Any student of financial history would have to conclude that financial crises and the volatility created by the instabilities of finance in recent years are an organic and harmful element of our social system. Wars and financial crises are time and again the greatest sources of disruption of the social order. Since the power of finance and the disruptive forces of our financial system are so pervasive, it is perhaps surprising that the prevailing economic paradigm since the 1920s tended to model the financial sector as either nonexistent or as a finely tuned seer who can anticipate anchored expectations infinitely far into the future to render they system stable.
This is a Panglossian fantasy rather than science. Stability is assumed instead of being derived from scientific observation. In essence, the prevailing economic paradigm creates a parable of the financial sector that represents how we would like it to behave rather than explain how it does behaves. It looks like a reflection from Narcissus's pool.
There have been several thinkers and extraordinary investors over time that have challenged this absurd portrait of the financial process, including John Maynard Keynes, Frank Knight, Hyman Minsky, George Soros, Seth Klarman, and Charles Munger. But this alternative perspective did not flatter the powerful interests of the financial sector, and more importantly, it did not assuage the anxieties of a society that desperately yearns for the reassurance that the future will be understandable, stable, and orderly. These alternative visionaries may have created a perspective that better describes reality than the orthodox tenets of equilibrium finance, but their visions did not satisfy the emotional needs of society and were set aside. As John N. Gray once wrote:
Illusions aren't errors that can be corrected by an increase in the intellectual ability or understanding. Illusions are beliefs we have because we need to have them in some way.
In 2008, we realized that these illusions were dangerous and costly. The false reassurance they provided ironically proved to be a very destabilizing force. In light of the calamitous evidence, our needs have changed. The simple assumption that we can anchor the economic system with certainty in the future is a convenience for mathematical modeling. But it is absurd. It led to the creation of bad maps of financial behavior -- and in 2008 our ship slammed into the rocks.
In this, the first of a series of mini-documentaries from the Institute for New Economic Thinking (INET) that will focus on important areas of economic exploration, leading scholars such as Joseph Stiglitz, John Kay, Steve Keen, Stephen Kinsella, Dirk Bezemer, and David Weinstein, and anthropologist and writer Gillian Tett, discuss why economics has failed to capture the real, volatile nature of financial markets.
In this video, these new economic thinkers -- many of whom are INET grantees or prominent members of the INET community -- explain in plain English why the mechanical metaphors of neoclassical economic models are bad maps for the financial system. They recognize the need to create a more integrative and relevant economics that places real human beings and real institutions at its center, not the narrowly defined, misleading, and simplistic abstractions from reality that the profession has clung to in the recent past.
Some assumptions simplify and are helpful and illuminating. Others introduce harmful distortions. We need to move beyond blind faith in the presuppositions of these financial models. It is time to puncture the blind spots and explore the taboos that have together contributed to this false portrait of financial process and regulatory design. The foundations that have been implicitly accepted must now be vigorously challenged in light of the damage they enabled. We need new economic thinking, however unsettling. The most sophisticated and honest scholars know this.
INET is there to give this process support and a nudge. We believe that a renewed economics can help society address the challenges of financial instability, social incoherence, and sustainable resource use. Economics can emerge from this technocratic and mechanical phase to a better place. Economics can grow again and provide better maps. It will take hard work and courage to rebuild. It is the duty and the responsibility of expertise, if it is to play a meaningful role, to help society navigate to a safer, more humane, and more satisfying course than the one we have been on in recent years.
© 2012, The Institute For New Economic Thinking | www.ineteconomics.org
Directed by Four Corners Media | www.fourcornersmedia.net
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The 11 October 2007 peak valuation for the Wilshire was predicted by the patterned behavior of saturation macroeconomics.
During this trading week of 23 April denominated in trading hours, a major crash devaluation has been predicted by the patterned behavior of nonlinear saturation macroeconomics.
The devaluation in 2008 and early 09 was primarily a US leveraged bad debt and default phenomenon. This crash will be primarily a leveraged bad euro debt and default phenomenon.
While the minority economists in the video are qualitatively correct, they have missed the very highly quantitative patterned science of the macroeconomy - equivalent to the patterned self assembly behavior of physics and chemistry.
They have missed the major observational discovery of the 21st century.
This is indeed a fascinating post. As a non-economist, I find it almost too intellectually challenging. So I strive to achieve a much simpler conceptualization of the monster.
I conclude that you might possibly boil it down to this by simple historical references.
In 1928 we had an upwardly spiraling demand for corporate securities. Had he been around, Allan Greenspan might have exclaimed this is “unrealistic euphoria”. This was not specifically encouraged by government action but by government complacency which is almost as bad. Cooler heads might have staved off the coming avalanche of deflation but they failed. Result, 1929 crash. Almost overnight you jump down from super “saturation” to super asset deflation.
In 2007 you had super “saturation” of the real estate market. There was government over subsidization of residential real estate, and the two trillion dollar BUSH tax cuts which over stimulated the commercial real estate markets. Exacerbating this were the BUSH regulator appointees turning a blind eye.
Now 2012. You have a government very panicked by the recent manmade deficit crisis. Gridlock prevents the creation of JOBS programs like bridge, road and school construction/repair and civilian conservation corps type opportunities.
We have perhaps a near majority who believe we can climb out of this crisis by economic starvation, especially of the middle class and by riding on the backs of the most vulnerable of our population. The first group hates ANY economic success if it is not to their political convenience.
You comment on how they've been ignored, while you do the same by ignoring what should be a fundamental, paradigm shifting corpus of work from Benoit Mandelbrot. How can you bemoan the lack of science in the analysis of markets and then ignore the most fundamental scientific exposition on how, and why markets actually behave the way they do?
What exactly is economics? It certainly puts on a good show of mathematical dexterity. If this sort of foundational mistake were made in natural sciences we would still be [fill in the blank]. What is the source that produces and maintains this illusion over such a long period?
1. A manageable amount of debt can improve the quality of life for society. Empirically, when total debt reaches about 400% of GDP, the interest payments bite into growth and the quality of life reverses.
2. Just 6 years ago we had deficits in the $300-400b range, were growing at 3-4% of GDP. Today we are adding to our deficit at about 9% of GDP and growing at 2-3%. That gap can't be sustained much longer.
3. Unless we develop a plan to to reduce the yearly deficit, and begin to execute it, we will wake up one day and find the bond vigilantes in control.
4. Interest rates spike, and the time to solve the problem is compressed.
5. The gap can't be closed without more tax revenues and spending cuts. Everyone will feel some pain for 5-6 years. These changes must be carefully managed so we don't create a recession during this period.
6. If nothing is done, the people who will feel the most pain will be retirees, welfare recipients, government workers. We can prevent this kind of disaster, but there is precious little time to start.
(government_spending = tax + debt)? The answer is NO. The correct equation is
(Federal Deficits = Net Private Savings+ net imports), applies to USA and other nations that create money! Yet the mainstream economists use the household model to explain the economy with wrong predictions and nobody seems to care,with notable exceptions ( http://www.forbes.com/2011/03/18/deficit-cut-danger-budget-jobs-leadership-managing-employment.html )
Govt “debt” which should be renamed "tdeb" because it means the opposite of personal debt, is the sum of all deficits and appears on one side of the equation whereas the private sector “debt” means negative savings. Govt deficit could be renamed "source" because it is exactly that.
Govt “debt” is the same as private savings .In fact
(National total debt of the govt in $) = (National wealth of the people in $), for proof in numbers see
http://pshakkottai.wordpress.com/2012/02/27/national-debt-and-national-wealth-compared/
The only way to grow the economy is by deficit funding which is safe and effective. Also read
http://rodgermmitchell.wordpress.com/2012/01/20/the-art-of-misdirection-how-to-keep-the-99-in-bondage-by-seeming-to-punish-the-1/
But this is a question of balancing the budget. Would you agree that isn't necessarily married to market economics?
The problem is that the money given to the private sector wasn't spent on jobs. It wasn't regulated.
If the US did just create money, why would we have any debt? We wouldn't need loans! But we don't just create money, we sell bonds, ie debt, which the Fed can then buy or sell (along with god knows what other assets these days) to the primary dealers. The Fed creates new money to buy bonds from these 'special' banks (that frontrun the transaction) which the bank then uses to create 10 times as much new circulating money (or 100 times maybe with off-balance sheet accounting) that used to go into loans but now is more likely to be directed to speculative derivatives or plays in commodity markets or to arbitrage interest in foreign debt, creating bubbles wherever the hot-money flows. This doesn't just create new money, this assures the parties with first opportunity to the money get seniorage profits and the most gains - so redistributes wealth up and to the finance sector. The cumulative effect of this process can't be countermanded with the small part of our budget that goes toward social programs.
But if we did just create money this time I would agree we should spend more on productive investment. We could; as you say bond vigilantes aren't after us, and as you evidence, it's generally assumed that's what we do anyway.
http://my.firedoglake.com/pshakkottai/2012/04/20/misunderstood-deficits/
Economics IS a science. Ironically Political Science IS NOT.
It's a combination of the wealthy hijacking the system and just the uninformed perpetuating voodoo economics.
1) first we don't understand the behaviour of the world economy to any worthwhile degree. That's not the problem - the problem is economists think they do.
2) The second is that economics is hopelessly corrupted by partisan politics.
I1) 'm a Systems Engineer and in my final year of study I came to realise that the human mind grasps the behaviour of complex systems very badly.Multiple cause effect relationships and feedback mechanisms leave the mind clinging on desperately and unsuccessfully. And that was before the effect of non-linearities and "Chaos Theory".
In the following years I became friends with a graduate economist who illustrated how very little his discipline understood and the appalling arrogance of how much he believed it did.
Nothing has changed.
2) Australia survived the GST like no other 1st world country. The stimulus package had some merit in this? Well it depends on who you ask. Joseph Stiglitz (Nobel Laureate) called it "a textbook example of Keynesian response to recession" while Nyall Ferguson (Harvard professor) says it had no influence whatsoever.
Do I have to tell which economist has "left wing" views and which "right"?
They can't even agree on what happened yesterday never mind what will happen tomorrow!!!
They call it speculation for a reason!
And we have many! Such as, credit is money... and, money is wealth... ergo, credit is wealth. Which leads us to the illusion that the more cake we eat, the more we can have.
Maybe that's an illusion we need to have in some way because many of us hate to work, and to shop, and to bake... but we REALLY LOVE to eat. (And maybe mommy forgot to tell us how cake comes to be... HINT: it's not borrowed into existence).
I found the post a bit disappointing in that it talks about science but neglects to mention history. History shows us where cake comes from and how humans interact with cake. It shows us recipes for success and recipes for failure (which of course must be re-formulated and re-evaluated as the world continues to change).
When it come to money and finance, I have found a word that many dismiss or ignore, yet this word appears again and again in the history of money and finance as an undisputed anchor to reality and and accountability and as a restraint on the tendency towards illusion. The word id "gold." (Hmm, a true Freudian slip - I think I'll leave it uncorrected.) I have a feeling we'll be hearing more of that word sometime soon.
Does gold attach itself to the dollar, euro, or something new?
" History shows us where cake comes from and how humans interact with cake"
FANNED
P.S.
Is there a way a working class guy can apply for a INET grant ?
Don't worry, it would finance a research. I haven't produced my paper yet, but a probable title would go as follows:
["Mediocrity and social unrest: How humans pick up rather quickly that living in animal stalls albeit with electricity and plumbing is not coherent with present day technical knowledge&capabilities and how, of all things, housing should never be considered or constructed as a fragile CONSUMABLE wood framed cardboard hut (especially when you compress and stack 24 of them in a 650' area) "]
OR, alternatively, if that last one is deemed a little...heavy; I have this other one that should prove a real bestseller ! :
["Peak Oil, Malthus and the Social Contract: or how economic rent is preventing the building of the majestic concrete superstructures that would take the pressure-cooker factor out of a demography challenged planet. "]
PLUS
,... as an added bonus for a limited time only! I can demonstrate mathematically AND empirically (like no other!!) that innovation is finite and will not save our behinds...
So what say you Rob ? What say you ? ;-)
Thank you for this post and for the video link but, unfortunately, it is too little too late. The PROFESSIONAL ACADEMIC ECONOMISTS totally failed every person on Earth and will never be taken seriously ever again. THINKING LAYMEN had to step forward and help people begin to think for themselves. Again, you are far too late.
Absolutely nothing to improve our plight will happen until we have a rational Credit System of Sovereign Interest Free Money for the Government and non-usury interest level bank loans for the citizenry. In short, Lincoln's Greenback Dollar.
Everyone must learn the sordid and tawdry banker history of what happened in 1873. Our present system of interest to bankers on the National Debt to create the money supply is the worst possible system imaginable. We we do not do a total re-think of our credit system this is the end of the United States.
THE SECRET OF OZ - Bill Still
http://www.youtube.com/watch?v=swkq2E8mswI
LIFE INC. - Douglas Rushkoff
http://www.youtube.com/watch?v=sOBWhVe68os
WEB OF DEBT - Ellen Brown (1 of 5)
http://www.youtube.com/watch?v=QU0XiklHPMc
A SHORT HISTORY OF THE "MONEY POWER"
http://www.monetary.org/wp-content/uploads/2011/10/32-page-brochure-sept2011.pdf
I suggest you and your talking head colleagues start looking for work doing something else in life.
OK great, but with big bankers now fighting tooth and nail against Dodd-Frnak, It will be a gargantuan task to get them to tolerate this. They have the poweer and the money.
It's horrible straw man articles like this that consistently mislead the public about the nature of economics. Economics is a complex science and learning happens similarly to learning mathematics. It's funny that you and all the compatriots you have mentioned from INET have all been criticized for misrepresenting economic thought and trying to combine too many fields without any logical anchor.
You are a fool and a brash one at that. Produce an academic paper of value and I might start listening to BS economists like you. I'm not going to hold my breath in anticipation, though.
The problem is implementing policy based on the recommendations of the right economists, not the recommendations themselves.
I prefer policy based on properly measured evidence over policy based on hope.
"- - - -which render the mechanics of number not always helpful, if not meaningless. Get back to the books"
RESONSE: You have a point here. I say LESS MATH AND MORE HISTORY. Just learning the detialed financial HISTORY of the years from 1927 through 1934 can be more instructive than reading a dozen econ books. Those who do not know HISTORY are bound to repeat the same mistakes. And its not all that difficult.
I doubt that Boehner nor McConnell could tell you who was vice president during trhose years or what CCC stood for. I'll bet my wrist watch that Obama could recite those without a telepromter.
http://fora.tv/2011/10/25/Growth_Innovation_and_the_Accelerating_Pace_of_Life
You're welcome.
One constant threat is that of Johnson-Ford type INFLATION. Wonder how they handle that in
Estonia (if that is the way it's spelled) Go gettem Ben Barnake!!