Bill Black: Bloomberg Notices Paul Romer’s Indictment of Macroeconomics

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly published at New Economic Perspectives

Bloomberg has written an article about the origins of Paul Romer’s increasingly famous critique of modern macroeconomics.

His intention actually had been to write a paper that would celebrate advances in the understanding of what drives economic growth. But when he sat down to write it in the months before taking over as the World Bank’s chief economist, Romer quickly found his heart wasn’t in it. The world economy wasn’t growing much anyway; and the math that many colleagues were using to model it seemed unrealistic. He watched a documentary about the Church of Scientology, and was struck by how groupthink can operate.

So, Romer said in an interview at the Bank’s Washington headquarters, “I just thought, OK, I’m going to say what I think. I don’t know if I’m the right person, but no one else is going to say it. So I said it.”

The upshot was “The Trouble With Macroeconomics,” a scathing critique that landed among Romer’s peers like a grenade.

A bit of background makes the first paragraph more understandable. Romer’s specialty is developmental economics.

There are many economists who have said for years that modern macroeconomics is an abject failure. But all economists are not equal, and Romer is both an extremely distinguished economist and the World Bank’s chief economist. When he writes that macroeconomics is absurd his position gets vastly more attention from the field.

The Bloomberg article humorously summarizes Romer’s article.

“For more than three decades, macroeconomics has gone backwards,” the paper began. Romer closed out his argument, some 20 pages later, by accusing a cohort of economists of drifting away from science, more interested in preserving reputations than testing their theories against reality, “more committed to friends than facts.” In between, he offers a wicked parody of a modern macro argument: “Assume A, assume B, … blah blah blah … and so we have proven that P is true.”

The idea that consumers and businesses always make rational choices pervades mainstream economics. Romer thinks that’s not only wrong, but may lead to the misleading conclusion that government action can’t fix big problems.

There is no better place to be writing this than from (nearly) Minneapolis, for the University of Minnesota’s economics department is the most devoted coven worshipping the most extreme form of “rational expectations.” The most famous cultists have now relocated, but the U. Minnesota economics department remains fanatical in its devotion to rational expectations theory.

A belief that consumers and businesses always make rational choices does not “pervade mainstream economics.” Mainstream economics is increasingly influenced by reality, particularly in the form of behavioral economics. Behavioral economics, which has led to multiple Nobel awards, has many currents, but each of them agrees that consumers and business people typically do not make rational decisions even in simpler tasks, much less demonstrate the ability to predict the future required by rational expectations theory. Similarly, even the proponents of modern macroeconomics admit that its predictive ability – and predictive ability is supposed to be their holy grail of legitimacy – is beyond pathetic. What is true is that mainstream economics’ most egregious errors have come from assuming contrary to reality in a wide range of contexts that corporate officers, consumers, and investors make optimal decisions that maximize the firm or the household’s utility.

In any real scientific field modern macro would, decades ago, have been abandoned as an abject failure. Romer, therefore, is not storming some impregnable bulwark of economics. He is calling an obvious, abject failure an obvious, abject failure. Private sector finance participants typically believe the academic proponents of rational expectations theory are delusional. Romer is calling out elites in his profession who have ignored these failures and doubled and tripled-down on their failed dogmas for decades. This makes the Bloomberg article’s title deeply misleading: “The Rebel Economist Who Blew Up Macroeconomics.” Romer is not a rebel. He did not blow up academic, mainstream macroeconomics – the academic proponents of modern macroeconomics blew it up decades ago. Romer is mainstream, and he is sympathetic on personal and ideological grounds to the theoclasscial economist most famous for developing rational expectations theory. Romer has strongly libertarian views and did his doctoral work under Robert Lucas. Romer has long been appreciative of Lucas. All of this means that Romer’s denunciations were sure to hit home far harder with mainstream and theoclassical economists than anything a heterodox economist could write.

The same Bloomberg article made a key factual claim that is literally true but misleading.

What’s at stake far exceeds hurt feelings in the ivory tower. Central banks and other policy makers use the models that Romer says are flawed.

Central banks and private economic forecasters rarely use modern macro models, though they have begun to use New Keynesian models that are hybrids. They do not do use “freshwater” models because they are known to have terrible predictive ability and because alternative models not based on rational expectations have far superior predictive ability. The private financial sector typically does not rely on modern macro models, even the New Keynesian hybrids. Romer is not saying that the models are “flawed” – he is explaining that they are inherently failed models. Worse, he is saying that the designers of the models know they are failed and respond by gimmicking the models by littering them with myriad assumptions that have no empirical or theoretical basis and are designed to try to make the models produce less absurd results.

I explained that Romer was far from the first to call out modern academic macroeconomics as a failure but that he is a prominent mainstream economist. The Bloomberg article’s most interesting reveal was the response by the troika of economists must associated with rational expectations theory to Romer’s article decrying their dogmas.

Lucas and Prescott didn’t respond to requests for comments on Romer’s paper. Sargent did. He said he hadn’t read it, but suggested that Romer may be out of touch with the ways that rational-expectations economists have adapted their models to reflect how people and firms actually behave. Sargent said in an e-mail that Romer himself drew heavily on the school’s insights, back when he was “still doing scientific work in economics 25 or 30 years ago.”

What this paragraph reveals is the classic tactic of theoclassical economists – they simply ignore real criticism. Lucas, Prescott, and Sargent all care desperately about Romer’s criticism – but they all refuse to engage substantively with his critique. One has to love the arrogance of Sargent in “responding” – without reading – to Romer’s critique. Sargent cannot, of course, respond to a critique he has never read so he instead makes a crude attempt to insult Romer, asserting that Romer has not done any scientific work in three decades.

The rational expectations purists have been unable to come up with a response to their predictive failures and their false model of human behavior for thirty years. The Bloomberg article does not understand a subtle point about their non-defense defense, as shown in these key passages.

Allies of the three Nobelists have been more outspoken, and many of them point out that Romer — unlike Keynes in the 1930s — doesn’t offer a new framework to replace the one he says has failed.

“Burning down the edifice, and saying we’ll figure out what we’ll build on its foundations later, just does not seem like a constructive way to proceed,” said V. V. Chari, an economics professor at the University of Minnesota.

Romer’s heard that line often, and bristles at it: “I’m saying, ‘the car is broken.’ And everyone’s saying, ‘Romer’s a terrible guy, because he couldn’t fix the car’.”

What the rational expectations devotees are actually saying is their standard line, which is a radical departure from the scientific method. Their mantra is “it takes a model to beat a model.” That mantra violates the scientific method. Their models are designed to embody their rational expectations theory. Those models’ predictive ability is pathetic, which means that their theory and models are both falsified and should be rejected. The academic proponents of modern macro models, however, assert that their models are incapable of falsification by testing and predictive failure. This is not science, but theology.

V.V. Chari’s criticism of Romer is revealing. He complains that Romer does not want to “build on [rational expectation theory’s] foundations.” Why would Romer want to commit such a pointless act? Romer’s point is that rational expectations is a failed theory that needs to be rejected so macroeconomics can move on to useful endeavors.

A “foundation” in such a building metaphor is the deep, well-grounded stone or reinforced concrete beneath the visible building that is attached to solid bedrock. Rational expectations theory has no such empirical foundations. It was not based on testing that found that people behaved in accordance with the theory. Behavioral economics and finance, by contrast, is based on a growing empirical base – virtually all of which refutes the first three assumptions of the models. Similarly, the work of Akerlof (1970), Akerlof & Romer (1993), and the work of white-collar criminologists has falsified each of the first three assumptions of the models.

Further, the dynamic stochastic general equilibrium (DSGE) models routinely fail the predictive test and, as Romer details, fail despite the use of dozens of ways in which the models are “gamed” with arbitrary inputs and restrictions that have no theoretical or empirical basis. Chari is right to describe the modern macro model as an “edifice.” I would add that it is a baroque edifice top heavy with ornamental features designed to hide its lack of a foundation. Modern macro collapsed as soon as its devotees tried to build without an empirical foundation.

The rational expectation devotees respond that predictive failures – no matter how extreme or frequent – cannot falsify their models or their theories. The proponents claim that only a better model, with superior predictive ability can beat their model. That might sound acceptable to some, but there is a critical unstated twist. The many rival models actually used by the private sector and central banks that produce far superior predictive ability can never be treated as “better models” to these devotees because the models with far superior predictive powers reject rational expectations theory, rational decision-making, and the “budget constraint.” To the devotees, only DSGE models that accept this trio of market fictions are eligible to be acceptable “models.” Dr. Kocherlakota states that acceptable models “share five key features.” These five characteristics define DSGE models.

  1. They specify budget constraints for households, technologies for firms, and resource constraints for the overall economy.
  2. They specify household preferences and firm objectives.
  3. They assume forward-looking behavior for firms and households.
  4. They include the shocks that firms and households face.
  5. They are models of the entire macroeconomy.

Kocherlakota’s summary description is appropriately terse. He later explains the dogmatic gloss that devotees place on each of these five points. The “budget constraint,” for example, means that nations with sovereign currencies such as the U.S. cannot run deficits, even to fight severe recessions or depressions. Why? Because theoclassical economists are enormous believers in austerity. As Kocherlakota archly phrased the matter, “freshwater” DSGE models were so attractive to theoclassical macro types because their model perfectly tracked their ideology.

[A]lmost coincidentally—in these models, all government interventions (including all forms of stabilization policy) are undesirable.

Yes, “almost coincidentally.”

Specifying household preferences and firm objectives is equally erroneous, as Akerlof and Romer’s 1993 article on “Looting” demonstrated. “Firms” do not have “objectives.” Employees have “objectives,” and the controlling officers’ “objectives” are the most powerful drivers of employee behavior. As Akerlof and Romer (and every modern crisis) demonstrated, this frequently leads to firm practices that harm the firm, the consumer, and the shareholders. Such behavior, however, is impossible under the second assumption, so any model (such as control fraud or “looting”) that violates the assumption is not eligible to be a rival model because it these superior models do not produce “general equilibrium.” The “GE” in a “DSGE” model is general equilibrium, so rival models from economics and criminology that note that the economy is not a self-correcting apparatus that produces general equilibrium are ruled out as superior models even though they are superior in that they have an empirical and theoretical basis and demonstrate far superior predictive results.

Kocherlakota unintentionally highlighted modern macros’ inability to incorporate even massive frauds driving national scandals and banking crises, despite the efforts of Akerlof (1970) (a market for “lemons”) and Akerlof and Romer 1993: (“looting”) in this passage.

In the macro models of the 1980s, all mutually beneficial trades occur without delay. This assumption of frictionless exchange made solving these models easy. However, it also made the models less compelling.

He then goes on to a delighted description of macro economists now sometimes building in (arbitrary) lags (“frictions”) in the time required to accomplish “all mutually beneficial trades.” But what of the three great fraud epidemics that produced the U.S. financial crisis and the Great Recession? Sorry, that’s not allowed into the “friction” canon. The market model is still one of perfection (albeit slightly delayed). It does not matter how many massive financial scandals occur in which the largest UK banks and Wells Fargo deliberately abuse their customers by encouraging them to engage in transactions that will harm them and make the bankers rich. It doesn’t not matter that over ten million Americans were induced by bankers and their agents to pay excessive interest rates in return for yield spread premiums (YSP) to the bankers and brokers. None of these things are allowed to happen in these models. Your better model, which includes such frauds and abuses, is not allowed precisely because it (a) is better and (b) falsifies the theoclassical ideology underlying “rational expectations” theory.

The assumption of “forward looking behavior” produces “expectations,” which are assumed to be accurate and rational. Theoclassical proponents claim that we all have the ability to predict vast aspects of the financial future. While we are not perfect, we are optimal in our forecasts given the state of knowledge. If your rival model lacks rational expectations, it isn’t a real model. Romer rejects the rational expectations myth, so he is incapable of presenting a superior model to the devotees of rational expectations.

If macroeconomics, outside the cult of modern macro, were a car, it would not be “broken.” It would be episodically broken when the rational expectations devotees got hold of monetary or fiscal policy. The rational expectations model fails the most fundamental test of a financial model – people trying to make money by anticipating the macroeconomics consequences of changes in monetary and fiscal policy overwhelmingly do not use their models because they are known to have pathetic predictive ability. The alternative models that embrace Keynesian analysis and are not dependent on the fiction of rational expectations function pretty well. The real world macro car, when driven by real world drivers, works OK. Essentially, the rational expectations devotees say that we can never drive the macro “car” because the public will defeat any effort to drive the economy in any direction. Instead, the economy will lurch about n response to random technological “shocks” that cannot be predicted because they occur without any relationship to any public policy choices.

Romer takes particular delight in shredding the pretension to “science” in the model’s abuse of shocks. Again, however, the Bloomberg article seriously misleads in making it appear that his critique of shocks is novel. Then Minneapolis Fed Chair Dr. Kocherlakota (formerly chair of the U. Minnesota economics department, where he was a “rational expectations” devotee) forcefully owned up to the egregious predictive failures of the models. He acknowledged that “macro models are driven by patently unrealistic shocks.”

It is unfortunate that Bloomberg article about Romer’s article is weak. It is useful, however, because its journalistic inquiry allows us to know how deep in their bunker Sargent, Lucas, and Prescott remain. They still refuse to engage substantively with Romer’s critique of not only their failures but their intellectual dishonesty and cowardice. It is astonishing that multiple economists were awarded Nobel prizes for creating the increasingly baroque failure of modern macro. In any other field it would be a scandal that would shake the discipline to the core and cause it to reexamine how it conducted research and trained faculty. In economics, however, a huge proportion of Nobel awards have gone to theoclassical economists whose predictions have been routinely falsified and whose policy recommendations have proven disastrous. Theoclassical economists, with only a handful of exceptions, express no concern about these failures.

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44 comments

  1. Portia

    I am completely confused about the prediction of “rational choices”. Do they include going bankrupt on purpose and letting your investors take the hit, burning your building down for the insurance money, hostile takeover behavior where businesses are run into the ground on purpose, tax strategies, people going on unemployment when they want a vacation from work, and on and on? These are decisions that have a rationale for the people who make them, and they have not been uncommon. Perhaps “economists” are best off observing not predicting “human behavior”.

    1. ChrisPacific

      It varies by economist, but Mankiw for example has said that it’s perfectly rational for CEOs to commit fraud. Here is Black on the subject from a while back:

      http://www.nakedcapitalism.com/2016/05/bill-black-mankiws-mythical-ten-commandments-of-theoclassical-economics.html

      Mankiw is from Harvard so this is not a fringe viewpoint.

      You are correct that they should not be trusted with input into any decisions of consequence. Unfortunately their doctrine serves the purposes of certain powerful interests very well (such as CEOs that would like to commit fraud, for example) and they return the favour by way of generous ‘research grants,’ lucrative speaking engagements, and the like.

    2. Procopius

      I think Greenspan exemplified their beliefs when he said there was no need to regulate or supervise the market in derivatives because self-interest would lead financial firms to police themselves. They would be concerned to preserve a reputation for honest dealing, because everyone would know if they cheated and cease to deal with them. At one point he confessed that he was wrong, but he soon put that behind him and now is back to selling the same Randian snake oil as before (remember, he was one of the founding members of Ayn Rand’s cult, “the class of ’43).

    3. TG

      Excellent point!

      Yes, apparently “rational choices” also includes a rich person bribing a public official to allow them to steal from the public treasury. I mean, if the rich person can outbid other people attempting to bribe said official, should we not let the market rule? And “rational choices” also includes a rich person bribing/funding/donating to a department of economics to push a specific economic model because it is to their narrow advantage… so we have a free market in ideas, with academic truth going to the highest bidder! How could the ‘invisible hand’ possibly be doubted?

      It’s like the old saying, that “market failure” is a term used by economists who believe that the market cannot ever fail, for when the market fails.

  2. shinola

    I was fortunate enough to have an econ. prof. (mid 70’s) who was also my student counselor tell me that unless I intended to work for the gov’t or teach the subject, a degree in econ. was pointless. What’s taught in class has very little to do with the real world.

    Anyone who contends that econ is a “science” rather than philosophy is deluded or just trying to protect their place in the hierarchy. Seems that “physics envy” is never going away.

    I’ll see your DSGE model & raise with with the IBGYBG* model; in theory, you should win that hand but I’ll be walking away with the actual money.

    *(by the time this blows up) I’ll Be Gone & You’ll Be Gone

    1. redleg

      Science is a method. Economics can be examined scientifically. However, limiting the possible outcomes of testable hypotheticals or denying unsavory results does not follow the scientific method.

      1. aab

        So Economics could be a science, but it is currently a form of alchemy. Gol durn it, just one more tweak and I’m sure to produce gold!

        In case Yves sees this, I recognize that lots of economists do test their hypotheses, as mentioned above. Likewise, part of alchemical practice eventually became the study of chemistry. But the discipline overall seems to have a LOT of problems in this regard. My takeaway from the above is that it’s far too easy in economics to just make stuff up to serve rich people that has no validity at all. That wouldn’t be allowed in, say, virology. Or, more accurately, economics doing this and wrecking the world has led to it now being common behavior in areas like virology. But at least the formal process of executing the scientific method acts as a break on this behavior, eventually. You can run cons in real science but you will, eventually, get caught. What’s is there within the discipline of economics that functionally acts as a inhibitor to this behavior? Do the behaviorial economists have any thoughts on this?

        Also, none of these guys won “real” Nobels, right? (I am personally neutral about this issue, other than the amusement value of needling Krugman and these guys over it.)

        1. ChrisPacific

          There seems to be very little in the profession that inhibits it – on the contrary, there seems to be a strong culture of constructing plausibility arguments in support of orthodox assumptions and avoiding the hard questions, to the extent that actually attempting to follow the scientific method is a career-limiting move. (Romer acknowledges this in his paper and says that the reason he is able to say this stuff is because he no longer cares about academic career advancement). For example, Black pokes fun at the economist who tried to debunk Romer’s paper without having read it, but this is by no means uncommon in the profession – I’ve seen it plenty of times.

          The main inhibitor seems to be the fact that economists like to think of themselves as serious scientists with high academic standards. The effort of squaring that viewpoint with the theories and methodology that are standard practice in the profession must require considerable mental gymnastics at times, and some people aren’t able to manage it. Some of those will then decide that their scientific integrity is too high a price to pay for being part of the in crowd and sharing the payola, and will raise a fuss about it. Generally these people are spotted early on and weeded out, which is what makes Romer unusual – I’d be curious to know how he has advanced so far in the profession if he genuinely believes in the scientific method, as he seems to do. I imagine it’s either a recent revelation on his part or he is very good at camouflage.

  3. Simon

    Portia,

    I majored in economics. as you go up higher up into the dismal science, the more deranged it gets. The reason they are vague is because they don’t know what they are talking about. They don’t consider the real world, and as Bill Black’s so brilliantly points out, they are in no hurry to out themselves as frauds.

    1. Portia

      thanks, Simon. there must be something in those mental masturbation models for some people. justification for something the 99 % are all paying for most likely

    2. diptherio

      The reason they are vague is because they don’t know what they are talking about

      Which also explains about 90% of the math

  4. beth

    Thanks again, Bill. A thanks to Paul Romer and Bloomberg too. How long will it take for the NYT , FT, The Guardian and WSJ to understand?

    Do $$$ make one “smart?” /sarc

  5. Ruben

    I am not sure which is the greatest shortcoming of the macro-economy theory described by Black: rational expectations or global equilibrium?

    In some natural sciences, abandoning equilibrium models and replacing them with dynamic models have led to great progress, and looking at the actual time evolution of economies, there is a great deal of dynamics, such as growth, recessions, demography, natural catastrophes, immigration/emigration, resource discovery and depletion, technological progress.

    1. Jim A

      I sometimes like to use the analogy of the famous failure of the Tacoma Narrows bridge failure. The engineers calculated the maximum force that the wind would have on the bridge, but didn’t calculate the dynamic aerodynamic effect as the bridge deck swayed in the wind. The result was a spectacular failure.

    2. redleg

      “I am not sure which is the greatest shortcoming of the macro-economy theory described by Black: rational expectations or global equilibrium?”

      Yes.

  6. Watt4Bob

    Since our economy has been gradually going casino for so many years, it makes sense that the folks who hold the reigns would make every effort to assure that all their key players adhere to their singular perspectives.

    The most important of these perspectives is that there is no higher human purpose than to make a lot of money, in essence, that greed is good.

    Thus the problem facing economists worshiping at the altar of “rational expectations” is that the only rational expectation that is accepted as ‘truly rational’, is first and foremost, the love of money.

    This leads to problems for businesses, as truly selfish, and money-motivated people are actually rare, as most people have a wide range of possible motivations working in their lives.

    This is why business ‘leaders’ give prospective employees tests to find the people they can ‘trust’, which is to say find those who are motivated by money, which is the only motivating factor our masters find useful.

    Of course those who are motivated exclusively by the love of money are also those who believe that austerity is the proper medicine for the rest of us.

    There’s one more thing about people who are motivated only by the need to accumulate money, they also tend to steal anything that isn’t tied down.

    This doesn’t bother FIRE sector employers since they are only concerned to ferret-out those whose motivations might be polluted by inclinations other than greed.

    Anyway, it seems to me that the importance of ‘rational expectations’ is in predicting the behavior of FIRE sector employees, not the economy as a whole.

    As far as the bulk of humanity goes, the only true ‘rational expectation’ is that people have many and varied motivations that make it hard to predict their behavior.

    1. shinola

      Speaking of “going casino”…

      Hey Econ. Prof. – I’ll see your DSGE model & raise with my IBGYBG** model. In theory, you’ll win the hand but we’ll see who actually walks away the money.

      **(by the time this thing blows up) I’ll Be Gone, You’ll Be Gone

  7. dutch

    The Nobel Memorial Prize in economics promotes the illusion that economics is a science. It is better conceptualized as a literary genre, and economists should be forced to compete with other writers for the prize in literature.

    1. Iowan X

      Back in the old days, it was called “Political Economy”, and in my opinion, it’s the proper formation.

      From Wikipedia: “Political economy is a term used for studying production and trade, and their relations with law, custom, and government, as well as with the distribution of national income and wealth. Political economy originated in moral philosophy. It was developed in the 18th century as the study of the economies of states, or polities, hence the term political economy.

      A classic definition of the term was articulated in 1877 by Friedrich Engels: “Political economy, in the widest sense, is the science of the laws governing the production and exchange of the material means of subsistence in human society… Political economy is therefore essentially a historical science. It deals with material which is historical, that is, constantly changing.”[1].

      I also believe that the original name for the Department of Defense should be restored. In certain matters, it turns out I AM an “originalist”!

    2. Jeremy Grimm

      The Nobel Prize — other than the $$$$$$$ — has not been awarded in recent times for great work in economics any more than for great work in striving toward world peace — every beauty contestant’s greatest wish. The $$$$$$$ is good — drop some on me — but the prestige of the award is waning.

  8. Disturbed Voter

    We need to get back to basics, to the real economy of people and necessary supplies to support people. Model a simple city, with a simple agricultural hinterland. You can know how many bushels of grain equivalent are necessary for subsistence economy. You can know how many people you have in the countryside and in the city. You can know how many bushels of grain equivalent are in storage. You can estimate how much of the economy is barter and how much is cash purchase. You can know how much money is in circulation, and from those determine what velocity the money needs to have, to pay for all that bushels of grain equivalent. You don’t need calculus, just arithmetic. End the sophistry and obscurity thru unnecessary complexity.

    1. madame de farge

      Bill Black has a fascinating opinion on unnecessary complexity and I agree with him 200 percent.

  9. susan the other

    interesting about Kocherlakota formerly being a rational expectations devotee… just the phrase ‘rational expectations’ is mind boggling… as if there were no reaction to any action anywhere. Jack Bogle was on the news this morning laughing about stock picking and saying that every stock picker that makes money is balanced out by another one who loses money and so the only thing that makes money net-net is the long term progress of the market, (or society I would say – and that requires planning).

  10. Synoia

    Not one mention of Chaos or Catastrophe Theory, which are theories of systems with non linear feedback (aka: Fear and Greed), which appear to me to be fundamental aspects of Economics, especially the humans who are the Economy.

    To me that is a large omission.

  11. Another Anon

    Two slogans I read somewhere recently seem appropriate for theoclassical economics:

    Ideology is easy, thinking is hard.
    Belief is belonging.

    1. animalogic

      I enjoyed this article — especially because it made clear something which most NC readers know to be true: that Macroeconomics, & neoliberalism in particular are – in essence – an ideology, dressed up in an economic discourse. It’s an ideology that has served the 1% fantastically well over last 40 or so years.
      I love the term “Theo classic” economists: another way of saying someone is a “useful idiot”…which (funnily enough) makes me think of Evangelicals & the Republican Party….

  12. Robin Kash

    Perhaps an approach to a solution for economists who are rightly disgusted with the continuing failures of macroeconomics is to confess that economics is theology/philosophy and not science. Economics lands on the “mammon” side of serving God or mammon.
    One doesn’t have to have read any Reformation theology, but only to have observed more or less casually that human being are scarcely rational even about their own self-interest, and then only self-deceptively. Thomas Frank has commented effectively on that point in the political arena in What’s the Matter with Kansas. To wit: Republicans have, he points out, diverted voters attention to social/cultural issues while picking their pockets. Perhaps one might sense an intersection of politics and economics on the latter point.
    There is less need to moralize about “sin” than to see it as an heuristic. That is, one might begin by assuming that businesses and individuals are not only guided by rationality, but to the contrary are aided by economists, say, of the U of Minnesota ilk, to rely upon the myth of rationality to cloak fundamental selfishness, which economists have neutered by casting it as “self-interest.” Selfishness is the root of continuing, destructive “irrationality,” because it is part of what defines a root of sin, i.e., missing the mark.
    An economics of gratitude for shared abundance would be closer to the mark.

  13. skippy

    Classic case of…… but they move… met by iron rule which would rather burn the joint down… than admit being wrong [horribly]… something about pathological lairs and eviromental aspects thingy [studies done on economics tutelage and changing human behavior] something quasi-religious …. burn the witches – !!!! – heretics – unclean….

    Dishevel Marsupial…. strange how for some its a case of Dawg [mysterious forces but don’t stray the path] or Atomtistic individualism [Newtonian – Bayesian laws of motion ascribed to put a leash on evolution’s non compliance to the aforementioned path]….

    1. diptherio

      And it’s even more eviscerating than Black led me to believe! “Post-real” economics, “phlogiston”…it’s awesome. Gonna have to take a copy by my old department and see if anyone wants to discuss it. Maybe just leave a bunch of copies lying around the study rooms….

      1. H. Alexander Ivey

        An excellent suggestion! And be sure to include Naked Capitalism URL on the cover page…hehhehheh. Bill me for the copying costs.
        Althro, since it is a theoclassical economics department I presume, nailing them on the department’s door would be more appropriate (like Luther’s 95 theses). But they would probably charge you with defacing public property-the only time they would acknowledge the school as a public charge instead of a private one for their own enrichment.

  14. Wen

    Good to see that bill black lays it properly out why the neoclassicald are wrong. But lets not get stuck with the fact that the rational expectations model doesn’t come close to representing human behaviour. As Mirowski shows people have been moaning about it for ages but it doesn’t faze the neoclassicals. And Why is behaviour kal getting credit for discovering that which is obvious from previous social science research! Move on and build a firm alternative.

  15. Wen

    And thanks but no thanks to romer. Anyone serious about economics knows his critique won’t make a dent on the profession. When two of the three don’t bother to reply and the third thinks it’s ok to reply without reading the paper in question you know they are doomed albeit with high salaries. If I were the Bloomberg writer I would ask the professor to actually read the paper and reply back or stop wasting my time with his forsaken assumptions.

  16. RBHoughton

    When we think about rational choices we should think about the race course. There are favorites but money goes on every horse and the punters all think they are being clever. On rare occasions an outsider wins and in economics immediately attracts a following as the man with the crystal ball.

    We should consider applying the results of the national lottery to our economic decisions. The top ten prizes are linked in a raffle to ten economic aims and they each get a decreasing share of government revenue.

    This is helpful recognition that luck is a constant determinant in everything we do. It will help us get over the pervasive idea that we know what we are doing.

  17. Jeremy Grimm

    In past times the Wise and Exalted — the Holy Ones — were able to predict the strange patterns of the seasons and make calendars to tell us when to plant and when the rains would come. They even suggested their powers extended to calling the rains — with blood sacrifices — when the rains came late by their calendars. And when the rains failed to come — whose blood dressed the jaguar altars?

    What kind of civilization are we that allows our High Priests to make so much blood sacrifice with so little ability to bring the rains and guide our actions through the economic seasons?

    1. HopeLB

      Such a fine point. And perhaps the signal of a tipping point, that is the Elites complete disconnection from the true reality. I guess Plato was wrong about the good Philosopher Kings in our current academic/political structure or maybe he just did not foresee the takeover of the Economist Kings and their demanding all of us along the path to earth’s ecological destruction/desecration?

    2. Norb

      Good question. It is the age old dilemma for the masses, stand and fight or just fade away. Being a warrior or a refugee seems to be the human condition. Either way, it seems humans have not mastered this civilization thing.
      Rise and Fall- here comes the fall.

      Coming to terms with violence seems to be the deciding factor. Most people shun violence and will put up with a lot of abuse to avoid conflict. Struggle and looking for leaders is the base state.

  18. HopeLB

    I love you Bill Black!For your love of justice and for your lucid writing style in promoting it. I just love you! Wish you were President or at the very,very least Sec. of Treasury. Forever grateful to you!Thank You!!!!

  19. Dick Burkhart

    Great critique, Bill. At first I thought that “theoclassical” was a misprint for “neoclassical”, then I got your point. I call it garbage economics, but that includes micro as well as macro. To get real world economic theory you have to go to complexity economics, evolutionary economics, and biophysical economics, in addition to behavioral economics.

  20. Sound of the Suburbs

    “The idea that consumers and businesses always make rational choices pervades mainstream economics”

    Advertising gave up appealing to rational consumers in the 1950s, since then it has tried to appeal to more primitive wants and desires.

    Advertising has shown that appealing to the irrational side of the consumer is far more successful than appealing to the rational consumers with technical specifications and lists of features.

    Advertising has seen no need to change since the 1950s as appealing to the irrational side of consumers sells more stuff.

    Economists, what planet are they on?

  21. Paul Art

    If Economists can be allowed to totally obliterate the concept and teaching of monopolies and oligopolies and how free markets in the absence of regulation will ALWAYS tend to monopoly or oligopoly then they can do anything they like and they will still be treated with deference by trade rags like the WSJ and Bloomberg and other likewise mouthpieces of the 1%.

  22. Sound of the Suburbs

    Why is economics so bad?

    Malthus came up with an economics that worked for the vested interests of the land owning class.

    Ricardo came up with an economics that worked for the vested interests of the financial class.

    Marx came up with an economics that worked for the ideology he was trying to put forward.

    It’s complex, quite fuzzy and can be easily biased to suit vested interests.

    Early on it became very apparent to the wealthy and powerful that economics needed to be biased in the right direction for their interests.

    As Classical Economics reached its zenith in the 19th Century it had come to some unfortunate conclusions powerful, vested interests didn’t like so they backed a new, neoclassical economics that missed out the undesirable conclusions from Classical Economics like the differentiation of “earned” and “unearned” income. It also conflated “land” and “capital” which had previously been distinct.

    This grew into the core of neoclassical economics which is basically a way of hiding earlier discoveries and looking after certain vested interests.

    It’s arguments look strange and convoluted because they are, they are there to hide something.

    Now if we want small Government and for business leaders to be left to their own devices, what other conclusions do we need?
    Capitalism naturally reached stable equilibriums.

    There is no evidence for this and the first recorded bubble was the Tulip Mania of 1600s Holland, there have been plenty of others since.

    We want the conclusion capitalism reaches stable equilibriums as it serves our purpose and the real world must be ignored.

    Neoclassical economics is an economics whose conclusions were put forward by lobbyists and then stitched together into an academic framework.

    It serves a purpose and it is not to describe how the economy functions.

    The effort to conceal the work of “Henry George” can be found in a book “The Corruption of Economics”, neoclassical economists did their job and hardly anyone knows his name today.

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