Robert Shiller points to an interesting conflict in economics today: “We are in the midst of a boom in popular economics: books, articles, blogs, public lectures, all followed closely by the general public. Yet this boom in popular economics comes at a time when the general public seems to have lost faith in professional economists – because almost all of us failed to predict, or even warn of, the current economic crisis, the biggest since the Great Depression.” Shiller thinks the best explanation is “that economics has become more interesting because it no longer seems to be a finished and closed discipline. It is no fun to read a book or article that says that economic forecasting is best left to computer models that you, the general reader, would need a doctorate to understand. And, in truth, the public is right: While there is a somewhat scientific basis for these models, they can go spectacularly wrong. Sometimes we need to turn off autopilot and think for ourselves-and, when a crisis occurs, use our best human intellect.” [%comments]
Hating Economists but Loving Economics
TAGS: economists, Robert Shiller
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Economists are the secular version of prophets or fortune tellers. We never remember when they’re wrong; we never forget when they’re right.
John Blow can write a book called “Why The Market Will Crash in 2011″ (the non-religious version of “Why Jesus Will Come Back in 1988″). If the market crashes, egads!–we have a genius, guru, prophet, savior.
If the market waits for six more years to crash (as it does from time to time), we hear, “Joe Blow was right…only his timing was off.”
Same thing happen in the Christian TV world. A “prophet” can say 100 different things. If just one comes to pass–the old “throw enough things against the wall and something’s bound to stick” game–we’ll forgive all the 99 false predictions.
Of course, if their are “false prophets,” then it stands to reason that there must be true ones. Likewise, with economists: some actually do know what they are talking about. Probably no more than four or five though–ha!
I think most of the popular resentment of economics comes from the fact that people didn’t understand in the first place that economics isn’t “a finished and closed discipline”.
It’s the difference between macro and micro as pointed out above. People love books that primarily deal with micro, not macro. Popular books such as Freakanomics don’t address macro issues but rather the “fun” stuff that has nothing to do with the bigger picture. Seems pretty obvious to me.
If the majority of the economics profession had predicted the GFC, would it have happened at all? That is, surely if thousands of economists had loudly announced in 2003 that excessive credit, ninja loans etc would lead to a crash in 07-08, people would have been more prudent in their borrowing and lending, removing the catalyst for a crash and then economists would be berated for falsely predicting a crash?
I don’t have any hatred or even dislike for economists. However, what I like least about them is their insistence on decoupling models made in the image and likeness of Rube Goldberg from reality. Any boom and bust economy can be predicted by simply observing biological systems work by real-world principles. Regulating to prevent geometric growth has, as its end point, the prevention of boom and bust. Thus, the economists who advocate a self-regulating market are denying reality for the thrill of watching stratospheric expansion of the building blocks in their model until it reaches sufficient instability to collapse. My three-year-old does the same thing.
It’s a Black Swan world! Some economists may see what looks like a gray swan approaching in the dark and say, “look a swan is approaching!” A few may even say that they believe the swan approaching to be black. Once the swan has arrived, however, and it is found to be black, that is when the bulk of economists dissect it and find out what hit us. Then, like generals, economists get busy analyzing the last black swan and they build their findings into their new and improved set of models. And so it will continue ad infinitum!
There were many highly regarded economists who predicted the financial crisis. Im an undergrad and the whole financial crisis is perfectly consistent with the models we learn.
The problem, as Krugman has said many many times, is what was once known was forgotten,(banking instability – diamond dybvig etc). We seem to be in a macroeconomic dark age where beauty was mistaken for truth in the form of the efficient markets,when all markets suffer from major pitfallsof human cognative bias, so while the models may in themselves be robust, the agents they model aren’t subject to things like overconfidence and confirmation bias.
I think we will see a rise in Game theory and Behaviour economics to account for our shortfalls in modelling human behavioural and psychological distortions. Macro can account for our preferences, but give no explanation for why we hold them. This needs to be explored further.
Economics presumes that people act rationally, and that is often not true.