Skip to comments.Encouraging More Reality in Economics
Posted on 01/06/2007 1:24:41 PM PST by infocats
CHICAGO, Jan. 5 The annual meeting of the American Economic Association, which opened here on Friday, is usually a pretty esoteric affair.
But this year it could resonate much more broadly as the departing president of the organization, which represents most of the nations academic economists, tries to push prevailing economic theory further away from the free market approach that has generally held sway for the last four decades.
The protagonist in this drama is George A. Akerlof, a Nobel laureate, who is using the same platform that the late Milton Friedman adopted in 1968. As president of the A.E.A. back then, Friedman laid out new theoretical justifications for a market system that he argued performs most favorably for nearly everyone when the government avoids tinkering with its operation.
The hundreds of economists who listened that day to Mr. Friedmans memorable speech did not immediately embrace his ideas. Keynesian economics, with a big role for government, still held sway.
But over time the Friedman approach took hold, eventually having profound effects on politics and government policy far beyond the ivory tower. This was partly because of Mr. Friedmans insistent, larger-than-life personality, and partly because Keynesian economics failed to adequately explain and respond to the simultaneous outbreak of higher inflation and rising unemployment that emerged in the 1970s...................
(Excerpt) Read more at nytimes.com ...
Realty Economics = Dumping Keynesian beliefs
"Realty Economics = Dumping Keynesian beliefs"
Keynes wouldn't have endorsed (or even recognized) most of the economic policy made in his name from 1960 on.
Rather, economics attempts to predict behavior in general, with all other factors held equal. Yes, some managers may choose to forego income in exchange for more social prestige. But do all managers, as a general rule, make the same choice? If there are only a few exceptions to a general trend, does it make sense to call for large-scale government intervention to adjust for the effects of a few exceptions?
The kind of critique outlined in the article makes another, more substantial error. While recognizing that certain aspects of the market may not always function with perfect efficiency or consistency, they seem to assume that the government does not suffer the same flaws as the market. Those calling for regulation assume that the government is capable of making perfect, instantaneous, highly detailed decisions to address the shifting and complicated imperfections in a market economy. Anyone whose ever had a run in with any kind of government committee or a few bureaucrats should know better than to make that assumption.
Any market economy in the real world will never perfect, as even Friedman would admit. That doesn't automatically mean government is the best or first solution to turn to. Using the government to correct minor market imperfections is like using a rusty machete to fix the stray whisker you missed during your morning shave.
They are, of course, neither.
Though I admire Friedman I have always thought he put too much weight in rational behaviour. I mean, I don't think we're talking about the odd person here and there. I think people behave irrationally often enough to designate people as irrational (and therefore rational behaviour cannot be expected or inferred).
I think you might see rational trends of behaviour that appear to represent reliable norms but I think the explanation for that is more because of cultural influences than it is from the human acting rationally himself. Cultural influences and trends can also be irrational for long periods though (war is an example). I think rational behaviour can be used as an abstract to offer an 'ideal economy index' against which you can measure the current economy but nothing more. People aren't rational thus the 'ideal model' cannot be used to predict perfectly what they as a whole will do.
For example, he says, people dont automatically insist on raises that keep their pay on par with inflation. They often are happy with smaller raises, considering them a compliment from the boss for valued work.
That statement pretty much encapsulates the elitist (a.k.a. Clintonist or Kerry-ist) worldview that most people are dolts, fools and rubes who should be forced to submit to the designs of their 'betters' for their own good, doesn't it...
And he is doing so at the moment when income inequality, more concentrated wealth and upheavals from expanded globalization are straining faith in a relatively unfettered market system.
Actually, that is a litany of misguided concerns typically expressed by collectivists and leftists of all stripes, and their faith in a relatively unfettered market system can not suddenly have been strained, because they never had it to begin with.
The NY Times article is a pure propaganda piece (but I would have expected nothing less from the NY Times)...
Economics can actually be simplified, but the explanation is far from satisfactory.
1) The purpose of the study of economics is to profit from an economic model. Everyone in an economy seeks to profit in that economy.
2) The majority follow the economic model, which eventually diminishes the profitability of whatever they do to "too little" return, if not zero profit. However, inertia allows much of the old way to survive for quite a while.
3) By acting in a way different from the model, someone may profit far more than the majority. They become the leader in changing the economic model, and the majority seek to adapt to the new direction.
The trouble is that you cannot predict the new direction of innovation, which means that your economic models will always be flawed. This is very frustrating to economists.