Recent Items

Economics Debunked: Chapter Two for Sixth Graders

Posted on by

Readers gave high marks to Andrew Dittmer’s summary of a dense but very important paper by Claudio Borio and Piti Disyatat of the BIS and asked if he could produce more of the same.

While Andrew, a recent PhD in mathematics, has assigned himself some truly unpleasant tasks, like reading every bank lobbying document he could get his hands on to see what their defenses of their privileged role amounted to, he has yet to produce any output from these endeavors that are ready for public consumption.

However, I thought readers might enjoy one of Andrew’s older works. He e-mailed me right after I started working on ECONNED. Our conversation went something like this:

Andrew: I am a Ph.D. student in mathematics at Harvard. I have found your blog to be terribly interesting while trying to make sense of the way in which the global economic architecture is evolving, or devolving as the case may be.

I should finish my doctorate in a month, assuming nothing goes terribly wrong. I would be very happy to help you with your book in whatever ways are useful for you. In particular, I would definitely be able to review and comment in a fairly minute and exacting way on chapters of your book.

Me: That is a very kind offer, thanks! What is your dissertation on, BTW? And are you doing theoretical or applied math?

Andrew: Theoretical math

Me: [inwardly] Holy shit, this is one of the smartest people in the country!

It turns out that Andrew did indeed provide detailed commentary on the logic of all the chapters, as well as the thread of the argument across the book after it was drafted (something few editors do). Chapter 2 was the most daunting chapter, in that it is a fundamental critique of economics from a methodological standpoint. Every time I though I had a draft nailed, I’d get extensive feedback from Steve Waldman and Andrew, with the net result that I’d go back and start from close to scratch. This happened eight times and I was clearly losing patience.

Andrew, recognizing that I was starting to lose it (writing an ambitious book in six months was rather deranged, and all the revisions were adding a lot of added pressure) suggested how to restructure the chapter in the form of a lesson guide for sixth graders (as mentioned earlier, Andrew taught six and seventh graders math in the Cambridge public schools on the side). It was useful and also provided some badly needed comic relief.

Those of you who have read ECONNED may recognize the parallels (I adopted his outline in large measure). I am confident readers who have not read the book will still enjoy his rendition.

* * * * * (HISTORY)

Once upon a time, about a hundred years ago, economics was different from how it is today. Many famous people had thought about economics, including Adam Smith, Ricardo, Marx, and others. Economics was not a perfect science, and lots of people who thought about economics disagreed. But in the last century, economists started to agree about two things: economics should become as mathematical as it possibly could, and politicians should listen to economists.

Economics at the time was not a very mathematical science, at least compared to the way it is today. Economists used to write articles with very few equations, or even without any equations at all. When did economists start to use math more? The beginnings might have been toward the end of the 1800′s, with some economists named Jevons, Menger, and Walras. But a person who was particularly important was Paul Samuelson. He comes into the story later.

In the 1920′s and 1930′s, there lived a great economist named John Maynard Keynes who came up with new ideas about economics. Many people thought that they made a lot of sense because they seemed to explain how governments had managed to get their countries out of the Great Depression. Politicians began to listen to economists more and more.

Someone named Lorie Tarshis went to Keynes’ classes, took notes, and made a book out of it. The name of the book was “Elements of Economics.” It was published in 1947. Back then, there were people who thought that communist spies were everywhere. Some of these people, including William F. Buckley, decided that Tarshis’ book was also part of a communist plot, and started saying so very loudly to as many people as they could find. Many colleges became afraid to use “Elements of Economics” as a textbook.

Meanwhile, Paul Samuelson was writing his dissertation, and he saw how angry the people had gotten with Tarshis. He decided to make it so his dissertation could not be attacked in the same way. So he did three things, writing very “carefully and lawyer like.” First, he changed Keynes’ ideas a little bit so that in Samuelson’s version of them, they said that corporations in the capitalist system would always give everybody a job as long as the government and labor unions didn’t bother the corporations. That made corporations happy with him, so that they didn’t think people should call him a communist. Second, he called his ideas “neoclassical synthesis Keynesianism.” That made other economists think that he wasn’t changing their ideas very much, so they were more happy to support him. Third, he wrote all of his arguments up in mathematical form. Now why would he want to write up his ideas as mathematical arguments?

Well, for one thing, a lot of people don’t understand complicated math, so he could automatically win arguments with someone who didn’t understand math. Even the people who went around calling people communists couldn’t call him a communist if they didn’t understand the math he was doing. There was another reason, too. Samuelson could turn problems that economists used to argue about into equations. Then he would solve the equations and the argument would be over. [Lucas quote]

Samuelson’s book was called “Foundations of Economic Analysis.” It was published in 1947, and it became a big success. Nobody told Samuelson that he was a communist. Other economists started to use mathematical models more.

Later on, in the 1950′s, two economists named Arrow and Debreu made a simplified mathematical model of the economy, and proved that in their model, there would never be a time when people wanted to buy something and nobody would sell it to them. Economists thought that this was very exciting. Now they used math even more.

Nowadays, most papers on economics have equations in them. All economists have to be able to talk about their ideas using mathematical models and statistics, or other economists won’t respect them. This is part of what is called being able to “think like an economist.” It is a special ability that you can only learn by going to graduate school in economics. A professor named David Colander surveyed economics graduate students to find out which of seven factors were most important in order for them to succeed in graduate school. The top three factors all had to do with being good at math. The least important factor was having “a thorough knowledge of the economy.”

So learning how to “think like an economist” is very important, because if you don’t do it, then no matter how well you understand the actual economy, economists still won’t take your arguments seriously.

Have these changes made economics a better science, or a worse science?


Samuelson, by using mathematics, was able to win arguments and make sure people liked him, especially the more important people. Other economists followed his example. How did Samuelson use mathematics to become successful? The first thing he did, if you remember, was that he made sure that his economics would say that corporations would make sure people had jobs, and so corporations were good. So his first technique was to make sure that his economics said things that people would like. But that doesn’t seem to make sense. Isn’t the point of mathematics that in math, things are either right or wrong?

Actually, the way that things work in math is that first, you make ASSUMPTIONS, and then you figure out from the assumptions whether things are right or wrong. So the way that you use a mathematical argument to say things that people will like is that you change the assumptions until they make it so the answers are answers that people like.

[At this point the kids become angry. "That's stupid, " they say. "It sounds like they're going in circles." The responsible teacher at this point tries to avoid being too political with his or her young audience, and tries to make vague excuses for the economists. However, the teacher can't help recognizing that the students sort of have a point.]

Even though economists were supposed to be using mathematics so that they wouldn’t have to argue any more, it doesn’t seem to help much if they can still get any answer they want by just changing their assumptions around. For example, [insert McCloskey quote about the A'/C'-theorem].

That means one way to figure out whether mainstream economics makes sense is to see what the assumptions are, and to try to decide whether those assumptions make sense. For example, what were Samuelson’s assumptions? What were Arrow and Debreu’s assumptions?

Samuelson had one big assumption, that economists call ergodicity.

[Teacher pauses to give kids time to stumble over the word.]

When they say ergodicity, they mean that no matter what happens in the world, in the end, everything will reach a point whether things stop changing. That point is called the “equilibrium.” At the equilibrium, everyone will end up with a certain amount of money. The amount of money that everybody gets at the equilibrium depends on how talented they are, and not on anything that happened before. So if you rob a bank, it won’t matter because when you get to the equilibrium, if you’re stupid, you will still have the same amount of money you would have had if you didn’t rob the bank.

[A kid with disciplinary issues mutters, "This is bullshit. Why do we have to learn this?" Other kids ignore him and try to take notes.]

What’s more, at the equilibrium point, everyone will have a job, everyone will have lots of stuff, and no one will feel like there is any way that America could be a better country.

[Eyes glaze over.]

Actually, what’s kind of funny is that in physics, if there are three stars or planets and gravity pulls them around, what do you think happens? They end up going into orbits around each other. But their orbits will be different if they start out in different places. So it would be kind of weird if an economy with millions of people doing all sorts of complicated things always ended up in the same way, if three planets can end up in all sorts of different ways depending on where they start moving from. But who knows? Maybe the economists are right about ergodicity.

It’s actually even weirder than that. Because in physics, Poincaré figured out one hundred years ago that even if you know where the planets start out, if you’re wrong about how far apart two planets are by even an inch, then as time goes on, the orbits that you think the planets will go on will start to get more and more wrong, until there comes a point when the orbits you thought the planets were going to settle on are totally different from the way that the planets are actually traveling. So it’s really hard to predict what will happen even to three planets, if you try to look far enough into the future. But who knows? Maybe economists are right about ergodicity, and in an economy if you measure things carefully enough and are clever enough, you can figure out exactly what will happen to the economy for the next one hundred years.

Then there were Arrow and Debreu, who proved that in their model people who wanted to buy something would always be able to find someone who would sell it to them. They had assumptions, too. They assumed ergodicity, like Samuelson, but they also assumed other things. They assumed that everybody in the world knows everything about everything that is being sold all over the world. Also that you know the odds of whether it will rain on a Tuesday in a thousand years. This is called “perfect information.”

Some people who don’t think like economists have made fun of economists for making unrealistic assumptions like these. Those people seem to think that if economics is based on assumptions like these, that maybe aren’t true, then economics must not be a useful science. But these people don’t know that in 1953, Milton Friedman destroyed all of their arguments with a magical “get-out-of-reality-free card.” When you play this card, it makes it so you’re not allowed to make fun of economists for basing their theories on assumptions that aren’t true.

Friedman said that if you could use a theory to describe the world correctly, it didn’t matter if your assumptions weren’t true. Actually, it was even better if they weren’t true, because that would mean that your theory was very, very clever!

That means to decide if standard economics makes sense, we need to see whether it says things that are true, and we shouldn’t pay attention to whether or not the assumptions are true. For example, economists say it’s bad to pay the people with the worst jobs more money

[Kids snap out of their stupor. "What?" a kid asks, dazed.]

because if you do, then the people who give the poor people jobs will fire some of them. A couple of economists named Card and Krueger tried to test the theory and they announced that the theory was wrong, and you could pay poor people more money and have it be a good thing. Other economists saw that if Card and Krueger were right, then standard economics had to be wrong, and they went into shock. They were sure that Card and Krueger had to be wrong somehow.

[One kid asks, "But wait. I thought that Friedman said that the assumptions of the theory weren't important, just whether it was true in real life. If it wasn't true in real life, then it was a bad theory, right?" Teacher tells the kid to wait, there isn't much time left in class and there are a lot of other things left to discuss.]

Some of them tested what happened when you gave poor people more money and said that no, the theory was right after all. Other ones tested it too and said that Card and Krueger were right and the other economists were wrong. So even though Friedman’s magic get-out-of-reality-free card sounds like a cool thing, it’s actually really hard for economists to use it in real life.

But even though the card might not really work, mostly people don’t argue with economists and so they still use their theories and “think like economists.” “Thinking like economists” is kind of like looking at the world with 3-D glasses. When you’re watching a 3-D movie, it makes it so that you see really neat things. When you’re not watching a 3-D movie, then everything looks red and blue and kind of weird. But economists still like wearing their 3-D glasses.

When economists look at the world through their 3-D glasses, they see it as having “ergodicity.” Remember what that means? It means that if you just leave corporations alone and help them to do what they want faster, the world will, all by itself, become a happy place. You don’t need to stop them from doing anything they want to do, or try to make them wear seatbelts. Just help them to drive as fast as possible. It also means that economists can figure out what the economy is going to do, and you can trust them.

For example, economists have invented computer programs called “DSGE models” that they use to predict the future. Because of ergodicity, the DSGE models say that nothing bad will happen to the economy unless something crazy happens, like the people in the Middle East not wanting to sell us any more oil or Martians attacking the earth.

Another example is that some of the big banks invented really complicated things that were sort of like money, but sort of not like money. Those things are called “derivatives.” The big banks liked the derivatives because they were sure they could make a lot of real money from them. Some other people who weren’t economists thought that derivatives might be dangerous. Those people thought that if things in the economy went faster, they might also break more easily. But because of ergodicity, economists were sure that since derivatives helped corporations do things that they want to do faster, the derivatives would be good. So the economists made it so nobody paid attention to the people who said derivatives were dangerous, and the big banks got to make all of the derivatives they wanted to.

Later, the derivatives helped to make trouble in the economy. That’s why some of your parents lost their jobs. The big banks who made all the money from the derivatives had trouble too and were almost destroyed, but the government gave them more money so that nothing bad would happen to them. Meanwhile, the government won’t let people find out what it did with the money it gave to the banks. It says that the details need to be kept secret by a group of bankers and economists called the Federal Reserve. The people on the Federal Reserve think like economists and so it’s okay for them to know the secret.


There have been some people who don’t like the economics that starts with assumptions and then tries to do math with the assumptions. [you could cite Blaug here] Some of these people have tried to make other kinds of economics.

Some people tried to make a kind of economics that is called “systems dynamics.” In this economics, you pretend like the economy is a really big machine, and sometimes parts of it can go crazy or break. Some people liked this kind of economics, including some of the people who said that derivatives were dangerous. But economists mostly don’t like this kind of economics, so they don’t use it.

One day, some economists noticed that if you’re playing cards, if you peek at someone else’s hand, then you’ll probably win more than someone who doesn’t peek. That’s because you know your cards and their cards and they only know their own cards. The economists who noticed this called it “asymmetric information.” Since economists before that assumed “perfect information,” so everybody playing cards knows everybody else’s cards, they were amazed at how smart these economists were and gave them Nobel Prizes.

Another day, some economists noticed that sometimes people are stupid and do things that waste money. They made a theory about this called “behavioral economics.” Since economists before that assumed “perfect information,” [and rational expectations] or in other words, people know everything that is happening everywhere in the world and always do whatever makes the most money, they were amazed at how smart these economists were and gave them Nobel Prizes.

There were also some economists who noticed that if you give another kid your lunch and tell him to hold it for you until lunch, he might eat your chocolate bar and then tell you that someone stole it. Their theory is called the “principal/agent dilemma.” This theory also seemed very new and exciting to other economists.

When people started making fun of economics because economists hadn’t realized that there was going to be an economic crisis, some economists like Eichengreen and Rodrik told those people that they were wrong and economists could have been able to know that there was going to be a crisis. Eichengreen and Rodrik said that the only problem was that economists hadn’t used the new theories like asymmetric information, behavioral economics, and principal/agent theory, but economists would remember and use them next time.

But since all of the new theories are different from the old economics, what usually happens is that economists use only one of them at a time. If they got rid of the old economics completely, then other economists who like the old economics would be angry at them or not pay attention to them. So they use the old economics and then add on a little bit of the new economics and hope that it works. An economist named Peter Dorman said that if the old economics is like a big giant, then each thing that is wrong about the old economics is like a wound that blood is pouring out of. Each new kind of economics is like a band-aid that economists try to put on one of the wounds, but they can’t put band-aids on all of the wounds at the same time. So the giant lumbers forward, blood spurts out of him all over the place, and nothing changes. Gruesome, huh?

Some economists have tried to use a lot less theories and mostly just figure out what is actually going on in the world. This kind of economics is called “empirical research.” For example, when Card and Krueger tried to figure out what would happen if you paid more money to people with crappy jobs, that was empirical research.

But when they did it, a whole lot of people got angry with them and disagreed. So it can end up being pretty hard to tell what is going on in the world.

There are a few reasons why this is true. For one thing, the way economists usually try to find out what is going on is by looking at some numbers or graphs and trying to find a pattern. But the numbers might not be right. And what happens if someone wants to study something and they can’t find any numbers to study it with? For example, some economics students decided they wanted to find out if the trouble with the economy had to do with making it so companies that try to get people to buy houses didn’t have to follow as many rules. But those companies wouldn’t give them any of the numbers they needed to find out if their idea was right. So the economics students gave up. They didn’t have to give up – they could have talked to people who bought houses and interviewed them and things like that. But it would have been more work and other economists might have thought that they were weird to use interviews instead of numbers. So instead they gave up.

This is kind of like the story about a drunk guy who loses his keys and walks over to the street light and looks under it. Somebody asks him why he’s looking under the light when he probably lost them some other place. He says that it’s dark in the other places so it’s hard to look there. Do you see the connection with the economics students who wanted to study houses? They couldn’t find the numbers that made it easy to look at their problem, so they stopped looking.

[In fact, the connection between the joke and the problems with the mortgage lender deregulation research is the one idea here that is abstract enough that it would be tricky to explain to sixth graders.]

Another problem is that if you look at enough graphs, you’ll eventually find one with a pattern just by chance. This is bad, because it might not be a real pattern. It might just be an accident. If you take a fake pattern and make people think that it’s a real pattern, that’s called “overfitting the data.” It’s kind of like cheating.

If you don’t want to cheat and overfit, there are some ways to make it more likely that you’re finding a real pattern and not a fake pattern. If you find a pattern one year, you can look at another year, or another place, and see if there is the same pattern. This is called “cross-validation.”

Even though it’s a good idea to do cross-validation, a lot of economists don’t do it. A couple of people named Gerber and Malhotra did detective work on economics papers, and they found out that lots of economists were probably overfitting. They couldn’t tell who was doing it, just that a lot of people were doing it. If you’re an economist, you want to have a good job, and to get a good job, it helps to find patterns and write papers describing the patterns to other people. So some economists maybe wanted to get a better job and so they overfitted so they could find more patterns.


Economics seems to be in a lot of trouble right now. The old economics has problems, and the new kinds of economics have problems too. Some economists have even given up studying the economy and now study things like speed-dating and violence in movies.

A guy named Thomas Kuhn said that when people make a science, they keep using it as long as they can. Sometimes they can tell the science isn’t working very well. This is called the “late-paradigm” stage. It sort of means that the old science has become sick. Even then, people will only stop using the old science when someone invents a new better science AND when all of the professors who liked the old science get old and die.

It looks like economics is in a “late-paradigm” stage. But people don’t have a new better economics, so people still keep using the old economics. What are some things that should happen?

(1) Economists should be honest about when they don’t know what will happen in the future so that people don’t rely on them in ways that they shouldn’t.
(2) Economists should admit that in economies some people want some things to happen and other people want other things to happen. They should be honest about what kind of world they want to live in, and not pretend like they know how to find a world in which everybody will be overjoyed.
(3) Economists should work less at trying to find reasons not to listen to people, and try harder to learn about the economy, even from theories that they don’t like, methods like interviews that don’t involve numbers, and from the ideas of people who are not economists.

Print Friendly


    1. Yves Smith Post author

      Would love to have, but did you notice how the endnotes (many of which contain useful explanation and some of which are also funny, are in microtype? My publisher insisted the book come in at under 400 pages. I was in desperate need of 10 more pages, for a longer Afterword and some more stuff in Chapter 9 (on Magnetar).

      It would have been nice not having the endnotes be rendered close to useless.

      1. ambrit

        That’s why I bought a magnifying glass on a stand. Lot’s of people are doing it. When’s the Second Edition coming out?

      2. Foppe

        Ah, I suppose that is a legitimate point, though it didn’t really bother me — used to small footnotes from my other reading. Anyway, too bad they didn’t allow you to put some stuff back in at the end (seeing how it finally turned out to have 362 pages).

  1. LucyLulu

    Priceless. That was hilarious. Thanks for the laugh, Yves. If Andrew gets bored with economics and math, he can always become a writer.

    1. KFritz

      Didn’t see Roubini in the article. As I understand it, he’s actually made at least one accurate prediction. Why single him out instead of, say, Uncle Allen?

    2. Benedict@Large

      Nouriel can’t excommunicate Yves any more. He said the “Marx” word a week or so back, and now everyone claims they don’t know anyone named Nouriel.

      1. Miles Kendig


        I’m just poking fun at the concept of “purity of essence” advanced by Nouriel most recently in his avocation of the proposition that one must be properly credentialed in the theology of modern economic thought to participate in the debate. Of course Nouriel is hardly alone in taking this position. It does appear he is on the receiving end for failing to support the consensus expressed by the white censors of economic debate. Timely and germane to the general thrust of the topics covered in this article.

  2. dearieme

    This chap certainly understands how applied maths works, namely “So the way that you use a mathematical argument to say things that people will like is that you change the assumptions until they make it so the answers are answers that people like.” And he uses Poincaré’s work as an example: good stuff. Plus he’s cynical about the Economics trade: I call that three out of three.

    Whether his own view of Economics is worth anything is a different matter, and I’m not the fellow to judge that.

  3. Fíréan

    Too much use of the word “terribly”.

    No reference to the economies of war ?

    Do the ecomonists mathemathical equations, or the present day accepted theories, allow for shadow banking and “black markets” ?

    Thank You for an entertaining read, much enjoyed.

    1. DanJS

      I believe there was a reference to “shadow banking” and “black markets.” That is when something of value was entrusted to a “thug” who, when asked to account for the missing “candy,” replied “Somebody (else) stole it! ..Or maybe the proper reference was to the “cheating poker players”?

      Shame on us for trusting scoundrel banksters, Wall-Streeters selling “snake oil” and rascal politicians whose votes are based on the “donated grease” of their “co-conspirators in crime.”

  4. Skippy

    “A guy named Thomas Kuhn said that when people make a science, they keep using it as long as they can. Sometimes they can tell the science isn’t working very well. This is called the “late-paradigm” stage.”

    Skippy…I call it the “Over Extended Jacuzzi Stage” where pleasure and pain become one…and death can ensue (how much self medication was applied thingy). You just have to shake your self out of the heat + induced stupor and hit the cool pool. Thanks for the chortle!

  5. Sean Fernyhough

    There is an accusation made against non-mainstream economists that they are no good at maths. Of course this was never the case: Sraffa and Goodwin being two examples (I accept Sraffa worked with a mathematician in writing Commodities). Steve Keen in his latest lectures (published on Youtube) shows that mainstream economists’ maths wasn’t too great, for instance in compiling the maths to bolster profit maximisation @ the point MC=MR.

    How I wish I was studying economics now and not 30 years ago when in the lecture theatre it was what we were seeing outside of the lecture theatre shouldn’t be happening.

    1. rotter

      “the mainstreams economist’s math’s”

      thuffering thuccotash thats a mouthful! are the internets doing this to the languages?

  6. Kathleen4


    Please send this mathematical paper on ergodicity and by assumption:) financial markets to Andrew:

    I think it might be of great interest to Andrew as Von Neumann was using an incomplete version(before this paper)for financial markets. I believe it could be resourceful for resource allocation to some extent as well.

    Thanks! Cheers!

  7. attempter

    Starting out with empirical research (or just simple observation); what a concept. It’s obvious why no corporate economist ever wanted to do that.

    For example, nothing’s been better proven empirically than that trickle-down (in this case, “corporations would make sure people had jobs, and so corporations were good”) doesn’t work and is a Big Lie. Nothing’s better proven than that people who do actual work would be better off in every way if extractive elites no longer existed.

    Yet to this day, and even in ostensibly dissenting places like Naked Capitalism, most people still implicitly believe in trickle down. “The problem isn’t economic elitism itself. There’s simply got to be a way to get those elites to trickle the wealth down, and then we’ll all be better off than without them!”

    And thus we’re still afflicted with every kind of economic and political reformism. As the piece says, only band-aids and duct tape are being proposed for merely malfunctioning parts of an otherwise sound machine. Down in hell Samuelson’s still chuckling.

    1. Toby

      “The problem isn’t economic elitism itself. There’s simply got to be a way to get those elites to trickle the wealth down, and then we’ll all be better off than without them!”

      This is precisely the failure of imagination David Graeber repeatedly mentions in “Debt”. Our culture can see only CAPITALISM or DISASTER. ‘There Is No Alternative.’ Right now we are choosing DISASTER by default.

      It is this bizarre mind-lock which so amazes me every time I come to NC. Every single axiom and paradigmatic notion that supports capitalism is shot to pieces by various writers, and yet the only conceivable way forward is some fine-tuned, user-friendly-at-last version of capitalism.

      1. attempter

        By coincidence, just this morning I got to p. 169 where Graeber discusses how the slave may be so wrenched out of his prior human context that the only way he can conceive things is through the slaver’s concepts, and he can express only through the master’s words.

        Meanwhile, as we see all the time, the very language of true democracy is taken to be alien and unintelligible. We see how reformists experience the ideas of lack of hierarchy, lack of coercion, and lack of Leadership to be literally inconceivable, even though these have been by far the most common practices of humanity’s natural history.

        1. Toby

          Graeber’s definition of a slave being a person ripped from the network that made him or her what he or she was, is probably the insight (one of many) I found most instructive. Combine this observation of slavery with Lewis Mumford’s that we are all Slaves to the Machine, the very Machine we fooled ourselves was ‘designed’ to serve us and provide us with oodles of leisure time, we have no reason to be puzzled by the mind-lock that so amazes me (and others). And yet despite myself I continue to be amazed. A sign of the times I guess. ;-)

          1. Foppe

            Thinking in terms of relational networks is one of the things most contemporary sociology (and social science more generally) seems incapable of doing.. A good, more formal introduction to this way of conceiving of collectives (“society”) can be found in Latour’s Reassembling the Social.

          2. David

            Toby’s comment calls to mind Adam Curtis’s excellent and most recent film series All Watched Over by Machines of Loving Grace (2011).

            About the film at Wikipedia:

            In the following I’ve omitted links to copies with annoying Spanish or Russian subtitles.

            Part One: Love and Power
            (part one chopped up into 5 pieces)

            Part Two: The Use and Abuse of Vegetational Concepts
            full length part two:

            Part Three: The Monkey in the Machine and the Machine in the Monkey
            (All the web version of part three i’ve come across were removed due to “copyright violations.” So the only way I saw it was via torrent download.
            Some sources:

          3. Toby

            Hi David,

            actually, I couldn’t watch that film to the end because of how it so completely misrepresented systems theory, which is about far from equilibrium instability, perpetual change, bifurcation, and other such juicy concepts. The systems theory I have acquainted myself with paints a picture of a universe in constant flux, in which change is the only constant, unpredictability rules, and the vitality of chaos and the richness of life are ever present. The other thing that grated on me was its assertion that self-organization is impossible, that anarchy is chaos, and its ongoing implication that authoritarian rule is the only thing that works. In his “All Watched Over…” Curtis seems to have forgotten his far more interesting and telling work “The Century of the Self”, which tells the very opposite story, namely of the dangers of elitism.

          4. Toby

            Hi Foppe,

            agreed. We have inherited a way of thinking too steeped in and informed by the idea of the sovereign individual, that each of us is a discrete and potent agent capable on our own of fully-formed inventions, earned success and deserved failure. Closer to the truth is a richer, fully interdependent and inter-networked reality of mind-numbing complexity in which Human Mastery of Nature is but an ego-fantasy doomed to burst. In fact it is bursting right now. This is perceived as DISASTER only because capitalism is the model that best expresses and gives free reign to the idea of the sovereign individual we have been in love with for so long.

            Of course, I’m saying nothing new; Goethe was pointing this stuff out hundreds of years ago:

            “We are surrounded and embraced by her [nature]—incapable of stepping out of her, incapable of penetrating deeper into her.”

            And yet embracing a socioeconomics that concerns itself with interdependence, cooperation, carrying capacity, etc., is proving a very tall order.

  8. craazyman

    I am willing to turn all my thinking over to Mr. Dittmer as a sub-contractor.

    It will fee me up to channel more and lay around in a lazy fog. Or maybe just sail to the Azores and say F*ck it! while Mr. Dittmer does the heavy lifting. And I’ll probably become a lot smarter too.

    Maybe if enough of us band together, we can get a good price. What’s not to like? :)

  9. René

    Economists provide a protection wall for the elite. It is a mutual conspiracy. The economists support the status quo and hide the exploitation and abuse. In return the elites make the economists world famous and endow them with Nobel prizes and other rewards.

    1. Fraud Guy

      You can only expect so much…even the Cartoon History of the Universe couldn’t fit all of history in its pages.

  10. Dan G

    Even the science of science changes over time from Newton to Einstein to the micro universe of Zweig and Gell-Mann. Hypothesis are relevative to time and space. No one knows all the interactions affecting an outcome for sure. Whether it be an economy contracting or a universe expanding, complexity of interaction renders any truth fleeting, except “things change”. Capturing small truths in time/space stand still is all we can hope for. We always need to question. For instance,What I wonder about lately is: How was an HFT machine able to place a trade faster than the speed of light;>)

    1. John M

      Different units. Speed of light has dimensions distance/time. Trade frequency has dimensions trade/time or 1/time. (Depends on whether one considers a trade a dimensionless quantity.)

  11. Barbyrah

    Dear Mr. Dittmer,

    As one with a background in education myself:

    1. Well done,
    2. Well done, and
    3. Well done.

    Highlights: your incredible way with honesty, your remarkable way with cutting through the obfuscation, and your delightful way of putting it all out there in plain view using terminology even a non-economist can “get.” (Oh, and your delicious sense of humor, too!)

    Simply: outstanding.

  12. Lefty

    Honest question for anyone reading this blog. I am a, I guess you could say, “non-orthodox” economist, wanting to go to graduate school to study ecological economics. I do NOT want to study neoclassical economics, I have a bias towards reality. I am into economists like Robin Hahnel, Herman Daly, Karl William Kapp (I would suggest his book “The Social Costs of Private Enterprise” to people reading this. Amazing book for its time, written in the late 40′s), Steve Keen, Frederick Soddy, Piero Sraffa, Joan Robinson and Kalecki (amongst others). I don’t think that economics is useless as some here say it is, but “economics” (ie neoclassical) is. Its assumptions aren’t based in reality and its policies are horrible in practice.

    Does anyone have a suggestion (and I don’t mean witty put downs, real advice) as to where to apply to study ecological economics or maybe just economics? Does anyone have advices as to where to study non-neoclassical economics? I know that UMKC has great teachers like Michael Hudson and William Black, I don’t know if I’d be able to get in. Maybe, maybe not. Anyone know of any, I guess you could say “progressive” and forward thinking economics departments, especially those that focus on cross discipline study?

    Much appreciated. This was a great article by the way. Thanks for the post.

      1. John M

        Look very carefully into them. That’s part of the Transcendental Meditation cult, the people who gave us crap about mental powers and the “lagrangian of the unified field.”

        My own suggestion? Find a practitioner of ecological economics such as Brian Czech(?) and ask him for decent schools. Maybe go to places like MIT or Caltech where there is some chance of interaction between the economics department and other scientific fields.

    1. solo

      In answer to your Where To Study Economics: Any first-rate university library. As to UMKC: If you have a pulse, you will be admitted. UMKC is a downtown branch of a mediocre state university (home site: Columbia, MO), in a dump of a city (Kansas City); a place where iconoclasts like Hudson can set up shop. (They are ostracized from the mainstream.)

    2. Calgacus

      Lefty: Does anyone have a suggestion .. as to where to apply to study ecological economics or maybe just economics? Does anyone have advices as to where to study non-neoclassical economics? Anyone know of any, I guess you could say “progressive” and forward thinking economics departments, especially those that focus on cross discipline study?

      Check out the data at Heterodox Economics Newsletter . In particular Rankings of Ph.D.-Granting Institutions in Heterodox Economics. For example, in addition to UMKC, U Mass Amherst is another big fish in the tiny pond of non-astrological economics.

  13. El Snarko

    MMMMMMMMMMM TASTY !! I shall make copies for at least 12 people!

    I trust that you realize you have a co-author for a book on financial economics? Perhaps the Neo-Political Economics for a flat and Slightly Depressed Age???

    1. Jim Elliot

      If something works “sometimes” does that make it the best choice? Hey if the “space shuttle” worked sometimes – wouild you get on it?

      Math is not the problem, it’s the choice of constants and variables. Then there’s a question of why someone would do math at all when they knew that the assumed constants and variables were “pre-selected”, or “wrong”. I can empathize with folks who do this, but it’s still dishonest.

  14. Dan Duncan

    A Phd…from Harvard…in theoretical math…who teaches grade school in Cambridge on the side. Talk about unassailable!

    [Let me guess: Before getting into theoretical math, you were janitor at the college, and you caught the attention of a Field Medal winning professor after solving an "impossible" problem that was posted on a hallway chalk board.]

    But here’s the thing:

    After Taleb, it is now fashionable to scoff at the application of math in economics from Samuelson, Mertons and Black, etc., etc

    Where these criticisms fail, however, is that some of the models did, in fact, work.

    Take the now, much-maligned Black-Scholes: Sure it’s “easy” to mock the BSM after the LTCM blow-up. But the fact of the matter is if you used it in the early years after 1973, it was damn effective.

    The tone of this Dittmer post, however, suggests that people like Samuelson were running around engaging in mathematical sophistry ala Auerbach, Wray, Mosler, Yves Smith, etc. with regards to the legitimacy of MMT. One might even be tempted to think that math has no place in economics.

    It terribly oversimplifies the state of affairs.

    Ask Ed Thorpe if he thinks these models are nothing but a lie.

    Math is traditionally looked upon as an “eternal truth”. By extension, models which rely on the eternal truth of math, are abused and distorted as being more timeless than they really are. Throw in “The Establishment” and its vested interest in promoting these models after too much wear and tear (entropy) and you get Modern Economics.

    But the problem isn’t with the use of math models, per se…Rather, it’s with the degradation of math models.

    The Math Establishment needs to step up and explain why certain models–based on the eternal truths of math–start out with a tremendous amount of energy that predictably dissipates over time.

    Robert Pirsig covered this quite well: The time span of a scientific truth is an inverse function of the intensity of scientific effort.

    Match that statement up with the fact that the intensity of scientific effort is a direct function of the money involved…

    And you get entropic models with a fleeting half-life.

    If a Truth isn’t timeless, was it really true?

    Which reminds me of the great Springsteen line:

    Is a dream a lie if it don’t come true
    Or is it something worse that sends me
    Down to the river…

    1. Foppe

      And, how, pray tell, do you intend to convince the economics profession that they should take reality more seriously? By begging them nicely?
      Anyway, the other problem you’re ignoring is that economists (and economic ‘theory’) are taken far too seriously by policymakers, as well as the lay public. And since it is quite impossible to convince economists to become more humble, it seems to me that the only way to reduce their status is by reducing their stature publicly — i.e., through attempts such as the one above. They are free to try to prove they have something meaningful to say, but let’s at least start out with the assumption that they don’t. It’ll encourage them to try harder.

    2. Lefty

      What really is true?! Great, now we’re in a sophomore philosophy class. If you assume perfect competition and there isn’t perfect competition in reality, if any, then you aren’t basing your theory in reality. Same with perfect information, same with assuming that externalities aren’t dominant, same with assuming away differences in wealth and power and their impacts on the real economy, same with assuming that all relevant information is “encoded” in prices when that clearly isn’t the case, same with the basic assumptions that underlie things like comparative advantage.

      If I assume that people have perfect information and they clearly don’t and never will, what good is my damn theory?

      Its like you and I are cosmologists and we’re trying to figure out how the solar system formed. So one day I come to you and I’m really excited. I tell you that I have figured it out, only you have to allow me a few assumptions: There isn’t one sun, there are three. The Earth is twice as far from the sun, there are three planets the size of Jupiter and there are 25 not 8 planets. If you can allow me those assumptions I can explain how the solar system was formed. Who would take that seriously? Would people use that as a foundation to build upon? Why in the hell would they?

      I am not impressed myself with most of the nonsense I have to study now. It might have wonderful math but the assumptions have no footing in reality. I might as well be studying how the solar system formed under the assumptions I mentioned. That is about how useful most of this garbage is for the real world.

      1. Just a thought...

        This is the problem with the current system of education, poor folks lefty to think for themselves.

        Some ‘simplifying’ assumptions work for some situations, particularly shorter analytical horizons, while others do not. Your absurd argument is not a simplifying assumption, it’s a sound bite.

        1. John M

          He’s correct in stating that “perfect information” and “perfect rationality” are completely off the planet of reality, nothing resembling a simplifying assumption. Paul Krugman in “Conscience of a Liberal” showed a case where relaxing even a tiny bit the assumption of perfect rationality complete wiped out the conclusion of perfect rationality.

          His case? A perfect rational person in response to increased government spending would slow down and put aside a few cents preparing for the later tax increase to pay it off. (Assume this is true…) Weaken the assumption to an almost perfect rational person, and he saves nothing.

          1. John M

            My conclusion from Krugman’s example is that if we take perfect rationality as the central point, and expand in a series about that central point (away from perfect rationality), the radius of convergence of that series is zero.

        2. Lefty

          LOL! Not going to work. Plenty of well trained economists, some of whom I named in another post, have said exactly what I said. I would imagine they have had far more of an impact on the profession and the real world than you or most of the current neoclassical teachers. What people like you do is dismiss an argument out of hand, without offering any counter logic, and you want people’s biases to take over. They don’t actually need a logical argument they just need someone like you, who doesn’t feel like using their brain, to call me names and to dismiss my argument out of hand. Certainly YOU showed what brilliant logic a practitioner of the faith like yourself can call upon!

          Who, for example, won the Cambridge Capital controversy? Did it have ANY impact on theory? Of course not, too many vested interests and economics professors would have been harmed. You’re probably one of them.

          People like you have ruined a perfectly good field of study. I have no problems with thought experiments. They just belong in the classroom or the local coffee house. I have no problem with people debating a set of policies in some alternate universe at academic seminars. Economics however shouldn’t be that, and it is. Economics is supposed to inform policy, to help with real world problems. So the assumptions of a theory don’t have to 100% line up with reality but they better come pretty close. If they don’t they have ZERO to add to the world we live in. You neoclassical, brain dead economists have no problem pointing this out with philosophies you disagree with.

          Steve Keen showed how the definition of “rationality” according to neoclassical economics is not possible. Perfectly competitive markets, where firms are price takers and have little to no influence on prices, barely exist. Most markets are dominated by oligopolies. “Perfect information” is not possible in reality. All information is NOT encoded in prices. Many ideas in free market environmental economics, like the Coase Theorem, have unrealistic assumptions. There ARE high transaction costs, people DON’T have perfect information, one on one negotiations are rare and wouldn’t fit the definition of a market transaction any damn way.

          Again, you didn’t really argue anything, nor could you. You just called me names. I’d bet you wasted a good portion of your life studying that nonsense. The truth hurts.

          If a theory assumes perfect information and people don’t have anything near perfect information, when is it relevant in reality? Don’t attack me, just answer the question. If we assume perfectly competitive markets and markets aren’t anything near that, how relevant is the theory? Again, explain. If we assume all information is in prices and all information isn’t will resources be allocated efficiently?

          1. bertram

            The purpose of those unrealistic assumptions, it seems to me are to say “let’s neglect the problem of lack of information for example” and try to isolate the impact of some other variable.

            It only becomes a problem when people continue to neglect the importance of lack of perfect information after the impact of the variable was isolated.

        3. Justicia

          Simplifying assumtions — like the neo-classical delusion that the economy is a closed system independent of the bio-physical world. That real things are created from nothing more than capital, labor and technology — who needs the material world. Everything is perfectly substitutable and absolute scarcity never exists.

          You mean those simply ridiculous assumptions that make economics a faith-based delusion?

    3. Jim Elliot

      If something works “sometimes” does that make it the best choice? Hey if the “space shuttle” worked sometimes – wouild you get on it? Better yet, would you let your kids get on it?

      Math is not the problem, it’s the choice of constants and variables. Then there’s a question of why someone would do math at all when they knew that the assumed constants and variables were “pre-selected”, or “wrong”. I can empathize with folks who do this, but it’s still dishonest.

  15. Mathy McMath

    Mathematicians look at the way math is misused by economists for evil and pretty much vomit.

    Economists don’t really understand the math they are using, and often misapply it. But the crux of the matter is that their assumptions don’t even make internal sense.

    If I had perfect information, I’d play the stock market for a day and then retire. But for some reason, they assume that being rational means that I should spend my whole life earning more money than I could possibly spend because more is always better.

    1. Just a thought...

      “If I had perfect information, I’d play the stock market for a day and then retire.”

      You seem to be unfamiliar with the Logic McLogic behind Perfect Information. Perfect information does not mean you have all available information at your disposal while others do not. That would Asymmetric Information.

      Under the assumption of perfect information, the equilibrium stock price would be consistent with all known information at the time and there would be no way to play the market for a day and retire. Unless you plan to retire on the amount of money you started with less transaction fees. In which case, you’re better off not playing the market and just retiring.

      Of course if you’re talking about being prescient, that’s a different ‘theory’ proposed by the friends of Dionne Warwick.

      Disclaimer: I do not support theories based on perfect information.

      1. bertram

        It’s good that you don’t endorse it because it’s an assumption from Cloud Cuckoo Land.

        It’s scary that policy makers rely on this McLogic to guide their decisions. I’d prefer it, I think, if they used ouja boards.

      2. Justicia

        Just can’t resist the old joke about two Chicago economists walking down the street. One spots a $20 bill on the sidewalk and say, “look a $20 bill lying on the ground.” To which his colleague replies, “Impossible. Some one would have seen it and pocketed it.”

  16. Valissa

    Very enjoyable morning read! Thanks!

    Especially appreciated the points about the lack of resepct for empirical research and the connection with Kuhn’s work on paradigm change in science.

    A guy named Thomas Kuhn said that when people make a science, they keep using it as long as they can. Sometimes they can tell the science isn’t working very well. This is called the “late-paradigm” stage. It sort of means that the old science has become sick. Even then, people will only stop using the old science when someone invents a new better science AND when all of the professors who liked the old science get old and die.

    Simply hilarious. Now Yves needs a cartoonist who can satirize economics using Wily Coyote and the Roadrunner ;)

    1. Fíréan

      With regards to the economics of Wile E. Coyote and his pursuite of the Roadrunner ; if he could afford all those gadgets and explosives used in his endeavour, why didn’t he just buy dinner ?

  17. Jane Doe

    Does economics follow the scientific method? Does it rely on testing theories to see if they lead to repeatable results through experimentation?

    Economics isn’t a science. Mathematical models are not the same as scientific inquiry, which requires experimentation that can show repeatable results. Just like logic is not the same as empiricism, math is not the same as empiricism.

    Economists do not repeat results to test whether an argument that they are advancing is correct or not:

    So what is economics?

    Its a philosophy.

    Philosophy is concerned with logic, which again is not empiricism.

    The problem is that economics is applied as if it is a science (Pretending monetary policy is the same as Watson and Crick discovering DNA).

  18. Sauron

    Lack of respect for empirical reality. Check. Complex, subtle, obsfuscatory models. Check. Its purpose is to rationalize the views of those in power. Check.

    These are all the things I hated when I studied medieval Scholastic metaphysics.

    *Aide whispers in ear*
    Response: “What! The topic was economics! Why wasn’t I informed?”

    They need the mathematics, otherwise even the 6th graders will call “bullshit”, much like the Scholastics need complex metaphysics so they didn’t sound stupid when saying stupid things about the Holy Trinity and Transubstantation.

  19. Larry Nordell

    Andrew mischaracterizes Debreu and Arrow, who were always very clear about the assumptions needed in their competitive equilibrium models. I studied under Debreu for several years and he never made claims for general applicability of his model, and you will not find any in his book. The model was always bound by assumptions of perfect information, no barriers to entrance or exit from markets, perfectly competitive markets, etc,and Pareto optimality is always conditioned by the starting distribution of wealth. I believe Ken Arrow was similarly careful.

    1. Hugh

      Aren’t you admitting that they knew their models had no applicability to the real world and as such weren’t anything more than mental masturbation? That’s a hell of a thing to base a career on.

      1. craazyman

        In my model, I’m on a sailboat in the Azores with 3 naked women and a few cases of beer.

        But it’s not reality, or even equilibrium.

        At least I know that. haha hahaha ahgagagagag

  20. vachon

    Indeed, I did read Econned and loaned it out to a few people at OMB. I loved the way you, with hilarious exasperation, explained to a 6th grader (ahem, like me) the chapter on economic theory. Brilliantly done!

    Any place I can get more of the same, I will read with good humor and appreciation. Thank you for all you do.

  21. Maju

    A very nice article thanks. I’ve “always” though that economics is rather a religion than a science, sadly enough.

    I’d suggest two approaches:

    1) Use Chaos maths (because of the hyper-sensibility to the initial conditions and the complexity of the reality in which to operate: only Chaos maths can work in that).

    2) Begin from an ecological materialist approach, as if money and markets would not exist: what is “production” (transformation for our convenience), what is value (demand, human convenience), etc. Do not automatically measure stuff in money, try to measure in objective terms like energy flows.

    As you say well, if the paradigm is broken and is like a giant bleeding to death (and breaking everything in this china shop), trying to mend it is pointless: we need to reinvent the whole science as such science and not mere adulation withing a corrupt co-opt system.

  22. Susan the other

    I loved it. Not just because exposing the truth is good comic relief. I actually learned a few things and became less confused and more relaxed. Seriously. Dittmer is excellent therapy. And yes, I stumbled over to the Google Q and typed in ergodicity and found I did not understand the definition. But I guess its pretty safe to assume that economists don’t either. Cool.

      1. craazyman

        It’s the principle that a smashed pumpkin will reassemble itself to its previous equilibrium state on the vine, as long as the goverment keeps away from it and if you wait long enough.

  23. dirtbagger

    All of the social and psuedo sciences have incorported math to gain scientific respectability. This would be okay if these same sciences would also accept the feedback loop as part of their disclipline to review the validity of the premises used to construct those theories.

    It took a crash of our economy for Greenspan to admit that perhaps the collective result of allowing our financial industry gurus to pursue self-interest was not a good thing. This realization is so self eveident and pathetic that it hardly bears comment.

  24. Joe Rebholz

    “… They [economists] should be honest about what kind of world they want to live in, and not pretend like they know how to find a world in which everybody will be overjoyed.”

    We, not just economists, need to be honest about what kind of world we want to live in. We need to design and evolve to a system that would allow more and more individual humans to develop themselves as far as they want to go. So I would like the goals of this system to be something like: supply the human necessities to every human — healthy food, water, clothing, housing, health care, as much education as anyone wants. And this to be done in an environmentally preserving and sustainable weay. The system should have such goals. The present system seems to have the goal to allow individuals to become arbitrarily rich no matter the consequences to other individuals or our physical world. We need some good goals first that almost everyone could agree upon, then change our present system, step by step, carefully, to a system with these or similar goals. This could be a nonviolent revolution.

    The old economics paradigm that assumes the system just exists, is given, and the job of economists is to “discover” the system, and possibly describe it mathematically, and as as a kind of after thought show that it is good for everybody, — this paradigm has got to be thrown out. Goals first, system second.

  25. Joseph Ward

    Economics is simply the study of human choices amongst our state of scarce resources. It is a field that attempts to take a scientific approach to what is essentially philosophy and logic, but the human element is paramount.

    The mathematical elements within economics, are only as relevant as they support the logical and real world applications. Thus, the use of equilibriums and such is only as useful as it is descriptive. If it is not descriptive, then it is useless irregardless of whatever proofs the theorem may have.

    This essay takes an overly negative (and patronizing) view on economics because the subject is so broad that it is almost beyond criticism. The study of human choices would infer the broadest range of approaches. If not by the present means… then by what? Whatever that answer is becomes economics.

    Your final three points are all very good ideas and should be adopted more widely than they already are.

  26. Jim Elliot

    What a great piece. I love thinking that makes sense.

    I’m really glad to get some acknowledgment around “derivative” being (a kind of) money. A huge issue (I think I understand) is that “securitization” of mortgages and creation of “derivatives” really was a way for the folks involved to “print money” and they did. A lot of it – and it did what economists would expect and created a “real estate bubble”.

    I guess a lot of people had fun on the way up. Now we have to clean up after the party, pay for the repairs, and apparently we have decided to pay the salaries and expenses of the folks who put on the “rave” and the folks they hired because in addition to creating a huge mess and wrecking the house, they also ended up creating liens against the property.
    A glaring omission(s) in economic thinking (I think) is that the world we live in is not the world that existed when economic theories were developed.
    It’s also like economists are ignoring huge interacting areas of the economy that clearly are having effects in the US and Globally: Hugely increased populations, increased interdependency, diminishing and limited resources (fresh water, fisheries, easy oil, metals, farmland, sinks for garbage/waste), Aging population, Huge imbalances in wealth.
    Deregulate, Adjust interest and taxes a bit, let folks fend for themselves, the market will take care of itself, isn’t going to create a better life for most of us.
    I don’t know what I would choose to do, but it’s clear economists really should be thinking more like 6th graders.

  27. Andrea

    Economics is not a science.

    Or if one likes, it is a social science filled with empty theorizing and little data – it is not a hard Science. No hypothesis can be tested. Economics is a partial – very partial – description of some elements of a complex system that few will take on.

    Worse, it has taken on the mission of serving the elites and the top dogs by justifying ‘the way things are” with crap, or crack-pot theorizing about everything under the sun, shoring up whatever order is current with slogans and weird ideology, not to mention incomprehensible math, usually invented on the spot and of high meaninglessness aka supreme nonsense (borrowing from precise Science to gain respectability) to bedevil and obfuscate. It is garbage. Economists are the servants of the elite. Krugman, Nobelized no less, comes to mind. Anyway.

    There is nothing wrong, in Science, to go stripping situations or events of details that are deemed insignificant, or not variables that affect the central or main processes. Some of these details might in the end turn out to be crucial – mistakes were made – that is the way it goes. Then, theories or paradigms may be reviewed and adjust. (A very standard epistemology – nuff said.)

    Ppl try to make models of what is going on, churn out hypotheses, test them, etc. But not in economics.

    Economics is propaganda dressed up as pseudo-science. In that sense, different strands of economics appear to support different societal models, of the -ism type. Economic hacks support that or that model because they are paid to do so, or find some other gratification in it. In the US, in China, in the old USSR, in the Ottoman Empire, and so on.

    They are spokesmen, underground politicians, supporting, or encouraging, maybe collaborating in imposing, some model of what the regulation of economic exchange of ppl should be – ideally or on the ground – so they propose actions (usually trivial), but on the whole spout guff to keep ppl in line, adhering to the Zeitgeist.

    Because of its uncertain grounding and fake credentials it is condemned to agree (with the PTB or that and that powerful figure) or disagree (amongst themselves) thus creating a lot of absolutely useless and extremely tiresome schisms, arguments, controversies, quarrels.

    Now, it is the case that a proper economics would be so complex a “Science” the mind would boggle. Very difficult. Not amenable to little descriptive recipes in columns labelled “supply and demand” and so on.

    The elephants in the room Economics has to ignore are so numerous it is hard to begin a list.

    Nevertheless, *Power relations* – always present in any economic exchange, if only thru publicity and created desirability – that is rather indirect – stand out.

  28. Hugh

    The purpose of modern economics is not to describe the real world but to provide a rationale for elite control of the economy and its looting by them.

  29. Francis from Brussels

    I fully agree that the Borio/Disyatat BIS paper which I read a few weeks ago thanks to the Vox EU post is an excellent piece of work and I am delighted that it is discussed in this blog which I read on a daily basis and I consider as my favorite one even on the other side of the pond here in Brussels. More recently I read an oustanding post on ‘Macroeconomic Resilience’ blog on distorsionary and distributional macro effects of mainstream Central Bank policy which I believe is an excellent complement to the Borio/Distayit analysis: ‘Bagehot’s Rule, Central Bank Incentives and Macroeconomic Resiliencede Macroeconomic Resilience,

    Greetings from Brussels

  30. Jonus

    I’m not a Math Head. It just doesnt excite me. Math is a tool that can help describe things in a very narrow context. Attempts by math heads to take over many disciplines in science are crippling. When I studied Psychology 25 years ago there was no math requirement. Now my daughter is told she must take advanced calculus to get into the Psych program.

    Computer Science programs are taught in the Math Departments at universities. I’ve been programming for 25 years. I fail to see the relationship. Oh you gonna tell me that you need to be good in math to write software? LOL go ahead make my day. That’s complete nonsense. Logic YES, Math NO.

    Stop trying to use math to define the human world. It just wont work. Economics has far more to do with human psychology than with pie-R-Squared.

    1. LucyLulu

      If you are writing sophisticated animated graphics or simulation software, which is an innovating edge in the industry right now, you most certainly DO need to know math to write software. And not just high school algebra.

      1. Jonus

        Right, and if you’re developing accounting software you need to know some accounting. And if you’re developing some biotech software you need to know some biology. If you’re writing some complex robotic forex trading software, gotta know forex. So what’s your point? Ive clearly made mine and supported it. By the way i’ve done all those types of development. If I come across the intense graphic project I will learn the math I need to get it done. But I doubt I will need to learn much since most compilers come with the libraries and routines I would need. Math. Its just a tool.

  31. Aquifer

    The Emperor’s New Clothes as applied to economics.

    Too bad kids don’t read “fairy tales” any more…
    Pinnochio (the original, not the Disney version) is another good read as well – where the little wooden head buries his school book money under the “money tree” on the advice of the fox and the wolf so that it will magically grow …

    1. Aquifer

      oops, it was the fox and the cat who were his financial advisers – tch,tch,tch – rather like confusing a hedge hog with a hedge fund, both can be mangy, but they are 2 different animals …..

  32. allcoppedout

    I can remember a very long article in Harvard Law Review 20 years back saying the legal-commercial paradigm (Lahatosian this time) was decadent. Lacked the wit here, but Kuhn’s work is very shaky. We have research programmes rather than paradigms (later called disciplinary matricies by Kuhn)and the core has to stand up to all evidence with an allowable periphery. What economics has lost as a core value is belief in democratic control of money.

  33. Timothy Gawne


    As with previous comment, it’s like the fable of the emperor’s new clothes.

    The Emperor was walking down the street stark naked, but everyone refused to notice because all the important people said that he was really wearing very fine clothes. A little girl spoke out “Look, that man has no clothes!”. And the emperor had the little girl and her family executed for impudence, and the important people lived happily ever after. The end.

    1. Aquifer

      Hmmm, somehow i remember a slightly different version – where the crowd tried to hush the kid up, but the kid persisted and gradually more and more of the crowd began to murmur “the kid is right” until the emperor was aroused from his Svengali induced trance – booted out the fakers (who had been spinning the thread for his invisible clothes), put some real duds back on, and returned the kingdom to some semblance of “normality”, or maybe they just booted the king out ….
      But i suppose there are different versions – depending on your assumptions, of course …..

  34. solo

    Andrew’s sixth graders are to be pitied; his account is full of factual errors. Example #1#: Says Andrew, “But in the last century, economists started to agree about two things: economics should become as mathematical as it possibly could, and politicians should listen to economists.” The last clause is false; note that Keynes is subsequently mentioned as the exemplar marking the time frame for the claimed hearkening of politicians. In fact, politicians had long before listened to economists on certain issues, most notably in the case of Great Britain’s Banking and Currency Acts of 1844 et seq., inspired by David Ricardo’s doctrine on money, descended from David Hume et al. (Source: Karl Marx, “Capital,” vol. III, ch. 34. Ex. #2: Andrew falsely conveys Samuelson with the claim, “First, he [Samuelson] changed Keynes’ ideas a little bit so that in Samuelson’s version of them, they said that corporations in the capitalist system would always give everybody a job as long as the government and labor unions didn’t bother the corporations.” The following, from p. 624 of the 16th ed. of “Economics,” by Samuelson and Nordhaus, is directly contrary to Andrew: “. . . Keynes brought a veritable revolution to macroeconomics . . . . Keynes and his followers emphasized that, because wages and prices are inflexible, there is no economic mechanism that will quickly restore full employment and ensure that the economy produces at full capacity. A nation could remain in its low-output, high-misery condition for a long time because there is no self-correcting mechanism or invisible hand to guide the economy back to full employment.” The political point of Keynes (and of Samuelson) was to open the way to governmental rescue of capitalism from contradictions that, after the 1930′s, could no longer be denied or blamed on the victims. Thus did economics open its Reformist franchise.

    Andrew’s broader point–academic economics is apologetic vis-a-vis the capitalist system that sponsors the academy–was made in a concise and historically grounded manner long ago when Karl Marx concluded that post-Ricardian bourgeois economics was “vulgar economy,” a rationalization of the capitalist system in the face of its manifest failures. (A google of “vulgar economy Karl Marx” can verify this claim, but better is Marx, “Capital,” v. 1, Afterword to the Second german Edition.)

    Anticipating the abuse that this post will glean: Just because you like the author’s conclusions is no grounds whatsoever for buying into the soundness of his scholarship. It is as if the postmodern advocate and his fans have been blessed with the same scholarly, particularly historical, amnesia that especially characterizes the ruling ideology in what Gore Vidal characterized as the United States of Amnesia. The point of economics as an humanistic discipline ought to be Know Thyself; this includes the details and history of the premises alleged in public discourse. And the best knowing, despite its failings and distortions in class society, is scientific knowing.

    1. Andrew

      As Yves indicated in her post, I wrote this essay originally in order to summarize the second chapter of her book “E-conned” in its currently drafted form. Writing it was partly an effort to make sure that I understood what she was trying to say in that chapter.

      Some of the “errors” you refer to may be disagreements between you and Yves. On Samuelson, I suggest you read Yves’ more detailed description in the second chapter of E-conned and see whether or not you find her discussion persuasive. I think it is obvious that economists play a more prominent role in the public discourse now than they did in the nineteenth century. On the other hand, it is a little bizarre to assume from my little summary that I personally believe that economists never intervened publicly before Keynes (not just in the 19th century — consider the Physiocrats in France, or Locke’s arguments on how the Bank of England should be constituted).

      Finally, maybe you thought your opening line (“his sixth graders are to be pitied”) was cutting. I worked, for an aide’s salary, full time, helping a group of urban kids to learn math. This was while trying to earn a PhD at the same time. I still keep in touch with several of the families of those kids – some are doing well, others have various problems. I spent hours and hours worrying about what I could do to help those kids. Maybe I could have done more. In any case, no one who worked with me would say that I was at fault because the math I taught them was “full of errors.”

      1. LucyLulu

        I have extensive experience as a student, as well as three years teaching, so I feel highly qualified to judge your teaching (or lack thereof) abilities. It was obvious from the article above alone. I’m quite sure you were very popular with your students, they looked forward to your class, and you left a lasting impression. It takes creativity like yours to get through. You have a gift, just as you have a gift for writing.

        I’m not qualified to comment on the accuracy of any economic statements (they were funny as hell though) but the teaching comments were off base. And even if you HAD taken liberties, this is sixth grade, not a graduate course on “Historical Perspectives on Financial Instability” (or some such). The important thing is you were engaging the kids in learning, and thinking about how money and the economy works. Thinking has become a highly under-rated skill.

        Unfortunately you suffer from the same affliction as many of us, including myself. That is the ability to brush off an entire page of complimentary comments and to zero in on the one that is critical. :) You can be my teacher any day and I hope you keep writing. Loved the piece, was crying I was laughing so hard…… seriously.

    2. Yves Smith Post author

      Your remark is laced with ad hominem and inaccurate.

      First, Ch. 2 is well substantiated and all the criticisms I cite re the methodologies used in economics (particularly the way mathematics is abused) are from economists, including Nobel prize winners.

      Second, your attacks aren’t even right. Andrew said “in the last century.” That is correct, the embrace of greater mathematicization came in the first decade after WWII. I suggest you acquaint yourself with a calendar. And I also have the goods on how Samuelson distorted Keynes, that section of the book is documented in detail (with the requisite references) so your criticism is incorrect there. Indeed, it is hardly controversial to say Keynesians distorted Keynes; Keynes himself objected to Hicks’ formalization (and Hicks later recanted) and Samuelson’s “Keynesianism” follows Hicks.

      Third, your opening sentence is a gratuitous insult and your reference to Marx is a transparent ad hominem, since right thinking people in the US aren’t supposed to take Marx seriously. And last paragraph is pure ad homimen.

      So you charge Andrew with inaccuracy, when it is you who are wrong, and then up the ante with personal slurs. And we are supposed to take this seriously?

      This reads like someone defending his intellectual meal ticket.

      1. Joseph Ward

        When I read Leon Walras’ “Elements of Pure Economics,” it was almost entirely an axiomatic explaination of economics, and I think that was written in 1874, well before Samuelson. I think the mathematization of economics goes back to Augustin Cournot’s “The Mathematical Principles of the Theory of Wealth” which I believe was published in 1838.

  35. Jonus

    Why are Economist & Mathematicians still trying to sum up the universe into one tight little equation? Some great unifying theory. A single grande and final solution, a holy grail?

    Because that’s how you get published, worshiped and rich.

  36. Fiver

    Good piece. Some quality comments. And a couple of real up-their-own-butts.

    I am reminded of the question as to whether theoretical physics was strictly necessary, or could experimental science have gotten us “there” given enough time.

    In any case, I think we (as in humanity) have completely lost control of our own systems’ evolution – having made it one great big TBTF we will keep choosing to attempt to preserve it even thought it’s evidently failed.

  37. Chilingo

    How do derivatives allow a corporation to do things faster? It seems like they make the companies I follow do things slower because they hedge costs and prices out a year to two years, especially in natural resources.

    Interest rate derivatives are how much of the total pie? 75%? Swapping floating for fixed or vice versa allows a company to move faster how? I do know it’s allowed banks to lower their duration risk in order to allocate that risk to fixed rate loans. I’m not what else it has done.

    None of these are rhetorical questions, I have zero axes to grind and I will not reply in any way with any arguments.

  38. Dave

    Chapter Two – appendix:

    On September 10th in 2001, Donald Rumsfeld let it slip that the bean counters in the Pentagon had lost track of 2 or 3 trillion dollars. What happened to this enormous mountain of money is still a well-kept secret, but it’s no longer a very important news story. After all, the next day a plane – hijacked by someone who didn’t know how to fly – flew into the side of the Pentagon exactly where all the bean counters were trying to count the beans again. The odds of this actually happening are strategically close to zero.

    A whole bunch more bean counters got a similar treatment at the World Trade Centre, where all the evidence for scandalous ponzi debacles like Enron and such, that were kept safely at the Securities and Exchanges Commission, was completely destroyed in what many architects and engineers are calling a controlled demolition. Again, the odds of this happening in a military superpower should be close to zero, which is why it was denied.

    This embarrassing and shocking turn of events prompted the neophyte puppet in the White House to give Mr. Rumsfeld several trillion more dollars, so they could go start a bunch of illegal wars of distraction in foreign lands while the whole planet started going into an economic tailspin. Some rich people who seem to lack any ethics got incredibly richer during this difficult period, while the vast majority got progressively poorer.

    This seems to mean that on average the odds are not in our favour.

Comments are closed.