Friday, September 04, 2009

It takes a great economist show you just what a village of idiots has been in charge of economic and financial policy. You don't have to read my rant but if you would like a panoramic and insightful review of the role of the wizards of the dismal science in our present state of world economic illness, do read this longish essay by Krugman.

Krugman has the vantage point and the level headed delivery I suppose one would expect of a Nobel laureate in economics. You usually have to pay Vanity Fair to hear what Stiglitz has to tell us but Prof. Krugman dishes out insight in the New York times more regularly and for a lot less. I'd pay the Times for this service if I had to.

He gave a good perspective on the health care impasse last week. I already was of the opinion we have too many crooks designing or sponsoring the legislation for any real reform to result but Krugman put a historical context around the picture that cements my disinterest in whatever they may do in Washington.

But even Paul Krugman could dig a little deeper in this week's appropriately critical filleting of how all but a two or three of the elites of economic forecasting missed all the signs of the world's, and particularly the US's looming financial fiasco's. He ends up saying the formerly cocksure enterprise of economic academics is in disarray and must learn humility. He says economists, now that the presumed wholeness of their lash-up of theories has been dashed to pieces, must learn to deal with "messiness" of irrational markets and investors that did not fit their tidy theories. Krugman's best theme in the piece is gently and massively poking holes in the neoclassical idea, beloved of our disgraced neofascistconservative pols, that markets are level playing fields populated with rational actors and can do no wrong.

Friedman is dead, so are his ideas. Krugman just touches the surface of the problem that I find with the academic economics that run the real world to ruin.
The birth of economics as a discipline is usually credited to Adam Smith, who published “The Wealth of Nations” in 1776. Over the next 160 years an extensive body of economic theory was developed, whose central message was: Trust the market. Yes, economists admitted that there were cases in which markets might fail, of which the most important was the case of “externalities” — costs that people impose on others without paying the price, like traffic congestion or pollution. But the basic presumption of “neoclassical” economics (named after the late-19th-century theorists who elaborated on the concepts of their “classical” predecessors) was that we should have faith in the market system.
Externalities indeed! The entire overworked surface of our planet is just an externality in the models of most economists, abstracted into a few productivity numbers if considered at all. That entire field rarely considers how much of the health of economies is stolen from the earth. It is like cash added to an account but not entered in the ledger: It allows all the leaks and pilfering and mismanagement which are also omitted from the record, to go on yet magically the statements show we still have money in the bank. Krugman is on the record as suspecting that economies are hurting because too many of us using too much of everything have shoved us dangerously close to pumping the last barrel of oil, digging up the last ingot of copper. Krugman suspects but I feel certain.

In the face of what should cause uncertainty and caution, how have our economists advised us? They have consulted the markets. On this, the old quotes are the best and Krugman has all the gems:
...Keynes considered it a very bad idea to let such markets, in which speculators spent their time chasing one another’s tails, dictate important business decisions: “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”