There is No Economics Without Politics

Yves here. It wasn’t all that long ago that economics was called “political economy.” One of the key choices in economics is what to prioritize: efficiency or fairness. And on top of that, as Nassim Nicholas Taleb and others have regularly pointed out, achieving a high degree of efficiency typically comes at the expense of safety.

One additional introductory point: Adamti mentions Adam Smith in passing and suggests, but doesn’t say frontally, something that needs to be said often: his views have been badly distorted. Smith inveighed against monopolists and depicted gatherings of businessmen opportunities for them to scheme against workers and customers.

By Anat R. Admati, the George G.C. Parker Professor of Finance and Economics at Stanford University Graduate School of Business (GSB), a Director of the GSB Corporations and Society Initiative, and a senior fellow at Stanford Institute for Economic Policy Research. Originally published at ProMarket

Author’s note: This essay is based on a speech I gave at the Stigler Center 2019 Conference on Political Economy of Finance. Whereas the content refers to my experiences as an academic with expertise in finance and economics, the key ideas apply to other areas in business schools and beyond. I hope colleagues will reflect on the harm from silos and on our opportunities as academics to benefit society. 

There is absolutely no way to understand events before, during, and since the financial crisis of 2007-2009 while ignoring the powerful political forces that have shaped them. Yet, remarkably, much of the economics and finance literature about financial crises focuses on studying unspecified “shocks” to a system that it largely accepts as inevitable while ignoring critical governance frictions and failures. Removing blind spots would offer economists and other academics rich opportunities to leverage their expertise to benefit society.

Commenting after the American Economic Association’s annual meeting in January 2017, The Economist urged economists to engage in deeper self-reflection and stated that economists must take politics into account to be relevant and useful. At the end of his recent book Crashed: How a Decade of Financial Crises Changed the World, which emphasizes the geopolitical context of events in recent decades, historian Adam Tooze laments the narrowness of economics. He quotes economist Abba Lerner, who famously said in 1972: “Economics has gained the title Queen of the Social Sciences by choosing solved political problems as its domain.”

The history of financial economics is revealing in this regard. By the second half of the 20th century, when modern finance emerged as part of economics, the holistic approach of early thinkers such as Adam Smith—which combined economics, moral philosophy, and politics—was long gone. Narrow social-science disciplines replaced the holistic approach by the end of the 19th century. In the 20th century, economists sought to make economics formal, precise, and elegant, similar to Newton’s 17th-century physics.

The focus in much of economics, particularly in finance, is on markets. Even when economists postulate a “social planner” and discuss policy, they rarely consider how this social planner gets to know what is needed or the process by which policy decisions are made and implemented. Collective action and politics are messy. Neat and elegant models are more fun and easier to market to editors and colleagues. In my first 25 years as a finance and economics academic, I had virtually no engagement with political economy.

Everything changed for me, professionally, after the financial crisis of 2007-2009. The crisis led me to wonder how financial markets could cause such havoc and why they needed such extraordinary government interventions. Staying initially within the academic debate, my frequent co-author Paul Pfleiderer and I proposed a way to address claims in the literature about the potential usefulness of debt for corporate governance while making banks safer. The idea was clever and based on economic concepts and insights, but our paper had no fancy mathematics or data. (A modified version was later published in a law review.) In the economics and finance academia, we realized, one cannot get any engagement on important corporate governance and policy issues without appearing “scientific” through symbols, tables or graphs.

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In the real world, it turned out, important economic outcomes are often the consequences of political forces. During 2010, people within regulatory bodies told me privately that false and misleading claims were affecting key policy decisions. They urged me to help clarify the issues and I felt compelled to become involved. Despite years of research and advocacy, however, flawed claims persist and still have an impact. (A recently updated document lists and debunks 34 such claims.)

Adam Smith

Many of my experiences in the last decade, which involved extensive interactions outside as well as within academia, were sobering. I saw confusion, willful blindness, political forces, various and sometimes subtle forms of corruption, and moral disengagement, first hand. The harm from economists ignoring political economy became increasingly evident. There was no way for me to return to ignoring the issues.

It was also impossible to explain my experiences using economics alone. In writing an essay in 2016 for a book on Finance in a Just Society edited by a philosopher, I went beyond economics and finance and drew from scholarship in political science, law, sociology, and social psychology. My essay was entitled “It Takes a Village to Maintain a Dangerous Financial System.”

Sadly, among the enablers of our inefficient and distorted financial system are economists and academics. Perhaps most shocking, a fallacious claim about the impact and “cost” of more equity funding, which contradicts basic teachings in corporate finance, has been included in many versions and editions of banking textbooks authored by prominent academic and former Federal Reserve governor Frederic Mishkin. (See Section 3.3 here or Chapter 8 of The Bankers’ New Clothes.)A risk manager in one of the largest banks, whom I met in 2016 at a conference attended almost exclusively by practitioners and regulators and who had dropped out of a top doctoral program in finance, quipped in an email after quoting from an academic paper: “with such friends [as academics], who needs lobbyists?”

Lobbyists, who engage in “marketing” ideas to policymakers and to the public, are actually influential. They know how to work the system and can dismiss, take out of context, misquote, misuse, or promote research as needed. If policymakers or the public are unable or unwilling to evaluate the claims people make, lobbyists and others can create confusion and promote misleading narratives if it benefits them. In the real political economy, good ideas and worthy research can fail to gain traction while bad ideas and flawed research can succeed and have an impact.

Luigi Zingales highlighted political economy issues within our profession in a 2013 essay entitled “Preventing Economists’ Capture” and in his 2015 AFA presidential address entitled “Does Finance Benefit Society?” Zingales notes and laments a pro-business and pro-finance bias within economics and finance and the pervasive blindness to issues such as corporate fraud and political forces. “Awareness of the risk of [economists’] capture is the first line of defense,” he writes in his 2013 essay. I agree that the issues are real yet often denied or ignored, and that recognizing problems is essential for addressing them.

Governance and political economy challenges are pervasive beyond banking, where I encountered them so clearly. For example, corporate governance research, including my own coauthored papers (in 1994 and 2009) on shareholder activism, has focused almost exclusively on conflicts between shareholders and managers, effectively assuming that competitive markets, contracts, and laws protect everyone except for the narrowly-defined “shareholder”—who is implicitly assumed to own only one corporation’s shares and to care only about the price of those shares.

Having observed governance and policy failures in banking, I realized that the focus on shareholder-manager conflicts is far too narrow and often misses the most important problems. We must also worry about the governance of the institutions that create and enforce the rules for all. How power structures and information asymmetries play out within and between institutions in the private and public sectors is critical.

A 2017 Journal of Economic Perspectives Symposium on the modern corporation includes an essay I wrote on the distortions that arise as a result of the focus in corporate governance on financialized targets that purport to capture “shareholder value” when combined with political economy forces that can lead to governments failing to set and enforce proper rules. The symposium also includes an essay by Luigi Zingales on how political and market power feed off each other. We both noted that more public awareness and understanding of these problems is essential for addressing them.

Economists and academics have numerous opportunities to be helpful by looking more frequently out of their windows, expanding their domain beyond “solved political problems,” collaborating across disciplines, and bringing back a more holistic approach to their work. Small changes in this direction are starting to happen, as the Stigler Center’s conferences on the political economy of finance show, but we can and should do much more.

Numerous research topics are ripe for more study by theorists and empiricists. Within the following long list of topics (still a partial one) there are low-hanging fruits and more challenging problems that may require interdisciplinary reach and which tenured academics are in a particularly privileged position to take on: whistleblower policies, the impact of consumers, employees, and politicians on corporate actions, accounting rules for derivatives, the effectiveness of boards, audits and auditors regulation, the design of bankruptcy laws, money laundering, corporate fraud, the organization and pricing of deposit insurance, debt subsidies, the role of financial literacy and ideology in policy discussions, the structure and governance of regulatory agencies and central banks, lobbying of multinational corporations, the governance of international bodies such as Financial Stability Board, Basel Committee, and IMF, and the political economy of corporate enforcement.

Anat Admati. Photo by Nancy Rothstein

Engaging with policy issues in our research and teaching, and even engaging in advocacy when appropriate and effectively lobbying on behalf of the public (for example by writing comment letters or opinion pieces) can be valuable and important. Policy involvement, however, requires not only disclosing potential conflicts of interest but, most importantly, scrutinizing research carefully to ensure it is adequate for guiding policy. A problem I have become acutely aware of is that economists and others can be cavalier in claiming that research is relevant for real-world application without such scrutiny.

As a theorist, I know models have unrealistic and sometimes stylized assumptions, yet models can bring important insights, and theoretical and empirical papers that capture key features of the real world can be useful for policy. It takes a big leap of faith, however, and can actually do more harm than good, to claim that models whose assumptions greatly distort the real world are adequate for real-world applications. Specific examples are discussed in the first paper I wrote with Peter DeMarzo, Martin Hellwig, and Paul Pfleiderer (Sections 5-7), the omitted chapter from the book I wrote with Martin Hellwig, Paul Pfleiderer’s paper on the misuse of models in finance and economics (which starts with the old joke about the economist assuming a can opener on a deserted island and, among other things, compares economics and physics) and a recent presentation by Paul Pfleiderer that discusses the role of assumptions in theoretical and empirical research and which includes great visuals.

The key takeaways if research is claimed to be relevant for the real world are:

  1. Just because a model claims to “explain” something in the real world does not give it logical or actual validity. Even if we may never have the data to be able to reject a model, there are ways to apply casual empiricism (“if this model was true, we would observe x and we don’t”), and we must be especially careful if a model contradicts other plausible explanations for what we see. (Consider: “cigarette smoking improves people’s health” as an “explanation” of why people smoke.)
  2. Just because a model can be “calibrated” does not give it logical or actual validity.

Applying inadequate economic models to policy in the real world is akin to building bridges using flawed engineering models. Serious harm may follow.

We can also enrich our teaching and connect more dots for our students by developing interdisciplinary courses and by bringing out the bigger picture, at least occasionally, in teaching standard courses. For example, basic corporate finance courses show how to calculate the debt tax shield, and we should point out that there is no good reason for the tax code to subsidize debt relative to equity and that this tax code can create distortions. We can also ask whether shareholders as individuals actually want a company in which they hold shares to pursue “positive Net Present Value” projects that involve pollution or deceptive marketing of harmful products.

Many students are anxious to have such discussions. There is a broad sense today that standard business practices and dysfunctional governments have exacerbated economic, social, and political problems. We must find ways to broaden the discussion beyond our narrow lanes. Academic silos are part of the problem, and we should break them to be part of the solution.

Finally, we can and should engage in trying to ensure that governments and other institutions serve society. If only conflicted experts engage in the process of creating rules, especially on important issues that appear technical and confusing such as accounting standards or financial regulation, we get what Karthik Ramanna calls “thin political markets” and our assumptions about markets are more likely to be false. Academics may be in the best position to inform policy, expose flawed or poorly enforced rules, and help hold power to account. We cannot assume others will be able or willing to do it without our help.

Governance and politics are key to outcomes everywhere. Related issues about power and control and about the respective roles of governments and private sector institutions are playing out prominently today in the technology sector. A course I taught recently about the internet allowed me to compare and contrast the finance and internet sectors. The Stigler Center has laudably been informing policy related to digital platforms.

In a recent Harvard Business Review piece, I argue that business schools should practice and promote “civic-minded leadership” much more than they currently do. (The text is also available here.) I hope more academics and academic institutions recognize and embrace the great opportunities we have to try to make the world a better place.

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  1. aj

    Does anyone know of a good book (or series of books) that discusses the history and evolution of economics. Ideally, I’m looking for something that discusses particular political philosophers (e.g Adam Smith, Marx, Keynes, Mises, etc.) in sequence. What I’m interested in is not only their ideas, but also their histories–what were the circumstances of their lives that lead to their ideas and how did the political environment they found themselves in contribute. Also, how were the philosophies adopted or corrupted by followers (e.g. Marx and Russian communism, Adam Smith and neoliberalism). I have yet to find a truly comprehensive book that has this info. I would expect a title something like “History of Political Economy.” Any suggestions from the NC commentariate?

    1. The Historian

      So far I haven’t found one book that covers it all. And most books I do find try to describe all economic thought in terms of the author’s particular belief system, which to me isn’t all that helpful. So I read a lot of books on history, economics, and archeology to try and piece together an accurate story. And I still have not read nearly enough to have a complete picture.

      One website that has been of great help finding sources is:

      Good luck to you. If you do find a great book, let us all know!

      1. aj

        If I was much smarter I’d try to do it on my own. Sadly, I’m only mildly intelligent and a crappy writer. Somebody get Michael Hudson on this so I can read it. I’ll start the Kickstarter campaign.

      2. Sol


        It’s much like religion in that introspection and study is generally confined to the walled-garden-containing-all-that-is-true-in-this-world of choice.

      3. Alfred

        This question intrigued me enough to explore what the Library of Congress catalog has to offer in response to it. The short answer, based on a good deal of rather fancy searching, is not much — in English. The subject heading, “Economics–History,” is the one that LC applies to the history of economics as a discipline. However, it retrieves so many citations as to be all but useless, even when those results are sorted chronologically, because it has been applied to so many works that treat narrow rather than broad sub-topics. LC has numerous books sharing the straightforward title, History of Economic Thought; they range in date from 1911 on. The oldest is by Lewis F. Haney. The latest of them seems to be the 2nd “updated” edition of History of Economic Thought, by E. K. Hunt (2002). The Library of Congress has also established the subject heading “Political economy–history.” However, it is attached to only one title that covers the topic broadly: Histoire de la pensée économique : abrégé des analyses et des théories économiques des origines au XXe siècle / Alain Redslob (2011). Despite characterizing itself as a ‘summary’ the book comes in at a hefty 355 pages. LC classifies this work at HB75. A title search on “Political Economy” yields, to my eye, only one somewhat recent work that seems to offer a general treatment: Political economy / Dan Usher (2003). Coming in at 427 pages, it is classified as “Economics” and classed at HB171.5. LC applies the heading ‘Economics–Historiography” to eleven works of which the most relevant here may be: History and historians of political economy / Werner Stark ; edited by Charles M.A. Clark (1994). As a check of those results a bit of googling turned up a set of essays edited by Maxine Berg under the title, Political Economy in the Twentieth Century (1990), which set out to represent thinking outside the ‘mainstream’ of neoclassical or Keynesian traditions. LC classes it at HB87. For books titled “History of Political Economy” it looks like one would have to go back into the 19th century, to discover works bearing just such a title by John K. Ingram (1888; reprinted 2013 by Cambridge UP) and Gustav Cohn (1894), thus apparently from the point where the Berg essays begin. I have read nothing by any of the authors I’ve mentioned here; am just posting the outcome of my searching fwiw.

    2. kevbot9000

      The Worldly Philosophers by Heilbroner isn’t anywhere near a complete depiction of what you’re asking for but it does cover a chunk of it, as a start.

    3. witters

      John Kenneth Galbraith – 2 books.

      Economics in Perspective: a critical perspective
      History of Economics:The Past as the Present

      1. skippy

        Yes Galbraith Sr was the last classical that pointed out the failings of the payed for PR merchants that some have called economists and to rub salt in that wound claim dominate economics has no value based biases.

        1. Bill

          Galbraith presented a sweeping 1977 BBC television series of his 1977 book, The Age of Uncertainty. Composed of 15 one-hour episodes, it’s a wonderful history of political/economic thought and casts light on the sort of overarchiture that aj is after. Here’s the link to Episode 1: The Prophets and Promise of Classical Capitalism:

        1. The Historian

          Be careful when reading just one author or depending on just one book. I read Galbraith many years ago so maybe I’m being unfair but it seem to me that he interpreted history in terms of his own views. I just started reading Heilbroner so I can’t come to any conclusions about him right now.

          Also remember that most economies that are written about are the economies of the top 10%. There is also the economy of the average people and it is usually very different.

          As an example: One of the failures of Socialism that economists often point to is the free rider problem and they use what was happening in Russia as their example and come to the conclusion that people will only work hard if they own their own land. And that looks good from the viewpoint of the top 10%.

          But there is another story that can only be understood if you look at what was happening in Russia at the time to the peasants. The peasants weren’t against communalism – they had been practicing it for years in Russia. With absentee landlords, the peasants often repeatedly divided up the land to be farmed among themselves so that everyone got a piece of land they could live on. And during planting and harvesting the peasants worked together to get as much out of the land as they could, i.e., they often worked as communes. What they did oppose was the state giving them the land and then taking it back, telling them what land they had to farm and how to farm. So they protested in the only way they could, by work slowdowns, no different than “blue flu” or worker slowdowns at factories in this country – and THAT was the reason for the loss of productivity – not the fact that they didn’t own the land. It wasn’t the theories of Socialism or Communism that caused this, it was how the economic policies of the top 10% were foisted on people. But you would never know this unless you actually studied the lives of the peasants at that time. And you would accept the top 10%’s view of why Socialism can’t work.

          Reading some of these economic histories is like reading “Gone With the Wind” and thinking that now you know how the plantation owners treated their slaves. It may look like that to the top 10% in their ivory towers, but it just may not be so.

    4. Deplorado

      Richard Wolff (of Democracy at Work) has one but I’m not able to search for the title. Just google/qwant his name and a title that you will recognize as what you are looking for will appear.

      I’ve skimmed that book and it seemed accessible and neatly putting together timelines and major inflection points in the development or economics.

    5. rob

      I always point out a book like :
      “Tragedy and Hope: a history of the world in our time.” By
      Caroll Quigley @ 1966?
      It covers the economic history of the “west” (mostly) from 1895 to just before it came out in the sixties.
      It is a 1300 or so page book detailing not just what was happening, but WHO was doing it…. with WHO”S money.
      It is a telling book. IMO
      The world today is shaped by what they did then.
      It also points out the relationships people had with each other, while they were running their respective parts of the world.
      Like the cecil family a little over a hundred years ago.

    6. Brick

      You might also consider Mariana Mazzucato’s The Value of Everything. The first couple chapters consider the societal forces that affected economists’ concept of value (Quesyan, Smith, Ricardo, etc). Probably more narrow than you’re looking for, but it’s an interesting focused treatment and the book generally is worth a read.

  2. anon in so cal

    “In the real world, it turned out, important economic outcomes are often the consequences of political forces.”

    Sorry to sound mean, but, duh.

    “The key takeaways if research is claimed to be relevant for the real world are:

    Just because a model claims to “explain” something in the real world does not give it logical or actual validity. Even if we may never have the data to be able to reject a model, there are ways to apply casual empiricism (“if this model was true, we would observe x and we don’t”), and we must be especially careful if a model contradicts other plausible explanations for what we see. (Consider: “cigarette smoking improves people’s health” as an “explanation” of why people smoke.)”

    Did the individuals she is addressing ever take a required undergraduate course in research methods?

    1. lyman alpha blob

      You beat me to it with that first quote.

      Not understanding that is like believing that money does actually grow on trees. I don’t understand how this could be a revelation to supposedly intelligent people with advanced degrees.

    2. skippy

      The problem with mainstream economics is its concept of theory to start with, but, you’ll get that with ideological funding.

  3. diptherio

    You’ve got Evonomic’s newsletter sign-up text box, copy-pasted in here, along with the article text. Guessing that wasn’t intentional. Mentioning it just in case.

  4. John Wright

    This has “Academics may be in the best position to inform policy, expose flawed or poorly enforced rules, and help hold power to account. We cannot assume others will be able or willing to do it without our help.”

    Given the funding method for much of academics (wealthy patrons, wealthy think tanks, wealthy companies and wealthy parents) is it reasonable to expect that academics will truly speak truth to power?

    In my view, the article implies a more vigilant economic profession COULD be important in influencing policy.

    But I have doubts this could occur.

    Economics and economists may be used in the same way that an insurance company executive told me that outside consultants were sometimes chosen at his firm.

    He suggested that consultants were sometimes selected because they were expected to agree with what management wanted to do.

    One could suggest that similar dynamics exist for newspaper editorial writers.
    If editorial writers were to go counter to their expected editorial content (right or left), they could well be expecting their future paychecks would be at risk.

    Western economics has evolved to serve TPTB, not the common good.

    One can see that outside voices, such as Steve Keen and Michael Hudson, are relegated to outside the mainstream.

    It is not because Keen and Hudson are incorrect.

  5. flora

    And on top of that, as Nassim Nicholas Taleb and others have regularly pointed out, achieving a high degree of efficiency typically comes at the expense of safety.

    An old Star Trek episode titled The Trouble With Tribbles is about Star Fleet and Klingons disputing ownership of a planet which can grow vast amounts of food grains. In one short scene the Klingons claim ownership based on their more efficient exploitation of resources (more efficient than the Federation) which, they claim, gives them ‘rights’ to own the planet. To which either McCoy or Kirk say to themselves, “Oh yes, they’re efficient all right. Ruthless, but efficient.”

    1. Another Amateur Economist

      And on top of that, as Nassim Nicholas Taleb and others have regularly pointed out, achieving a high degree of efficiency typically comes at the expense of safety.

      No system ever operates at a greater efficiency than at the moment before its collapse.

      Just something to think about, Capitalism rewarding efficiency rather than sustainability or robustness. Both of these require the expenditure of resources, costs, which subtract from potential profits.

      1. Susan the Other

        Yes, exactly. I liked this piece, long overdue for me. But what exactly is “efficiency”? I agree that there is no good reason for the tax code to subsidize debt if, if, adequate financing is otherwise available. Hence the question: Why is there no alternative? I dunno about small changes but I’m pretty sure we need to be able to downshift, as opposed to spinning out disastrously. There’s this too: finance itself (because financial time is much faster than ordinary time) is more desperate, even frantic, to maintain its survival in a competitive “economy” so that as finance turns into financialization it achieves critical mass. And in order just to hang on and not explode requires massive infusions of new money just so finance can stay on top of their own monster. Some rodeo. The first good regulation for economic security might be to extend financial time – reducing the necessity for huge turnover profits. But doing so in a way that preserves finance in a tame and domestic manner. Like preventing all the animals in the barn from eating exponential volumes of alfalfa and producing mud slides of manure in order that the noble farmer doesn’t lose his tennies whilst mucking…. Thereby reducing the risks inherent in equity finding – which for a sole proprietor (should any still exist) is also known as crushing debt.

        1. Steve H.

          > The first good regulation for economic security might be to extend financial time – reducing the necessity for huge turnover profits.

          In ecology there is a tau function, the delay time. Predator population lags prey variation and can stabilize systems. And Theo Compernelle gives details about delaying response time, as the productivity of a work session drops with the number of interruptions. The Oct 28 Links included the article “Asynchronous Communication: The Real Reason Remote Workers Are More Productive”, along similar lines.

          This seems to go against instant messaging, hi frequency trading, and OODA loops. But those seem to operate best in disregulated situations. To extend financial time – what would that do to speculation?

          Edit: Also, Taleb had something on taking data points too often leading to noisy results.

          1. Susan the Other

            tau function seems to apply here. so as not to eat the seed corn. by extending financial time I meant slow it way down, in my mind that means extending obligations over a much longer period. That might also mean many fewer financings, less opportunity to speculate. tau is interesting; nice to know nature has this one figured out.

            1. farmboy

              speculation is the “money” in financial markets. lenghten time=0 opportunity=0liquidity
              on the other hand maybe another LTCM can be avoided.
              pet theory, financial markets and all their attendend complexity exist to abosrb blasting high energy, innovation to assure survival,nutjob i know

              1. skippy

                The McCrazzypants part about that is interruption or increased lag in information is denoted in the loss of billions in productivity.

                Not that it actually translates to better outcomes for the bulk of humanity or life on this orb.

        2. Another Amateur Economist

          I’m thinking that one possibility would be money that expires after a set amount of time. Say one year. Money could not then be used as an asset. It would have to be continuously and reliably spent. All assets would be physical. For one thing, we would know what society really possessed, as opposed to the imaginary stuff/asset money is.

  6. Danny

    When I was a little boy, obsessing over Christmas presents, it seemed to me that politics was economics and that economics was about the extraction of resources from the earth, and from human beings, with all kinds of shenanigans about timing.

    No matter how much I learn, it seems that not much has changed.

  7. Glen

    Thank you for this post! Political economics is a much better name for this pseudo science. If aerospace engineers were wrong as often as theses clowns airplanes would routinely fall out of the air.

    And as Boeing so aptly demonstrates, putting the MBA PMC types in charge of the engineers, also results in airplanes falling out of the air.

    But huge props to Steve Keen for calling this out!

  8. Arthur Dent

    Paul Samuelson and Milton Friedman took the “animal spirits” out of economics and turned it into a mathematical model. However, the behavioral economics and psychological research has shown that people are hard-wired in ways that make the mathematical models flawed and erroneous.

    As a design engineer, we use lots of complex modeling but ultimately our design blueprints and specifications are not rigidly based on these models because people and/or robots have to build and operate the things. So there is a fair amount of simplification and clarification that has to happen to have something built without major errors and then operated without major errors, as well as maintained with varying levels of attention and funding. These require a fair amount of understanding about how humans process and execute things and/or the limitations on what can be programmed into robots and computers.

    I point out to junior engineers that the people who will build and operate the systems did not necessarily graduate in the top 25% of their high school class unlike the designers. However, many of them have different skill sets that the designers don’t have, such as how to operate heavy equipment and do physical trade activities. So we need to design systems to a common denominator that work from design and operations viewpoints.

    In economics, we are seeing the systems being biased by focusing on theoretical models that don’t actually work in practice because they don’t account for what people actually do compared to what a “rational” model says they should do. Hence the crap about “trickle-down” that never actually works in practice in tax cut plans for the wealthy. Similarly, complex private healthcare systems in the US don’t remotely follow a “perfect information” model that would allow the “invisible hand” to produce efficiency. so we get massive bloat and rentiere models that prey on consumers. However, that has become a feature, not a bug, on K-street.

    1. flora

      Thank you X 10. Samuelson and Friedman claimed they could take the “animal spirits”, aka human nature however defined, out of economics. The claim amounts to saying they could measure, quantify, model, and manipulate human responses to changing situations, which amounts to a claim of god-like understanding of human mental capacities. How do they measure a human? Reason and logic and measurable outputs are only a part – and how large a part is as yet undetermined – in human awareness and decision making. Logic is a good servant but a bad master, as the saying goes. Samuelson and Friedman construct a ‘rational man’ without ever questioning the epistemology of their construct. (Mary Shelly might recognize the conceit.)

      1. newcatty

        The role of neo-lib economists has been to provide “scientifically rationale” models of how systems work to make the wealth-go-round always spin to benefit the PTB. This objective is, indeed, a feature of their systems. The conceit that a rationale outcome of the, say, ” trickle down” tax cuts for the wealthy is not a mistaken economic practice, but very successfully accomplished it’s goal. Just see who benefited. The conceit that “this situation (whatever it might be in life” ) is not rational, just, fair or right has been propagandized into the consciousness of people. As I got older, i realized that the need to be right was drummed into people’s minds from a very young age.

        Why did i get a speeding ticket? Lots of people were whizzing by me. So unfair! Damn those f****ing cops! Had to make their quota by me. My rent was just raised . It’s so totally uncalled for by the owner. He(she) admitted he owns this dump rental, and lots of others and does nothing to keep them up to basic standards. It’s so unjust that he can increase his bank account on exploiting working people. This sense of not having the world “be” like it should is a common defense mechanism for all of us in some degree of self preservation. It also is a major contributor to failed relationships. It gets extrapolated to most circumstances in our lives. It’s a key in understanding why power (control) is so addictive. It is a world filled with cognitive dissonance. If we, “the people” can keep our awareness of the lies and corruption of those who have the seats of power in “the government”, then we can support political candidates ,who have shown by words and deeds , that they actually care about the country, her people’s and the planet.

  9. Paul Hirschman

    Michael Hudson is perhaps the best place to start. (Bill Black is a close second. Author of “The Best Way to Rob a Bank is to Own One.”)

    Really, if one’s education includes a healthy dose of history, anthropology, sociology, politics, and social theory, it’s tempting to suggest that economics is a self-important and smug discipline. Wow, politics affects markets, property relations, and conflict over economic surplus! Wow. Good to know. And someone just told me that human beings aren’t as rational as economists assume. Wow again. Thanks.

    1. JBird4049

      Taking cultural anthropology at the same time as macroeconomics was interesting. I have to believe that political economics was stripped down to a simpleton’s version designed not to inform, but to channel the beliefs of students into supporting neoliberal thought, or at least an economy that would support the wealthy and powerful.

  10. Sound of the Suburbs

    We progressed in what seemed like a straight line, but it was the arc of a huge circle.

    “Everything is getting better and better look at the stock market” the 1920’s believer in free markets / Trump / today’s journalists / nearly everyone

    “Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.
    This 1920’s neoclassical economist that believed in free markets knew this was a stable equilibrium.
    He became a laughing stock.
    We haven’t got that far yet, but we are close.

    What lifted US stocks to 1929 levels in 1929?
    Margin lending and share buybacks.
    What lifted US stocks to 1929 levels in 2019?
    Margin lending and share buybacks.
    As long as US companies keep doing share buybacks things should be OK, otherwise it’s all going to fall off the edge of a cliff.
    A former US congressman has been looking at the data.

    It’s one minute to midnight, we have nearly come full circle.

    (“nearly everyone” – everyone apart from me, I think)

    1. Sound of the Suburbs

      This is the UK, but the US is petty much the same and most other places in the world.

      The neoliberals put their faith in technocratic expertise.
      Unfortunately, the technocrats were trained in neoclassical economics.

      The economics of globalisation has always had an Achilles’ heel.
      The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at private debt, neoclassical economics.
      Not considering debt is the Achilles’ heel of neoclassical economics.

      What could possibly go wrong?
      As soon as we switch over to an economics that doesn’t consider debt, we head off on a one way trip to a financial crisis and get there in 2008.

      In 2008 the Queen visited the revered economists of the LSE and said “If these things were so large, how come everyone missed it?”
      It’s that neoclassical economics they use Ma’am, it doesn’t consider debt.

      “We cannot solve our problems with the same thinking we used when we created them.” Albert Einstein.
      What does he know?
      Let’s just plough on.

      Why have Western economies been so sluggish since 2008?
      Debt repayments to banks destroy money.

      What do our experts think the problem is?
      They don’t really know.

      After 2008, the BoE experts always expect things to pick up next year.
      Their models don’t include debt, which is the problem.
      If you don’t include the cause of the problem that is holding the economy back it will look like things will get better very soon.

      For heaven’s sake we desperately need some people with a vague idea of what they are doing, which we haven’t had since 1980.

      1. Sound of the Suburbs

        Bank credit; how does it really work?

        Debt repayments to banks destroy money.
        Bank loans create money.
        Bank credit effectively brings future prosperity in today.
        We spent the bank loans and it’s time to make the repayments.

        The 1920s boomed on borrowed money; the 1930s were impoverished as they made the repayments.
        Japan boomed on borrowed money, in the late 1980s; the economy flat-lined for the next thirty years as they repaid the debt from their 1980s excesses.
        Richard Koo had studied what had happened in Japan and knew the same would happen in the West after 2008. He explains the processes at work in the Japanese economy since the 1990s, which are at now at work throughout the global economy.
        Debt repayments to banks destroy money, this is the problem.

        When you use bank credit to inflate asset prices, new money pours into the economy, which causes it to boom.
        You are just inflating asset prices, not creating real wealth as measured by GDP.
        The debt rises much faster than GDP.
        You are effectively borrowing that money from the future, which will be impoverished.
        You should use bank credit to increase the productive capacity of the economy, and if you do that future debt repayments won’t be a problem.

        The UK:
        Before 1980 – banks lending into the right places that result in GDP growth (business and industry, creating new products and services in the economy)
        After 1980 – banks lending into the wrong places that don’t result in GDP growth (real estate and financial speculation)
        What happened in 1979?
        The UK eliminated corset controls on banking in 1979 and the banks invaded the mortgage market and this is where the problem starts.

      2. DanP

        It’s incredible isn’t it. Economic models that don’t include debt!

        And since debt is actually how a claimed 95% of money is created, as loans made by commercial banks, it tantamount to saying that the economic models don’t account for where money comes from!

        How did we get into such a state?

        Whatever the cause, it’s been very convenient and enriching for the banks to not have their business model included and exposed in the economic textbooks.

  11. Scott

    I really thought I was missing something for a long time when I’d read that people were baffled wages were low and not increasing—the power dynamic is so obvious. This is the first time I’ve ever read this explicitly stated. I’m always surprised that there is no acknowledgement that all types of additional factors and complexities have to be accounted for when you transition the membrane from theory to actual life.


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