The Dynamite Prize in Economics

February 4, 2010 10:09 PM

As a reaction towards the financial crisis the Real-World Economics Review will award the Dynamite Prize in Economics to the three economists who contributed most to blowing up the global economy. The Real-World Economic Review is the central organ of the movement for Post-Autistic Economics which is critical about the current mainstream in economics — in particular microeconomics and neoclassical theorists.

Voting is now open and the nominees are:

Fischer Black and Myron Scholes: They jointly developed the Black-Scholes model which led to the explosive growth of financial derivatives. The importance given to their hypothetical calculation of derivative prices was baneful not just because it was bogus, but also because it meant that relevant and often urgent real-world economic research was widely neglected by the profession.

Eugene Fama: His “efficient market theory” provided the moral umbrella for all sorts of greed, predatory behaviour and incompetent corporate management. It also provided the rationale for deregulation. And his theory’s widespread acceptance meant that “discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse.” In these three ways Fama’s work created the environment which made possible the GFC.

Milton Friedman: He propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of the financial theories with unrealistic assumptions that facilitated the GFC. In short, he opened the door for everyone subsequently to theorize without fear of having to be attached to reality.

Alan Greenspan: As Chairman of the Federal Reserve System from 1987 to 2006, he both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation. Before a Congressional committee on 28 October 2008 Greenspan confessed that his theoretical beliefs of 40 years were now proven to be without foundation, hence his total confusion and failure at his job.

Assar Lindbeck: By working to make the Riksbank Prize in Economic Sciences (“Nobel Prize in Economics”) almost exclusively a prize for neoclassical economists, this Swedish economist has contributed significantly to the conversion of the economics profession and of world public opinion to market fundamentalism.

Robert Lucas: His development of the rational expectations hypothesis, which defined rationality as the capacity to accurately predict the future, both served to maintain Friedman’s proposition that monetary factors do not affect the real economy and, in the name of “rigor”, distanced economics even further from reality than Friedman had thought possible.

Richard Portes: As Secretary-General of the Royal Economic Society from 1992-2008, he helped suppress worries expressed by non-mainstream economists about developments in the financial sector. In 2007 he wrote a Report for the Icelandic Chamber of Commerce giving a clean bill of health to Icelandic banks only a few months before they collapsed. When investigators called attention to the real state of Icelandic banking, he wrote a series of letters to the Financial Times defending the soundness of Icelandic banks and imputing professional incompetence to those who doubted it.

Edward Prescott and Finn Kydland: For jointly developing and popularizing “Real Business Cycle” theory, which by omitting the role of credit greatly diminished the economics profession’s understanding of dynamic macroeconomic processes.

Paul Samuelson: Through his textbook Economics: An Introductory Analysis (19 English language editions and translated into 40 languages), he popularized neoclassical economics, contributing more than any other economist to its diffusion and thereby to the deregulation of financial markets which made possible the GFC.

Larry Summers: As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), he worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also worked with Greenspan and Wall Street interests to torpedo efforts to regulate derivatives.

posted by jfricke (52 comments total)

I always found it insulting to autists to have their condition compared to the beliefs of classical economists.
posted by Ndwright at 10:48 PM on February 4, 2010 [4 favorites]

Yes, I know some high-functioning autistic people and I don't think they would ever stoop to the level of "profits over people". Why isn't there an award for Buddhist economics?
posted by shii at 10:54 PM on February 4, 2010

Greenspan by a mile. Crackpot theories that are faddish are nothing new to economics. People in charge of national economies have a duty to try and see through the smoke and mirrors of academic masturbation. Greenspan was the chairmain the Federal Reserve. He had the intellectual, moral and political duty to apply his considerable intelligence to safeguarding the US economy. The fact that he chose to ignore facts and cast his (and our) lot with ideology rather than reality makes him a clear "winner." Reprehensible doesn't begin to describe the man. Andrea Kramer has got to have a lot of love in her, because her husband is FUCKING BOGUS!
posted by KingEdRa at 11:10 PM on February 4, 2010 [1 favorite]

So my graduate advisor was one of the major figures in the PAE movement and I still consider myself someone who came out of this discipline. The choice of the term "post-autistic" remains controversial and there's been a lot of discussion about changing it. More often than not you hear people describe themselves as "heterodox" instead of "post-autistic" but showing my age, I tend towards the latter.
posted by allen.spaulding at 11:11 PM on February 4, 2010

Wiki Links:

Fischer Black and Myron Scholes
Eugene Fama
Milton Friedman
Alan Greenspan
Assar Lindbeck
Robert Lucas, Jr.
Richard Portes
Edward C. Prescott and Finn E. Kydland
Paul Samuelson
Larry Summers

It's so tough to choose, but I think I'll go with Summers, Greenspan, and Portes. Summers' current position of influence and his Harvard gambling problem put him over the top:

"By late 2008, those [swap contracts] had lost approximately $1 billion in value. This forced Harvard to borrow significant sums in distressed market conditions to meet margin calls on the swaps. In the end Harvard paid $497.6 million in termination fees to investment banks and has agreed to pay another $425 million over 30-40 years. The decision to enter into the swap positions has been attributed to Summers and has been termed a 'massive interest-rate gamble' that ended badly." (wiki)
posted by benzenedream at 11:13 PM on February 4, 2010 [1 favorite]

Also, Larry Summers and Black-Scholes round out my top three. They're not as bad as Greenspan, simply because they are too cunning and greedy. I'm convinced they knew what they were doing. Crazy Allan on the other hand, drank his own kool-aid. It's case of the Emperor's New Clothes.
posted by KingEdRa at 11:15 PM on February 4, 2010

I guess someone's gonna have to explain it to be because the Wikipedia didn't really clarify. Do post-autistic economists use math or statistics?

I mean I can see an argument about complex theoretical mathematical models versus analysis of experimental evidence but to do science without any mathematics whatsoever is akin to playing tennis with the nets down.
posted by pwnguin at 11:43 PM on February 4, 2010

So is this science? Math? Stats? Or just crazy?

You can criticize many of the economists in that list for being wrong, but by and large they are a rational lot that are trying to find better and better models to describe the incredibly complex world around them.

Having said that, I don't know what the Post-Autistic take on "rationality" is, so they may see this as a handicap as well.
posted by bbuda at 11:49 PM on February 4, 2010 [1 favorite]

Steve Keen takes apart the pseudo-science of neoclassical economics in Debunking Economics. His website is awful looking, but there's a lot of meat there.
posted by Jimmy Havok at 12:19 AM on February 5, 2010 [2 favorites]

All this will do is rotate the justifications used by those who want to defraud while obscuring the actual guilt of the fraudsters.
posted by srboisvert at 2:29 AM on February 5, 2010

$teve Keen is a self-promotion artist, soon to be walking up Kosciusko. I've got few quibbles with the list up there, they all deserve to be berated for their contributions to magnifying economic risks, but Steve KEen would be a real disaster.
posted by bystander at 2:33 AM on February 5, 2010 [1 favorite]

Couldn't they simply blanket nominate the Chicago School and be done with it?
posted by Thorzdad at 4:32 AM on February 5, 2010 [1 favorite]

I always find the hate on these economists, and the Chicago School in general, to be kinda funny. You have to assume that these guys have significantly influenced the marketplace with their ideas. Which they haven't, really.

The Black-Scholes model was accepted because it was fairly close to the actual prices being traded on options when it was discovered; it never exactly determined options prices anyhow, rather it just made implied volatility the "price" of the option.

The Efficient Market Hypothesis has survived quite well in the weak to semi-strong form. There has been no economists to-date that has found a way to consistently beat the market. And anyone trading at a bank probably doesn't believe in it too much, given that their job depends on the EMH being wrong.

The others have similar errors.
posted by FuManchu at 5:06 AM on February 5, 2010 [1 favorite]

This is pretty clueless editorializing.

More to the point, this is the kind of know-nothingism I generally associate with anti-science cultural conservatives. It's rah-rah partisanship, and mostly misdirected resentment, as well.

Scientific theories are subject to testing and amendation, you know? You might as well blame physicists for the atom bomb, or go after the global cooling folks.
posted by anotherpanacea at 5:22 AM on February 5, 2010 [3 favorites]

Hey, how about an International Economic Crimes tribunal. We could convene one, put all these guys -- the CEOs of the banks who fucked people over, and the government decisionmakers who created an environment where short-sight wins over long-vision -- on trial for predatory economics and willful destruction of the hopes and dreams of hundreds of millions of poor and middle class people. I'm having a hard time thinking of the ultimate punishment, though.

Maybe we could just set up a Randian enclave on a salt flat, toss them all over the fence, and let them do their thing when the only resources available for them to exploit are their own flesh and bones.
posted by seanmpuckett at 5:57 AM on February 5, 2010 [1 favorite]

Well, some physicists were pretty conflicted about their role in the atom bomb, anotherpanacea. It's not a particularly outrageous position. I can't believe anyone would look at the Manhattan Project and not think about the political and historical context.

And to the extent that many Chicago School economists were pushing (and have continued to push!) for policies that benefit the rich over the poor, that privatize gains and socialize risk...well, why not engage them in a bit of rough-and-tumble debate? (And some of that debate can and has come from well within orthodox economics.)

The descriptions given here could be a little more temperate, but I wouldn't call this "know-nothingism." I would, however, say that it's fairly naive to pretend that economics is a Pure Science done in a vacuum. Most obviously, it differs from natural science in that economic thinking can directly structure economic behavior--most natural sciences don't, in the course of their operations as a science, affect the workings of their objects of study. There has been some good work done on this sort of thing, and it's really not that difficult to imagine (and history furnishes us with some examples) how rightwing/libertarian economists could (through their roles in regulatory institutions, teaching in business schools, working in finance firms, and so forth) have a substantial effect on the economy.
posted by col_pogo at 6:23 AM on February 5, 2010 [2 favorites]

Gosh I don't have a lot of time to peruse all of their nominations, and some I can't comment on as I'm not really an Economist by education or profession.

However I am a Quant and solely on the basis of the first of their "Short List Dossiers", I have to question the rigour of those publishing Real-World Economics Review.

For example, the author states that Fischer Black and Myron Scholes they state "jointly developed the Black-Scholes model which led to the explosive growth of financial derivatives." which is ok, you could read as much in any newspaper so nothing illuminating there. But then they go on to say "The importance given to their hypothetical calculation of derivative prices was baneful not just because it was bogus …"

Huh? Says who? And compared to what?

The fact seems lost on the author that Black and Scholes weren't solely responsible for the growth of the options markets, in fact options, financial and others, had been traded, literally, for centuries before their work was published (which was arrived at solely by a serendipitous event, someone just passing by a blackboard and seeing the heat transfer PDE in business school no less) but fair value was difficult to quantitatively determine.

Of course Frenchman Bachelier had been trying to solve the problem even before Black or Scholes were born, but he lacked some insight, specifically knowledge of differential equations in general and the heat transfer problem specifically.

We know Black Scholes prices options fairly because it largely (not exactly, mind you) agrees with other models, for example, Lattice Pricing (there is a free excel model here, but I haven't messed about with it so you're on your own … ), which effectively is a discrete form representation of the Black & Scholes continuous form partial differential equation.

As others unthread have mentioned unthread, the author doesn't come across as that knowledgeable, rather more like someone who is looking for something to blog about and thinks he's found a topic.
posted by Mutant at 6:25 AM on February 5, 2010 [3 favorites]

shii: I was really loving that Buddhist economics link until this - Women, on the whole, do not need an "outside" job, and the large-scale employment of women in offices or factories would be considered a sign of serious economic failure.

UGH. Why modern Buddhism can't embrace modern feminism in this instance is beyond me. Not all women want to stay home and to force them to do so destroys the idea of "right livelihood" entirely.

(On the actual topic, this is really fascinating, but I know nothing about economics, so I'm just gonna sit back here in the peanut gallery.)
posted by grapefruitmoon at 6:36 AM on February 5, 2010

You can criticize many of the economists in that list for being wrong, but by and large they are a rational lot that are trying to find better and better models to describe the incredibly complex world around them.

Actually these people aren't that rational at all and frankly a lot of it is crazy. It isn't so much that their models are "wrong". They are mathematically rigorous, but they have been crazy in thinking that their models actually do describe the world, and trying (successfully) in getting people to make decisions based on their models, when the models are often incomplete.

Another problem is that they are hugely ideological. I mean think about it. I mean think about it. Would a liberal and conservative physicist disagree about whether an atom bomb would work? Or a nuclear reactor? Or global warming? Would a liberal and conservative biologist disagree about evolution? Or about the effectiveness of AIDS drugs? Obviously not.

But liberal and conservative economists disagree completely about lots of things in economics, because so much of it is designed to serve ideological ends. And the ones "in power" like Larry Summers and especially Alan Greenspan and Friedman and greenspan are very conservative. Greenspan was an Ayn Rand loving Objectivist!

More to the point, this is the kind of know-nothingism I generally associate with anti-science cultural conservatives. It's rah-rah partisanship, and mostly misdirected resentment, as well.

Scientific theories are subject to testing and amendation, you know?

The question is whether economics is a "real" science. It's actually classified as a social science like psychology or sociology. It's not like physics or chemistry or climate science or something. And social sciences, lets face it, don't have the same track record as the hard sciences. Think about all the crazy stuff that psychologists have come up with in the past century and prior with Freud and his impact. Think about how psychologists used to say people's drawings could determine if they were guilty of crimes or whatever. Or hell, look at the psychologists today who say video games cause violence, porn causes rape, etc. No doubt there is plenty of legitimate stuff in psych, but there's also some crazy. It's the same with economics.

You've got to be mathematically rigorous in economics, but it's fundamentally a social science, with all that entails.
posted by delmoi at 6:37 AM on February 5, 2010 [4 favorites]

I mean think about it. I mean think about it.

Yeah, man, totally.

All science is deeply riddled with divisions that can be attributed to sociological facts like networks of influence and citation. Usually, these differences don't bear on our ordinary political beliefs, and so we don't worry about it.

My problem with this post is that it confutes policy makers like Summers and Greenspan with researchers like Fama and Samuelson. But the real problem is that it treats everyone who did anything related to the Chicago school as if their research is somehow tainted or blameworthy.

This isn't like holding the folks involved in the Manhattan Project partly accountable for Nagasaki. It's like blaming Isaac Newton or Ernest Rutherford for the current tensions with Iran over nuclear enrichment.
posted by anotherpanacea at 7:16 AM on February 5, 2010

All science is deeply riddled with divisions that can be attributed to sociological facts like networks of influence and citation. Usually, these differences don't bear on our ordinary political beliefs, and so we don't worry about it.

A couple of people have already mentioned this, but just to boldface if for you: Economics is not a science.

Economics is a social science, and the link between those two words has always been tenuous. It begins on Day One of Economics 101, when you crack the ole textbook and read that a key first principle is the assumption that consumers behave rationally. This'd be akin to walking into a chemistry class and being told to assume all cells are made up of midichlorians that govern an equilibrium between good and evil in the world.

I am not exaggerating for effect. Reason is an invention of a handful of Enlightenment philosophers. It is no more empirically quantifiable than free will or natural law or loving kindness or pure evil. It's an idea, nothing more. (And since I happen to be reading Lakoff's The Political Mind at the moment, I'll be all pedantic and point out that the idea that reason is a separate phenomenon from emotion is a fundamentally false one at the neural level - i.e. from a scientific perspective).

I'm new to this post-autistic economics movement - I'd welcome a link dump of the most important documents if anyone out there's got such a thing - but I'm betting one of its key motivations is indeed to deflate the falsehood, profitably disseminated by neoclassical economists, that what they are doing is as solid and scientific and immutable as the bridge an engineer builds.
posted by gompa at 8:07 AM on February 5, 2010 [4 favorites]

Like mutant, I don't think Black-Scholes should be on that list either.. their model is used for discretely pricing vanilla options--a very mature product--and has little relevance to the more recently invented credit and asset-backed derivatives.

Summers' current position of influence and his Harvard gambling problem

Harvard has been a large hedge fund wrapped with a university guarantee for awhile now
posted by chalbe at 8:13 AM on February 5, 2010

Scientific theories are subject to testing and amendation, you know?

And that's exactly why orthodox economics is not science. It is built on a foundation of unobservable premises (Keen's critique), and all evidence is cherry-picked to reach the pre-ordained conclusion. It's a religion with pretenses to science.

The case of Chile is a perfect example. Chile's economy was wrecked by a gang of Friedman acolytes, and it never really recovered until they were pushed out. But the Chicago crew loves to point to Chile as a demonstration that their ideas work. How? By choosing their beginning date after the crash their policies created, so they can claim that the growth following that crash was its result....even though that growth never brought Chile to parity with its neighbors, when it had been ahead of them before the crash.
posted by Jimmy Havok at 8:21 AM on February 5, 2010 [2 favorites]

As a system of reasoning microeconomics is by far the less mathmatical of the two big branches. Much of the cognitive horse power behind micro is dedicated to following complex chains of cause and effect and sophisticated logical arguments I guess compared to many things it has a lot of math but it's not nearly as math intensive as macro. The credit crisis was really much more in the domain of macroeconomics than micro.

And many of the objections (not all) voiced by people outside economics about the limits of economics are really about the limits of the economics that can be taught in 4 months as 101 level class. It's sort of like if people got really upset and dismissive about physics because there are no frictionless planes or perfect insulators in the real world.

There's a lot in science that isn't contentious F=MA or water being made up of two hydrogen atoms and an oxygen atom. And there are some things that are contentious like the many worlds interpretation and how time functioned at the very begining of the universe. In economics there's a lot more that's contentious for a number of perfectly understandable reasons complexity, newness, a sort of heisenbergian property where the behavior you describe is changed by the awareness of the behavior. More to the point, people are effected in real ways by which way the wave breaks with regard to economic contraversies. If the many worlds interpretation of physics is true I'm not going to behave self destructively confident that my otherworld self is out there living the dream. But if economics shows that taxing goods with negative externalities like liquor or gasoline is more efficient than taxing labor that's going to effect those people who like to drink or who refine oil.
posted by I Foody at 8:24 AM on February 5, 2010

Actually calling it the "Dynamite" prize sounds kind of cheezy. Maybe they should name it after the guy who invented Dynamite. More formal that way. Go with his last name, of course. Some Swedish guy, right?
posted by delmoi at 8:32 AM on February 5, 2010

"even though that growth never brought Chile to parity with its neighbors, when it had been ahead of them before the crash."
What? I'm not defending Pinochet but Chile has three neighbors the relatively rich Argentina, the very poor Bolivia, and Peru which is somewhere in the middle. Currently Chile is richest of these countries (and when compared to Bolivia and Peru by a pretty significant margin) this is after several years of rule by a center left government (though probably to the right of the other countries).
posted by I Foody at 8:37 AM on February 5, 2010

Black & Scholes and Samuelsson don't really belong with people like Summers and Greenspan.
posted by Chrysostom at 8:38 AM on February 5, 2010

I don't know much about economics but I had to choose anyone to blame for our economic troubles on a large-scale, I would certainly choose people responsible for setting economic policy at a large scale.

It seems to me that regardless of whether econ is considered a "hard" science or a social science, the test is the same.

Yes, use rigorous mathematics to work out your theories. Differential equations and all that.

But be aware, as any good physicist would, that to model something as complex as a natural system or an economy using math, certain simplifying assumptions must be made.

It is necessary to identify those assumptions and be very aware of their limitations. Those limitations will tell you when a theory will give reasonable predictions and when it won't.

For example, in physics, you can sometimes ignore friction pretty well, but other times you really can't. I would like to learn more about what assumptions these economists made that were not reasonable, and where they fell apart.
posted by mai at 9:20 AM on February 5, 2010 [1 favorite]

I would like to learn more about what assumptions these economists made that were not reasonable, and where they fell apart.

Well, there was that whole "markets will act rationally" bit, for one.
posted by Thorzdad at 9:48 AM on February 5, 2010

The complaint of the post-autistic economics movement isn't that neo-classical economics isn't mathematically rigorous, it's that it starts off with unproven axioms, like the aforementioned "people make rational choices" assumption. They don't start from observed phenomenon, which other physical sciences and social sciences do.

I'm not an economist by any means and I have never formally studied economics, though I am trying to improve my understanding of their theories and methods. However, as a historian I have moved into economic history, so I have a fair bit of knowledge of WHAT has happened in the economic past, if not why. And what has happened in the economic past often does NOT fit with what neo-classical economists claim about how markets and economies work. For example, the highest levels of economic growth in the early modern period (c1500-1800) in Europe is correlated not with international market integration (aka international free trade and connectedness with global markets), but with protectionism -- though it was also correlated with increased national market integration. Why was international market integration not correlated with as much growth? I don't know. But that certainly makes me question assumptions like the idea that free trade is necessarily the best thing for a developing economy; we need to do more comparative study of what has been correlated with growth, and what might work best for different markets at different stages of development. Similarly, all historians who look at such things know that consumption choices are rarely completely rational -- they are always informed by cultural ideas and prejudices. When working class families in c1900s London spent a large proportion of their food budget on a roast for Sunday dinner, this was not the most efficient allocation of their resources or of societal resources (considering that they also might have relied on charities to make up the lack, or been less efficient at work due to hunger later in the week). But it was an important cultural choice for them. Our consumption continues to be driven just as much by cultural choices -- and also psycological quirks like over-valuing "free things" and other odd tricks of our minds.

Economics desparately needs to move away from models based on assumptions about humans and groups, and into models based on the observation of actual economic behaviour. And this is one of the reasons that I find behavioural economists as well historical economists to be some of the most interesting economists around -- both groups use real world data as the basis for their models, one on an individual level and the other on a societal level.
posted by jb at 11:10 AM on February 5, 2010 [1 favorite]

I have to agree with the "this is stupid and unfair" crowd, especially for the academics (which most of them are). Still, I can understand everyone's frustration so maybe I can help.

Economics is hard, especially macro. Economists can't run experiments to test theories, micro-economists at least can look at many different individuals to understand how people will behave but with macro all your data ends up being is a few economies where lots of other things are going on so it's hard to say "markets act in this way if you do x" because a million other things are going on at the same time. So you build models to explain things and test your models. The problem for the macro economist is that there are too many degrees of freedom for building models, you can make a model say whatever you want it to say so the preference has been to make them as simple as possible while still capturing the essential components. There is a fierce competition between the models, economists are prideful people and the people at the top are really smart. (I'd like to think the people at the bottom are smart too, but that's b/c I'm one of them.) This doesn't mean they have all the answers. They have some ideological guidelines, but these need to be interpreted by policymakers. Just like I believe global warming is a problem, but I don't want climate scientists deciding how we're going to take the CO2 out of the air (I'd rather have a carbon market do that for us).
posted by treeshar at 11:44 AM on February 5, 2010 [1 favorite]

gompa: "One of Economics 101, when you crack the ole textbook and read that a key first principle is the assumption that consumers behave rationally. ...
I am not exaggerating for effect. "

I wish I could take a look at my old econ 101 book, because the only key first principle from Econ 101 I remember is scarcity of resources.
posted by pwnguin at 12:12 PM on February 5, 2010

What's actually in introductory economics textbooks:

Ten Key Principles in Economics

Everything has a cost. There is no free lunch. There is always a trade-off.

Cost is what you give up to get something. In particular, opportunity cost is cost of the tradeoff.

One More. Rational people make decisions on the basis of the cost of one more unit (of consumption, of investment, of labor hour, etc.).

iNcentives work. People respond to incentives.

Open for trade. Trade can make all parties better off.

Markets Rock! Usually, markets are the best way to allocate scarce resources between producers and consumers.

Intervention in free markets is sometimes needed. (But watch out for the law of unintended effects!)

Concentrate on productivity. A country’s standard of living depends on how productive its economy is.

Sloshing in money leads to higher prices. Inflation is caused by excessive money supply.

!! Caution: In the short run, falling prices may lead to unemployment, and rising employment may lead to inflation.
posted by anotherpanacea at 1:29 PM on February 5, 2010 [2 favorites]

Mistaken theoreticians should be in a different group than people who pushed policies for personal gain or on the basis of ideological beliefs. Marie Curie and Edward Teller both contributed to the nuclear arms race, but it's obvious who did so for political gain.
posted by benzenedream at 1:36 PM on February 5, 2010

is that Mankiw? I kind of remember it from the stand-up economist.
posted by treeshar at 1:38 PM on February 5, 2010

Currently Chile is richest of these countries

It wasn't, under Chicago-based economic policy. They've had several decades to recover from that debacle...oops, I mean miracle.
posted by Jimmy Havok at 3:19 PM on February 5, 2010

It's sort of like if people got really upset and dismissive about physics because there are no frictionless planes or perfect insulators in the real world.

Well, in physics, we eventually imbue our frictionless planes with velocity-dependent friction coefficients; we might represent our once-spherical cows with networks of springs and masses, or with a finite element model. Physics really does have methods to deal with the complexity that is glossed over in earlier coursework.

I ask this out of genuine curiosity and to advance the discussion beyond what would be its sticking point: what comparable methods exist in economics to address the ubiquity of non-rational actors?
posted by Jpfed at 3:22 PM on February 5, 2010 [1 favorite]

I would like to learn more about what assumptions these economists made that were not reasonable, and where they fell apart.

Steve Keen can tell you. Link above.
posted by Jimmy Havok at 3:24 PM on February 5, 2010

Jimmy Havok I don't want to be seen as a Pinochet defender or a free market absolutist but you are factually incorrect about Chile relative to its neighbors and who was in the leadership during those years. From 1973 to 1990 Pinochet was president of Chile or president of the Junta, during pretty much the entire time Chile was richer than Peru and unambiguously richer than Bolivia on a per capita basis. Argentina was generally richer than Chile for this period while starting from roughly the same base though both nations were sufficiently volatile to allow moments when Chile was the richer of the two.

When the "Chicago reforms" were put into place Chile had triple digit inflation so serious economic problems were coming regardless of what policies so it isn't cherry picking exactly to note the fact any more than it would be cherry picking to not to lay all of the job losses in 2009 at the feet of Obama.

The Pinochet government's economic policies were to the right of what was ideal. The Pinochet government was also bad for important reasons that have nothing to do with its economic policies. It certainly does not seem that the right wing economic policies can be credited with terrific economic outcomes. That the Chilean experiment was a success is a fringe belief among economists. However after 1990 and after under Patricio Aylwin a very economically liberal (in the south american/european/everyone but the US sense) with a moderately increased social safety net, and the stability that comes from democratic government has enjoyed pretty remarkable success.
posted by I Foody at 4:09 PM on February 5, 2010

For example, the highest levels of economic growth in the early modern period (c1500-1800) in Europe is correlated not with international market integration (aka international free trade and connectedness with global markets), but with protectionism -- though it was also correlated with increased national market integration.

???

There were more monopolies established and mercantilist restrictions put in place during that time, but international trade absolutely exploded. There was certainly more free trade and global integration in 1800 than in 1500, but only because the previous restrictions were technological rather than governmental.
posted by FuManchu at 8:11 PM on February 5, 2010

I Foody: did you look at that article I linked to? If there are claims in there that you disagree with I'd be interested. For example:

In 1982, Milton Friedman enthusiastically praised General Pinochet (the Chilean dictator) because he "has supported a fully free-market economy as a matter of principle. Chile is an economic miracle."

...When you take both the recession and recovery into account, Chile actually had the second worst rate of growth in Latin America between 1975 and 1980. Only Argentina did worse.

... Between 1972 and 1987, the GNP per capita fell 6.4 percent. (13) In constant 1993 dollars, Chile's per capita GDP was over $3,600 in 1973. Even as late as 1993, however, this had recovered to only $3,170. (14) Only five Latin American countries did worse in per capita GDP during the Pinochet era (1974-1989).

The claim that Chile was a miracle may be less commonly seen today, but occasionally I still see it made as an argument for Freidmanist economic policy.

(I was looking for some comment on Chile by Thomas Sowell [representing the most diehard public Friedmanite I can think of] and I ran across this howler from 2000, where he bemoans the fact that Social Security isn't being put into the hands of the investment bankers.)
posted by Jimmy Havok at 11:56 PM on February 5, 2010

Fu Manchu -- yes, international trade increased, but it was not free trade. And what the study found is that countries like Britain which practiced protectionism (Britain was protectionist until the 19th cent, at which point they made an about face) grew more than counties which did not. In the 19th century, countries like the United States and New Zealand were protectionist over their fledgling industries, and today they are richer than similarly placed countries in South America or Africa which were not (in the case of African colonies, not allowed to be -- whereas white colonies like NZ were allowed to develop industries and enact some barriers to protect them).

History seems to show that free trade is correlated with faster growth for developed economies --taking down barriers like the Corn Laws in the 19th cent was great for Britain. But as far as I know, most currently first world nations had protectionist measures in place as they began to develop their industries and manufacturing. The exceptions may be Taiwan or Singapore or other places in East Asia -- I don't know the recent economic history there. I do know that neither China nor India have truly embraced lowering all barriers to trade -- they both have opened up to more international investment but maintain thing like (in China, for example) requirements for local partnership.

In case you were wondering, the study in question looked at grain prices -- if the markets were integated, the prices should be similar. And the economist found that markets actually were more integrated circa 1500 than in c1650 -- which is not so surprising considering that they had just had 30 years of horrific war. But it showed that markets did not become simply more integrated over time and previous studies which showed increasing integration btw c1650 and 1800 were too seeing a come-back, as it were. She also noticed that The markets of places like Britain were less intgrated into the international markets (though very well integrated nationally -- due to the small size and good river systems) than places whose economies grew less over this period.

Now, please forgive me for any mistakes -- this was a talk I attended some 5 years ago. (obviously a memorable one). I have attended a couple of similar seminars presenting research on market integration and economic growth. Another talk regarding India found that market integration (in this case btw Indian cities) grew over the nineteenth century -- but it's not clear that the economy did.
posted by jb at 6:51 AM on February 6, 2010

And what the study found is that countries like Britain which practiced protectionism (Britain was protectionist until the 19th cent, at which point they made an about face) grew more than counties which did not.

The problem with these kinds of studies is that they usually ignore trade imperialism. Britain wasn't just protectionist, they went to war numerous times to force other countries to open their markets to British goods, and to prevent their colonies from developing competitive industries. This ended up being good for Britain and bad for the Commonwealth, which is why the colonies' open markets look worse than Britain's closed markets. But that kind of violently-enforced asymmetry isn't an option any longer, nor should it be.
posted by anotherpanacea at 8:35 AM on February 6, 2010

Anotherpancea -- that's a good point, that imperialism has a place in the story as well. But trade wars are really more a feature of the 19th century.

Things Britain did earlier included limiting the export of raw wool -- they had been exporters of raw wool which was then spun and woven and dyed in places like the low countries. But the govt stopped this to support the development of a local textiles industry, and wool processing became a very important part of economic growth in the 16th century (with a bad collapse c1620 but it came back somewhat).

My point was that there is a neoclassical assertion that open markets always lead to more growth and that current developing nations should lower all barriers to trade and foreign investment. But history shows us that the story is more complicated, that at times judicious protectionist policies -- as in 16th cent England -- are better for economic growth, and that countries which have tried to develop under an straight economic liberal position -- like many post-colonial Latin American countries in the 19th and early 20th centuries have found themselves far worse off than countries, like the US and NZ, which had some protectionist measures. Notably, NZ also did not have any gunboat diplomacy, though it benefitted from Britain's.
posted by jb at 9:23 AM on February 6, 2010

That's not to say that economic liberalism might not be the best thing for a developed nation. I favour international trade, though I would attach free trade agreements to worker pay and condition agreements to be sure that competition isn't simply about who can have the most abused workers. International trade is also important for developing nations --but so is developing their own "value-added" sectors -- that is, trading not just raw materials (whose prices tend to be volatile and whose value has fallen against finished goods over time) but also stimulating industries to process those raw materials. And I would want to see the profit stay within the developing nation -- which means you need barriers to capital like requiring local partnerships.
posted by jb at 9:31 AM on February 6, 2010

Two things, jb:

1. You're right about trade wars in China, but the British Empire was preserving its markets using force since at least 1171, in Ireland. See also the East Indian Trading Company. There's also a little matter of the American colonies which had already broken away in 1776. If you look at the Townshend and Tea Acts, they all center around enforced trade regimes through tariffs and taxes.

2. There's a longstanding tradition of using minimum wage and workplace safety regulation to prevent free trade. I'm with you on the overall concern with exploitation and inequality, both at home and abroad, but you can't regulate other people, and except in terms of slave labor, I think it's self-contradictory and wrongly paternalistic to say that we'll only compete with people who make first-world wages. Properly implemented, trade is the best way I know to equalize the tremendous inequalities between the first and third worlds.
posted by anotherpanacea at 10:02 AM on February 6, 2010

On the issue of protectionism in the past, the world today is so different from that of the early industrial revolution that it is difficult to take any lesson from it, other than that people of all ideological bents can find whatever they want in history.

On the issue of protectionism the modern world, part of China's success has to be laid to its protectionist scheme of artificially suppressing the value of its money. This makes Chinese goods relatively cheap compared to those of other countries, both in China (protecting the domestic market) and outside.

Of course, like all of the successful modern economies, they also depend on selling vast amounts of goods to the US, to the point that they are lending us the money to buy from them. That's not a tactic that has long-term potential.
posted by Jimmy Havok at 11:44 AM on February 6, 2010

jb, It strikes me as though you're looking into the details too much. The idea of Free trade came into being at the end of that time period to protest the protectionism, and used the correlation between expanding trade and economic growth as evidence. The claim is that with less protectionism/mercantilism during that time the economies could have grown even faster. The effects from the increase in trade were much larger than the effects from policies. Most modern economists would claim any decrease to the barriers to trade, whether technological of political, are a boost to Free Trade. It's just that the only debatable barriers are political.

The grain prices phenomenon is very interesting, but I'm having a hard time moving from that to the claim that the closed markets helped growth. Do you happen to recall names or I don't have access to academic searches, and Google Scholar hasn't given me anything obvious. Discrepancies in prices has not exactly disappeared.

And here in China, I understand the claims that the protectionism has not hampered it, but it really has in many ways. Everything that depends on imports is more expensive here. The same car costs twice as much in China as it does in the US, 60% more not including taxes. The export industry really has been supported by the dollars from every citizen. It has surely promoted more stable growth, but the majority of citizens would be marginally better off if they could buy everything at the prices other countries do.
posted by FuManchu at 4:31 PM on February 6, 2010

Unfortunately, FuManchu,your conjecture is unsupported by any evidence. Yes, if foreign goods were cheaper, the Chinese would be able to buy more of them...assuming that cheaper foreign goods didn't reduce internal wages, and thus the amount the Chinese had to spend on those goods.

It's hard to take a claim that the fastest-growing economy in the world could have grown faster seriously.
posted by Jimmy Havok at 11:02 PM on February 6, 2010

1171? Please give more details. What types of goods? How enforced, considering that the Norman hold on Ireland was never perfect and slipped considerably over the next few centuries -- and few medieval kings had much ability to police their states.

And we were talking about the growth period c1500-1800, specifically. You made the point that imperialism and forcing open markets for British goods was an important part of British development, and I agreed, but I feel that this is really a major factor in the nineteenth century. Yes, they did hold colonial markets open, but (the later importance of the US notwithstanding) colonial markets were pathetically small and unimportant. The British did not fight the war with the colonies over tax, but over issues of government, soverignty and empire-pride. Their primary markets at the time were in Continental Europe, which is the reason why Napoleon's later exclusion of them out of the Continental system is such a bad economic blow. At the time, they were expanding in India and international trade and especially slavery had contributed a great deal to levels of capital in the country, but had yet to provide significant export markets.

I'm not claiming that developing countries should do what Britain did. I'm not pro-slavery, for one, and that was probably the single most important factor for increasing capital in Britain (grow tobacco/sugar with slaves, planters make a shitload of money they bring home to buy British estates, meanwhile tobacco/sugar is refined and re-exported from London to the Continent). But I still have yet to see anyone offer any evidence that complete openness to international markets, as is currently recommended by bodies like the IMF, has ever been correlated with better growth for a developing economy. I know that economic liberals had a THEORY which was inspired by the problems with protectionism, but what country has sucessfully developed with these policies? Latin American elites were very swayed by these theories and the model of late 19th cent Britain as a free trading nation (being one of the most powerful economies, that was working well for the Brits) -- far more so than the Anglo North Americans, who kept up their protectionist ways well into... well, the 21st century. (Rhetoric aside -- has the US ever not had protectionism either directly or indirectly through subsidies?)
posted by jb at 9:02 AM on February 7, 2010

I looked back through my notes - sorry, the research on market integration was presented in a seminar some 4-5 years ago, and I apparently did not take electronic notes, so I don't have the scholar's name.

Her research didn't find that closedness helped economic growth. She just found that openness was NOT correlated with economic growth, and that closedness was. Now, as we've been talking about in this thread, closedness to international markets could come along with policies of seeking captive markets and using slave labour -- and either or both of those could be the keys to economic growth (not closedness -- I've been using "correlated" very conciously). But it certainly puts a question in the theory that openness -- aka economic liberalisation -- itself is key to economic growth. That's not to say that those European countries whose markets were more open to international trade didn't grow -- she just found that they didn't grow as quickly as those whose markets were not internationally integrated. What then for the advantage that economic liberals claim for market integration?

Sorry if it seems that I'm harping on market integration -- I'm just using this as one example of a theory (that market integration and efficiency was a key reason that Europe's economy grew so rapidly c1650-1800 to allow them to be more powerful than Asia in the 19th century) which has not been supported by the evidence. The theory was originally based on studies looking at growing market integration c1650-1800, which was assumed to have been a linear trend up earlier -- what this research showed is that a) international market integration was not a linear trend, but had been higher in c1500 than in c1650, only to rebound, and b) that it was not correlated with growth, so it didn't seem to offer an advantage. There are a hell of a lot of other things happening that did offer advantages -- but this international market integration thesis (which is just a thesis, not even a theory) has been used to justify a lot of real world policy with real world effects, though its real world basis is questionable. I've also attended research seminars that presented evidence that China's markets were as integrated internally as Europe's in c1750 (that was by Carol Shiue and Wolfgang Keller, published 2007, though I heard a much earlier version) and that more efficient markets followed industrialisation rather than leading to it, and another on market integration in India (sorry, no notes from this one) which showed that Indian markets were not well integrated in c1800, but were very well integrated c1900 -- but it was unclear what advantage this had brought to the Indian economy. I don't know Indian economics or history well -- I imagine that the population grew substantially. All I have read is that the subcontinent was significantly poorer per capita c1900 than in c1800 -- when I think it may have been slightly richer per capita than Europe.

Now, as I've said, I'm no historical economist; I'm not entirely sure why market integration is supposed to aid economic growth. I'm a social historian; I deal with real world things like how many people lived where, when, and what did they eat and how much money did they have to live, and did they have a cow or not? (Learning how to count cows takes a lot of specialized knowledge that makes it hard to have time to be up on all the economic theory, especially as I spent my undergraduate and graduate classes learning more about armies, politics, religion, housing and farming than about markets). All I know is that often when I hear classical/neoclassical economist explain their theories -- or when I attend seminars by historical economists -- these theories don't seem to fit with what happened. (Aka, how many cows there were, and who owned them).

And this disconnect between theory and data is at the heart of the complaint that started this thread. The people making the complaint aren't claiming to have all the answers -- just saying that the answers ought to be based on careful observation of the data rather than modelling without real world evidence.
posted by jb at 9:37 AM on February 7, 2010

Rhetoric aside -- has the US ever not had protectionism either directly or indirectly through subsidies?

No! And that's one reason to fight for free trade, as Oxfam does. Right now, certain parts of the global trade regime more closely resemble the colonial market integration of old. That's why we talk about neo-colonialism: using a mixture of international institutions and independent treaties, the imperial center forces its not-quite-colonies' markets to be open to their goods, while remaining protectionist in the opposite direction.

That's not to say that those European countries whose markets were more open to international trade didn't grow -- she just found that they didn't grow as quickly as those whose markets were not internationally integrated. What then for the advantage that economic liberals claim for market integration?

Without seeing the study myself, I just can't comment further than asking for some more granularity. Specifically, colonial exploitation and access to slave labor seems to have played a major role in Europe's development 1500-1800. No one thinks that's just, but it seems to have played a role in distorting growth figures in asymmetric ways. Does she consider that?

All I have read is that the subcontinent was significantly poorer per capita c1900 than in c1800 -- when I think it may have been slightly richer per capita than Europe.

As it was put above, clearly the industrial revolution transforms the trade picture in ways that make old lessons difficult to apply today. Plus we have to account for 19th Century colonial effects, especially in the sub-continent. In the absence of legitimate trade asymmetries, is it better the champion openness or closedness? I live in the US, where the answer seems to be openness, as evinced by the Oxfam link above. But again, this is the difference between an ideological position (freer trade is always good) and the work that economists actually do: when is freer trade better, and for whom?

The people making the complaint aren't claiming to have all the answers -- just saying that the answers ought to be based on careful observation of the data rather than modelling without real world evidence.

I just don't recognize practicing economists in these caricatures of pure formalism. Look at the work of Bill Easterly, Paul Collier, and Dani Rodrik for examples of economists who take the question of free trade seriously. I don't think you'll find much of this "Assume we have a can opener" stuff that is being accused.
posted by anotherpanacea at 12:01 PM on February 7, 2010