Neoclassical Economics: theory not law

I do not even know if my poor participation as of late should allow me post anymore but until Peter restricts my access...I will continue sharing interesting FT articles when I can.
I'm easing up on international politics because the much needed and much too late dialectic seems to finally be taking off in the US and because I want to show that I do not only think about the Middle East.
This piece touches upon the dangers of paradigms and ideological fanaticism...In my view economics should remain a social science and quit trying to be a hard science... ceteris is never quite paribus in the real world.

Enjoy the read...

Baroque fantasies of a peculiar science
By Philip Ball
Published: October 29 2006 18:48 | Last updated: October 29 2006 18:48
NB- Click ‘read more’


It is easy to mock economic theory. Any fool can see that the world of neoclassical economics, which dominates the academic field today, is a gross caricature in which every trader or company acts in the same self-interested way – rational, cool, omniscient. The theory has not foreseen a single stock market crash and has evidently failed to make the world any fairer or more pleasant.
The usual defence is that you have to start somewhere. But mainstream economists no longer consider their core theory to be a “start”. The tenets are so firmly embedded that economists who think it is time to move beyond them are cold-shouldered. It is a rigid dogma. To challenge these ideas is to invite blank stares of incomprehension – you might as well be telling a physicist that gravity does not exist.
That is disturbing because these things matter. Neoclassical idiocies persuaded many economists that market forces would create a robust post-Soviet economy in Russia (corrupt gangster economies do not exist in neoclassical theory). Neoclassical ideas favouring unfettered market forces may determine whether Britain adopts the euro, how we run our schools, hospitals and welfare system. If mainstream economic theory is fundamentally flawed, we are no better than doctors diagnosing with astrology.
Neoclassical economics asserts two things. First, in a free market, competition establishes a price equilibrium that is perfectly efficient: demand equals supply and no resources are squandered. Second, in equilibrium no one can be made better off without making someone else worse off.
The conclusions are a snug fit with rightwing convictions. So it is tempting to infer that the dominance of neoclassical theory has political origins. But while it has justified many rightwing policies, the truth goes deeper. Economics arose in the 18th century in a climate of Newtonian mechanistic science, with its belief in forces in balance. And the foundations of neoclassical theory were laid when scientists were exploring the notion of thermodynamic equilibrium. Economics borrowed wrong ideas from physics, and is now reluctant to give them up.
This error does not make neoclassical economic theory simple. Far from it. It is one of the most mathematically complicated subjects among the “sciences”, as difficult as quantum physics. That is part of the problem: it is such an elaborate contrivance that there is too much at stake to abandon it.
It is almost impossible to talk about economics today without endorsing its myths. Take the business cycle: there is no business cycle in any meaningful sense. In every other scientific discipline, a cycle is something that repeats periodically. Yet there is no absolute evidence for periodicity in economic fluctuations. Prices sometimes rise and sometimes fall. That is not a cycle; it is noise. Yet talk of cycles has led economists to hallucinate all kinds of fictitious oscillations in economic markets. Meanwhile, the Nobel-winning neoclassical theory of the so-called business cycle “explains” it by blaming events outside the market. This salvages the precious idea of equilibrium, and thus of market efficiency. Analysts talk of market “corrections”, as though there is some ideal state that it is trying to attain. But in reality the market is intrinsically prone to leap and lurch.
One can go through economic theory systematically demolishing all the cherished principles that students learn: the Phillips curve relating unemployment and inflation, the efficient market hypothesis, even the classic X-shaped intersections of supply and demand curves. Paul Ormerod, author of The Death of Economics, argues that one of the most limiting assumptions of neoclassical theory is that agent behaviour is fixed: people in markets pursue a single goal regardless of what others do. The only way one person can influence another’s choices is via the indirect effect of trading on prices. Yet it is abundantly clear that herding – irrational, copycat buying and selling – provokes market fluctuations.
There are ways of dealing with the variety and irrationality of real agents in economic theory. But not in mainstream economics journals, because the models defy neoclassical assumptions.
There is no other “science” in such a peculiar state. A demonstrably false conceptual core is sustained by inertia alone. This core, “the Citadel”, remains impregnable while its adherents fashion an increasingly baroque fantasy. As Alan Kirman, a progressive economist, said: “No amount of attention to the walls will prevent the Citadel from being empty.”
The writer is consultant editor of Nature and the author of Critical Mass (Heinemann)
Copyright The Financial Times Limited 2006

Read more!

The Global Middle

Pt2 of my sad attempt to be a meaningful contributor by stealing the FTs work deals with the mounting pressures on the middle class. On a related note, I've always found Europeans confuse the problems of the US system, it is not so much that the poor suffer from a liberal (economic) state (though the images from Katrina make it hard to say this convincingly) but that the (lower) middle class suffers, too rich to be helped too poor to help themselves, these are the 46 million without health insurance.
But I digress...the mounting political pressures resulting from the radical transformations taking place in the world at a record pace will undoubtedly need to be addressed if we want to keep the global economy growing ( which we, or at least I, presumably do)...

The global middle cries out for reassurance
By Larry Summers
Published: October 30 2006 02:00 | Last updated: October 30 2006 02:00
NB- Click ‘read more’


Against all odds, we are living in a time of plenty. Neither the after-effects of September 11 2001 nor a tripling in oil prices has prevented the world's economy from growing faster in the past five years than in any five-year period in recorded economic history.
Given this recent performance and the pricing-in by world markets of an optimistic outlook, one might have expected this to be a moment of particularly great enthusiasm for the market system and for global integration.
Yet in many corners of the globe there is growing disillusionment. From the failure to complete theDoha trade round to pervasive Wal-Mart-bashing, from massive renationalisation in Russia to the success of populists in Latin America and eastern Europe, we see a degree of anxiety about the market system that is unmatched since the fall of the Berlin Wall and probably well before.
Why is there such disillusionment? Some anti-globalisation sentiment can be seen as a manifestation of resistance to the US arising from the Bush administration's foreign policy misadventures. But there is a much more troubling source: the growing recognition that the vast global middle is not sharing the benefits of the current period of economic growth - and that its share of the pie may even be shrinking.
Two groups have found themselves in the right place at the right time to benefit from globalisation and technological change. First, those in low-income countries, principally in Asia and especially in China, who are able to plug into the global system. The combination of low wages, diffusible technology and the ability to access global product and financial markets has fuelled an economic explosion.
It is important to remember that the period between the late 18th and early 19th centuries in Britain and continental Europe was called the Industrial Revolution for a reason. For the first time in human history, the standard of living of one generation was demonstrably better than the one before: in a single lifespan, real per capita incomes doubled and then doubled again. If one looks at the growth rate of China during the past 30 years, living standards are increasing at a rate that will lead to a hundred-fold improvement over a single human lifespan. The impact cannot be overstated.
Second, it has been a golden age for those who already own valuable assets. Owners of scarce commodities have seen their returns rise prodigiously. People running businesses that can take advantage of globalisation to source labour less expensively and sell to larger markets have seen their incomes rise far faster than incomes generally. Certainly those in the financial sector in a position to benefit from the asset revaluations associated with globalisation have prospered.
Everyone else has not fared nearly as well. As the great corporate engines of efficiency succeed by using cutting-edge technology with low-cost labour, ordinary, middle-class workers and their employers - whether they live in the American midwest, the Ruhr valley, Latin America or eastern Europe - are left out. This is the essential reason why median family incomes lag far behind productivity growth in the US, why average family incomes in Mexico have barely grown in the 13 years since the North American Free Trade Agreement passed, and why middle-income countries without natural resources struggle to define an areaof comparative advantage.
It is this vast group that lacks the capital to benefit from globalisation and is desperately seeking either reassurance or a change in course. Yet without its support it is very doubtful that the existing global economic order can be maintained.
Let us be frank. What the anxious global middle is told often feels like pretty thin gruel. The twin arguments that globalisation is inevitable and protectionism is counterproductive have the great virtue of being correct, but do not provide much consolation for the losers. Nor can they rally support for policies that maintain, let alone promote, international integration.
Economists rightly emphasise that trade, like other forms of progress, makes everyone richer by enabling them to buy goods at lower prices. But this offers small solace to those who fear their jobs will vanish.
Education is central to any economic strategy, but there is a limit to what it can do for workers in their 40s and beyond. Nor can education be a complete answer at a time when skilled computer programmers in India are paid less than $2,000 (£1,050) a month.
John Kenneth Galbraith was right when he observed: "All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership." Meeting the needs of the anxious global middle is the economic challenge of our time.
In the US, the political pendulum is swinging left. The best parts of the progressive tradition do not oppose the market system; they improve on the outcomes it naturally produces. That is what we need today.
There are no easy answers. The economic logic of free, globalised, technologically sophisticated capitalism may well be to shift more wealth to the very richest and some of the very poorest in the world, while squeezing people in the middle.
Just as the Federal Housing Administration's effort to make owner-occupied housing more available after the second world war was a crucial part of the policy approach that permitted the Marshall Plan to go forward, so also our success in advancing international integration will depend on whatcan be done for the great global middle.
Our response will affect not just the livelihoods of millions of our fellow citizens but also the prospects for continuing global integration, with all the prosperity and stability it has the potential to bring.
The writer is former US Treasurysecretary
This column will appear monthly
Copyright The Financial Times Limited 2006

Read more!

Yet again, the Onion says it best

Read! It's difficult to disagree with these views of US foreign policy when they're presented in such a compelling context.

Read more!

In the line of fire

... or "in the cross-hairs of terror"... apparently the UK is now Al Quaeda's number 1 target. One reason suggested is that there's such a large Muslim population over here that also maintains close links with Pakistan. The article drifts into slightly bizarre territory when it talks of tactics similar to those used by the Provisional IRA during the Troubles - such as meeting each other in parks!
And having "cells" that operate independently yet within a strong hierarchy. Incidentally, my GCSE history course taught me that this system of terrorist cells was developed by Gerry Adams while he was in prison. Locking people up really works...

Read more!

Climate update

Worrying discussion of "runaway climate change." This kind of stuff leads me to think that the planet is actually genuinely screwed and we may have seen the peak of human civilization. We could be headed for the world described in the central portion of David Mitchell's Cloud Atlas - obviously having bypassed that futuristic bit (it's a fine read and recommended BTW).

No more below.

Read more!

The Universe: "a put-up job"

Fascinating extracts from a new book, "The Goldilocks Enigma" by a guy called Paul Davies. His website describes him as a "theoretical physicist, cosmologist, astrobiologist, author and broadcaster."

The content has much to do with the topics discussed under "Science vs. Religion" below, bringing an awful lot of disparate sources to bear on the problems of the existence of the Universe.

These include, at opposite ends of the spectrum, particle physics and cosmology. The interesting thing is that in the Universe's early moments, the two fields were fundamentally connected, as the interactions of tiny particles dictated the future structure of the Universe. The "Goldilocks Enigma" is that articulated by astronomer Fred Hoyle, who said the Universe looks like "a put-up job" - i.e. it was designed for the purpose of supporting life. What he means is that the laws of physics are fine-tuned in such a way that it became possible for sentient life to eventually emerge. It doesn't seem plausible for such a thing to happen by chance, leading to many possibilities. God is one of them; the existence of a vast number of parallel Universes with our one being the only one where those fundamental constants were "just right"... The extracts available on the BBC website don't include it, but I wonder about a cyclical Universe - one characterised by an infinite series of Big Bangs followed by Big Crunches (the Universe collapses in on itself), each time with slight adjustments such that we eventually get the right conditions for life.

My mind's boggling a little now and I ought to do some work.

Read more!