Ivory Tower Economics
“I don’t detect any change at all. [Academic economists are] like an ostrich with its head in the sand.”
-James K. Galbraith, Lyndon B. Johnson School of Public Affairs at the University of Texas
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I’ve been meaning to mention this terrific little article that seemed to be misplaced in the NYT Arts section last week: Ivory Tower Unswayed by Crashing Economy.
Excerpt:
“For years economists who have challenged free market theory have been the Rodney Dangerfields of the profession. Often ignored or belittled because they questioned the orthodoxy, they say, they have been shut out of many economics departments and the most prestigious economics journals. They got no respect.
That was before last fall’s crash took the economics establishment by surprise. Since then the former Federal Reserve chairman Alan Greenspan has admitted that he was shocked to discover a flaw in the free market model and has even begun talking about temporarily nationalizing some banks. A Newsweek cover last month declared, “We Are All Socialists Now.” And at the latest annual meeting of the American Economic Association, Janet Yellen, president of the Federal Reserve Bank of San Francisco, said, “The new enthusiasm for fiscal stimulus, and particularly government spending, represents a huge evolution in mainstream thinking.”
Yet prominent economics professors say their academic discipline isn’t shifting nearly as much as some people might think. Free market theory, mathematical models and hostility to government regulation still reign in most economics departments at colleges and universities around the country. True, some new approaches have been explored in recent years, particularly by behavioral economists who argue that human psychology is a crucial element in economic decision making. But the belief that people make rational economic decisions and the market automatically adjusts to respond to them still prevails.
The financial crash happened very quickly while “things in academia change very, very slowly,” said David Card, a leading labor economist at the University of California, Berkeley. During the 1960s, he recalled, nearly all economists believed in what was known as the Phillips curve, which posited that unemployment and inflation were like the two ends of a seesaw: as one went up, the other went down. Then in the 1970s stagflation — high unemployment and high inflation — hit. But it took 10 years before academia let go of the Phillips curve.”
I found the full, well hidden article — to be quite interesting.
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Source:
Ivory Tower Unswayed by Crashing Economy
PATRICIA COHEN
NYT, March 4, 2009
http://www.nytimes.com/2009/03/05/books/05deba.html
March 8th, 2009 at 2:31 pm
Barry,
As a PhD candidate myself (history) I can tell you that this is at least partly a product of the way the American university system works. Influence, tenure, promotion, and the cushy corner office are determined by your ability to find a “new” idea and then sell it to the academic audience. Teaching ability and the actual validity of your argument matter much less than people realize.
We don’t deal in reality for this reason. Our whole careers are wrapped up in one or two ideas, and we have to defend those ideas against all comers. That’s not how it should be imo. I think teaching ability should be #1, because who cares if you have an earth-shattering idea but are such a clod you can’t communicate it to non-specialists? But I’m in the minority on that view.
March 8th, 2009 at 2:40 pm
“Janet Yellen, president of the Federal Reserve Bank of San Francisco, said, “The new enthusiasm for fiscal stimulus, and particularly government spending, represents a huge evolution in mainstream thinking.”….
Uh…just a sec.
Didn’t the Gallup poll before Congress passed the initial Paulson/Bernanke sky-is-falling bailout show that most Americans opposed this?
Maybe I disremembered…
March 8th, 2009 at 2:45 pm
Free Market is just that, a theory.
Math Models: Mathematicians, good ones, have been winning the Nobel Prize for Economics. Now how does the prize committee know they are economists? They believe in their models.
Deregulation: like, who wants to be regulated.
Conclusion: Ponder the implications of these folks finding they have been more than wrong, done right stupid. Generations of supply side brain trained folks coming out of the same cracks in the pavement whose best pitch is the Philip’s Curve. Now that all is lost what are the moves to be made?
1. Save the few at the top. Axiomatic Truth.
2. Bicker about doing anything else. Moral Hazard. Free Market.
Dudley, Friday, what does he offer? Sorry, but a salesman needs a product. When Dudley and Summers do not know what to do to help their friends, watch out below.
March 8th, 2009 at 2:58 pm
James KG, Auerbach, Yellen, et al., and their ilk, won’t be happy until May Day is a National Holiday, here in the NAU.
http://en.wikipedia.org/wiki/May_day
http://www.sourcewatch.org/index.php?title=North_American_Union
March 8th, 2009 at 2:58 pm
Many ivory tower theories are quite neat and cute until the brutal messy reality of human nature intervenes. This sad fact still won’t stop the charlatans in academia and elsewhere from vainly trying to prove their brilliance even while of real world facts contradicts them. Maybe we’re getting close to THE bottom. I’m almost getting too fatigued to even comment on this site these days (still lurk regularly though).
March 8th, 2009 at 3:11 pm
There are two obvious responses to this.
First is to point that within academia, economics is the only department with moderate, let alone “conservative”, viewpoints on anything. So it seems rather silly (and overtly political) to complain that economists are, at worst, two years behind the evidence when Women’s Studies, Political Science, Sociology etc. are still fighting the Bolshevik Revolution … and will be for generations to come.
The second is that Economics really is more science than “social science.” Economics today is highly rigorous and mathematical; the fact that it doesn’t move quickly in response to current events is hardly an indictment. My favorite analogy (courtesy of Stephen Landsburg) is that of the physicist who somehow has never seen an airplane; upon seeing one, he immediately abandons the theory of gravity, since it has just been disproved, right? That would be a terrible physicist, yet the desire seems to be for economists to act exactly this way.
March 8th, 2009 at 3:40 pm
Ray,
Give me a break. The fact is that economics is no more science than sociology, history or political science. All of these fields deal in human behavior, and as such there is absolutely no certainty or truth in their predictions of future developments.
I can devise a mathematical formula that will tell me where two billiard balls will end up if I strike them at a certain angle with a certain amount of force under certain conditions.
I cannot devise a mathematical formula that will tell me what those two billiard balls will be worth now, or in the future. Why?
Because the value of billiard balls is determined by human behavior. If people decide they don’t like playing billiards anymore, then even if there is extreme scarcity the balls are worthless. If people decide that billiard balls are better than gold as an investment, then the balls are worth far more than the materials and labor needed to make them. The sole determinant of everything in economics is human behavior, meaning that economics is a farce.
March 8th, 2009 at 3:42 pm
“But the belief that people make rational economic decisions and the market automatically adjusts to respond to them still prevails.”
The seduction of logic is that a valid argument can be made from a faulty premise.
March 8th, 2009 at 3:42 pm
“Free market theory, mathematical models and hostility to government regulation still reign in most economics departments at colleges and universities around the country.”
Wow, I learn something everyday.
Anyone have any polls of economists/economics professors as whether they are Marxist, Keynesians, Reaganomics, Austrians, etc. ?
March 8th, 2009 at 3:52 pm
Taleb had a very interesting observation about academic economists in the Black Swan. Since they are all tenured, they in effect ‘own’ the conventional knowledge which is unlike any other endeavor. They tend to shun anyone who is an outlier or contradicts the current orthodoxy. Being tenured they really can’t get fired regardless of what they teach, even when proven to be incorrect.
March 8th, 2009 at 3:57 pm
hr,
unless they invent those, the polls you seek, as well, you’ll never see them..
IOW, no way, on G-d’s green Earth, could they even substantiate that assertion..
these people are, truly, dangerous, they will, like more well-known sociopaths, say/do anything to achieve their aims..
franklin411,
you might care to rethink this: “The sole determinant of everything in economics is human behavior, meaning that economics is a farce.”
Economics, known as: the variant that this author is peddling, fits your conclusion that it is a Farce.
Though, luckily for us, there are, still, other variants. Economics, not yet, anyways, is not a monoculture..
March 8th, 2009 at 4:00 pm
Moss,
We’re supposed to police ourselves, and the idea is that if your theory is wrong people will make their careers tearing down yours. However, what happens when the whole field insists on defending a failed theory to the extent that dissenters are effectively defenestrated from the ivory tower? That’s what seems to have happened to economics.
BTW, here’s an interesting obit about a guy who conservative patrons at Stanford attempted to have fired for teaching a radical economic theory. Guess what theory that was?
Keynesianism.
http://news-service.stanford.edu/pr/93/931011Arc3112.html
March 8th, 2009 at 4:09 pm
Student: Uh, Professor, look out the window – it’s raining cats and dogs.
Professor: According to my advanced understanding of the weather – as evident by the many books I’ve authored on the subject – it’s not raining. If it was, I wouldn’t have a round of golf scheduled for an hour from now. Who is grading you in this course – me or your own lying eyes? You’re not smart enough to be in my class.
March 8th, 2009 at 4:15 pm
“…Alan Greenspan has admitted that he was shocked to discover a flaw in the free market model…”
Fed policy, however, has been perfect.
March 8th, 2009 at 4:15 pm
Ah the Phillips Curve – it looked suspicious the first time I saw it in a 1968 macro class (http://www.ritholtz.com/blog/2008/11/models-the-risk-of-ruin/). But it should be pointed out in this context that it was the Free Market Guru Milton Friedman who actually led the charge against the Phillips Curve.
No single theory, Free Market or otherwise, is ever going to capture the complexity and variety of the modern global economy. Rather the trick is to stay in touch with reality and realize that the old term “Political Economics” is is more accurate than “Scientific Economics” and “Psycho-Political Economics” is better yet.
March 8th, 2009 at 4:17 pm
What is the old saying — “Economists were invented to make weather forecasters look good.”
There’s a term I recall from undergraduate psychology, “functional fixedness” ,where humans have a difficult time seeing the significance of contradictory information after coming to accept a particular idea. They will twist every encounter after that into this fixed vision despite growing evidence to the contrary. In the controlled studies I recall it was at times amusing to see how people fought to make all future data fit their mindset. It took a very long time and a large amount of contradictory information for them to finally break free and begin to question their initial concept. Whether conservative or liberal or other, this sort of fixedness is will serve to surpress new legitimate challenges to current theories.
March 8th, 2009 at 4:29 pm
@krice2001: “It took a very long time and a large amount of contradictory information for them to finally break free and begin to question their initial concept. Whether conservative or liberal or other, this sort of fixedness is will serve to surpress new legitimate challenges to current theories.
It will also serve to dramatically lengthen and possibly worsen the crisis we’re in now. The collective affliction of never admitting being wrong is a cancer on this country and makes me concerned about our ability to come together and do/fix big things for the betterment of the country.
March 8th, 2009 at 4:31 pm
If all economics were called behavioral economics…we’d probably have fewer points of contention
March 8th, 2009 at 4:45 pm
Economists serve a useful role in society. They help fill an oversupply of endowed chairs at prestigious universities, they give “street cred” to the usury of bankers, and they are able alchemists for the aristocracy.
March 8th, 2009 at 5:00 pm
krice2001,
I think it actually goes “…to make astrology look good”.
See, that’s funnier because weather forecasters use real science and they’re right much more often than economists whereas astrol….well, you get the idea.
March 8th, 2009 at 5:13 pm
Do you want to get the attention of a person in a university ivory tower? Eliminate tenure. Security breeds a false sense of security which breeds an “I am special and untouchable” attitude which results in irrational thinking which results in the blind leading the blind. Par for the course of human nature. Only a healthy irreverence for the knowledge base of our civilization can produce rational, productive and permanently positive results.
March 8th, 2009 at 6:00 pm
I love it, I love it, I love it.
Here’s hoping that behavorial economics now starts to get it’s day in the sun.
People are emotional beings proned to “highs and lows.” The same can be said of the “crowds,” as they are composed of the same emotional beings. The tendency to swing from being in a good mood to a bad mood is no different for markets or economies. When the “collective mood” is positive, people just tend to buy more “things” and take on more “risk.” Indeed, at the end of that swing, the markets will act “irrational.” And then, when everyone’s “feeling good,” there can only be one way to go….down. For that is the nature of the human experience. For some reason it’s “unnatural” to always feel happy and excited or to always feel depressed and despondent. We put these folks in “special facilities.”
And so it goes…the mood is really negative and everyone is scared.
Sidenote on markets for this week…I currently have no positions on except for a “grains” v. “softs” trade. The SP500 found support at an interesting level on Friday and then snapped back pretty hard into the close. (just short covering or the beginning of something bigger?)
For the Bearish Case, any rally over the next few weeks should have a “choppy/consolidative” type look that should peak into the 716/746 zone. In that zone, we should see a final leg lower that would target 600 ish and would FINISH a major wave pattern. We should then see a Powerful move higher…a real head snapper.
For the Bullish Case, friday just completed a “zig-zag” B wave from 944 to 666 (within the major degree Wave Four) that finished at a fairly exact 1.382*A=B in both price and duration. If this be the case, then we should witness a very strong move higher in short order. It should NOT look “choppy” or “consolidative”…it should really thrust. If this case is correct the market will “slice” through the 716/746 zone like a hot knife through butter. The minimum target would be 792 for .618*A = C. The maximum target…GULP….would be 995 for a 1.618*A=C.
Both these cases have some pretty compelling features to me, so that’s why I’m sidelined for now. It will depend on the way the price action evolves next few days. The bullish case described here gets voided if we take out 664. So from a risk/reward aspect, it actually might make sense to get a little long because the “stop loss” point is pretty close. I like trades where you know you’re wrong very quickly.
Another aspect that shouldn’t be overlooked is the “seasonal” cycle. Nov- May tends to be a great time for the stock market. So, it should be a surprise to see us trading at much lower levels than we were in November. Perhaps there won’t be a seasonal upcycle into spring, as we normally might be see, but it’s definitely something to be aware of.
Why do we get rallies into Spring? (“Sell in May and Go Away”) Maybe we should ask a Behavioral Economist!!!!
March 8th, 2009 at 6:53 pm
Ha! Ha! Ha!
All I can do is laugh at all this theoritical bilge water sloshing around in the hold of this sinking ship. Right now the world is full of theorists, with nobody knowing what to do after the torpedo nobody saw coming has taken the world on its way to the bottom. But as always, the politicians are around arranging the deck chairs.
March 8th, 2009 at 6:56 pm
Andy Tabbo @ 6:00
625 before 995
March 8th, 2009 at 6:58 pm
in a truly free market economy, greed conquers all, sacrificing
everything else like pollution, ethics, and on a macro level may not
be the most efficient or productive.
I am surprised everybody is buying into this free market crap, when it
was just an excuse to get the big boys better tax breaks and looser regulations
March 8th, 2009 at 7:04 pm
@DL. Maybe so…Just throwing out the technical concept that there is a very bullish possibility over the next several weeks….
I also like to think about things this way: “What price action would cause the most harm to the most people?” Markets tend to follow that path….
I would suggest that a 45% rally into a May peak (euphoria and bottom pickers rejoicing), followed by a summer collapse to new lows (Holy Shit! I knew I shouldn’t have bought stocks again!!!! Puke out) might be sufficiently damaging to trading accounts of most people…..That’s not my forecast…just thinking about various ideas….
March 8th, 2009 at 7:49 pm
From Franklin411 (4:00)’s link (from 1993):
“Keynesian economics eventually dominated macroeconomics but began to fall out of favor in the 1970s. Now, Scitovsky said, economists generally recognize that Keynes’ ideas “were sound for that time but don’t work under the modern condition. We now have a much freer system of trade and capital movement with flexible exchange rates.”
Yea! Who needs it?
March 8th, 2009 at 7:50 pm
Given the lack of respect for economists who question free market theory, I wonder how the author of the article would explain Krugman’s nobel. Things must have really changed since I was in school when professors would discuss the viability of the Soviet model without bursting into laughter.
All that devotion to free market orthoxy may have something to do with market economies having provided a few billion people with living standards undreamt of by their forefathers.
March 8th, 2009 at 8:24 pm
AT,
thinking about that some, I like it, I could see that happening. though, to the use the other hand, it’s either that, or more, sustained Selling to new Lower Lows..
something tells there’s, just, too much energy built up for the “Markets” to chop, narrowly, sideways, for all too long(months)..
the i-Rate picture should be interesting, going fwd:, I’m wondering if the 10-30 spread makes a difference @ 2-3, or 4-5.5, one way, or the other..
past that, though, there is much to the old adage: “Markets move to make the most people wrong..”
March 8th, 2009 at 9:14 pm
Che Stadium,
Here’s a link to the press release announcing Krugman’s Nobel for “his analysis of trade patterns and location of economic activity.”
March 8th, 2009 at 9:32 pm
Hoffer.
Agreed. There is a lot of tension built up in this market. Taking a look at the Weekly RSI…you definitely now have some clear RSI divergence. Usually the “third of the Third” down will cause the most oversold reading on RSI, which it did in October. The next waves down should cause bullish RSI divergence, lower prices without setting lower RSI readings. This is clearly happening right now on a very large level. This is one of the signals you would want to have present before putting in a longer term “bottom.” The ADX indicator is approaching some levels that are difficult to maintain on the Daily chart. Short term RSI signals all showing various levels of bullish RSI divergence as well.
So, looking at non-Elliott technicals I can see some bullish “tension” building up….
March 8th, 2009 at 10:02 pm
AT,
that’s cool, that, and the out-of-the-money Puts are looking awfully dear..
that, and after these “Waterfalls”, we’ve, yet, to have any really hard rallies..
as a +, those huge down days, early last week, as PdP was pointing out in his weekend compendium, on nearby thread, might have ‘compressed the Spring’, enough..
and, speaking of Spring, I know that peep, here in the NE, are more than ready for it to bloom..
March 8th, 2009 at 10:11 pm
carping demon Says:
From Franklin411 (4:00)’s link (from 1993):
“Keynesian economics eventually dominated macroeconomics but began to fall out of favor in the 1970s.”
Really?
I thought it was Keynesian economics providing the (so-called economic) underpinnings for the deficits that the US government has been running since before the 1970s, and since!! Keynesianism justifies deficit spending, (priming the pump).
Also, to Mark E Hoffer,
A poll of economics professors could surely be done. Other polls have shown vast majorities (90%?) of journalists vote Democrat. So a poll could be done showing the idealogy that those professors subscribe to.
March 8th, 2009 at 10:59 pm
hr,
yes, of course, the polls could be done, probably have been..
though, sorry if I wasn’t clear, I was trying to convey that ‘polls to substantiate: “Free market theory, mathematical models and hostility to government regulation still reign in most economics departments at colleges and universities around the country.”–would have to be ‘made up’/fabricated, otherwise, they would not/could not be found..
March 8th, 2009 at 11:17 pm
@AT “I would suggest that a 45% rally into a May peak (euphoria and bottom pickers rejoicing), followed by a summer collapse to new lows (Holy Shit! I knew I shouldn’t have bought stocks again!!!! Puke out) might be sufficiently damaging to trading accounts of most people…..That’s not my forecast…just thinking about various ideas….” Glad to see somebody whose comments i hold in high esteem has seen technical indicators that are along the same lines of my theory i posted on this thread the other day http://www.ritholtz.com/blog/2009/03/dow-6500/#comments.
What are your thoughts on the final “bottom” level of the “puke out”? (or are you smarter than to try and pick one, haha)
March 9th, 2009 at 1:51 am
@Dow: Krugman’s chance for the Nobel would not have been helped by his being laughed off of campus.
March 9th, 2009 at 7:29 am
Re Ivory Tower Economists: (some with Nobel Prizes) I hear oil is going to $200 pretty soon. Bet on it. (HA HA HA! Dumbass)
March 9th, 2009 at 8:24 am
@Franklin411:
Many ‘theories’ have been proved wrong yet the proponents are still Noble winners. The problem is that the theories are based on bogus assumptions which are based on bogus models.
March 9th, 2009 at 11:46 am
Perhaps the global economic crisis is presenting us with a 2-fer solution regarding economics.
Budget-tightening is being forced upon all manner of higher ed institutions: 1) Harvard & other super-elite schools are reeling as their bubble-inflated endowments de-leverage; while 2) poorer private schools with piddling endowments join state schools facing brutal reductions in state funding, in scrambling to reduce costs.
All should target their Economic Depts as 1st in line for elimination as a budgetary step.
Why? Well something has to be cut, right?
But more importantly, the field needs to follow a military practice where rampant severe non-performance mandates a lock-down of activity while procedures and (re)training are applied.
America has suffered enough from dysfunctional economic curriculums…and it’s no use continuing to pay good money to spew the same conjectures and political science masquerading as “theory”.
The shutting down of an entire depts and degree-granting programs allows almost all schools to void existing tenure commitments.
The biggest blessing here will be that tenured and non-tenured academic economists will be tossed on the streets to fend for themselves in the “real world” for some years. Imagine how much more sobered up they will be…or the survivors will be…when they’re subsequently recruited to re-write curriculums for the pending re-opening of econ depts in the year 20xx.
This is a win-win situation for America, students, and state budgets.