5 ms·

Old economic models couldn't predict the recession. Time for new ones

10 points by kawera 11y ago

JSeymourATL 11y ago
> US investment in developing a better theoretical understanding of the economy is very small – around $50 million in annual funding from the National Science Foundation – or just 0.0005 percent of a $10 trillion crisis. Hey Economists... There's plenty of money > http://cagw.org/reporting/pig-book http://cagw.org/reporting/pig-book
sebastianconcpt 11y ago
Let me guess.. that list of "old economic models" that could not predict recession completely ignore Austrian Economics or anything of what acuratelly was predicted by Ludwig von Mises, decades ago. Can I suspect that this is because no politician wants to act restricted by science?
- czr80 11y ago
  " I do not deny that Austrian economists have made valuable contributions to economics. Rather, as the sequel will argue, I maintain that: (a) The effort to rebuild economics along foundations substantially different from those of modern neoclassical economics fails. (b) Austrian economists have often misunderstood modern neoclassical economics, causing them to overstate their differences with it. (c) Several of the most important Austrian claims are false, or at least overstated. (d) Modern neoclassical economics has made a number of important discoveries which Austrian economists for the most part have not appreciated." http://econfaculty.gmu.edu/bcaplan/whyaust.htm http://econfaculty.gmu.edu/bcaplan/whyaust.htm
toyg 11y ago
> very few experts saw it coming. Meh. Plenty of people saw it coming eventually; but most of them had a stake in ignoring it, certain that they could profit handsomely from the subsequent conditions (which they did: bankers received a massive amount of money at rock-bottom prices from state actors, which they wouldn't have got otherwise, and most CxO bonuses were still paid throughout). The failure was not an academic one, but rather a political one: nobody wanted to reign in financial speculators. We don't need new theoretical models (or rather, we don't need them more than we usually do), we "just" need better politics.
wycx 11y ago
For those interested in new models, may I suggest the work of Steve Keen, one of the economists who did predict the financial crisis. I have been following Steve's work since the mid-2000s, and it is a more convincing framework for thinking about the economy than most other things I have read. Examples here [1] and here [2]. The intellectual bankruptcy on modern neoclassical economics is exposed in some of the battles Steve has had to fight over the years, such as criticism for using debt toGDP ratio [3]. If neoclassical economists cannot even describe how money is created in the modern economy, what meaningful contribution do they have to describing an economy? [4] [1] http://www.debtdeflation.com/blogs/ http://www.debtdeflation.com/blogs/ [2] https://www.youtube.com/user/ProfSteveKeen/videos https://www.youtube.com/user/ProfSteveKeen/videos [3] http://www.debtdeflation.com/blogs/2009/03/14/rory-robertson-designs-a-car/ http://www.debtdeflation.com/blogs/2009/03/14/rory-robertson... [4] http://www.businessspectator.com.au/article/2012/10/22/commodities/myth-money-multiplier http://www.businessspectator.com.au/article/2012/10/22/commo...
astr0n0m3r 11y ago
The authors aren't economists. They are hammers, and they think economics is a nail.
dragonwriter 11y ago
The "very few experts saw it coming" claim is patently false. "Very little media and popular attention was paid to the warnings from experts -- coming from several different economic approaches -- that saw it coming because there was lots of financial interest of lots of powerful people in not having people concerned about it" would be more accurate, but kind of undermine the idea that new models are a solution. Which is not to dismiss the value of "big computing" and agent-based modelling in economics, just that the Great Recession wasn't a failure of experts to see where the course led that can be mitigated by having better models. In any case, if you want to proceed that agent-based modelling can do better for macroeconomic modelling, than, well, we don't need long advocacy pieces, we need published research. There's sort of an aside in the article that seems to suggest that the authors think that economics research funding is inadequate, which, if it's a real issue the authors are concerned about, is probably a more fruitful subject for a long advocacy piece than "we need this particular kind of model for this domain, even though we can't point to a model of this type that does better in the domain than existing models, just some good models in related-but-distinct domains."

10 points by kawera 11y ago

> US investment in developing a better theoretical understanding of the economy is very small – around $50 million in annual funding from the National Science Foundation – or just 0.0005 percent of a $10 trillion crisis. Hey Economists... There's plenty of money > http://cagw.org/reporting/pig-book http://cagw.org/reporting/pig-book

sebastianconcpt 11y ago

Let me guess.. that list of "old economic models" that could not predict recession completely ignore Austrian Economics or anything of what acuratelly was predicted by Ludwig von Mises, decades ago. Can I suspect that this is because no politician wants to act restricted by science?

czr80 11y ago
" I do not deny that Austrian economists have made valuable contributions to economics. Rather, as the sequel will argue, I maintain that: (a) The effort to rebuild economics along foundations substantially different from those of modern neoclassical economics fails. (b) Austrian economists have often misunderstood modern neoclassical economics, causing them to overstate their differences with it. (c) Several of the most important Austrian claims are false, or at least overstated. (d) Modern neoclassical economics has made a number of important discoveries which Austrian economists for the most part have not appreciated." http://econfaculty.gmu.edu/bcaplan/whyaust.htm http://econfaculty.gmu.edu/bcaplan/whyaust.htm

toyg 11y ago

> very few experts saw it coming. Meh. Plenty of people saw it coming eventually; but most of them had a stake in ignoring it, certain that they could profit handsomely from the subsequent conditions (which they did: bankers received a massive amount of money at rock-bottom prices from state actors, which they wouldn't have got otherwise, and most CxO bonuses were still paid throughout). The failure was not an academic one, but rather a political one: nobody wanted to reign in financial speculators. We don't need new theoretical models (or rather, we don't need them more than we usually do), we "just" need better politics.

wycx 11y ago

For those interested in new models, may I suggest the work of Steve Keen, one of the economists who did predict the financial crisis. I have been following Steve's work since the mid-2000s, and it is a more convincing framework for thinking about the economy than most other things I have read. Examples here [1] and here [2]. The intellectual bankruptcy on modern neoclassical economics is exposed in some of the battles Steve has had to fight over the years, such as criticism for using debt toGDP ratio [3]. If neoclassical economists cannot even describe how money is created in the modern economy, what meaningful contribution do they have to describing an economy? [4] [1] http://www.debtdeflation.com/blogs/ http://www.debtdeflation.com/blogs/ [2] https://www.youtube.com/user/ProfSteveKeen/videos https://www.youtube.com/user/ProfSteveKeen/videos [3] http://www.debtdeflation.com/blogs/2009/03/14/rory-robertson-designs-a-car/ http://www.debtdeflation.com/blogs/2009/03/14/rory-robertson... [4] http://www.businessspectator.com.au/article/2012/10/22/commodities/myth-money-multiplier http://www.businessspectator.com.au/article/2012/10/22/commo...

astr0n0m3r 11y ago

The authors aren't economists. They are hammers, and they think economics is a nail.

dragonwriter 11y ago

The "very few experts saw it coming" claim is patently false. "Very little media and popular attention was paid to the warnings from experts -- coming from several different economic approaches -- that saw it coming because there was lots of financial interest of lots of powerful people in not having people concerned about it" would be more accurate, but kind of undermine the idea that new models are a solution. Which is not to dismiss the value of "big computing" and agent-based modelling in economics, just that the Great Recession wasn't a failure of experts to see where the course led that can be mitigated by having better models. In any case, if you want to proceed that agent-based modelling can do better for macroeconomic modelling, than, well, we don't need long advocacy pieces, we need published research. There's sort of an aside in the article that seems to suggest that the authors think that economics research funding is inadequate, which, if it's a real issue the authors are concerned about, is probably a more fruitful subject for a long advocacy piece than "we need this particular kind of model for this domain, even though we can't point to a model of this type that does better in the domain than existing models, just some good models in related-but-distinct domains."