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Paul Davidson: What Makes Economists So Sure of Themselves, Anyway?

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By Paul Davidson, America’s foremost post-Keynesian economist. Davidson is currently the Holly Professor of Excellence, Emeritus at the University of Tennessee in Knoxville. In 1978 Davidson and Sydney Weintraub founded the Journal for Post-Keynesian Economics. Davidson is the author of numerous books, the most recent of which is an introduction to a post-Keynesian perspective on the recent crisis entitled ‘The Keynes Solution: The Path to Global Prosperity’.

Introduction by Philip Pilkington

In a recent interview I asked the US’s leading post-Keynesian economist and founder of the Journal of Post-Keynesian Economics, Paul Davidson to discuss what is known as the ‘ergodic axiom’ in economics. This is a particularly important axiom as it allows mainstream economists (including left-wing Keynesians like Paul Krugman and Joseph Stiglitz) to claim that they can essentially know the future in a very tangible way. It does this by assuming that the future can be known by examining the past.

Without this axiom the whole edifice of mainstream theory rests on very shaky grounds. Yet, it should be clear to anyone that given that the theory is supposed to explain human behaviour it is unlikely that the future will correlate with the past because people and institutions tend to change and evolve over a given period of time.

Yes, often past behaviour will help us understand future behaviour – apply this in a simple psychological way to anyone you know and you will find it to be true – however, it should be quite clear that all future behaviour cannot be wholly explained by past behaviour. Clearly it should be quite obvious that the same should apply when we consider large aggregates of individuals and yet mainstream economics steadfastly refuses to accept this.

What follows is an particularly succinct overview of these ideas and a summary of their importance that Professor Davidson has kindly written for us. He also lays out the alternative view that the future is not determined by probabilistic risk but is instead subject to an absolute unknowability or uncertainty as laid out in the work of John Maynard Keynes and the implications of this.

This is a hugely important debate in that it essentially touches on what a good economic theory would allow for in terms of government policy. The ergodic axiom is possibly one of the key reasons that many economists show a remarkable anxiety when it comes to any human action undertaken outside of their models.

– — Philip Pilkington

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I. DECISION MAKING IN ECONOMICS

The economy is a process in historical time. Time is a device that prevents everything from happening at once. The production of commodities takes time; and the consumption of goods, especially durables, takes considerable time. Economics is the study of how households and firms make decision choices regarding production and consumption when the outcome (pay-off) of today’s decision occurs at a significantly later date.

Any study of the behavior of economic decision-makers, therefore, requires the analyst to make some assumption regarding what today’s decision-makers ‘know’ about future outcomes.

There are two different concepts of the uncertain knowledge regarding the future outcomes of decisions made today. The mainstream concept regarding knowledge about the future and the Keynes General Theory concept. The ability of economists to explain the importance of the role of money, liquidity, and the existence of persistent unemployment in a market economy depends on which concept of knowledge about the future economists use as the basis of their economic analysis.

Because economists are split into two major theoretical camps about what decision-makers know about the future, these groups provide differing explanations of economic problems and their policy solutions. Understanding the differences in these two concepts of knowledge of future outcomes is essential to understanding the philosophical differences between economists on the role for government and economic policies in the economic system.

As explained below, mainstream economics assumes that households and entrepreneurs are optimal decision makers, that is, they choose the decision today that optimizes their utility, income and profits over time.

II. THE ABSENCE OF UNCERTAINTY IN 19TH CENTURY CLASSICAL ECONOMICS

Ricardo (1817), the father of 19th century classical economics, assumed a world of perfect certainty. All households and businesses were assumed to possess a full and correct knowledge of a presumed programmed external economic reality that governed all past, present, and future economic outcomes. The external economic environment was assumed immutable in the sense that it was not susceptible to change induced by human action. The path of the economy, like the path of the planets under Newton’s celestial mechanics, was determined by timeless natural laws. Economic decision makers had complete knowledge of these laws. Households and firms never made errors in their spending choices. They always spend everything they earned on things with the highest ‘known’ future pay-off in terms of utility for households and profits for businesses. Accordingly, there could never be a lack of demand for the products of industry or for workers who wanted to work. Classical economics justified a laissez-faire philosophy for the economic system. No government action could provide a higher pay-off than the decisions individuals made with complete information about the future in free markets.

III. UNCERTAINTY IN TODAY’S ORTHODOX ECONOMICS

In the early 20th century, classical economists tended to substitute the notion of probabilistic risk premiums and “certainty equivalents” for the perfect knowledge assumption of earlier classical theory. Risk premiums was said to provide “uncertainty” allowances where the latter referred to the difference between the estimated value of a future event, held with an objective (frequency distribution) probability of less than unity and the value of a perfectly certain (p = 1) event that evokes the same behavior.

By the 1970s this classical risk analysis had evolved into what mainstream economists call the New Classical Theory of ‘rational expectations’ where individuals make decisions based on their subjective probability distributions regarding future events where the subjective probabilities are presumed to be equal to immutable objective probability distributions that govern future outcomes [Lucas, 1972]. Today all mainstream economists interpret uncertainty in economics as synonymous with objective probability distributions [Lucas and Sargent, 1981; Machina 1987] that govern future events but are completely known to all persons today.

This device of labelling statistically reliable estimates of probabilistic risk regarding future outcomes as uncertainty permits mainstream economists to preserve intact most of the laissez faire efficient market analysis that had been developed under the earlier perfect certainty assumption. While rejecting the perfect certainty model, mainstream economists still accept, as a universal truth, the existence of a predetermined external economic reality (similar to Newton’s celestial mechanics which, for example, permits the astronomer to accurately predict the next solar eclipse) that can be fully described by unchanging objective conditional probability functions that are fully known by the decision makers in one’s model… Unlike the perfect certainty model, however, conflating the concept of uncertainty with the probabilitistic risk permits individual decision makers to make an occasional erroneous choice (in the short run) just as a single sample means can differ from the true universe value. In the long run, the assumption that people with rational expectations already “know” the objective probabilities assures correct choices on average for those “fittest” decision makers who survived in the Darwinian world of free markets. In other words, free markets lead to optimal solutions at least in the long run

In mainstream economics, economic data are typically viewed as part of time series realization generated by an ergodic stochastic processes. In fact, Nobel Prize winner Paul Samuelson (1969) has made the acceptance of the ergodic axiom the sine qua non of the scientific method in economics. What is this ergodic axiom that Samuelson insists is necessary for economics to be a science?

IV. UNCERTAINTY AND ERGODIC STOCHASTIC PROCESSES

Logically, to make statistically reliable probabilistic forecasts about future economic events, today’s decision-makers should obtain and analyze sample data from the future. Since that is impossible, the assumption of ergodic stochastic economic processes permits the analyst to assert that the outcome at any future date is the statistical shadow of past and current market data.

A realization of a stochastic process is a sample value of a multidimensional variable over a period of time, i.e., a single time series. A stochastic process makes a universe of such time series. Time statistics refer to statistical averages (e.g., the mean, standard deviation) calculated from a single fixed realization over an indefinite time space. Space statistics, on the other hand, refer to a fixed point of time and are formed over the universe of realizations (i.e. they are statistics obtained from cross-sectional data).

Statistical theory asserts that if the stochastic process is ergodic then for an infinite realization, the time statistics and the space statistics will coincide. For finite realizations of ergodic processes, time and space statistics coincide except for random errors; they will tend to converge (with the probability of unity) as the number of observations increase. Consequently, if ergodicity is assumed, statistics calculated from past time series or cross-sectional data are statistically reliable estimates of the statistics probabilities that will occur at any future date.

In simple language, the ergodic presumption assures that economic outcomes on any specific future date can be reliably predicted by a statistical probability analysis of existing market data. By assumption, New Classical economic theory imposes the condition that economic relationships are timeless or ahistoric ‘natural’ laws. The historical dates when observations are collected do not affect the estimates of the statistical time and space averages. Accordingly, the mainstream presumption (utilized by both New Classical economists and New Keynesian economists) that decision-makers possess rational expectations imply that people in one’s model process information embedded in past and present market data to form statistical averages (or decision weights) that reliably forecast the future. Or as 2011 Nobel Prize winner Thomas Sargent [1993, p. 3], one of the leaders of the rational expectations school, states “rational expectations models impute much more knowledge to the agents within the model (who use the equilibrium probability distributions)… than is possessed by an econometrician, who faces estimation and inference problems that the agents in the model have somehow solved”.

By using probabilistic distributions calculated from past market data, rational expectations theory assumes that, on average, the actions fostered by these expectations are precisely those that would be forthcoming in a perfectly certain world – at least in the long run.

In recent years, partly in reaction to the rational expectations hypothesis, some mainstream economists have raised questions regarding the use of such stochastic concepts to define uncertainty. For example, Nobel Prize winner R. M. Solow (1985, p. 328) has stated “economics is a social science….much of what we observe cannot be treated as the realization of a stationary stochastic process without straining credulity”. Since stationary is a necessary but not sufficient condition for ergodicity, Solow’s statement implies that only the very gullible would ever believe that most important macroeconomic processes are ergodic.

V. DISTINGUISHING BETWEEN UNCERTAINTY AND PROBABILISTIC RISK

Beginning with Knight’s [1921] seminal work, some economists have drawn a distinction between “true” uncertainty and probabilistic risk, where the latter is calculable based on past frequency distributions and is, therefore, conceptually insurable, while uncertainty is neither calculable nor insurable.

John Maynard Keynes (1936) launched a revolution in economics. Keynes explicitly developed an alternative “general theory” to classical theory. Keynes argued that the difference between probabilistic risk and uncertainty had important implications for understanding (a) the operations of a market economy and (b) the role of government in influencing market outcomes through deliberate legislative policies.

In Keynes’s (1936) analysis, whenever the full consequences of today’s economic decisions occur many days in the future, uncertainty would prevail and economic behavior could not be described as an “outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities”.

Unlike today’s orthodox economists, Keynes did not write in the idiom of stochastic processes in developing his concept of uncertainty. Keynes (1937) simply described uncertainty as occurring when there is no scientific basis to form any calculable probability. Nevertheless, in criticizing Tinbergen’s use of econometric analysis, Keynes (1939) argued that Tinbergen’s ‘method’ was not applicable to economic data because “the economic environment is not homogeneous over a period of time”, a criticism that is equivalent to stating economic time series are not stationary.

With the development of ergodic theory and stochastic process analysis since Keynes wrote, it is possible to interpret Keynes’s uncertainty concept in terms of this statistical lexicon. Keynes’s theory required decision-makers to recognize that in the market system in which they operate, in some but not necessarily all economic dimensions, the future is uncertain and cannot be reliably predicted on the basis of any statistical analysis of past evidence. The absence of ergodic conditions, therefore, is a sufficient condition for Keynes’s concept of uncertainty. In a nonergodic environment, even if agents have the capacity to obtain and statistically process past and current market data, these observations do not, and cannot, provide a statistically reliable basis for forecasting the probability distributions, if any, that will govern outcomes at any specific date in the future. According to Keynes (1937), “About these [future] matters there is no scientific basis to form any calculable probability whatever. We simply do not know.”

Keynes’s uncertainty concept implies that the future is transmutable or creative in the sense that future economic outcomes may be permanently changed in nature and substance by today’s actions of individuals, groups (e.g., unions, cartels) and/or governments, often in ways not even perceived by the creators of change. (It is also possible that changes that are not predetermined can occur even without any deliberate human economic action.). [George Soros’s concept of ‘reflexivity’ asserts future market outcomes are determined by market participants’ actions today.]

This nonergodic view of modelling the future out comes as being determined by peoples’ actions rather than a timeless probability distribution has been described by Nobel Prize winner Sir John Hicks (1977) as a situation where people in the model “do not know what is going to happen and know that they do not what is going to happen. As in history!” Hicks (1979) declared that “I am bold enough to conclude from these considerations that the usefulness of ‘statistical’ or ‘stochastic’ methods in economics is a good deal less than is now conventionally supposed.”

Accordingly, mainstream macroeconomics is logically inconsistent with Keynes’ macroeconomic general theory explaining employment, interest, and money. The result has been a continuing debate between the followers of Keynes and mainstream theorists over the relevant policy prescriptions for solving the macroeconomic problems of the real world.

The first postulate of mainstream economics is the presumption that there exists a finite set of acts and outcomes and that each agent can make a complete and transitive preference ordering of all possible alternative choices. Decision making by agents who know the statistically reliable future can characterize the decision process as “Look before you leap”. This “Look before you leap” analysis, however, is not a general theory of decision making for it does not explicitly deal with uncertainty per se. As the statistical theorist Leonard Savage recognized “a person may not know [all] the consequences of the acts open to him in each state of the world. He might be … ignorant” and hence might want to leave his options open; a decision that Savage characterizes as “You can cross that bridge when you come to it”. Savage admits the latter is often a more accurate description of the human economic predicament. When a decision maker is ‘ignorant’ and wants to wait before making a decision, we can classify the situation as one involving Keynes’ uncertainty concept and therefore the mainstream ergodic axiom is violated.

As Savage puts it, mainstream economics “attack[s] relatively simple problems of decision by artificially confining attention to so small a world that the `Look before you leap’ principle can be applied”, i.e., where Keynes’ uncertainty concept is not relevant. Savage warns that mainstream theory is “practical [only] in suitably limited domains… At the same time, the behavior of people is often at variance with the theory. The departure is sometimes flagrant … the `Look before you leap’ principle is preposterous if carried to extremes”. Yet when today’s mainstream economic theorists talk about efficient free markets they treat uncertainty in economics as synonymous with a probability measure The behavior they describe flagrantly departs from the behavior that determines employment in a money-using market economy.

If, as Savage recognizes, in some areas of economic activity the ability of humans to form a complete preference ordering regarding all potential consequences of all actions is not possible, then mainstream theory cannot provide a useful explanation of the behavior of decision-makers in these areas. It is here that Keynes’ uncertainty concept becomes paramount

In the classical (ergodic) theory, where all outcomes are conceptually calculable, there is never a need to keep options open. People will therefore spend all they earn on the products of industry (Say’s Law) and there can never be a lack of effective demand to prevent the system from reaching full employment.

On the other hand, when households and firms “know that they do not know” the future and therefore cannot order all future consequences associated with any possible choice today, they may wish to defer forever making “look before they leap” decisions. When people believe the future is uncertain in the sense of Keynes, they prefer to leave their options open, i.e., to cross that bridge when, and if, they come to it.

Whenever households and business managers believe they cannot predict the future with any degree of a priori or statistically reliable probability, then the axiomatic foundation of mainstream economic theory is violated. Hicks (1979) has associates this transgression of mainstream axiomatic ergodic basis with Keynes’ long-term ‘liquidity’ concept. For Keynes, it is the existence of an uncertain future that makes a long-run demand for liquidity (money and other liquid assets traded in well organized markets where prices movements are ‘orderly’) a ubiquitous fact of life. The ability to save one’s income in the form of money and other liquid assets permits households and firms to keep their options open by not having to spend all of their earned income on the products of industry, even in the long-run.

As long as income-earning decision-makers have this option of demanding liquidity rather than the products of industry, then a laissez-faire market system cannot assure that peoples’ total market demand for goods and services will be sufficient to make it profitable for firms to fully employ all who want to work.

The notion of a demand for long-term liquidity can only be justified in a world of Keynes’ (nonergodic) uncertainty. This desire for long-term liquidity is incompatible with mainstream’s optimal decision makers in an ergodic environment. Only the Keynes concept of uncertainty in economics provides a logical, statistical explanation of the phenomenon of persistent unemployment that occurs in the market economies in the world we inhabit. Only the Keynes uncertainty concept can justify a role for governmental policies to assure full employment when questions of liquidity are important.

REFERENCES

Davidson, P. (1991) “Is Probability Theory Relevant For Uncertainty? A Post Keynesian Perspective”, Journal of Economic Perspectives, 5. (Distinguishes between economic decisions where ergodic circumstances might prevail, and situations where nonergodic circumstances are likely. The former are called routine decisions, the latter are crucial decisions.)

Hicks, J. R. (1977), Economic Perspectives, Oxford University Press, Oxford.(Argues for economic models where agents ‘know’ that they cannot reliably predict the future.)

Hicks, J. R (1979), Causality in Economics, Basic Books, New York. (Argues that economics is embedded in time in a way that the physical sciences are not. Consequently stochastic theory is not applicable to most dynamic economic problems.)

Keynes, J. M. (1936), The General Theory of Employment, Interest and Money Harcourt, New York. (The basis for the ‘Keynesian Revolution’ where the existence of uncertainty explains why market economies have no endogenous forces that assure full employment.)

Keynes, J. M. (1937), “The General Theory of Employment” Quarterly Journal of Economics, 52. (A further extension of what Keynes means by ‘uncertainty’ and why uncertainty is the root cause of unemployment in market economies.)

Keynes, J. M. (1939), “Professor Tinbergen’s Method”, The Economic Journal, 47. (Keynes attacks the statistical method of regression analysis as not applicable to economic time series data.)

Knight, F. N. (1921), Risk, Uncertainty, and Profit, Houghton Mifflin, New York. (Distinguished between probabilistic risk and uncertainty.)

Lucas, R. E., (1972) “Expectations and the Neutrality of money”, Journal of Economic Theory,4. (The article that initiated the rational expectations analysis in macroeconomics.)

Lucas R. E., and Sargent, T. J. (1981), Rational Expectations and Econometric Practices, Minneapolis, University of Minnesota Press. (Develops the relationship between the rational expectations hypothesis and the axioms underlying econometric analysis for macroeconomic analysis.)

Machina, M. J. “Choice Under Uncertainty; Problems Solved and Unsolved”, Journal of Economic Perspectives, 1. (Attempts to shore up the theory of choice under uncertainty on “solid axiomatic foundations” of probabilistic risk in the face of the famous St. Petersburg paradox and other challenges to expected utility theory).

Ricardo, D. (1817), On the Principles of Political Economy and Taxation. (The first economist to formulate the axiom of perfect certainty in economics.)

Savage, L. (1954), The Foundations of Statistics Wiley, New York.(Develops the Expected Utility Theory of economics for making decision with complete subjective probabilistic information.)

Sargent, T. J. (1993), Bounded Rationality in Macroeconomics, Oxford, Clarendon Press. (A founder of the rational expectations school who now argues that rational expectations are not applicable to situations where people find themselves in new, i.e., nonergodic, situations.)

Solow, R. M. (1985), “Economic History and Economics”, American Economic Review Papers and Proceedings, 75.

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72 comments

  1. craazyman

    wow. 1817 to 2012.

    one hundred and ninety-five years of total nonsense.

    that’s almost a triumph of imagination over reality. hahahah.

        1. Valissa

          Since economists lack the creative imagination to create their own deity, I nominate the Wrathful Deity Mahakala in both his Hindu and Japanese aspects.

          Mahakala was the personal tutelary deity for the Mongol ruler Kublai Khan. His terrifying imagery ultimately derives from the angry form of the Hindu god Shiva, known as Bhairava. In Tibetan iconography he typically has one head with three bulging eyes. His eyebrows are like small flames, and his beard is made of hook-like shapes. He can have two to six arms.

          The essential nature of Mahakala in the Tibetan pantheon can be gauged from the fact that he is worshipped as the Protector of the tent. http://www.exoticindiaart.com/article/wrathful

          In this case the “tent” symbolizes the “big tent” of economic dogma.

          In Japan, Mahakala…

          enjoys an exalted position as a household deity in Japan, as he is one of the Seven Lucky Gods in Japanese folklore. Mahākāla’s association with wealth and prosperity gave rise to a strange custom known as Fuku-nusubi. This custom started with the belief that one who stole divine figures (gods and goddesses) was assured of good fortune, if not caught in the act of stealing. In the course of time stealing of divine images became so common a practice in Japan that the Toshi-no-ichi or the ‘year-end-market’ held in the Asakusa Kannon temple became the main venue of the sale and disposal of such images by the fortune-seekers.

          1. steelhead23

            God I love NC. Where else can I read of the Keynesian perspective on uncertainty and comparative Asian religion in a single thread? Where’s the course syllabus for this seminar?

        2. digi_owl

          Actually their deity would be “the invisible hand”. And most mainstreams seems to think of it as being very much benevolent. Never mind that it seems to have ruined just about any community it has touched…

      1. F. Beard

        But the collection basket remains and you don’t even have to reach into your own pocket! The banks do it for you while most economists look the other way.

      2. enouf

        Think of economics as religion without the music, the art and the cathedrals.–Jake chase says: January 19, 2012 at 9:01 am

        Think of everything and everyone whom blatantly denies (and even those “agnostics”) the existence of a Higher Intelligence as a “humanist” or Belief in Humanism.

        The denial of reality of a consciousness/awareness of self, the creativity, and innate personal moral fortitude (the sense of Injustice, the feeling of Love, etc) leads to nothing short of a carnival act.

      3. enouf

        Think of economics as religion without the music, the art and the cathedrals.–Jake chase says: January 19, 2012 at 9:01 am

        Think of everything and everyone whom blatantly denies (and even those “agnostics”) the existence of a Higher Intelligence as a “humanist” or Belief in Humanism.

        The denial of reality of a consciousness/awareness of self, the creativity, and innate personal moral fortitude (the sense of Injustice, the feeling of Love, etc) leads to nothing short of a carnival act.

    1. tyaresun

      The father of rational expectations is John Muth. I had the priviledge of working with him in 1985-86. He was working on an errors in expectations model at that time. I don’t think you will be able to find any published research on that model. Also, Muth never received the Nobel Prize even though rational expectations forms the fundamental brick of modern economics. Why? One of the reasons given is that others took over the idea and made more fundamental contributions.

      Could it be that Muth did not receive the prize because he had changed his mind on ratioanal expectations?

  2. Tom Dority

    I suppose economists are stuck in a closed loop. Describing events but not understanding. Maybe quantum economic theory and understanding of the Heisenberg principle would be a start. Every market participant is defined by their own uncertainty and environment – they are a molecule or atom in the economic world – thus economists have only described what they see and fool themselves when they think they can know why – having limited themselves to old earth centrism quasi science in my view. The butterfly principle alive and well. I am not an economist but, I think looking into math and scientific understanding of our physical universe may lead to an expansion in understanding our economics. Sorry first post and a bit loose.

    1. Birch

      Before getting into quantum economic theory, it would be very useful for economists to apply the laws of thermodynamics to their discipline. Frederick Soddy did this in the ’30s to great effect, and the tradition has been continued; most notably by Herman Daly whose economic theories actually relate to the real world.

      1. Fiver

        Would like to see NC take an interest and do a piece on Daly – we either develop a sustainable economy or we are headed for a very bad outcome.

  3. jake chase

    The only value of economics is derived from the fact that a substantial number of people believe it, at least selectively. Their actions create opportunity for contrarians who ignore the signals cherished by the believers.

  4. Tom Dority

    To add, Is there a periodic table of economic elements of a grand theory like E=mc2, maybe something like Economic output is equal to money supply times x too the second power.

  5. René

    “The ergodic axiom is possibly one of the key reasons that many economists show a remarkable anxiety when it comes to any human action undertaken outside of their models.”

    This is true for all models created by the elite and their helpers. Hence, NDAA and the SOPA Act.

  6. Eric Patton

    I am not an economist, but the fact that Robin Hahnel and Michael Albert’s 1990 Princeton University Press book Quiet Revolution in Welfare Economics is out of print and persona-non-grata in the profession really tells you all you need to know about the religion that is economics.

    1. Frank Speaking

      just as, “War is…an act of force to compel our enemy to do our will” so is economics an act of force to compel members of a society to do the will of others.

      Herbert Gintis and an entire school of economic thought has been marginalized because economics is—as is religion—a political device.

      Religion and economics exist for the sole purpose of coercive control one step short of physical violence.

      There is no surer proof of this than the speed and certainty that violating the preceps of either bring about violence.

      The only thing that brings about violent coercion quicker and with greater certainty is a direct challenge to a society’s political structures.

  7. Th3T1ck

    Probably the biggest problem with economics is that it is treated as a science. It is not. There are no hard and fast laws (Like relativity, conservation of energy, etc), because economies are 100% man made constructions. They are subject to the “imperfect” actions of people.

    The truth is that all economists findings are temporal. They can show trends and actions constrained within by time and environment. They really are glorified actuaries. They may be able to model actions with a considerable confidence interval, but they cannot find scientific laws.

    1. Brennan Young

      Economics is a “social science” (a concept which hard scientists snigger at, with some good reason) and it does indeed have much in common with ecology – we could more properly say that economics is an ideologised or politically partisan branch of ecology dedicated to of celebration of one set of values and relationships (usually money and its distribution), and the total wilful ignorance of any others.

      George Soros points out that markets are made up of ‘thinking individuals’ who are more likely to ‘go with the flow’ than act rationally. (Therefore we have boom/bust cycles, and bubbles of all kinds). The most up-to-date cognitive-psychology research indicates that homo sapiens’ capacity for ‘rational’ behavior is very limited. The latest consciousness research indicates that most people are little more than sleepwalking, or running on autopilot most of the time. All of this trashes the hypothesis that humans act rationally (well-informed or not) in economic matters. Few economists seem interested in these hefty, hard-scientific blows to a central pillar of their sacred mainstream theories – human rationality. No wonder. It will put them out of business if it is more widely known.

      It’s very human to be as irrational as a mainstream economist, sticking to his theory, as the system collapses around his ears. This kind of behavior has been studied too. It’s called cognitive inertia.

      The real [hard] science behind economics (and ecology) is cybernetics:The study of control and communication, especially a study of the dynamic distribution and flow of any information in any system. Cybernetics has some pretty hard and fast mathematically-bound laws, such as the law of requisite variety, which has direct application in economics and many other fields: A system must fully map the variety of its environment. Unexpected or ‘new’ elements or relationships in the environment which are not mapped by the system will make that system less viable (i.e. threaten its survival).

      This means that a truly viable system must also have the capacity to adapt and learn, which ultimately means it must be able or permitted to change the propositions under which it operates! Valentin Turchin’s book “The Phenomenon of Science” used this principle to criticise – very subtly and cleverly – the way that research was organised in the USSR, and pointed out that the most important kinds of system learning are what he called ‘metasystem transitions’ (aka revolutions), but his arguments apply perfectly well to the current pickle.

      This means the fixed ideology – the certainty and the hubris – behind mainstream economics goes immediately into a bin called ‘junk science’ or even ‘superstition’. Ashby (who first proposed the law of requisite variety) said “Every piece of wisdom is the worst folly in the opposite environment”, which is just a poetic way of describing his law.

      Cybernetics also shows us (again with hard math to back it up) that optima are more viable than maxima – any system which continually attempts to maximise a given value (e.g. “the bottom line”) will inevitably be compromised in its flexibility, reslilience, viability etc. If the system is at all viable, then there is absolute mathematical certainty that it will go into ‘runaway’ and crash, sooner or later. This is most likely if there is too much unexpected variety in and around the system.

      The more rabbits you have, the more rabbits you get, until the environment can only support a starvation diet for a vast dying population. The result is not that 50% of the rabbits die. Instead, almost all of them will die, because those that survive longest will compete to the death over the meagre remaining resources. But if you cull the rabbits regularly, e.g. by introducing foxes and other predators, this problem of runaway->crash never arises. Regulation is therefore necessary in any viable information system. The regulations may change however.

      But hardly any economists bother to study cybernetics, or ecology, and it seems that even George Soros – who seems to get impressive results with his heresies – is treated like a crackpot. It’s wilful ignorance. Heads in the sand. And they’re still in unchallenged positions of power, celebrated, almost worshipped, never seriously admonished for giving junk advice. This is why so many of them are so damn certain that their dumb, politically partisan theories are universally valid.

      1. jake chase

        Very interesting stuff. IMHO Veblen is the only economist of the past one hundred odd years having anything useful to say about how the world actually works. I have found his Theory of Business Enterprise indispensable.

      2. Fiver

        Good comment.

        That modern economics is about denying its subject cannot be divorced from politics/power or the natural world by draping it in a mathematics describing a non-existent reality always was a stunning conceit – but to not yet recognize at this very late date that what it now prescribes is suicidal when viewed ecologically demonstrates the power of elite belief systems to become every bit as dogmatic as the prior thinking they strived to replace and are just as eager to shut out or shut down conflicting opinion now as any other claimant to special knowledge of the “Truth”.

      3. paul davidson

        Soros’s theory requires the rejection of the ergodic axiom as Soros recognized in a letter to the Editor in THE ECONOMIST in 1997 [ I provided a draft of the leeter for Soros to send]

  8. Susan the other

    Keynes on liquidity and unemployment is interesting. It’s saving for a rainy day. Makes sense that if liquidity is necessary to offset recession (as now) and to keep the economy from grinding to halt, that for a time the government needs to create jobs. Add to this a paradigm shift from industrial to digital and from national to global and from stable climate to chaotic climate, and toss in the hyper-productive efficiency level of modern economies and it seems only sensible that government should probably be in the business of creating jobs on an ongoing basis. Because uncertainty seems to grow along with civilization. Complex civilizations fail. There is no law that the economy cannot run on several levels at once. Government stimulus should not be eliminated. Funny that injecting liquidity (at first?) suppresses the level of demand, effectively affirming caution, and so slows (?) re-employment. But without it there is worse stagnation.

    1. F. Beard

      It’s saving for a rainy day. Susan the other

      That’s gold standard thinking. Also, according to Steve Keen, (if I recall correctly) even a reduction in rate of new credit creation can trigger a recession. I expect government surpluses would have the same effect (cue Rodger Malcolm Mitchell). Is that why they are so rare because they are dangerous.

      I expect that an expanding-shrinking money supply is no more healthy than an expanding-shrinking blood supply.

      1. Min

        F. Beard: “I expect government surpluses would have the same effect (cue Rodger Malcolm Mitchell). Is that why they are so rare because they are dangerous.”

        In the U. S. in the 19th century (post 1836) and early 20th century (pre 1930) the gov’t ran a surplus around one year in three. They only became rare in the U. S. after 1932.

  9. Min

    “Yet, it should be clear to anyone that given that the theory is supposed to explain human behaviour it is unlikely that the future will correlate with the past because people and institutions tend to change and evolve over a given period of time.”

    Sorry, folks. The best predictor of behavior is past behavior.

    Sure, things change. And economic predictions should include error estimates. If they did, people might laugh, but there you are.

    1. alex

      “The best predictor of behavior is past behavior.”

      But that still doesn’t mean it’s a good predictor, certainly not good enough for people to bet the whole farm on it.

    2. Yves Smith Post author

      Astrology works on that principle too. So are you saying we should take astrologers as seriously as economists?

      Remember that believing your “past is best predictor” led directly to the crisis (see Ch. 2 and 3 of ECONNED for more detail as to why). So its track record empirically is not so hot.

      1. Valissa

        “The only function of economic forecasting is to make astrology look respectable.” -John Kenneth Galbraith

        An econometrician and an astrologer are arguing about their subjects. The astrologer says, “Astrology is more scientific. My predictions come out right half the time. Yours can’t even reach that proportion”. The econometrician replies, “That’s because of external shocks. Stars don’t have those”.

      2. Min

        Yves Smith: “Astrology works on that principle too. So are you saying we should take astrologers as seriously as economists?”

        I guess that’s to me. :)

        Astrology does not work on the principle that previous behavior is the best predictor of future behavior. There is some empiricism in astrology, but it relies upon magical thinking.

        I was actually surprised at the claim that economists believe that previous behavior predicts future behavior (which is what I think that Pilkington is claiming). I did not think that economists were that empirical. While I do think that economics is a social science, it seems rather like scholasticism to me.

        Yves Smith: “Remember that believing your “past is best predictor” led directly to the crisis (see Ch. 2 and 3 of ECONNED for more detail as to why). So its track record empirically is not so hot.”

        Well, I am not so sure that that was the doing of economists. Didn’t the economists think that “This time it’s different”? That’s why the thought that the regulatory apparatus adopted to help prevent another Great Depression could be dismantled? Mortgage brokers believed (or pretended to believe) that “You can always refinance in a few years” because you always could. Traders believed that prices followed trends or repeated past patterns, in direct opposition to the efficient market hypothesis. But economists? Say it ain’t so, Joe. ;)

      3. different clue

        Wouldn’t that depend on how long a span of past time one
        looks at? One can pick a 3-years-long snapshot of the past chosen to flatter one’s theory, or one can pick a three-centuries-long timelapse-shot to get a bigger range of events to test one’s theory against.

  10. Friedmanite

    “biology is a pseudoscience because darwinism is false,creationism rules!” says the Republican

    “economics is a pseudoscience because the free market is false,LONG LIVE socialism” says the leftard

    libertarians=the smartest people in the crown since 1817

  11. Hugh

    “What makes economists so sure of themselves anyway?” This sounds like a setup for endless one liners, but the answer is economics is part of the propaganda of the ruling elites and an air of certainty is part of the job description. This is also why economists persist in theories that events have proved conclusively false. It is not about being right. It’s about sounding convincing. If there is a discrepancy between reality and theory, then to the propagandistic mind reality is simply to be ignored.

    As for the ergodic axiom, it is all about what parts of the past are looked at and how these are defined. For example, comparisons are made with recessions going back to the 1800s, but the truth is that only one recessionary period, the Great Depression, resembles current events, and this only approximately.

    Consider that we live in an age dominated by wealth inequality, kleptocracy, and class war, during which the greatest financial crimes in history (hey, a reference to history if you want one) are going on, and economists, even liberal economists, have little or nothing to say about any of it. Again to use my favorite metaphor for this, it is like military historians discussing the period 1939-1945 without any reference to the Second World War.

    1. Min

      “For example, comparisons are made with recessions going back to the 1800s, but the truth is that only one recessionary period, the Great Depression, resembles current events, and this only approximately.”

      Really? What about the Long Depression? What about Japan’s Lost Decade?

      1. Hugh

        I think the Long Depression other than its length has very little correspondence to what we are experiencing now. Japan is quite simply another country. As Yves has often pointed out, how they handled their Lost Decade(s) is very different from how we are handling ours. The Great Depression foreshadows what we have now because of its sequence of bad private sector decision making (the Crash)followed by bad public decision making (the Hoover years). Still the fit is, as I said, only approximate. When you go further afield, as to the Long Depression and Japan, the connections become less direct and more metaphoric. Go to regular recessions and the resemblances are mostly misleading.

    2. Birch

      If we look at the broader historical and anthropological record, we have thousands of years in which to find parallels to todays goings-on. I think the main reason for restricting history to the past 200 years or so is to ignore the long record of environmental devastation and economic armageddon that would suggest we should change our ways now rather than waiting for devastation.

    3. Fiver

      As always, a good, coherent post. There is no worse guide to the future than any day’s consensus view of leading economists – none.

  12. MontanaMaven

    High Paying Careers with No Future was a story on Yahoo Finance last year. One of them was…..

    Economist

    The Federal government is the largest employer of economists in the country. More than half — 53 percent — of all economists in the U.S. work for declining government sectors, so Uncle Sam’s not hiring a lot of economists just now. “Econ” is a hot college major, but most of those newly-minted grads won’t find work as traditional economists. Instead, they’ll end up in niche sectors in business, finance, insurance, and education. Those set on working as conventional economists better have a Plan B, or a Plan Ph.D, because they’ll need one. The economists at BLS do tell us that by 2018, an additional 900 economists will be employed — so the outlook is not as dismal for dismal scientists as it is for, say, travel agents. But if current trends continue, the future isn’t promising. “You look at the last 10 to15 years and it has been flat,” says Henry Kasper of the BLS. “There’s little reason to think it’s going to get better.”

    From Louise’s lips…
    finance.yahoo.com/news/pf_article_111385.html

  13. UnBeliever

    The more I learn about economics the more angry I get, and I’m a scientist working in a bank. Ergodicity is an extremely restrictive technical condition, to just assume it applies is plain stupid. Think of the difference between ink drops dispersing in water and minestrone. Water is ergodic, minestrone less so. I’ll take on all comers on the maths here, but let’s stick to common sense: is an economy more like a glass of water or a bowl of chunky soup?

    1. Min

      “Ergodicity is an extremely restrictive technical condition, to just assume it applies is plain stupid.”

      Hear, hear!

    2. scraping_by

      Think of Ergodicity as a bad take on Galelio’s law of inertia. In reality, though, if the people in a market avoid any new inputs, the system doesn’t continue exactly like before. It stops dead. Which is, I think, where our friend George Soros comes in.

      Part of economists’s physics envy.

  14. Joe Rebholz

    I wrote the following just before reading “Paul Davidson: What Makes Economists so Sure of Themselves, Anyway?”. It makes a good response.

    Abandon all Economic Theories.

    Economic theories often claim to be about the way things are, as if they were objective scientific theories about the real world of human group behaviors — as if they were about how we actually produce and distribute goods and services. But some of these theories have another element to them. And that element is: how things should be.

    How can we distinguish whether a theory is a description of how things actually are, how our systems actually work as objectively observed and scientifically verified, and when a theory is attempting to say how things should work? When is a theory attempting to describe what people actually do versus what they should do?

    It seems that most economic and political theories (and it is impossible to separate the two) have a lot of “should”s in them. Few if any have no “should”s.

    Governments exist. Many of the “should”s have to do with the role of governments in our systems. How much should governments be involved in economics? Some people (some capitalists) say governments should have no role or a minimal role; some people (some communists) say governments should make all or most economic decisions. Clearly both extremes do not describe how any actual systems actually work. Governments always have some role. They make and enforce laws which constrain human behavior. Stop on red, go on green, be careful on yellow. And enforce contracts. And no government can make all economic decisions. Governments don’t know enough and they can’t possibly manage everything. They don’t have enough information and even if they did, they wouldn’t know how to put it all together and use it. So many of the “should”s are about the roles of governments.

    Every law is a “should”. If a law were not a “should” then it would be a description of actual behavior and it would not need to be enforced.

    Many “should”s are about individual behavior. Traffic laws, for example are about individual behavior. Most individual behavior occurs with or in groups of other people — in families, clans, tribes, towns, cities, clubs, associations, partnerships, corporations, states, nations. Many of the “should”s are about these groups, these human organizations.

    “Should”s are not only laws. Customs and habits that most people (in some group) follow most of the time are also “should”s. Human life is full of “should”s.

    Some “should”s take the form of: You should behave according to theory X because if everyone behaved as specified in theory X, then good thing Y will happen. Classic capitalists said that if everyone would pursue his own rational self-interest, then the resulting system would be the best for everyone. If everyone is greedy, then the resulting system will be best for everyone. Classic communists said that if you let the central government make plans for all the types and amounts of goods and services to be produced in some period of time, and if everyone follows the plan, then this will result in a good and efficient system that will be best for everyone. If everyone just works and obeys orders, everyone will be taken care of, it will be the best for everyone. Note that in both cases “best” is not clearly spelled out and there was no proof, no valid argument, that the “best” could be actually attained. Note also that in both systems many people were and are left out — their situations became worse.

    There are many reasons why any preplanned social system for the production and distribution of goods and services will not work as expected. The main reason is we cannot predict the future at least in detail. And human behavior changes. Technology changes. Cultures change. Nature intervenes. Accidents and disasters happen.

    So we cannot dream up an ideal system with specified roles and rules for governments, corporations, organizations in general, and individuals, and claim that if every organization and individual behaves as specified (everybody and every organization always follows the specified rules), then the result will be the best for everyone. We can’t even claim it will be good for everyone, or for sure better than some other system. There is no such thing as perfection in such matters.

    We cannot get 100% compliance with any set of rules and laws. At present huge numbers of laws are ignored by individuals and corporations and are not enforced by governments. So any such predesigned system would have to be built with the assumption of less than 100% compliance. And since nothing stays the same, since culture, technology, nature, and human nature are always changing, always evolving, any preplanned and highly specified system will not continue indefinitely to produce the same results it once may have produced.

    So any system we might contemplate implementing must not be too highly constrained. It must have mechanisms to allow it to co-evolve with evolving nature, human technology, human nature, and culture in general.

    In a sense we already have some of this co-evolution. Not so much in our theories (which are often presented as static, highly specified, and unchangeable), but in our practice. We are constantly changing our laws regarding our economic and political systems. The goals, purposes of the new laws are often to benefit or favor certain individuals and groups but not everyone. Sometimes the purpose of a new law is to make our practice (our operational system) conform better to one of our simple theories such as capitalism, communism, socialism, libertarianism, “the Austrian school”, Keynes, or the theories of any particular economist. But often, behind such a purpose is the more basic goal to benefit some individual or group.

    We need something else beyond these simple, highly specified, over-constrained systems as the goals for our system changes, as our law changes. We don’t need any more theories like those listed. They are all simple-minded, limited, and do not (or would not) work very well for most people. Each may work well for a subset, some class or classes of people, the rich or the powerful, but often make things worse for most people.

    We need a simple, clear, direct goal for our system changes, our law changes: We should design our system changes, our law changes to our economic and political systems, so that to the best of our abilities, the resulting system is better for everyone. We must eliminate the middle men — the simple-minded theories (which are mostly fake covers for benefiting the few at the expense of everyone else) — and we must aim clearly and directly at the goal of changes that benefit everybody.

    Clearly since we will have no theory to guide us (and even if we did, it wouldn’t help), and we cannot predict the future in detail, we will have to use trial and error, which is the scientific method. That means we make our best estimate, our best guess, as to what to change. Then change it and look at the result. Check whether it made things better for almost everybody. (We must not get hung up on seeking perfection in every single step. Perfection is an illusion.) If the change made things better for a large enough number of people (and not just a few individuals or classes) then keep that changed law. If the change only benefited a few individuals or classes, then reverse that change and try something else. Trial and error. There really is no other way.

    When I say abandon all the above theories I mean abandon them as exclusive overriding dogmatic systems. There surely is important knowledge about how human organizations work and can work, both internally and in cooperation with other organizations (for example maybe money, markets, property, contracts, laws, incentives, technologies, education, safety, redundancies, etc.) and this knowledge should be the basis for our best estimates and best guesses when changing our systems to make them better for everyone. In any case we must start with whatever we have now. No system as complex and interconnected as the present world system can be “overthrown” and a new one built from nothing.

    Finally I want to spell out in more detail what the goals of our world economic and political systems should be: The goal should be to change our systems step by step as above into systems that provide almost all human beings with the human necessities which are: sufficient water, food, clothes, shelter, education, health care, opportunity to work with others to contribute to the welfare of everyone, maximal liberty consistent with the welfare of others, nonviolence — and all this consistent with the earth’s limited resources and consistent with preserving the natural world from further degradation and destruction.

    We cannot know now if it is possible to reach such a goal. Nor can we know now that it is impossible to reach such a goal. To find the answer, we must try. We can measure how close we are to each of these sub-goals. This is something economists can do since they can stop wasting their time generating grand theories. Surely great progress can be made. Reaching the goal is not the main thing. The main thing is to keep moving our economic and political systems toward these goals. Let’s have a directed evolution. That will be a real revolution.

  15. Jim

    Many Keynesians (Post and otherwise) love to condemn the Austerians for their moralizing about the economy (i.e.their constant harping about spending too much).

    But Keynes, in his own way, was all about attempting to remoralize the capitalist economy(which is part of his attraction for the left) only the sin(from his perspective and theirs)as articulated by his biographer, Skidelsky, was not in spending too much but in spending too little, especially in Depressions.

    This sin of spending too little could be remedied by using what(at the time of his writing)was a relatively unexploited resource–the state. We were only later to learn about the pathologies of state centralization and management.

    Is is fascinating to me that Keynes began to devlop his concepts of economic management at a time when the certainities of Victorian cultural values were breaking down.

    It could no longer be assumed that individuals would do what was good and right for the community nor could it be assumed (as it was by Keynes) that one’s own life ought to be lived in a quest for excellence in the context of public duty.

    Today we experience the reverse of Victorian civility–the captain if one of the first off the sinking ship and everyone else must fend for themselves.

    Keynes’s state managerial economic response to a breakdown in values–no longer seems adequate to the magnitude of the crisis we face in 2012.

  16. jcb

    I’m by no means a believer in classical economics, but the first paragraph describing David Ricardo as an early exponent of rational expectations is such a travesty that I stopped reading. It’s completely unhistorical. It’s a joke.

    David Ricardo never implied anything at all about economic motivation. He believed in objective laws of economics that depended on the profitability of different factors of production.

    No, he did not look for micro-economic foundations to macro-economic behavior; neither concept had yet been invented. David Ricardo was never a tenured member of the University of Chicago economics department.

    http://en.wikipedia.org/wiki/David_Ricardo

    1. Steve (the other Steve)

      Exactly. This article was an incredible pile of simplistic crap.

      Classical economics has many weaknesses, just as Newtonian physics does. But it’s a useful framework under which to analyze many empirical observations, as is Newtonian physics.

      It would be news to Smith, Ricardo, Say et al. that they were constructing a quasi-religious system of political-economic beliefs. They were first and foremost empiricists who were trying to explain the world around them.

      Maybe their theories were abused later by polemicists and politicians with agendas etc. But the Classical economists are not to blame for this any more than Newton is to blame for artillery firing solutions.

      1. paul davidson

        But just as Newtonian physics had some dramtic flaws that was corrected by Einstein’s GNENERAL THEORY OF RELATIVITY , Keynes’s GENERAL THEORY OF EMPLOYMENT INTEREST AND MONEY is aimed at correcting the two great flaws in the actual entrepreneurial economy that operates the way the Austrians see it – namely the failure of the economic system to maintain persistent full employment of all workers who are willing to work and the arbitrary and inequitable distribution of income and wealth.

  17. ChrisPacific

    Good summary, thank you. More readable than Keynes (which is admittedly not much of a compliment).

    I’ve been trying to work my way through the General Theory recently in an attempt to educate myself on what Keynes was really saying, unfiltered by intermediaries with an axe to grind (I am an armchair economist with a mathematics background). It’s hard going. By academic standards he is very readable but by layman standards he is still pretty opaque – he also states upfront that he is writing mostly for his academic peers rather than the general public. Still I think I am able to get the general idea, and some parts are unexpectedly delightful:

    “Ricardo offers us the supreme intellectual achievement, unattainable by weaker spirits, of adopting a hypothetical world remote from experience as if it were the world of experience and then living in it consistently. With most of his successors common sense cannot help breaking in – with injury to their logical consistency.”

    In any case, my overall impression is that the difficulty comes not so much from the mathematics – that’s mostly trivial – but from the assumptions and definition of the models and terminology. For all that he’s challenging their beliefs, Keynes definitely comes across as one of the establishment. He berates people for using terms without properly defining them, but does exactly the same thing himself, frequently and it seems almost unconsciously. I’m only a little over halfway through and I have already found very many things that I disagree with. One of the most pervasive assumptions seems to be the idea that any two variables can be linked by means of a single valued continuous function. Keynes seems to be better than most about this (he spends some time justifying the dependencies that he’s representing) but still suffers from it.

    Notwithstanding the flaws, though, it’s clearly a significant contribution – most notably because his theory obviously does a better job of predicting how things actually happen than the conventional wisdom at the time did.

    1. paul davidson

      If you want an interpration of what Keynes actually wrote see/Macmillian/Palgrave’s series “Grest Thinkers in Economics” for which I was commissioned to write the book entitled JOHN MAYNARD KEYNES — this book was published in 2007.

      for a layman’s version of this book see my 2009 book THE KEYNES SOLUTION:THE PATH TO GLOBAL ECONOMIC PROSPERITY — a book that got excellent reviews in THE ECONOMIST and in the business section of the NEW YORK TIMES — but has been completely ignored by the economic’s professional mainstream who has not only failed to review the book — but also failed to demonstrate any errors in the book. Their strategy is, in this case, ignore the book and the truth and perhaps they will go away!!

      Paul Davidson

  18. William Neil

    This discussion makes me think of the world of derivatives, and all the assurances we were issued in the late 1990′s, and early 2000′s that even though the “notional value” was climbing into the hundreds of trillions of dollars worldwide, they were distributing risk, not concentrating it, and, as illustrated by the Republican minority retort in the Financial Crisis Inquiry Report, there was no need to worry because half the derivative bets went one way, and the other half the other, so they cancelled themselves out – approximately. Of course the Republican report did not address the chances that five or ten firms, or even one, if large enough,might have most of its own bets leaning the wrong way, and set in motion a train of events that could not be controlled, a runaway financial fission event. And of course, there was tremendous effort exerted during 2010, and beyond, to keep as many derivative instruments off of exchanges, to keep them over-the-counter, fighting the very idea that anyone should collect all the data to even give these rational market theories a chance at full transparency. Is there any wonder why today there is still a strong “liquidity preference?”

    My second thought goes back to undergraduate economics courses, especially the micro-economics classes, where I always had the feeling that I was being carried high into the stratosphere of assumption piled upon assumption, as in some Greek forum class in imaginary geometry, being pulled along and along, away from any grounding in economic history. It was all so tightly wrapped, like a geometric proof…only when it came apart in the actually lived experience of societies over the centuries, there would be real lives falling back to earth from the heights of the fractured theories.

  19. Fiver

    I have to question the assumption that an economy that has for some reason become less “certain” in its agents’ collective outlooks, and whose agents are “crossing that bridge when they come to it” is a state that only Government can resolve. Surely it’s altogether possible that circumstances overall may improve organically, and perhaps in ways not initially discerned, so that individuals simply start spending again as their own accord. We’ve based our understanding of these processes largely on a unique historical circumstance (the Depression), one about which both sides of the debate claim the reason it persisted was major wrong moves by the “other guys” attempting to undo some prior mistake.

    And how is government actions’ certainty of outcome any greater than private players in a crisis? If there is any certainty anywhere, it would appear to be confined to the sociopathic plots of criminals who essentially cannot lose, not the public of its government.

  20. Passerby

    John Cassidy said much the same thing in his book ‘How Markets Fail’. He also said it far better.

    1. paul davidson

      In his blog of October 12, 2011, Cassidy complains about the two who received the Nobel Prizes in 2011 [ namely T. Sargent and C. Sims] At the end of the blog Cassidy states that the Nobel Commitee would have done better if they had considered three economists who had a lot to say about the current financial global crisis and how to fix this problem. Among the three economists, that John Cassidy specifically mentions is Paul Davidson .

      I am very proud that Cassidy mentioned me — but I do not think you should hold your breath until I or the other two are ever named for a Nobel Prize.

      paul Davidson

  21. Anders Ericsson

    ALL mainstream economic theory is bs. It was invented before we understood ecology. If one person here can explain how an economy can grow infinitely, while bound by a finite resource base, I’ll run naked through the streets singing Mary Had a Little Lamb. It is ALL a lie! It is a theory based on illogical premises that is only sustained because a small fraction of the world’s population is getting stinking rich. The answer is here, but you’ll never hear it. ECOLOGICAL ECONOMICS! Burn it on your brain. Repeat it. Spread it. Shut down anyone who talks about “growing” the economy to solve our economic problems. Simply pose the question I did earlier and watch them shut down. Never heard of ECOLOGICAL ECONOMICS? Never heard of Herman Daley? Never heard of William Rees? Robert Costanza? Joshua Farley? They are our future, but they need us. We need to bring this argument to the forefront. Educate yourself by starting here: http://www.nakedcapitalism.com/2011/07/on-dangerous-disconnect-between-economics-and-ecology.html
    and here: http://www.nakedcapitalism.com/2011/07/on-dangerous-disconnect-between-economics-and-ecology.html
    Davidson…screw him. Screw Krugmann and Friedmann and Hayek and Keynes and Von Mises and Smith and Bentham. Screw them ALL. They are dinosaurs and they are leading us to the same fate. STOP buying into the rhetoric!

    1. Fiver

      Great to see William Rees was featured on NC. Hope lots of readers have a look. Thanks for posting.

      It has for decades seemed to me that only the agents of blind greed could not understand that ecology trumped all else, and that we would, with a lot of hard work and good will, get our act together before it was truly too late (back in the late ’60′s, I thought that meant by the turn of the century we’d at least be on the right track) and yet it has all unfolded as if the overwhelming majority of our best and brightest (along with the rest of us) were raised inside a dolt’s simulacron – a seemingly self-generated, completely independent 24/7 techno-bubble reality that can never fail because…um, because……just because, that’s why.

      If we in the rich world do not take the lead and voluntarily reduce our footprints, meaning a far lower level of pure consumptive waste, it will be done for us, and soon. In fact, we’ll end up in a global scramble for what’s left well before the absolute limit is hit – the fight that you see right now all over the globe, dressed up as a “war on terror” or “meeting the Chinese challenge” or “investing” in food production in Africa by dispossessing and impoverishing hundreds of millions via World Bank-enabled looting of land to produce food, oils etc., for EXPORT.

      The financial crisis is a dire warning. It’s the effect of insane, bare-knuckle, hopelessly imbalanced globalization driven by a corporate class that is incapable of thinking about a common good in a common future.

      1. enouf

        Yep;

        The trouble is with Man’s Heart (all humans, females too, but i say it like that to retain the simplistic point).

        Everything else is nothing more than distractions; mere attempts to circumvent the real underlying root cause–fluffed and wrapped and packaged into what we call The Sciences.

        Until we as a species accept that fact, not only will real progress never be made, but our demise will surely be hastened.

        Now; what to do about that fact, once we collectively accept it, is an entirely ‘nother matter ;-)

        Love

        note[1]; I found this very interesting as a concept;
        http://www.zcommunications.org/alternative-economy-cultures-documentations-by-michael-albert
        I think someone here at NC posted a link either directly to that TLD, or indirectly. Thanks for that

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