The Economist's View today posted an excellent link to a paper which has caused a good bit of discussion there and rightfully so. The post, entitled "The financial Crisis and the Systemic Failure of Academic Economics" is simply an excerpt from the conclusion of the document includes this ditty:
Paradoxically self-reinforcing feedback effects within the profession may have led to the dominance of a paradigm that has no solid methodological basis and whose empirical performance is, to say the least, modest. Defining away the most prevalent economic problems of modern economies and failing to communicate the limitations and assumptions of its popular models, the economics profession bears some responsibility for the current crisis.
What makes this paper topical is the current financial crisis, but it cannot be said that this is the first time many of the topics and the general concept of classical economics being out of touch with reality has been broached. The Real-World Economics Review has as its origin a discussion and petition in France in 2000 regarding how and what is being taught in economics classes. Another site, with more frequent updates, is Real World Economics.
In brief, real-world economists argue that the equalibrium based, economics of maximized utilization is fundamentally flawed. The thinking stipulates rational behavior and models this mathematically. These models assume a "normal" state of equalibium, which of course cannot be representative in the world we live in, or the people we deal with. Changes are considered "shocks" or "jolts" which after they occur will simply lead to a new equalibrium. Hence, using this type of methodology, most classic economic thinking has been broken down into economic models, which as suggested above provide questionable utilization.
This particular fact leads us to a fundamental question: "If this methodology of studying economics yields such poor guidance, is it an economical use of our time to pursue this methodology?"
The "real world" economists don't yet have a cogent theory of their own as they are still in a bit of a self-exploratory phase, however the trait they do posses is the ability to unflinchingly criticize their own thinking. I'm not convinced we actually will see a theory any time soon as we still grapple with predicting human behavior on a large scale.
While I am not convinced that economists could really have prevented the current crisis, I certainly believe that they could have sounded an alarm that might have caused political figures to look into the housing market and associated financials. However, even Greenspan believed that the system would sort itself out. Furthermore, the Bush administration was quite business friendly, and would have been rather adverse to anything that might have slowed down the housing boom, particularly considering that the housing market was driving what little expansion there was in the economy at that time.
Paradoxically self-reinforcing feedback effects within the profession may have led to the dominance of a paradigm that has no solid methodological basis and whose empirical performance is, to say the least, modest. Defining away the most prevalent economic problems of modern economies and failing to communicate the limitations and assumptions of its popular models, the economics profession bears some responsibility for the current crisis.
What makes this paper topical is the current financial crisis, but it cannot be said that this is the first time many of the topics and the general concept of classical economics being out of touch with reality has been broached. The Real-World Economics Review has as its origin a discussion and petition in France in 2000 regarding how and what is being taught in economics classes. Another site, with more frequent updates, is Real World Economics.
In brief, real-world economists argue that the equalibrium based, economics of maximized utilization is fundamentally flawed. The thinking stipulates rational behavior and models this mathematically. These models assume a "normal" state of equalibium, which of course cannot be representative in the world we live in, or the people we deal with. Changes are considered "shocks" or "jolts" which after they occur will simply lead to a new equalibrium. Hence, using this type of methodology, most classic economic thinking has been broken down into economic models, which as suggested above provide questionable utilization.
This particular fact leads us to a fundamental question: "If this methodology of studying economics yields such poor guidance, is it an economical use of our time to pursue this methodology?"
The "real world" economists don't yet have a cogent theory of their own as they are still in a bit of a self-exploratory phase, however the trait they do posses is the ability to unflinchingly criticize their own thinking. I'm not convinced we actually will see a theory any time soon as we still grapple with predicting human behavior on a large scale.
While I am not convinced that economists could really have prevented the current crisis, I certainly believe that they could have sounded an alarm that might have caused political figures to look into the housing market and associated financials. However, even Greenspan believed that the system would sort itself out. Furthermore, the Bush administration was quite business friendly, and would have been rather adverse to anything that might have slowed down the housing boom, particularly considering that the housing market was driving what little expansion there was in the economy at that time.
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