Friday, November 20, 2009

Economists Don't Learn

"The pain of the financial crisis has economists striving to understand precisely why it happened and how to prevent a repeat. For that task, John Geanakopolos of Yale University takes inspiration from Shakespeare's 'Merchant of Venice.' ... For years, his effort to understand this process didn't draw much interest. Now it does--yet another aftereffect of the brutal deflating of the credit bubble. ... Mr. Geanakopolos is among a small band of academics offering new thinking about those cycles. A varied group ranging from finance specialists to abstract theorists, they are moving to economic center stage after years on the margins. The goal: Fix the models that encapsulate economists' understanding of the world and serve as policy-making tools at the world's central banks. It is a task that could require a thorough overhaul of the way those models work. ... Mr. Geanakopolos is emblematic of the new thinking but now necessarily the one whose ideas will prevail. ... The past century saw two economic revolutions in the way economists view the world. Both required painful crises to set them in motion, but both arguably improved government's ability to manage the economy. The first came after the Depression, when economists built some of the first mathematical models that policy makers could use to try to manage the economy. The second came after the inflationary 1970s, when economists created new models that took into account how people's expectations, such as about prices or income, can influence the economy over time. ... As Robert Lucas of the University of Chicago, one of the intellectual fathers of the models, put it in 2003: The 'central problem of depression-prevention has been solved ... for many decades'," my emphasis, Mark Whitehouse at the WSJ, 3 November 2009, link:

"Professor [Steve] Hanke argues that the chief enabler of both the Great Depression and our latest economic downturn is the [Fed], who sees itself as America's systemic risk regulator. This is the world upside down, Hanke explains: The [Fed] is the systemic risk. ... The bottom line is that the idea that government bureaucrats have enough knowledge to manage an economy well is the height of conceit--what Nobel Laureate Fredrich Hayek called the 'fatal conceit'," Walter Williams (WW), 5 November 2009, link:

Does anyone remember JFK's adminstration and the Phillips Curve? We conquered the business cycle then! The economists here are still looking for the philosopher's stone. They are wasting their time. If they studied the Austrian Theory of the Business Cycle, they might learn something. This is pitiful. Where is George Stigler when we need him? That Lucas, a Chicago professor, should sprout this nonsense is inexcusable. Did he study the History of Economic Thought? It appears Geanakopolos has no concept of capitalization. He doesn't understand the efffects of central bank monetary base expansion on bank lending practices. This search for the "new paradigm" is an intellectual joke, see my 23 August 2007 post: To end business cycles, kill the Fed. New thinking? That's laughable. Go back to gold!

I agree with WW, an economics professor at George Mason University.


Anonymous said...

The big show these days is watching Bernanke and Geithner keep their cool as the global financial sops up the produce of their printing press.

Bill Gross and the Chinese are warning them in public of their inflation exporting. Everything "stable" in USA and risk growing in other economies... capital controls cropping up here and there... the bridges are being drawn up.

ZimBen you're about out of tools other than the messing with the construct of your balance sheet. The duration cakewalk coming up.

It's likely ZimBen won't be reconfirmed. I vote Stiglitz for Fed chair. Or Treasury Secretary.

PCE said...

Yeh but if we kill the Fed we have to kill off the welfare state and the military industrial complex. Both feed off a fiat money system. Without the ability to finance spending via increased money supply, you'd have to raise taxes drastically to finance these two parasites on productive activity.
How many dragons you think you can take on sir ?

Independent Accountant said...

These things will happen sooner or later. The US can't go on consuming more than it produces forever. As for taxes, they are being paid anyway. How? By the Fed confiscating the public's savings through inflation.


PCE said...

IA, thats true, though it can take a long time. Britain squandered its wealth on a military empire and welfare spending and it is sad to see the US treading the same path to impoverishment. Maybe the US can find its Margaret Thatcher to reverse the decline. (Alas her good work undone by 12 years of socialist government)

Prof Emeritus said...

Can you post a citation to the source of the Robert Lucas' comment that depression-prevention has been solved?