Saturday, December 8, 2012

Model This

"Let's begin with the premise that everything you've done up to now is wrong."
- Sheldon Cooper

At Lars P Syll, Neoclassical economics – a theory based on shaky foundations. Syll quotes from Alan Kirman's What’s the use of economics?

we have to radically change the way we conceive of and model the economy.

They sure do. Unfortunately, that's easier said than done. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.

A longer quote from Syll, from Kirman:
The typical attitude of economists is epitomised by Mario Draghi, President of the European Central Bank. Regarding the Eurozone crisis, he said:

“The first thing that came to mind was something that people said many years ago and then stopped saying it: The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now – and I think people ask ‘how come?’ – probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate to a real bee. And that’s what it’s doing” …

What Draghi is saying is that, according to our economic models, the Eurozone should not have flown. Entomologists (those who study insects) of old with more simple models came to the conclusion that bumble bees should not be able to fly. Their reaction was to later rethink their models in light of irrefutable evidence. Yet, the economist’s instinct is to attempt to modify reality in order to fit a model that has been built on longstanding theory.

Why are we talking about bees?

I was at another site earlier today, Thoughts on Economics. Robert Vienneau writes, "I study economics as a hobby." I thought that was funny, because I study the economy as a hobby.

When economists create models, they do things like Krugman does:

Does that really help you think? Reminds me of something I read, I know not where: "He explains English by way of Greek."

One more thing. I don't mean to be critical of Alan Kirman. After all, he did say "we have to radically change the way we conceive of and model the economy." I think Kirman is trying to see past all those ramifications in the corners of his mind. But in his opening, he says:

The simple question that was raised during a recent conference organised by Diane Coyle at the Bank of England was to what extent has - or should - the teaching of economics be modified in the light of the current economic crisis? The simple answer is that the economics profession is unlikely to change.

And in his closing, he says:

Does this mean that we should cease to teach ‘standard’ economic theory to our students? Surely not.

We have a long way to go, brother.

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