Are the stu­dents revolt­ing?

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I’ve had a few exchanges with neo­clas­si­cal econ­o­mists recently via the East Asia Forum blog, whose edi­tor approached me to write  a ver­sion of my “What a load of Bol­locks” post on this site. That piece “Why neo­clas­si­cal eco­nom­ics is dead”, cri­tiqued an East Asia Forum post “The state of eco­nom­ics” by neo­clas­si­cal text­book authors McTag­gart, Find­lay and Parkin.

A reply to my arti­cle by Ade­laide University’s Richard Pom­fret, enti­tled “Too soon for obit­u­ar­ies: eco­nom­ics is alive and (rea­son­ably) well”, con­cluded with the fol­low­ing state­ment:

Why is there such a mar­ket in Aus­tralia for writ­ers who cre­ate a straw man of ‘neo­clas­si­cal eco­nom­ics’ or, in the 1990s jar­gon, ‘eco­nomic ratio­nal­ism’? It may reflect the low level of eco­nom­ics lit­er­acy across the pop­u­la­tion as a whole.

Unfor­tu­nately that is a vicious cir­cle: peo­ple do not want to study eco­nom­ics because it is irrel­e­vant, and they believe it is irrel­e­vant because they have not stud­ied eco­nom­ics. Or per­haps they stud­ied under one of the icon­o­clasts who told stu­dents that neo­clas­si­cal eco­nom­ics is dead.” (Pom­fret)

I haven’t both­ered to reply to Pom­fret, partly because that East Asia blog doesn’t have all that high a level of dis­cus­sion (most posts get 5 or less com­ments on them, rather less than the norm here!), partly because I’d rather let events decide which of us is right, and partly because I know that try­ing to point out the flaws in neo­clas­si­cal eco­nom­ics to believ­ers is as futile as a dis­cus­sion about the exis­tence of a god between an athi­est and a the­ist. But the degree of dis­con­nect between his defence of neo­clas­si­cal eco­nom­ics, and how peo­ple are feel­ing about eco­nom­ics and the econ­omy today, is remark­able:

There is a risk/return trade-off to open­ing the econ­omy and lib­er­al­is­ing the finan­cial sec­tor. The OECD coun­tries with the most dynamic finan­cial sec­tors (the US, the UK, Ire­land and to a lesser extent Aus­tralia and Spain) had the fastest growth in the 1990s and 2000s and were more exposed to finan­cial crises than say Italy, Ger­many or Japan – but the reform­ers are much bet­ter off over the two decades, even allow­ing for the cur­rent finan­cial cri­sis, than the oth­ers.” (Pom­fret)

Of course he’s also ignor­ing the myr­iad aca­d­e­mic cri­tiques of the inter­nal con­sis­tency of neo­clas­si­cal eco­nom­ics that I detailed in Debunk­ing Eco­nom­ics, but I’m so used to neo­clas­si­cal econ­o­mists ignor­ing (and more fre­quently, not even being aware of) such cri­tiques that I saw no point in wast­ing my breath point­ing them out.

How­ever I was pleased to find that at least some stu­dents in eco­nom­ics are start­ing to voice their frus­tra­tions with neo­clas­si­cal eco­nom­ics in class–something that I know is vital if we’re ever to get rid of this pseudo-sci­ence and develop a gen­uinely empir­i­cal alter­na­tive. A stu­dent at Mel­bourne Uni­ver­sity who is cur­rently suf­fer­ing through Inter­me­di­ate Micro­eco­nom­ics wrote this set of obser­va­tions (Part 1 and Part 2) on the sub­ject prior to his exams this semes­ter, and dis­trib­uted it to his class­mates.

I hope this isn’t the last time that a stu­dent gives a neo­clas­si­cal lec­turer a hard time. It cer­tainly isn’t the first–I was doing like­wise almost 40 years ago as an under­grad­u­ate at Syd­ney Uni­ver­sity, in the strug­gles that led to the devel­op­ment of the Depart­ment of Polit­i­cal Econ­omy there (a quick reminder to any Syd­ney-based read­ers that I’ll be speak­ing at a dis­cus­sion of Polit­i­cal Econ­omy with Frank Stil­well and Evan Jones at Glee­books on Tues­day June 16).

That’s not to say that I agree with the man­ner in which Polit­i­cal Econ­omy has devel­oped since those heady days of stu­dent rebel­lion in the early 1970s. I have always taken a strongly ana­lyt­i­cal approach to eco­nom­ics; I sim­ply reject the sta­tic method­ol­ogy that dom­i­nates neo­clas­si­cal eco­nom­ics, and too often turns up in rival schools of thought as well because econ­o­mists in gen­eral are igno­rant of the stan­dard meth­ods of dynamic analy­sis that per­me­ate the true sci­ences and asso­ci­ated dis­ci­plines like engi­neer­ing and com­put­ing. Instead I argue that we need to embrace dynamic analy­sis as a start­ing point to devel­op­ing a mean­ing­ful, empir­i­cal approach to eco­nom­ics (see these proofs of two new book chap­ters for more details–one on maths and the other on micro­eco­nom­ics).

Hope­fully the days of a truly empir­i­cal approach to eco­nom­ics are approach­ing, given the obvi­ous role that neo­clas­si­cal eco­nom­ics has had in mak­ing this cri­sis so much worse than it would have been with­out their dereg­u­la­tory interventions–ones that Pom­fret of course applauds in his reply to me:

In Aus­tralia, the advice of econ­o­mists led to reforms in the 1980s that pro­duced two decades of stel­lar eco­nomic growth. Not only do we have more goods, but we have bet­ter goods and choice.” (Pom­fret)

Right, those reforms. One of the lat­est such set came out of The Wal­lis Com­mit­tee, at which I argued against dereg­u­la­tion of the finan­cial sec­tor on the basis of Minsky’s Finan­cial Insta­bil­ity Hypoth­e­sis. In his piece, Pom­fret trots out the “tsunami” defence of the fail­ure of econ­o­mists to pre­dict this cri­sis:

Econ­o­mists rec­og­nized a bub­ble before 2007, even though they did not pre­dict when and how a finan­cial cri­sis ensued in the US, UK, Ice­land and else­where (but not every­where). As Greg Mankiw says in the arti­cle cited by Keen, to blame econ­o­mists for this pre­dic­tive fail­ure is like crit­i­cis­ing doc­tors for not pre­dict­ing that swine flu would orig­i­nate in Mex­ico. Steve Keen didn’t pre­dict the tim­ing either.” (Pom­fret)

In fact, I did pre­dict the timing–by devel­op­ing this site, by my com­men­taries on the inevitabil­ity of a debt-induced cri­sis from Decem­ber 2005, and by the remarks I made in Decem­ber 2006 to the Wal­lis Com­mit­tee, on the con­se­quences of their rec­om­men­da­tion to allow secu­ri­tised lend­ing. The eco­nomic fiasco we are now expe­ri­enc­ing was not an unpre­dictable tsunami, but entirely pre­dictable:

The secu­ri­ti­sa­tion of debt doc­u­ments such as res­i­den­tial mort­gages does not alter the key issue, which is the abil­ity of bor­row­ers to com­mit them­selves to debt on the basis of “euphoric” expec­ta­tions dur­ing an asset price boom. The abil­ity of such bor­row­ers to repay their debt is depen­dent upon the main­te­nance of the boom, and as the share mar­ket reac­tions to yesterday’s com­ments by Alan Greenspan reminded us, such con­di­tions can­not be main­tained indef­i­nitely.
Should a sub­stan­tial pro­por­tion of eli­gi­ble assets (e.g., res­i­den­tial houses dur­ing a real estate boom like that of 87–89) be financed by secu­ri­tised instru­ments, the inabil­ity of bor­row­ers to pay their debts on a large scale will not, of course, directly affect liq­uid­ity in the same fash­ion that a fail­ure of bank debtors does. Instead, the impact will be felt by those who pur­chased the secu­ri­ties, or by insur­ance firms who under­wrote the repay­ment.
Where this is a gov­ern­ment, the impact on liq­uid­ity will again be slight, since pub­lic debt will replace pri­vate.
Where this is a finan­cial insti­tu­tion, such as a bank, it will be in a very sim­i­lar sit­u­a­tion to the State Bank of Vic­to­ria (and many oth­ers) after the last real estate crash, with sim­i­lar con­se­quences.
Where this is an insur­ance com­pany, it could be dri­ven into bank­ruptcy, with an impact on liq­uid­ity via its share­hold­ers and its own cred­i­tors. How­ever this would not be as seri­ous as the sec­ond instance above.
Where the secu­ri­ties are trade­able, there would obvi­ously be a col­lapse in the trade­able price, and, poten­tially, the bank­rupt­ing of many of the investors–depending again on their own financ­ing arrange­ments.

The secu­ri­ti­sa­tion of debt doc­u­ments such as res­i­den­tial mort­gages does not alter the key issue, which is the abil­ity of bor­row­ers to com­mit them­selves to debt on the basis of “euphoric” expec­ta­tions dur­ing an asset price boom. The abil­ity of such bor­row­ers to repay their debt is depen­dent upon the main­te­nance of the boom, and as the share mar­ket reac­tions to yesterday’s com­ments by Alan Greenspan reminded us, such con­di­tions can­not be main­tained indef­i­nitely.

Should a sub­stan­tial pro­por­tion of eli­gi­ble assets (e.g., res­i­den­tial houses dur­ing a real estate boom like that of 87–89) be financed by secu­ri­tised instru­ments, the inabil­ity of bor­row­ers to pay their debts on a large scale will not, of course, directly affect liq­uid­ity in the same fash­ion that a fail­ure of bank debtors does. Instead, the impact will be felt by those who pur­chased the secu­ri­ties, or by insur­ance firms who under­wrote the repay­ment.

Where this is a gov­ern­ment, the impact on liq­uid­ity will again be slight, since pub­lic debt will replace pri­vate.

Where this is a finan­cial insti­tu­tion, such as a bank, it will be in a very sim­i­lar sit­u­a­tion to the State Bank of Vic­to­ria (and many oth­ers) after the last real estate crash, with sim­i­lar con­se­quences.

Where this is an insur­ance com­pany, it could be dri­ven into bank­ruptcy, with an impact on liq­uid­ity via its share­hold­ers and its own cred­i­tors. How­ever this would not be as seri­ous as the sec­ond instance above.

Where the secu­ri­ties are trade­able, there would obvi­ously be a col­lapse in the trade­able price, and, poten­tially, the bank­rupt­ing of many of the investors–depending again on their own financ­ing arrange­ments.” (Keen 1996)

I would like at least some ack­knowl­edge­ment from aca­d­e­mic neo­clas­si­cal econ­o­mists that gee, maybe it wasn’t such a good idea to allow secu­ri­tised lend­ing after all–even Alan Greenspan has done some­thing of a “mea culpa” after the event. But instead they trot out banal­i­ties like “Not only do we have more goods, but we have bet­ter goods and choice” as a defence of their pol­icy inter­ven­tions.

The rea­son they get away with such iso­la­tion from the real world is pre­cisely that: their iso­la­tion. Greenspan would have been torn to shreds by the Con­gres­sional com­mit­tee had he used such a defence to them.

We can’t bring Con­gress, or Par­lia­ment, to bear on what hap­pens in aca­d­e­mic instruc­tion in eco­nom­ics. But stu­dents can give their lec­tur­ers a hard time about serv­ing up empir­i­cally bar­ren non­sense as eco­nomic analy­sis. Are the stu­dents revolt­ing? I cer­tainly hope so!

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  • ak

    I am pretty open to the pos­si­bil­ity that the nuclear energy is not the solu­tion for the next 50–100 years for Aus­tralia pro­vided that car­bon diox­ide seques­tra­tion works on an indus­trial scale (what I doubt). Nuclear power may be good for some coun­tries but we don’t need to bother if we can pro­duce enough energy with­out screw­ing our­selves up.

    Also if for exam­ple some­body invents cheap organic solar pan­els and cheap energy stor­age — why not? But this is a big “if”. Oth­er­wise nuclear tech­nol­ogy is avail­able right here and right now how­ever to be safe it has to be expen­sive.

    So back to eco­nom­ics — there is no escape…

    Obvi­ously I agree that con­serv­ing energy is an obvi­ous solu­tion but going back to the dark ages is not an option. (By the way — what do you think about per­sonal car­bon trad­ing?
    http://www.defra.gov.uk/environment/climatechange/uk/individual/carbontrading/ )

    Regard­ing my vot­ing pref­er­ences I think that pure ide­al­ists screwed up enough in the coun­try where I was born (and in the neigh­bour­hood — Europe) that’s why I have to vote for the prag­ma­tists even if they are a bit not fresh (the Labor).

  • ak

    Let me clar­ify some­thing — the fact that I share the most of the val­ues with peo­ple belong­ing to The Greens doesn’t mean that I agree with some of the naive poli­cies

    http://greens.org.au/node/787

    and the way mem­bers of the move­ment under­stand (or rather don’t under­stand) the polit­i­cal process.

    I am sim­ply against faith-based pol­i­tics. I think that join­ing green forums or the party is point­less as I believe that wouldn’t make any dif­fer­ence.

    http://www.physorg.com/news165643839.html

    I would be extremely happy to con­front some of the views on an exter­nal forum though because there is no easy escape route if some­body is pinned down by argu­ments.

    The best exam­ple of how The Greens in Europe screwed up on the cli­mate change front is the pol­icy of clos­ing nuclear reac­tors pro­moted by the Senior Fig Leaf For For­eign Affairs Joshka Fisher serv­ing under Gasprom’s Chan­cel­lor Schroder
    http://en.wikipedia.org/wiki/Gerhard_Schroder

    Demo­c­rat Tom Lan­tos, chair­man of the United States House Com­mit­tee on For­eign Affairs, likened Schröder to a “polit­i­cal pros­ti­tute” for his recent behav­iour.”

    They man­aged to increase the depen­dency on the Russ­ian gas and brown coal-fired plants but got rid of the reac­tors. Well done com­rade Shred­der. Your sup­port com­rade Fisher should also be com­manded.

    By the way they both were the great­est “friends” of Poland delay­ing join­ing the EU by sev­eral years.

    Do you think that The Greens in Aus­tralia are less naive? The roots of the anti-nuclear atti­tude are in the polit­i­cal strug­gles of 1970–80-ties (when I was locked up on the other side on the Iron Cur­tain). Then the total mis­un­der­stand­ing of the Cher­nobyl dis­as­ter played a pre­dom­i­nant role in shap­ing the poli­cies.

    The cur­rent eco­nom­i­cal cri­sis is an effect of apply­ing the faith-based neo­clas­si­cal eco­nom­ics to the real­ity. It can­not be solved by another faith-based sys­tem.

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