“AFTER more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don’t know about the economy. Indeed, the area of economics where I have devoted most of my energy and attention — the ups and downs of the business cycle — is where I find myself most often confronting important questions without obvious answers…”

-Greg Mankiw

>

This week’s Sunday NYT Business section has an interesting column from Greg Mankiw: If You Have The Answers, Tell Me.

Well, Professor Mankiw, you asked. Rather than just give you the answers, I want to start by suggesting you are looking in the wrong places. That wrong place, is the field of economics.

Let’s put aside the fundamental error of classical economics — that Humans are rational, self-interested, profit maximizing creatures. They are clearly not; Humans are actually irrational social animals with flawed cognitive apparatus. Frequently emotional, occasionally self-destructive, often times erratic, humans only rarely exhibit the traits that economics ascribe to them. If the study of economics begins with such a shaky foundation, is it any wonder they get so much wrong?

Back to the questions Prof Mankiw asked about: Let’s see if we can’t give you a shove in the right direction (I have to warn you, I doubt you are going to like the answers):

1) How long will it take for the economy’s wounds to heal?

Most economists seem to focus on the post WWII economic cycles. This is the wrong approach. The most recent contraction was quantitatively different than the typical recession/recovery cycles. To get a better grasp as to what to expect, turn to history and statistical analysis instead of economics.

That is essentially what Reinhart & Rogoff did. In their December 19, 2008 paper, they showed historically, “the aftermath of banking crises is associated with profound declines in output and employment.” They had identified this phenomena 3 years ago, while the collapse was still unfolding. Their book, This Time Is Different: Eight Centuries of Financial Folly, expanded their prior paper on credit-crisis recessions.

2) How long will inflation expectations remain anchored?

Like the premature New York Journal obituary for Mark Twain, reports of inflation expectations have been greatly exaggerated. Human beings cannot forecast their own behaviors, let alone act on their expectations for inflation. Indeed, the only time most people even notice inflation is AFTER prices have skyrocketed — not before. The Recency Effect, the tendency to over-emphasize a single data point of what has just occurred rather than focus on long term series or trends –THAT is what drives behavior.

Friedman’s belief that people were engaging in immediate behavior based upon their momentary consideration of long term inflation reveal he hadn’t a clue as to how actual human beings operated in the real world. No wonder he foolishly believed we could get rid of the FDA — who needed Food inspections anyway? And the marketplace will help determine what Drugs will and should sell.

As Prof Mankiw writes, this “theory is now textbook economics, and is at the heart of Federal Reserve policy.” Which perhaps goes a long way in explaining why the Fed gets so much wrong in terms of recognizing inflation on a timely basis.

3) How long will the bond market trust the United States?

This is the most revealing question, because it reveals some biases that Professor Mankiw labors under.

He writes: “A remarkable feature of current financial markets is their willingness to lend to the federal government on favorable terms.” This must be a change of heart for the professor, given his role as Chairman of the Council of Economic Advisors from 2003-05. He never said much — at least publicly — about this “unsustainable fiscal trajectory” when his boss was busy turning a surplus into a “huge budget deficit.”

From the CBO to the GAO, every honest broker who has analyzed the situation has observed that the Bush tax cuts, the war of choice in Iraq, the prescription drug entitlement were the biggest factors pre-2008 in the runaway budget. Add to that the collapse of revenues brought about by the financial crisis, and you have the makings of a awful balance sheet.

Ironically, this is the one question Prof Mankiw asked that COULD be solved by economics. I do not know why he chose to ignore the answer. Perhaps it might be because he did not care for the answer economics gave.

~~~

One last comment: Prof Mankiw noted that “It is easier to attract with certainties than with equivocation.” Do not overlook a key underlying issue: The causal factor here is that the public wants certitude, regardless of how erroneous. Study after study has revealed that a “Frequently wrong, never in doubt” commentator is much preferred by the majority of viewers/readers over an intelligent commentator honestly discussing the unknowable future in terms of what is unknown and unknowable.

Probabilistic nuance versus strongly confident (but wrong)?  The public chooses the latter almost every time.

You can see this not only in the ratings for various shows, but in the public’s investing performance. Its about as good as their favorite pundits are.

Which is to say, not very . . .

>

Source:
If You Have the Answers, Tell Me
N. GREGORY MANKIW
NYT, May 7, 2011
http://www.nytimes.com/2011/05/08/business/economy/08view.html

Category: Economy, Inflation, Psychology, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

46 Responses to “To Find the Answers, Look Beyond Economics . . .”

  1. dss says:

    Kudos for pointing out the clueless conclusions of Friedman that so much of our “free market” mentality is based upon.

    The other crazy meme our economic and regulatory policy was built around was that house prices never go down. Any student of history knows that is not true, and Bernanke being the so-called “Depression” expert knows that was a lie from the very beginning.

    You are right, the economists of the day ignore everything pre-WWII.

  2. Lookout Ranch says:

    A most excellent column, Mr. Ritholz. Very insightful. I’d like to suggest that you adapt these thoughts for an op/ed in a general circulation publication.

  3. faulkner says:

    Excellent on all points, especially Friedman’s (mis)take on human attention.

    A new (Cognitive/Behavioral/Historical) economics is (re)emerging.

    May articles like this help clear the way.

  4. riodogg says:

    I don’t see where you offered an answer to questions 2 and 3.

    ~~~

    BR: As I wrote above:

    “Rather than just give you the answers, I want to start by suggesting you are looking in the wrong places.”

    and

    “Let’s see if we can’t give you a shove in the right direction”

  5. Britonomist says:

    I’m sorry, but what you’re doing is highly highly obnoxious. Saying you shouldn’t be using economics, then citing Reinhart & Rogoff, two economists, is just plain disingenuous. Even worse, saying that “history and statistical analysis” isn’t economics is… ignorant at best, but again deliberately dishonest at worse. Read any economics journal, the majority of papers you’ll see are statistical/econometric analysis. Half of my course, as an economics student, is essentially statistical analysis. There is no way you can spin that into it NOT being economics.

    Furthermore, the reason there aren’t too many studies using data from before WW2 is not because of anything sinister, it’s simply that good quantitative data is very hard to find in periods before this, in fact Reinhart & Rogoff themselves go into detail about this.

    ~~~

    BR:
    1.I said look BEYOND Economics — not completely ignore it

    2. R&R used engaged more in history than traditional Econ –it’s what makes them such good Economists

  6. Francois says:

    “theory is now textbook economics, and is at the heart of Federal Reserve policy.”

    How impressive! I’m in total awe.

    May I remind Dr. Mankiw that erudite and thick “grimoires” (books of magic spells) were available to alchemists and apothecary during the Middle Ages?

    Yet, I’ll take Harrison Principles of Internal Medicine or the Textbook of Pharmacology and Therapeutics over the aforementioned grimoires any day of the year.

  7. DL says:

    “…the public wants certitude…”

    Yeah, unless that “certitude” means higher taxes and lower entitlement spending.

  8. Britonomist says:

    BR: Okay, I guess my only complaint is that you’re using a very narrow definition of economics. I think me, and many other fellow economics students, find disheartening people constantly dismissing the entire subject of economics, when what people are really describing is a specifically monetarist/Chicago style neoclassical concept of economics. Yes, we should probably look beyond that, but not into something which isn’t economics. Anything, to me, which studies the economy is economics. Behavioural economics is economics. Statistical/econometric analysis of economic data is economics (and is probably what the majority of economists do). My macro textbook presented lots of different concepts of the macro economy and inflation expectations, from hard Keynesian to hard monetarist, as well as some heterodox theories. I think I should point out that the original position, which essentially ignored or disregarded the importance of expectations of inflation, was described by the ‘rational expectations’/Chicago school much like how you describe rational expectations now: nothing like “how humans operated in the real world”.

  9. beaufou says:

    It is hard when you are a tool of plutocrats to predict or understand this failing system.
    Markets are not civilizations, they are at societies service, not the other way around.

    “I have a confession to make: There is a lot I don’t know about the economy”
    No mate, there’s a lot you don’t know about being a decent human being, otherwise you could easily see through your layers of hypocrisy.
    Geez guys, why so much poverty all of a sudden, I advocated for tax cuts for billionaires.

  10. kaleberg says:

    I think the answer given to 2 is that inflation expectations really don’t matter. It is inflation that matters, and that is measured after the fact. That’s an example of economists asking the wrong question. It happens to scientists all the time. Think of inflation expectations as the luminiferous aether. Sometimes it takes an Einstein to ask the right question. Sometimes it doesn’t.

    The answer to 3 is that lending to the government is still the safest game in town, and that all that out of control budget nonsense didn’t deter investors back when Bush was destroying the surplus with tax cuts and wild cat spending increases, and it isn’t bothering investors now, nor should it. The money has to go somewhere.

  11. socaljoe says:

    A big part of the problem is that academia tries to apply deterministic models to processes which involve constant evolution, government manipulation, and human emotion.

    Unfortunately, there will always be a demand for deterministic models as they are more useful for selling a political agenda or a financial product.

    Maybe a step in the right direction would be to recognize that economics is more philosophy than science.

  12. dtraxel says:

    Excellent! The kind of intelligent analysis that one always receives from this site.
    And I agree with an earlier writer: respond in one of the bigger media outlets like the Washington Post or the Times.

  13. Ted Kavadas says:

    RE: “Friedman’s belief that people were engaging in immediate behavior based upon their momentary consideration of long term inflation reveal he hadn’t a clue as to how actual human beings operated in the real world. No wonder he foolishly believed we could get rid of the FDA — who needed Food inspections anyway? And the marketplace will help determine what Drugs will and should sell.”

    As an fyi, the complete set of Friedman’s “Free to Choose” television series is available on Google Video. He talks at length about (excessive) government regulation and getting rid of the FDA in Volume 7 – “Who Protects the Consumer?”

    I’ve assembled the links at my blog post here, for those interested:

    http://economicgreenfield.blogspot.com/2011/02/milton-friedman-free-to-choose-videos.html

  14. “Aggregates mean nothing to me, an acting man — an individual.

    Regardless of what the politicized aggregates say, my market basket tells my story — a story of inflation.

    In the past month: gas at my favored station is up 12%, with my desired in-store candy bar up 13%; milk at the convenient corner drugmart is up 16%; and my self-claimed fiscally conservative neighbors voted to raise my property taxes 20%.

    That’s my market basket.

    And I do not need to look at the official numbers to know that I must rearrange my future purchases to align with my evolving reality.

    According to Mises, “A judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell.”

    That’s the truth. And it is as true for us men as well…”"
    http://blog.mises.org/16837/im-an-acting-man-not-an-aggregate/
    ~~~
    Dear Professor Mankiw,

    A little over five years ago, a student of yours emailed you asking if you had read Ludwig von Mises’s Human Action. You responded that, while slightly embarrassed, you had not read Human Action on account of its age — published in 1949, it is well beyond the 20-30 year limit you suggest as relevant literature — and the fact that Mises and the Austrians are considered fringe figures by modern mainstream academia. I thought that these excuses were weak and rather unfitting for an intellectual of your stature. They seem more appropriate to professors who rather employ their time teaching what is already known than to a scholar who has spent his life advancing the subject he teaches. I hope that perhaps I can nudge you toward reconsidering your opinion on picking up Mises’s magnum opus…”
    http://mises.org/daily/5237/Misess-Gift-of-Human-Action
    ~~~
    http://blog.mises.org/?s=Praxeology
    ~~~
    also, re: FDA
    “…A case in point: it turns out that only about half of the new prescription medications pushed onto the market over the last decade had the proper data together for the U.S. Food and Drug Administration – yet the FDA approved them anyhow…”
    http://www.naturalnews.com/032279_Big_Pharma_fraud.html

  15. Tarkus says:

    “He never said much — at least publicly — about this “unsustainable fiscal trajectory” when his boss was busy turning a surplus into a “huge budget deficit.”

    Ironically, this is the one question Prof Mankiw asked that COULD be solved by economics. I do not know why he chose to ignore the answer. Perhaps it might be because he did not care for the answer economics gave.”

    The Upton Sinclair quote is appropriate at this point:
    “It is difficult to get a man to understand something when his job depends on not understanding it.”

    Perhaps is the Prof asked “Why are we allowing failed companies to distort the economy?” he might actually start with a relevant question.

  16. NormanB says:

    First, be careful of what you take from Mankiw when he makes comments because he has an eye on how they will play in a Senate confirmation hearing for the FRB and he wants no controversy. Secondly, if he’s at sea with regards to the business cycle all he has to do is sidle over to the great Paul Krugman who knows absolutely everything. Actually, Mankiw and Krugman will never make you a dime.

  17. ilsm says:

    DL,

    Bond vigilantes want deficits reduced:

    Unless reduced means higher taxes, breaking up medical insurance schemes and fewer overrunning weapons for highly unlikely wars.

  18. Winston Munn says:

    Inflation is defined as a general rise in prices of good and services. That definition is useful as far as it goes, but it offers no means to demonstrate why prices rise.

    Inflation is a verb, not a noun, an affect rather than effect. How distressing the affect is cannot be determined by any intinsic attributes of “the inflation effect” but only by consequences to economic actors of higher prices. Prices only rise due to supply and demand. Even a loose debt supply and/or an expansionary money supply can only affect prices by acting as increased demand, and both are dependent – to have any affect on pricing – on the willigness of economic actors to spend more liberally. Without that willingness to spend, both attempts to stimulate inflation suffer price-rise impotence.

    This is where the Fed theory fails, as willingness to spend cannot be altered by availability of credit or the affects of higher prices unless extremes of either are reached. The past data the Fed relies on for future activity is based on a religiouslike belief that the economic actions that resulted from their prior maninpulations, which occured during normal downtrends, neutral times, or even good enonomic times, will be duplicated during times of extreme financial distress.

    The idea is more faith-based than factual. An ideology, really. Asserting inflation expectations can alter prices is as dualistic a claim as the asserting Uri Geller could bend spoons with his mind. Maybe what the Fed needs is a James Randi rather than a Bent Bernanke.

  19. Francois says:

    “Humans are actually irrational social animals with flawed cognitive apparatus.”

    You don’t say! Alas, it is even worse than Barry think it is. Consider this:

    http://www.wired.com/wiredscience/2011/05/the-sad-reason-we-reason/

    …a fascinating and provocative new theory of reasoning put forth by Hugo Mercier and Dan Sperber. In essence, they argue that human reason has nothing to do with finding the truth, or locating the best alternative. Instead, it’s all about being able to argue with others:

    Reasoning is generally seen as a mean to improve knowledge and make better decisions. Much evidence, however, shows that reasoning often leads to epistemic distortions and poor decisions. This suggests rethinking the function of reasoning. Our hypothesis is that the function of reasoning is argumentative. It is to devise and evaluate arguments intended to persuade.

    In the most recent edition of Edge.org, there’s a great conversation with Mercier, now a post-doc at Penn. Mercier begins by explaining how the argumentative theory of human reason can explain confirmation bias:

    Psychologists have shown that people have a very, very strong, robust confirmation bias. What this means is that when they have an idea, and they start to reason about that idea, they are going to mostly find arguments for their own idea. They’re going to come up with reasons why they’re right, they’re going to come up with justifications for their decisions. They’re not going to challenge themselves.

    And the problem with the confirmation bias is that it leads people to make very bad decisions and to arrive at crazy beliefs. And it’s weird, when you think of it, that humans should be endowed with a confirmation bias. If the goal of reasoning were to help us arrive at better beliefs and make better decisions, then there should be no bias. The confirmation bias should really not exist at all.

    But if you take the point of view of the argumentative theory, having a confirmation bias makes complete sense. When you’re trying to convince someone, you don’t want to find arguments for the other side, you want to find arguments for your side. And that’s what the confirmation bias helps you do.

    The idea here is that the confirmation bias is not a flaw of reasoning, it’s actually a feature. It is something that is built into reasoning; not because reasoning is flawed or because people are stupid, but because actually people are very good at reasoning — but they’re very good at reasoning for arguing. Not only does the argumentative theory explain the bias, it can also give us ideas about how to escape the bad consequences of the confirmation bias.

    Needless to say, this new theory paints a rather bleak portrait of human nature. We like to think of ourselves as rational creatures, blessed with this Promethean gift of being able to decipher the world and uncover all sorts of hidden truths. But Mercier and Sperber argue that reason has little to do with reality, which is why I’m still convinced that those NBA players are streaky when they’re really just lucky. Instead, the function of reasoning is rooted in communication, in the act of trying to persuade other people that what we believe is true. We are social animals all the way down.

    Food for thought aplenty right there!

  20. Jay H says:

    Brilliant article from Barry who almost always gives a thoughtful and balanced view . At the heart of all issues of investing and regulating the investment world are these paragraphs…

    “Let’s put aside the fundamental error of classical economics — that Humans are rational, self-interested, profit maximizing creatures. They are clearly not; Humans are actually irrational social animals with flawed cognitive apparatus. Frequently emotional, occasionally self-destructive, often times erratic, humans only rarely exhibit the traits that economics ascribe to them. If the study of economics begins with such a shaky foundation, is it any wonder they get so much wrong?”

    regarding the flawed Randian ( as in Aryn ) policies of the last 20 years….

    “Friedman’s belief that people were engaging in immediate behavior based upon their momentary consideration of long term inflation reveal he hadn’t a clue as to how actual human beings operated in the real world. No wonder he foolishly believed we could get rid of the FDA — who needed Food inspections anyway? And the marketplace will help determine what Drugs will and should sell.”

    My take. The policy of an individual ( self interest ) and the policy of a nation or group of nations ( collective interest ) are and should be different. One is isolated to the individual the other effects the collective and has an impact beyond the individual person/nation/group.

    This was the flaw in the AIG model. They sold insurance on companies they way the sold life insurance on people. Typically ( except I guess the bubonic plague ) if one insured dies it doesn’t effect the collective. Not so with insuring large financial institutions whose untimely demise effects many of the other players in a negative way.

  21. beaufou says:

    Francois,
    It’s worse for this guy, he probably can’t remember the last time he had a thought he wasn’t getting paid for.

  22. wildebeest says:

    Many of these guys have got it back to front. Rather theory being used to explain empirical observation theories get created devoid of empirical support. Neoclassical, or theoclassical (it appears to be a belief system), economics might have done better had the behavioral sciences existed, or been better developed, at the time of its evolution.

    http://www.amazon.com/Debunking-Economics-Emperor-Social-Sciences/dp/1856499928

  23. Mike C says:

    IMO, the single largest mistake that most economic analysis makes is they seem to completely disregard the impact of credit/debt on the system. This is so bizarre and antithetical to common sense and observation.

    Clearly, credit extension and debt accumulation massively impacts both prices and economic activity. Look at the housing bubble, and look at college tuition prices over the past 20 years compared to overall CPI. The ability to pay for goods and services out of credit rather than current income clearly has huge ramifications for both the overall economy and sub-sectors where credit may be more or less available. I almost think you have to look at 2 economies in terms of what can be purchased from income versus what can be purchased on credit.

    I continue to believe the consumer is on a path of multi-year deleveraging, and most people still don’t factor that into their analysis of overall economic activity, new home purchases, etc.

  24. further, if Mankiw believes Mises’ “Human Action” ‘too old’ (as inane as that could be), maybe he’d do well to checksum his foibles against this, newer, work by Professor Chang..

    http://www.booktv.org/Program/12340/23+Things+They+Dont+Tell+You+About+Capitalism.aspx

    “Chang presents an enlightening précis of modern economic thought—and all the places it’s gone wrong, urging us to act in order to completely rebuild the world economy: ‘This will [make] some readers uncomfortable…[;] it is time to get uncomfortable.’”—Publishers Weekly

    “Myth-busting and nicely-written collection of essays”—Independent (UK)

    “Shaking Economics 101 assumptions to the core … Eminently accessible, with a clearly liberal (or at least anticonservative) bent, but with surprises along the way—for one, the thought that markets need to become less rather than more efficient.”—Kirkus Reviews

    “For anyone who wants to understand capitalism not as economists or politicians have pictured it but as it actually operates, this book will be invaluable.”—John Gray, Observer (UK)

    “A lively, accessible and provocative book.”—Sunday Times (UK)

    “For 40 years, I have worked as a journalist and trained thousands of other journalists from my former perches as a University of Missouri Journalism School professor and as executive director of Investigative Reporters and Editors. I have written newspaper articles, magazine features and entire books with heavy doses of economics policy and business behavior. I wish the book 23 Things They Don’t Tell You About Capitalism had been available when I was a rookie; I would have been more alert to the hands-off-business catechism by which Americans are relentlessly indoctrinated.”—Steven Weinberg, Remapping Debate
    http://www.amazon.com/Things-They-Dont-About-Capitalism/dp/1608191664

    also by Chang..
    http://www.amazon.com/Bad-Samaritans-Secret-History-Capitalism/dp/B001P3OMQY/ref=pd_bxgy_b_text_b

    http://www.thefreedictionary.com/checksum

  25. Madame Sosostris says:

    Great job with the probabilistic nuance! Thank goodness there is still an audience for subtle thinking.

  26. Andy T says:

    Hoffer.

    Good Stuff there.

    Mankiw’s textbooks are MBA 101 stuff in some Universities….I’ve got his textbook on Macroeconomics on my shelf….

    Too bad he never broadened his horizons….

    Though, the same could be said for many different people.

  27. Seaton says:

    I’m still convinced our current economic problems are being conflated with too many simple sociology/psychology problems. Your first words say it all: Let’s put aside the fundamental error of classical economics — that Humans are rational, self-interested, profit maximizing creatures. They are clearly not; Humans are actually irrational social animals with flawed cognitive apparatus.

    Greed is still rampant….’cause it’s sooo well-rewarded!

  28. DiggidyDan says:

    THIS IS SPARTA!

  29. cyaker says:

    More answers for Mankiw and Von Mises

    http://www.moslereconomics.com

    And check out the car as well but if anyone thinks rising gas prices are only a result of our economic policies they need to broaden their reading to include rising demand in China and the volatile situation in the Midle East.

  30. wildebeest says:

    @ Jay H

    “They sold insurance on companies they way the sold life insurance on people. ”

    Actually one of the reasons that all blew up was precisely because it was not treated like life insurance, e.g. you did not have to have an insurable interest in order to take out insurance, i.e. make bets, on a credit default. If this was regulated like insurance then it is doubtful any of this could have happened — certainly not to the extent that it did anyway.

  31. [...] – To find answers, look beyond economics. [...]

  32. bigbases says:

    Uber Barry groupie that I am, I respectfully quibble with the observations that humans are not rational, self interested and profit maximizing creatures. To the contrary, we are all of the above.

    Specifically, we all try to survive and live another day. What could be more rational than that? We seek food, housing, clothing and an overall means of improving our standards of living (see fall of Iron Curtain, rise of China, India and recent turmoil in the Mideast). Again, rational by any measure. At every turn, we humans try to avoid pain, while seeking comfort and well-being: hardly irrational!

    Furthermore, as social animals, we exhibit a fair degree of rationality by congregating with folks of similar persuasion, outlook and taste, while staying away from those with whom we disagree. Not bad plans. In addition, when it comes to maximizing profits, don’t we all seek adequate compensation for goods produced/services rendered? A discerning and enlightened choice. Have any of these ever not been true? Seems to me, “rationality” is in a long term uptrend.

    But wait a minute. Aren’t we “frequently emotional, occasionally self destructive and often times erratic”? Of course: we buy tops, sell bottoms, accumulate egregious amounts of debt, eat way too much of the yummy stuff, and root excessively for the local teams. But with all due respect, aren’t those examples of the “recency effect” — ignoring long term trends, while placing too much emphasis on short term excesses and gyrations?

    Maybe I’m way off base — maybe all you’re talking about are financial decisions and love. If that’s the case, “right on”. But for the large part, humans, while sometimes short-sighted and misguided, appear quite rational in the big picture.

  33. JerseyCynic says:

    ECONOMICS RUINING AMERICA

    http://www.sun-sentinel.com/news/opinion/fl-sgcol-shock-doctrine-goldstein-05020110506,0,1601514.column

    WARNING: Reading Naomi Klein’s “Shock Doctrine: The Rise of Disaster Capitalism” will disturb your sleep and haunt your waking hours. If you’re a real American, it will make you want to scream — and do something to put “the bad guys” in their place. Everyone — especially Milton-Friedman, free-market lovers like Kingsley Guy — should read “Shock.” If enough people do so, it could save the country. If they don’t, our democratic/representative government and capitalism will be permanently replaced by the un-American, corporate-socialist state that has already taken hold — and it will be our own fault.

    For 50 years, laissez-faire economist Friedman and his apostles at the University of Chicago have spread a doctrine based upon “the elimination of the public sphere, total liberation for corporations and skeletal social spending,” according to Klein. Even worse is how they do it: For Friedman and his minions, widespread disasters (natural and man-made) are opportunities to make money. While victims are really or figuratively bleeding, too shocked to realize what’s happening, in cahoots with lapdog governments, they impose “deregulation, privatization, and cutbacks” on economies as the formula for recovery. Promising prosperity for all, they deliver widespread poverty and oppression.

    From Chile in 1973 to Sri Lanka after the 2005 tsunami, Russia after the Soviet Union collapse, South Africa after apartheid — in country after country, Klein “rips away the ‘free-trade’ and globalization ideologies that disguise a conspiracy to privatize war and disaster and grab public property for the rich few,” says Chalmers Johnson.

    Klein will help you see how “shock doctrine” has disfigured the U.S. — from the privatization of public schools in New Orleans after Katrina to corporate takeovers today in Wisconsin, Michigan, Indiana, Florida, across the nation. You’ll understand the aftermath of the recent mortgage crisis as a made-for-free-marketers, financial windfall. Since the 2010 mid-term elections, when tea party/Republicans gained control of governships and legislatures, Friedmanites have been following the same script: using “the shock” of our current economic recession permanently to replace government with for-profit businesses. It explains why Gov. Scott Walker’s budget was really about union-busting and privatization, even after workers made the economic concessions he demanded. The GOP/Paul Ryan “Path to Prosperity,” that kills Medicare, Medicaid, and Social Security, uses “shock doctrine” to remake America as a corporate state.

    Klein speaks truth to power and empowers people with truth. Of course, some people will refuse to read “Shock Doctrine” and even some who do will deny its proofs. Too many people have believed too gullibly in free-market ideology to be convinced they have been ripped off by immoral, greedy schemers. The Wisconsin uprising against Republicans proves “shock doctrine” can fail. But will it be the exception or the rule — and will Americans wake up soon enough from the shock of being shocked?

  34. freemarketeer says:

    Anyone obtuse enough to publish this should not be trusted: http://www.nytimes.com/2010/10/10/business/economy/10view.html

    Any semblance of respect I had for the guy evaporated after reading this drivel.

  35. davver1 says:

    “Let’s put aside the fundamental error of classical economics — that Humans are rational, self-interested, profit maximizing creatures. They are clearly not; Humans are actually irrational social animals with flawed cognitive apparatus. Frequently emotional, occasionally self-destructive, often times erratic, humans only rarely exhibit the traits that economics ascribe to them. If the study of economics begins with such a shaky foundation, is it any wonder they get so much wrong?”

    Alright, I’m getting tired of this tripe. Its the kind of “aha” moment a third grader gets.

    Let’s take a simple example of when I played poker professionally. Often I would encounter people who were in love with “action”. The highs and the lows of making big wagers was a rush. They obviously played too loose, but they found a way to rationalize it. Were these people rationally maximizing profit in a dollars and cents measure, no. But they were certainly maximizing their enjoyment playing the game. They were pursuing their self interest, that self interest merely had an emotional consumption component.

    If you don’t think there are people who get a rush off stock trading the way people got a rush off poker, I got a bridge to sell you. The only difference is people in polite society can admit to it gambling in a casino but can’t admit to it in investing. I didn’t just throw my hands up and go, “this person is irrational and I don’t understand his motivations.” The person was perfectly rational, they just had different goals then I did. So I helped them to satisfy those goals (getting action) in a way that satisfied mine (getting their money).

  36. [...] Ritholz dissected Harvard econ professor Greg Mankiw’s piece from the Sunday NY Times.  I think Barry is [...]

  37. AHodge says:

    beautiful
    nothing like publically aiding someone putting out a fakely humble– not really– request for help
    I’d say anyone saying certainties or equivocation are the only two choices for communication
    is beyond help
    and clearly not a scientist

  38. AHodge says:

    there are also decent economists and economics,
    and you are citing the behaviorist shiller brand
    just not the crackpot Chicago market near perfection types taught in most of your colleges,
    that mankiw now depairs of getting rid of

  39. AHodge says:

    we should give him credit for his confession of confusion and doubt
    as his beliefs rudely bumped into reality
    but this is not something i would pay for or subsidize
    for my kids to learn from

  40. JimInMissoula says:

    Your last comment on the ‘preference for certitude’ was so true. Great response over all.

  41. NeutralObserver says:

    Come on folks! If you don’t think you have confirmation bias, just try to imagine what it would take to change your mind. Hellooo, every human is plagued by confirmation (well, maybe not sociopaths) and it takes effort to get around that.

    And for all of you still thinking humans are completely rational, there are numerous examples where we are not rational even though we only need one to falsify your postulate. Here is one:

    The rules of the Ultimatim Game are simple. Two players have to agree on how to split a sum of money. The proposer makes an offer. If the responder accepts, the deal goes ahead. If the responder rejects, neither player gets anything. In both cases, the game is over. Obviously, rational responders should accept even the smallest positive offer, since the alternative is getting nothing. Proposers, should be able to claim almost the entire sum. However, in a large number of human studies conducted with different incentives in different countries, the majority of proposers offer 40 to 50% of the total sum, and about half of all responders IRRATIONALLY reject offers below 30%. Interestingly, chimpanzes behave similarly. Perhaps chimpanzes know something economists do not. :-)

  42. “3) How long will the bond market trust the United States?”

    This is best addressed by monitoring the USA’s long-term Deficit/GDP ratio. Albeit a crisis is quite probable as a result of current Debt Limit discussion in Congress, when one views the three decade CBO projection it appears 2022 is the transition episode that will incite the next financial event.

    Presently, the vigilantes know the present 9.7% ratio is scheduled to decline to 3.1% by 2014. From there it enters a bumpy plateau but generally rising. With what we know today about Entitlements, the structural deficit becomes unmanageable in 2022 – upon attaining 3.8% – with no prospect of correction.

    If there is good news , it is that at worse the Deficit/GDP ratio does not exceed 4.0% by 2040. Similarly, the Gross Debt/GDP ratio declines from 98% today to 95% over the next three decades. This latter ratio will not be the critical determinant. It is the prospect of never again having a balance Budget that will be seen to be unsettling to stakeholders and policymakers.

    2010-2040 chart: http://trendlines.ca/TrendlinesUSADebtMeter110225.png

  43. davver1 says:

    NeutralObserver,

    That doesn’t say jack shit. The person rejecting the offer gets personal joy out of sticking it to the other guy. And the person who pushes the other guy thinking he can get the other to acquiesce and goes too far gets joy out of stamping their boot in someone else’s face. I mean what is more important to most people, a couple of bucks in some game or the personal satisfaction that comes with giving some a-hole the finger.

    You want to know what the problem with behavioral economics is, it doesn’t have many answers. It tries to make all these statements about how people act on the flimsiest of reasoning and data and then proposes various heavy handed policies to fix “irrational” behavior. Now that’s hubris. At least the other guys are saying that human motivation is complicated and we best leave it up to individuals rather then constructing elaborate models of how we “think” people act.

  44. “…You want to know what the problem with behavioral economics is, it doesn’t have many answers. It tries to make all these statements about how people act on the flimsiest of reasoning and data and then proposes various heavy handed policies to fix “irrational” behavior. Now that’s hubris…”

    davver1,

    No Kidding. In, too, many instances, “Behavioral Economics” is, just, the ‘New, New Beard of the Totalitarians’…

  45. NeutralObserver says:

    Hmmm davver1, your reaction says more about you and your world view than you realize. Are you seriously saying you can’t imagine that people would act irrationally?

    Can you imagine ANY evidence that would change your mind? If so, what would that evidence look like?