maria Bartiromo, and then we may have something.

  6. Speaking as a mathematician, what economists do should never be referred to as mathematics.

    • Amen to that.

      Economics isn't a science, social or otherwise. It's an elaborate hoax perpetuated on fabricating predictions that eliminate any data that don't fit their theory.

      • I like to call economists "sociologists in suits". You seem to give social sciences more credit than I do.

    • It shouldn't be called science, at least not in the traditional sense, but they're certainly using mathematics. It's not like they're adding wrong, or don't understand how to multiply, or are getting calculus wrong. No, it's the asumtions them make about the math they do and what it represents that's often wrong (or horribly oversimplified), which is why it doesn't qualify as a real science.

  7. Isn't that a little unfair Aaron? Making Harper to account for something he said LAST YEAR???

    excuse me now, I am searching for a British GQ from July of 86… I hear Ignatieff might have said something critical of Bananarama.

  8. The problem is that Harper wasn't speaking as an economist. He was speaking as a politician (who pretends to still be an economist).

    • So what are you saying? That any of his past experience and training is worthless while he's a politician? Or that as a politician we shouldn't believe anything that comes out of his mouth?

      In either case.. why do people vote to keep Harper as a politician again?

  9. I read Paul Krugman's article too.

    While I don't believe I belong to the new Chicago school where markets are always rational, I shouldn't have to forced to accept Keynesian economics should I?

    Can't I believe that the market at times can be volatile, but also that the government shoveling deficit money out the door to increase liquidity is a waste of time and counterproductive to economic recovery?

    • Sure. I'm lucky in that I haven't the faintest idea of what Keynesian economics are (don't explain it) or what the opposing economics theory is. I do know that one apple doesn't magically transform into an orchard overnight, if you make two dollars and spend three you are in trouble, and that no banker, economist, financial advisor or trader is looking out for the average citizen or investor as their number one concern.

      What I do not understand is why laws haven't been enacted already that cap the size of an employee's total remuneration. I say make that cap one million dollars, although others I have spoken to would set it more at $500,000. I am not talking about business owners or investors, just plain old employee remuneration. I defy anyone to justify an employee making more than one million dollars–including sports teams employees. What does the President of the United States (i.e., the world's top job) make again?

  10. Physics is the art of approximation.

    Economics is the art of wild-ass guesses.

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