Economics has some made-up thing funded by the propaganda arm of the Swedish Central Bank. I mean look at the listing of the prizes at Nobelprize.org:
- Nobel Prize in Physics
- Nobel Prize in Chemistry
- Nobel Prize in Physiology or Medicine
- Nobel Prize in Literature
- Nobel Peace Prize
- Prize in Economic Sciences
I've forgotten who first had the idea but the thought of making early morning phone calls to American economists in a Swedish Chef accent during mid-October sounds hilarious to me.
The only thing funnier is that the guy who follows up the announcement calls from the permanent secretary of the Royal Swedish Academy of Sciences with the short interview call is named Adam Smith.
Anyhoo.
I've seen three or four "Is Economics Relevant" stories in the last week and they are starting to get tiresome.
Here's the one that got me thinking about Sweden. From Trust Your Instincts:
Can economics be re-established as a relevant social science?
In an interesting post, Lars Syll, a Swedish economist, looks at what it would take to re-establish economics as a realist and relevant social science.Here's one from the Bonddad blog that, although not directly comparable hits on some of the same points and has a great quote about Mike "Mish" Shedlock:
Economics – and especially mainstream neoclassical economics – has as a science lost immensely in terms of status and prestige during the last years. Not the least because of its manifest inability to foresee the latest financial and economic crisis – and its lack of constructive and sustainable policies to take us out of the crisis....Please re-read the highlighted text as Professor Syll has nicely summarized both the failure of economics to foresee the crisis and, much more importantly, the failure of economics to present constructive and sustainable policies to get us out of the crisis.
Neoclassical economists, however, have wanted to use their hammer, and so decided to pretend that the world looks like a nail. Pretending that uncertainty can be reduced to risk and construct models on that assumption have only contributed to financial crises and economic havoc....Please re-read the highlighted text as Professor Syll has nicely made the critically important point that the economics profession has contributed greatly to the financial crisis.
How do we re-establish credence and trust in economics? Five changes are absolutely decisive.(1) Stop pretending that we have exact and rigorous answers on everything. Because we don’t. We build models and theories and tell people that we can calculate and foresee the future. But we do this based on mathematical and statistical assumptions that often have little or nothing to do with reality. By pretending that there is no really important difference between model and reality we lull people into thinking that we have things under control. We haven’t! This false feeling of security was one of the factors that contributed to the financial crisis of 2008.Your humble blogger has frequently said that the every economist who offers their opinion about how to respond to the financial crisis should first say whether they publicly predicted the crisis or not....MORE
In New Paper, Professor Thoma Overlooks The Contribution of Financial Bloggers
Professor Thoma has a new paper coming out which highlights that bad advice and the herd mentality can hurt prognostication. Here are some salient points from the summary available on his website:When I remember the other two I'll post them.
The belief that housing prices would continue to rise into the foreseeable future was an important factor in creating the housing price bubble. But why did people believe this? Why did they become convinced, as they always do prior to a bubble, that this time was different? One reason is bad advice from academic and industry experts. Many people turned to these experts when housing prices were inflating and asked if we were in a bubble. The answer in far too many cases – almost all when they had an opinion at all – was that no, this wasn’t a bubble. Potential homebuyers were told there were real factors such as increased immigration, zoning laws, resource constraints in an increasingly globalized economy, and so on that would continue to drive up housing prices.
When the few economists who did understand that housing prices were far above their historical trends pointed out that a typical bubble pattern had emerged – both Robert Shiller and Dean Baker come to mind – they were mostly ignored. Thus, both academic and industry economists helped to convince people that the increase in prices was permanent, and that they ought to get in on the housing boom as soon as possible.
But why did so few economists warn about the bubble? And more importantly for the model presented in this paper, why did so many economists validate what turned out to be destructive trend-chasing behavior among investors?
One reason is that economists have become far too disconnected from the lessons of history. As courses in economic history have faded from graduate programs in recent decades, economists have become much less aware of the long history of bubbles. This has caused a diminished ability to recognize the housing bubble as it was inflating. And worse, the small amount of recent experience we have with bubbles has led to complacency. We were able to escape, for example, the stock bubble crash of 2001 without too much trouble. And other problems such as the Asian financial crisis did not cause anything close to the troubles we had after the housing bubble collapsed, or the troubles other bubbles have caused throughout history.
A second factor is the lack of deep institutional knowledge of the markets academic economists study. Theoretical models are idealized, pared down versions of reality intended to capture the fundamental issues relative to the question at hand. Because of their mathematical complexity, macro models in particular are highly idealized and only capture a few real world features such as sticky prices and wages. Economists who were intimately familiar with these highly stylized models assumed they were just as familiar with the markets the models were intended to represent. But the models were not up to the task at hand,[1] and when the models failed to signal that a bubble was coming there was no deep institutional knowledge to rely upon. There was nothing to give the people using these models a hint that they were not capturing important features of real world markets.
Let me respond to these observations from the perspective of a financial and economic blogger.
First -- a large number of financial bloggers called the housing market before the "accredited" economists. Mish (who has since regrettably lost his mind), Calculated Risk, Barry Ritholtz and yes, Bonddad and NDD all called the bubble and have also been pretty good at predicting the trajectory and magnitude of the recession and the recovery....MORE
In the meantime here's Salon on "What do Swedes Think of the Swedish Chef?":
"They think he sounds Norwegian. Also, they’d like you to stop asking"...
