Category Archives: Science and the scientific method

Cash Flow Discounting Leads to “Astronomically” Large Mistakes Over the Long Term

Your humble blogger is a vocal opponent of placing undue faith in single metrics and methodologies, like placing a lot of weight in total cholesterol as a measure of heart disease risk. One of the most troubling examples is the totemic status of discounted cash flow based analyses. It’s a weird defect of human wiring that reducing a story about the future to a spreadsheet and then discounting the resulting cash flows (which means you are now layering a second story, about what you think reasonable investment returns will be over that time period) is treated as having a solidity and weight that simply is not there, a reality of its own that manages to take precedence over the murky future it is meant to help understand.

An article by physicist Marc Buchanan in Bloomberg gives a layperson’s summary of an important paper by Yale economist John Geanakoplos, and Doyne Farmer, a physicist at the Santa Fe Institute. It shows that the conventional use of discounted cash flow models over long time periods, as is often the case when discussing environmental impacts, is fatally flawed.

Scott Sumner Puts Foot in Mouth and Chews

Reader Valissa has taken to providing economist jokes in comments, but the members of the discipline so often seem eager to make themselves the object of ridicule that efforts like hers sometimes seem redundant.

The latest sighting is a remark by Scott Sumner, a professor of economics at Bentley University. As

How Algorithms Shape Our World

I don’t know about you, but I’m suffering from debt ceiling/Eurozone mess fatigue and thought readers might enjoy a wee respite. This engaging presentation by Kevin Slavin provides some useful food for thought about how the use of algorithms are coming to literally reshape our world.

“A Dramatic Demonstration of the Power of Mental Frames”

This demonstration by Simon Singh is an intriguing little exercise of sorts. Hat tip Richard Smith:

Jon Rynn: A Fracking Mess – Natural Gas is Not the Fuel of the Future

By Jon Rynn, author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems. Cross posted from New Deal 2.0.

Between questionable science, health hazards, and exorbitant costs, there’s no fracking way that drilling for natural gas will solve our long-term energy issues.

Dubious Research: The More Debt Students Have, The Higher Their Self Esteem

It’s a sign of the times that your humble blogger is having to create finely stratified typologies for the various types of ~~propaganda~~ dubious research being deployed to promote the idea that rule by our new financial overlords, despite the considerable evidence to the contrary, really is for our own good.

We’ve already instituted the Frederic Mishkin Iceland Prize for Intellectual Integrity for special-interest-group- favoring PR masquerading as research.

However, Mishkin is a Respected Personage, and the initial Mishkin Iceland Prize recipients, Charles Calomiris, Eric Higgins, and Joe Mason, presumably knew they were writing utter bunk and were handsomely compensated for attaching their names to less than credible arguments. That suggests we need a separate category for the more mundane, bread-and-butter shilldom that is dressed up to look like serious academic work. Let’s call it the Lobsters Really Want to be Your Dinner Prize.

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?

Doug Smith: Shock Therapy For Economics, Part 1

By Douglas K. Smith, author of On Value and Values: Thinking Differently About We In An Age Of Me

In “Economics In Crisis”, professor Brad DeLong notes:

The most interesting moment at a recent conference held in Bretton Woods … came when Financial Times columnist Martin Wolf (asked) Larry Summers, “[Doesn’t] what has happened in the past few years simply suggest that [academic] economists did not understand what was going on?”

DeLong agreed with Summers’ response: “the problem is that there is so much that is “distracting, confusing, and problem-denying in…the first year course in most PhD programs.” As a result, even though “economics knows a fair amount,” it “has forgotten a fair amount that is relevant, and it has been distracted by an enormous amount.” DeLong then goes on to call for serious change in what economics departments do and teach.

In Part 2 of this post, I’m going to address the realities of ‘serious change’; and, in that context, what is troubling for INET about Summers’ presence at the recent Bretton Woods gathering. I’ll do this from my experience in leading and guiding real change as well as by contrasting INET with another, smaller, and more nascent effort called Econ4.

For now, though, let’s put aside the serious lack of self-respect in paying any attention at all to a world historical failure like Summers (Why is this arrogant sophist even on anyone’s C list, let alone A list? Why isn’t Summers wearing sack cloth and rolling in ashes?). Instead, let’s respond to DeLong’s ‘fessing up to the crisis in economics:

Gas From Fracking More Damaging to Climate Than Coal?

I’m pretty amazed that no one looked into the greenhouse gas impact of fracking until now. One of the big rationales for fracking, which is already controversial due to reports of damage to aquifers, is that it was abundant in North America and also produces comparatively little in the way of carbon emissions.

The problem, per a study soon to be published by Cornell University, is fracking results in the release of methane, one of the most potent greenhouse gases, apparently enough to undercut the claims that it is relatively “clean”.

Is Nuclear Power Worth the Risk?

One of the interesting features during the Fukushima reactor crisis were the fistfights that broke out in comments between the defenders of nuclear power and the opponents. The boosters argued that the worst case scenario problems were overblown, both in terms of estimation of the odds of occurrence and the likely consequences. The critics contended that nuclear power was not economical ex massive subsidies, that there was no “safe” method of waste disposal, and that nuclear plants were always subject to corners-cutting, both in design and operation, so the ongoing hazards were greater than they appeared.

Reader Crocodile Chuck passed along a story from the Bulletin of Atomic Scientists, “The Lessons of Fukushima“, by anthropologist Hugh Gusterson. Here is the key section:

US Faces Substantial Obstacles to Increasing Rare Earths Production

Reader James S. highlighted a useful article at the MIT Technology Review, “Can the U.S. Rare-Earth Industry Rebound?” Our only quibble to this solid piece is its summary, which underplays some critical aspects of the article: The U.S. has plenty of the metals that are critical to many green-energy technologies, but engineering and R&D expertise […]