Richard Alford: If War Is Too Important To Be Left To The Generals, Isn’t Economic Policy Too Important To Be Left To Economists?

By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.

Apologies to both Clemenceau (Prime Minister of France 1917-1920) and General Jack D. Ripper (Dr. Strangelove 1964)

The recent crisis and continuing economic and financial dislocations has led many to question the usefulness of the current macroeconomic paradigm, if not economics more generally. Raghuram Rajan, whose paper, “Has Financial Development made the World Riskier,” was summarily dismissed at the Fed Jackson Hole Conference in 2005, has recently posted a piece titled “Why Did Economists Not Foresee the Crisis?” In this piece, Rajan rejects three popular explanations for the failure of economics and economic policy, i.e. the absence of “models that could account for the behavior”, “ideology”, and “corruption”. Rajan offers alternative explanation(s): “I (Rajan) would argue that three factors largely explain our (economists) collective failure: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.” The logical conclusion of Rajan’s explanation(s) is that to avoid future crises, the role of economists, or at least academic economists, in the policy formulation process should be reduced. More troubling yet for economists, including Rajan, is some recent work by Frydman and Goldberg which argues that current economic models are inherently flawed.

Rajan dismisses the argument that economics lacked relevant models. He cites the fact that academic economists have studied and modeled many of the factors that contributed to the crisis. Rajan does, however, cite the compartmentalization of economics which leaves macroeconomists ignorant of findings in other sub-disciplines of economics.

In Rajan’s view, the inability to forecast accurately reflects shortcomings in the current model. All models of the economy abstract from the complexities of the economy and financial system. Models are simplifications of realty. Hence the models are incorrect. (We will return to this point later.) The only questions are how large and costly will the model-driven errors be.

Observers should not be surprised by the fact that the models employed by economists contained simplifying assumptions. However, they should be disturbed by the recent performance of policymakers. They ought to ask the question: why did economists remain wedded to their model despite the growth of all the macro-economically important economic and financial imbalances and unsustainabilities that existed in the years prior to the crisis?

Rajan rejects the argument that it was an ideological commitment to market efficiency that led economists to undue faith in the model. Rajan cites the fact that both behavioral economists who reject market efficiency and progressive economists who reject free markets also failed to see the crisis coming.

However, economists and policymakers in the US dismissed evidence of numerous unsustainabilities, as well as rejected warnings by the likes of Rajan, Shiller, White, and ironically Kohn formerly of the Board of Governors. In an op-ed piece, Shiller blamed the failure to foresee the crisis on group think. (here) He cited as evidence his experience on an FRBNY advisory board. In a 2003 paper, Kohn cited potential risks in unsustainabilities in the housing market, consumer expenditures and the build-up of debt. However, judging by his response to Rajan at the 2005 Jackson Hole Conference, he didn’t see problems or risks despite the large and growing unsustainabilities in areas he had cited in 2003.

The narrow specialization of academic economists is consistent with this highly specialized group think dominated the policy perspective. This is also reflected in the job description offered by one former member of the Board of Governors, appointed during the run-up to the crisis. The appointee said something to the effect that his job on the Board was helping Bernanke implement inflation-only targeting. This reflects a narrow anti-intellectual mindset. This view of the job of a central banker implies that the appointee’s model of the economy had morphed from an engine of analysis (potentially one of many) in to a set of intellectual blinders complete with an disregard for a governor’s regulatory responsibilities. Hence It is probable that the imbalances and unsustainabilities were ignored because they were at variance with the group-think-endorsed model and were a)implicitly and without thought deemed to be unimportant, or b)if addressed would have ruined or delayed the proof the their model was the correct one.

Rajan rejects the argument that consulting contracts and other outside (outside of academia) money had corrupted economics. The view that economics had been corrupted became more popular when it became widely known that former Fed Governor Mishkin, while still an academic, had been paid for a review of developments in Iceland by Icelandic groups with an interest in promoting financial markets and institutions in Iceland. Two observations:

1) Did anybody ever think that he did it for free? (Do academics, economists, psychologists, sociologists, chemists, statisticians generally consult for free?); and
2) To suggest that this corrupted Mishkin is an insult to the Icelanders who hired him. Does anyone think that they did anything but search out someone with proper credentials and who was already predisposed to produce a favorable review?

Rajan points out that that the vast majority of economists who subscribed to the views held by Mishkin never got a dime from Iceland or any other outside source.

Rajan also cited the disengagement of much of the profession from the real world as a reason why economists failed to foresee the crisis:

The main advantage that academic economists have over professional forecasters may be their greater awareness of established relationships between factors. What is hardest to forecast, though, are turning points – when the old relationships break down. While there may be some factors that signal turning points – a run-up in short-term leverage and asset prices, for example, often presages a bust – they are not infallible predictors of trouble to come…

The danger is that disengagement from short-term developments leads academic economists to ignore medium-term trends that they can address. If so, the true reason why academics missed the crisis could be far more mundane than inadequate models, ideological blindness, or corruption, and thus far more worrisome; many simply were not paying attention.

Rajan’s explanation for the failure of the academic economics profession to foresee the crisis should be more disturbing to academic economists than the popular criticisms. The shortcomings mentioned in the popular explanations are more easily corrected. The vast majority of academic economists have not benefitted at all from lucrative outside consulting contracts. There exists a spectrum of opinions within the economics profession even if a narrow perspective dominated macroeconomics. Economists are already at work to alter the assumptions in their models that have been linked directly to the financial crisis. (This is no guarantee that altering these assumptions will prevent future crises.)

On the other hand, virtually all academic economists are “specialized” in one or another compartmentalized sub-discipline of economics. It would probably take a generation before academic programs produce and reward “Renaissance” academic economists. It will also take years (a generation?) for the degree of academic disengagement “from the real world” to be reduced significantly.

However, Rajan also ignores the fact that academic and professional economists (his distinction) share many of the same problems. “The difficulties of forecasting” exist for both academic and professional economists. This is important given the existence of lags in the policy process. In a book titled “Beyond Mechanical Markets: Asset Price Swings, Risk and the Role of the State”, Frydman and Goldberg address some of difficulties beyond those raised by acknowledging the short-comings of models that incorporate “rational expectations”. They address difficulties inherent in economic modeling and forecasting in general. Some of the salient findings have been cited in reviews and blog posts (see here and here). Quoting from one of the reviews:

Frydman and Goldberg’s thesis deals with more fundamental macroeconomic matters: To what extent can we predict the future? Is there a mechanical causal link that we can ever truly identify and quantify between past and future? They gather and deploy their intellectual confederates: Frank Knight, John Maynard Keynes, Friedrich Hayek, Karl Popper. They argue that rational expectations is one method, certainly a ubiquitous one, based on what they call a “fully predetermined model,” in which market players act as robots and markets operate as a kind of machine; another predetermined approach, they argue, is the New Keynesian school, that is the formalization into mathematical models of Keynes’ “General Theory” of 1936; a third includes some of the more mechanical tendencies of the behavioral school. “To portray individuals as robots and markets as machines,” they write, “contemporary economists must select one overarching rule that relates asset prices and risk to a set of fundamental factors such as corporate earnings, interest rates and overall economic activity, in all time periods. Only then can participants’ decision-making process ‘be put on a computer and run.

(The book) … marshals a powerful argument that’s bolstered by empirical reality: the eternal failures of mechanical forecasting; the sheer difficulty of beating the market with consistency; the unforeseeable ways that history unfolds. The belief in precise prediction resembles a kind of utopian project, a tower of economic Babel. … They quote Popper: “Quite apart from the fact that we do not know the future, the future is objectively not fixed. The future is open: objectively opened…

…. the insurrection Frydman and Goldberg argue for is far greater than just an overthrow of rational expectations; it’s an entire economic world view that claims the power to accurately predict, forecast and capture market reality …

The perspectives of Rajan and the F&G book have implications not only for financial markets, economics, and economic forecasting, but for economic policy beyond its interaction with asset prices. Model-driven financial and economic activities do not always produce the expected outcome. Firms will not always maximize profit streams and policymakers will fail to minimize the “misery index”. On the private side, think LTCM. On the policy side, policymakers did not plan or expect the inflation of the 1970s. The current set of policymakers did not expect the crisis or the great recession, but it is clear that policy through omission, commission or both contributed to this less than positive outcome.

The F&G perspective calls attention to the fact that there is risk attached to policy, especially during periods dominated by non-routine changes, e.g. globalization and rapid financial innovation. The inherent risks attached to policy, in turn, imply that while the Fed’s mandate to hit targets for inflation and unemployment makes wonderful sense politically, pursuing it will at times contribute to inferior outcomes. Notwithstanding all the false precision attached to forecasts and estimates e.g. the existence of the great moderation and the equivalence of $600B of QEII with exactly 75 basis points of reductions in the Fed funds rate.

The risks in policy and the possible costs associated with policy errors suggest that policymakers should not behave as if their model-driven decisions will invariably produce optimal outcomes. Policymakers should be more open than they have been to evidence that indicates that the chosen policy stance is inconsistent with sustainable growth and price stability. Given the specialization in the economics profession as well as evidence that economists or at least economists in macro-economic area are subject to “group think”, the policy process must include individuals who think outside the current box and can see when the reigning model omits non-routine developments which may play a crucial role in driving outcomes.

Economic policy is too important to be left economists who do not appreciate the limitations of economic models. If you think that being a professional economist is necessary to be a good policymaker ask yourself: Whom do you think history will look on more favorably the non-economist Volcker or one of the academic/professional economist Burns, Greenspan or Bernanke?

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  1. alex

    Frydman and Goldberg’s work was long preceded by that of Berra, who said “it’s tough to make predictions, especially about the future”.

    BTW, that’s not to disparage Frydman and Goldberg’s work, who may well have built on Mr. Berra’s insight with more detailed analysis.

    1. kievite

      Is not believing in nonsense such as “rational expectation” consitute a precondition to being employed in academic economic field?

      Rajan’s “unpredictability of future” defence is just another smoke screen designed to mask the fact that there is no economics as an academic discipline, only “political economy”. And most current economics textbook’s math jumbo-mumbo is just a nice trick to conceal this fact.

  2. Foppe

    This is a very interesting piece, and won’t pretend I can do it justice in my reply.
    Having said that, it is a shame that the author did not try to engage more explicitly with the politics of economics, and, more broadly, with the way specific kinds of ‘economic theory’ are used by policy-makers to further an agenda (the direction of which is influenced by the shape the theoretical works takes). By focusing almost entirely on the epistemic issues encouraged by the ‘compartmentalization’ of knowledge, he’s left himself little room to explain why it is that economists are so keen on reductionist analysis (a tendency also visible in other social sciences), or why some types of theorizing are so marginalized, while others are so popular. (Stiglitz went into this question a little bit in his INET talk.) The belief that models don’t need to conform to reality is part of that, but doesn’t explain why economists themselves accept this — fairly unscientific — bit of dogma.

    One of the most important reasons why I find David Harvey’s Enigma of Capital as interesting as it is is because Harvey offers a very plausible framework in which both economic growth and stagnation make sense, and specifically how these two are related. And, probably more importantly, because he describes the economic development of the globalizing world, rather than just of single nations. Given that narrative, it is fairly astonishing to see how economists still cannot explain the stagnation in the US that started in the 1970s, why the wage repression made a little bit of sense then but no sense now, and why unrestricted capital flows are so problematic.
    The fact that DSGE-modelers assume growth and generally do not allow for stagnation is only one part of the problem; the other part is that these models generally only look at the dynamics within a single country. Yet pretending the world still consists of single nations that can be “analyzed” in isolation is still immensely helpful to people pushing specific agenda’s.

    1. Foppe

      (Note that my suggestion that ‘i don’t think i can do it justice’ should not be taken very seriously; i meant to rephrase it, but i got distracted and forgot to edit it.)

    2. StrayCat

      Your critique is right on. To ignore stagnation and readjustments of economic behavior is unscientific, and arises from a subjective, politically motivated bias.

  3. RebelEconomist

    I would raise the pressure to publish theoretical work in a stylised format as one reason why few academic economists saw the crisis coming. Publication in the most prestigious theoretical journals is so vital for one’s career, and the difficulty of the mathematical style generally used so great, that most ambitious academic economists simply do not have time to follow economic current affairs. I tried to become an academic economist after a career in practical finance, and I was surprised at how little such experience was valued. The more theoretical academic papers tend to assume a standard stylised world, and then proceed to manipulate it, often following on from previous papers, and it would be more difficult to get work based on different, more realistic assumptions accepted. Even the students intending to pursue a practical career were concerned to learn the standard assumptions and techniques in order to get the good degree they needed to get a job. My suggestion therefore would be for a wider variety of work, including teaching, writing books, engaging in media discussion, and even blogging, to be valued for the purposes of securing tenure of individual academics and rating departments.

    1. alex

      “difficulty of the mathematical style generally used so great”

      Is it? I honestly don’t know, but admit that I’m a bit skeptical. How is it difficult? Is it the math per se? I know that Steve Keen, for example, castigates economists for lacking mathematical sophistication. I’m honestly interested in your reply.

      “The more theoretical academic papers tend to assume a standard stylised world, and then proceed to manipulate it …”

      In other words it’s a circle jerk. Scientists are supposed to create theories that can be shown to jibe with reality, not make assumptions that they don’t bother to verify.

      1. Philip Pilkington

        “I know that Steve Keen, for example, castigates economists for lacking mathematical sophistication.”

        So do most mathematicians. Keen’s main gripe is that economists use static mathematical models — he advocates a dynamic approach that is more complex (I’m suspicious of both, but that’s besides the point).

        Philip Mirowski also claims that the mathematics is unsophisticated. He claims that it’s just a takeover of 19th century engineering principles.

        I think this is more anthropological. The mathematical economists are often second-rate physicists and engineers. But they get a certain prestige granted to them by other economists who look up to them as ‘real scientists’.

        This prestige is granted by the fact that the other economists — usually the one’s we encounter at policy-level and as commentators — attribute to the mathematical economists what Veblen called ‘esoteric knowledge’; that is, knowledge with no practical use, but that lends a person authority (priests and shamans are thought to have similar ‘knowledge’).

        1. readerOfTeaLeaves

          Remarkable post and comments.

          For the first time in many, many years I am placing a whole new value on my early college-university education in two institutions that boldly emphasized interdisciplinary curriculum.

          Per Alex’s question about the maths: because my original training was moving from counting bacteria in science labs in the a.m. on to economics seminars in p.m., the kinds of exponential maths required to measure the rapid growth rates of bacilli were quite naturally mapped onto economic data later in the day. Ditto log scales for economic shrinkages, in much the same way that a plague of fruit flies all die off in a period of hours (due to their very short life spans).

          I forget that I had such an extraordinary education. (Indeed, I walked away from it for other endeavors.)

          Consequently, I forget that others who have sat through many, many hours of what you point to as ‘static math’.

          After so many years and hours of banging my head against a wall, or my desk, and moaning, “HOW can these [economists, highly paid academics, a la Glenn Hubbard] BE **this** blind, ideological, and stupid?!!” I think that I’m finally connecting a few dots.

          Too many narrow static-math and straight econ courses.
          Too little history, too few experiential [ or ’empirical’] science labs, and not nearly enough other, more broad experiences (art, music, biology, geography…).

          I tend to forget how narrowly many people are educated.
          I think Alford points to some pretty solid evidence for seriously revamping a lot f Econ Dept curricula.

          As for Mishkin, my recollection from “Inside Job” was not simply that he acted as a consultant; I follow the point that it’s natural to consult. What he did that is considered in my personal experience as a sign of depravity, and unforgiveable was that **he altered his bibliography!**.

          We all know that people make errors.
          Science — true science! — if full of them.
          Science is the process of correcting errors, of locating errors, in something of the way that a sculptor makes fine, tiny alterations in order to better grasp reality.
          That is natural and forgiveable.

          What is not condoned, cannot be condoned, is **altering the evidence, or altering the record**. Mishkin’s bibliography had been altered, and “Inside Job” showed that as a fact.
          THAT was the thing that revealed him as a craven tool, a man of more cowardice and ambition than principle.

          We all make mistakes – most of us make plenty of them.
          But you can only count on those who ‘fess up to their errors and seek to correct them.
          How could you count on Mishkin for anything, after what he did with his bibliography?
          That man showed himself as untrustworthy, and it was the ‘misprint’ in the bibliography that was his undoing.

      2. RebelEconomist

        I mean things like representing preferences with a cobb douglas function in order to derive demand curves mathematically. Since such a function is chosen for its mathematical tractability rather than as an accurate representation of consumer preferences, the exercise adds no more economic understanding than, say a graphical explanation, which most people find easier to understand. Nor is such mathematical analysis any more rigorous, especially when fine points such as checking the second order conditions (which is even more complex involving Hessians) are left out. And if following an existing explanation in this style is hard, it is harder still to develop for a new problem.

  4. Jessica

    It is interesting in a Kremlinological kind of way that a former NY Fed acknowledges the problems in economics.
    Also indicative that he does not even touch on the real source of blindness in economics. Economics see only what those in power want seen. It blindnesses are the same as those of our political system. That is not a coincidence.
    I am sure that most readers of this blog already know that. I just thought it needed to be pointed out. Since, thankfully, we are one of the venues where mentioning the most important realities is not taboo.

    1. Foppe

      To emphasize a different kind of problem with economic ‘analysis’ (that I allude to in my mention of Harvey above — namely, the fact that economists love to ignore issues to do with political and geographical formation), allow me to quote the following passage, where he makes a similar point to yours:

      When theorists have ventured very far in this direction, they find the insertion of geographical and anthropological perspectives disruptive for how the universal theory actually works. The mere introduction of spatiality (let alone environmental dynamics and the politics of place formation) into economic theory, for example, has a powerfully disruptive effect upon its foundational propositions. In 1957, T. Koopmans and A. Beckman published an article that threw “serious doubt on the possibility of sustaining an efficient locational distribution of activities through a price system.” The “decisive difficulty,” Koopmans reported, is that the “dependence of one man’s [locational] decision criterion on other men’s decisions appears to leave no room for efficient price-guided allocation.” Throw spatiality into the hopper of economic reasoning, and the whole logic falls apart because prices cannot do their proper work of coordinating activities in an efficient and optimal manner. Koopmans and Beckman were so distressed by the result that they delayed publication for several years. Koopmans got his Nobel Prize, and most economists have cheerfully avoided the paradox ever since. Only recently did Paul Krugman return to the question in order to offer at least a partial mathematical solution. But that solution is neither complete nor foundational, and in any case it is marginalized within economics as a special kind of geographical applica biJity precisely because of its troubling implications. Given the hegemony of economic thinking, it is passing strange that a discipline that cannot incorporate raw spatiality (surely a universal conditionality of all economic activity), let alone real geography or anthropology, into its fundamental propositions, and which still cannot adequately explain geographical differences in the wealth of nations (except by crude versions of geographical determinism), has such a profoundly influential position in our knowledge structures, over public policy as well as in the media. That this theoretical apparatus ends up obscuring the class character of capitalist accumulation through market exchange is not entirely accidental.

      (David Harvey, Cosmopolitanism and the Geographies of Freedom, p. 108.)

  5. Alex SL

    Ideology and corruption work for me, as explanations. Group think – you only get papers into the good journals or jobs in your field if you do not rock the boat too much – is also a form of corruption.

    But what I find weirdest here is the premise of the whole deliberation: that economists did not foresee the crisis. Didn’t they? Some of them warned of the housing bubble years before it burst. The media discussed and it was common knowledge in my country (Germany) throughout the naughties that the US citizenry is running up too much consumer debt, and that that is not sustainable in the long run. Everybody who did not go “lalala I can’t hear you” KNEW, just as it did not come as a surprise to anybody outside of the USA that there were no WMDs in Iraq.

    This is not meant to imply that Germans are any wiser re economic policy, see Euro-crisis. But everybody saw the moat in the eye of the chap across the Atlantic, so it is not as if the information was not available.

    1. StrayCat

      You are right, of course, and many here, including many in the general populace knew where we were heading and had a general understanding of why. The claim that people missed the signs is a form of group amnesia that allows the mandarins to refrain from publishing an indictment of their benefactors, and to avoid personal and general responsibility for their failure to do what they were hired to do.

  6. Richard


    Thanks for the insightful post. I think it would help the economics profession if at the start of every paper they were required to publish a warning disclosure:

    The following paper is based on many assumptions that may not reflect what actually occurs in the real world. As a result, any policy recommendations in this paper should not be followed as they may actually do dramatically more harm than good.

    1. Anonymous Jones

      I would append to “As a result, any policy recommendations in this paper should not be followed as they may actually do dramatically more harm than good” the following: “On the other hand, the policy recommendations in this paper may also inadvertently do dramatically more good than expected. Proceed with caution.”

  7. Dan Kervick

    Economists will never be able to predict the future. Human beings participating in the economy are constantly innovating and responding to prevailing patters by generating novel patterns. They work to improve their positions by understanding how others are behaving, and then behaving differently themselves. So any snapshot model of the way the economy works at any given time, no matter how accurate, will become inaccurate over time as real-world participants change their behavior.

    What I’m most concerned about is not that economists can’t predict what is going to happen. It’s that they don’t understand the things that have already happened, and that are ongoing. And if they don’t understand what is going on, they will not be able to offer policy suggestions for fixing ongoing problems.

    I think the isolation from the real world is an acute problem. People who are actually down in the trenches somewhere working in the economy – and not just in the rarefied academic sector thereof – are more likely to understand what is going on. At the very least, their day-to-day experiences and observations would provide them with a host of hypotheses to test.

  8. Hugh

    Horse hockey. There are all these myths at play in this article. The first is that bubbles and systemic risk factors are difficult and often even impossible to see. Bubbles must by their very definition be huge in order to have the effects they do. They can be seen years before they burst. What we are being asked to accept here is on the order of someone standing in front of Everest and saying, nope, can’t see it, or looking out over the ocean and asking, so where is all the water?

    So when a Ragan or Roubini get all the credit and elevation to seerdom for seeing the obvious, I don’t really know how I am supposed to react. It’s nice that they did but why didn’t everyone else in the economics community? And treating them like New Age shamans? Thanks but no. While Ragan and Roubini saw the bubbles that everyone else should have seen, they are still both traditional in their approach to economics and otherwise fit easily into the neoliberal paradigm.

    As Alex SL notes, a lot of people in fact did see the housing bubble. I didn’t start looking at the economy more closely until 2007 and then only specific segments of it, initially dealing with energy, but in 2005 I knew there was a housing bubble and that the effects of its going splat were going to be devastating. Similarly, 3 years before the dot com bubble burst it was clear even to me that it was a bubble completely untethered to reality. And in the 1990s when I first heard of derivatives my first thought was that’s something that could blow things up.

    I reject that this stuff is esoteric or that special oracular vision is needed to see it coming. I mean we talk about the new crop of systemic risks everyday here, the bubbles in banking, real estate and overcapacity in China; sovereign debt and banking insolvency in Europe; and TBTF, stock and commodities bubbles, the mortgage morass, high unemployment, private debt, derivatives here, and of course overarching these and tying them all together the 3 great issues of kleptocracy, class warfare, and wealth inequality.

    Ragan throws up a strawman to deal with the issue of corruption in economics. But the problem is not a bag of money slipped under the table as he would have it, but institutional. It’s about careers, that gig at the Fed, that grant, that position at university X, that paper published, that promotion, tenure, that government position, that media that want you as a pundit. For someone who made his reputation from not ignoring the obvious, Ragan sure can ignore the obvious when he wants to.

    “Economic policy is too important to be left economists who do not appreciate the limitations of economic models.”

    A nice sentiment that completely misses the point. This is not a bug but a feature. Kleptocracy for the nth time is a system. The looters on Wall Street own the policymakers who legitimize and facilitate their looting, they own the academics who rationalize it, and the media that variously sells these rationales or distract us from the looting and the looters with the latest missing white girl, grisly murder, or political sexcapade.

    1. StrayCat

      Right on all points. And your observations apply to all of the academic disciplines and all of the regulatory bureaucracy. It is a feature of our overly complex governmental and economic systems. Because there is too much to properly oversee and control, there is so much room for the mandarins to play status games and experiment with our money.

    2. liberal

      Bubbles must by their very definition be huge in order to have the effects they do. They can be seen years before they burst. What we are being asked to accept here is on the order of someone standing in front of Everest and saying, nope, can’t see it, or looking out over the ocean and asking, so where is all the water?


      One thing I hate it is when economists retort that “yeah, well, geophysicists can’t predict when/where the next earthquake will occur.”

      The geophysical analogue of the housing bubble circa 2005 isn’t an earthquake but rather was huge streams of lava flowing down the sides of a volcano, with a town dead in the middle of the path of flow.

  9. craazyman


    I knew that DNA is a radio when I was 5 years old, but at that age my analytical framework was not sturdy. When Trudie came to the side yard with her brother Werner her arms stuck out of her chest like stubs, waving through short sleeves in the summer afternoon. I felt a surge of panic and yelled “Monster, monster!” and ran into the back yard, in tears, screaming and looking frantically for my mother. The expression on Trudie’s face and on Werner’s face as they looked at each other and at me — it wasn’t pain or shame or anger, but a bewilderment and astonishment and shock, oddly composed and puzzled more than alarmed or angry.

    Those 5 seconds are in my mind now like a hologram, repeating an eternal loop of perception and feeling and panic at the strange and jarring form of arms protruding from a child’s chest. We were friends later, in our group of kids 6, 7, 8 years old, and I don’t think we ever talked about the monster scream. I was embarrased and ashamed and sorry and sad as we became friends and it was clear the monster was a little girl who laughed and played like all of us, her life overtaken by some horror that was so natural to her that it was her Self, and that overwhelmed us into an uncomprehending silence.

    There is something about economic logic that’s like thalidomide. It takes the Gnostic perception and strips it of empathy and insight and feeling and channels it through deformed mind sculptures, short hard arms of logic as fragile and nourishing as ice or bones, protruding it through equations that make deformed skeletons out of abstractions and take it so far away from life that it is almost a form of dying.

    The spectacle of it all makes my soul spirit surge with the convulsion of a form of mental shock. It’s something quite demonic really, they way it infects and distorts the awareness of things, the way it solidifies in a certainty the intellectual rigor of the insanity of the removal of empathy from it’s proscriptions. The anonymous victims it leaves and the pain it spreads. One wonders whether it’s some trick played on mankind by a higher and more remote intelligence than the intelligence we can feel and know and use with our limited perceptions, and that we defy only with the innate, instinctive and inarticulate knowing that distinguishes, at the most insightful level of spirit, truth from illusion and life from death.

    How can it even be without knowing what money is? How can it mistake a list of attributes for an essence? It has to start from a beginning and not from the middle of things to be truly sane. It has to start from true nature, and not from a logically induced mind coma state of contra-naturam, blind to the externalities of its abstractions, deaf to the screams of its victims, refined and sealed over in its cold logical incomplete and vacuous perfection.

  10. liberal

    Economics itself provides the mechanism whereby most economists (people like Dean Baker excepted) didn’t see the bubble: incentives.

    The profession as a whole is incentivized to produce results pleasing to the rich and powerful. A priori, this is what we’d expect, and empirically, this is what we see.

    In the case of the housing bubble, the players closest to the action were benefiting from “heads I win, tails you [the taxpayer] lose,” and were largely rich and powerful. Thus, economists pretended nothing was going on.

  11. kernel alive

    economic models are inherently flawed.

    Rajan dismisses the argument that economics lacked relevant models. He cites the fact that academic economists have studied and modeled many of the factors that contributed to the crisis. Rajan does, however, cite the compartmentalization of economics which leaves macroeconomists ignorant

    Just to keep the mathematical model of economic-simulation-guys honest, you got to keep “public policy economist” out of the situation room. Here you got the epitome of labour division. Here you got your highest priority for division of labour.


  12. El Cid

    Whether it be economists or politicians or journalists, we sure do use a crude notion of “corruption” to talk about the influence of wealth over such people.

    You don’t exert power over people merely by reaching out to them and getting them to change their minds about something with the lure of money.

    The biggest way that the super-rich get such people to favor their agenda is to influence *which people* get to be in more policy-influential positions. (Including, of course, hiring and promotion practices and patterns in major media organizations.)

    So if you wanted to get economists — of *any* general ideological orientation — who favored your desired views on some range of issues, you’d fund the sorts of think tanks and policy groups and endowed chairs and so forth, and you’d over time invite and promote the ones who saw things most clearly your way.

    But that could do so effectively. If someone agrees with your agenda, but has no likelihood of influence anyone else to do so, who cares?

    You don’t have to do this in a clearly conscious way, either, no evil laughter and lightning through the window.

    You and your peers and the people they work with know who the people are who seem to have the most ‘sensible’ outlook, or the people who do other work for you know.

    1. Toby

      Well said, El Cid!

      Conspiracy is one of those words that’s most often used poorly, perhaps it even has a poor definition. If the road to hell is paved with good intentions then all convictions passionately felt, that lead to a fanatical or even stubborn shaping of ‘reality out there,’ engender conspiring of one kind or another. And the more powerful you are, the more passionately you believe you ‘know’ the way the world should work, the more able you are to conspire effectively to ‘do good,’ to keep things working as you ‘know’ they should.

      For me this is a key problem with hierarchies. They are about exploitation and a grossly disproportionate distribution of their product; they are elitist by definition. This leads over time to institutions resistant to change, hell-bent on protecting the status quo which justifies their existence, an existence which becomes more precarious as rich and poor divides widen. While the System ‘works’ you could call such a dynamic a necessary evil. But, because absolute power corrupts absolutely, when the time for radical change comes, it can only be effected–if at all–through collapse and violence. So, regardless of naive notions of ‘good’ and ‘evil’ conspiracy and conspiring can be thought of as systemic properties of hierarchical social systems. They’re baked into the hierarchical cake, so to speak.

      Humanity has accrued in its wider cultural lexicon deep experience with egalitarian (or anarchical) social systems. From what I’ve read of these, corruption and conspiracy play a far lower role. They are also more sustainable since they are more cooperative. A greed-based rat race to secure as much as possible for me and mine at the cost of you and yours, does not arise. This is not to be sniffed at, indeed I believe humanity is now tasked with constructing a new (or perhaps updated) egalitarianism, which includes somehow the organizational skills our experiments with hierarchy have taught us. To get there, one of the most important challenges we face is redesigning the money system, and economics with it (since they are Siamese Twins), so as to allow a far more egalitarian system to emerge and prosper. Only thereafter will we have a chance of not wiping ourselves out, and much of the planet’s ecosystems with us, fighting to protect the very system whose endless greed is destroying us.

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