Sunday, April 27, 2014

Kaletsky: Replacing "defunct" with nothing

Revised 4:24 AM -- shortened.

Reuters: Opinion: Kaletsky: Time to stop following defunct economic policies

Anatole Kaletsky asks, "Can economists contribute anything useful to our understanding of politics, business and finance in the real world?"

Joseph E. Stiglitz, the Nobel laureate, asked rhetorically in Toronto: “Why are central banks and governments still trying to predict the effects of their policies with an economic model that is manifestly absurd?”

Why does not Stiglitz offering an alternative? Or if he does, why is not Kaletsky quoting the alternative, instead of the overly-dramatic question?

[Stiglitz's] answer was that the economic models studied in universities and published in leading academic journals are still largely based on a simplifying concept, known as the Representative Agent, which effectively assumes that “everyone in the economy is the same.” So these models have nothing to say about lending or borrowing, ignore the existence of banks and treat bankruptcies as unimportant because “when the borrower does not repay, he only defaults on himself.”

Well... Stiglitz's answer there, it says the models are no good. (One hears that often, lately. It's not economics; it's a meem.) Yeah, he's probably right about that, Stiglitz, but so what? He does not answer his own question:

Why are they still using that absurd model?

It's Stiglitz's question, not mine. But he didn't answer it. He complained that the model is no good, which is like, his answer is a tautology, a restatement of the question as opposed to an actual answer.

Based on Stiglitz's complaint -- that the models "ignore the existence of banks" as Kaletsky put it -- the productive answer would be to present a model that doesn't ignore the existence of banks. Or to correctly describe the economy, and leave the modeling to others. But Stiglitz's answer was empty.

Kaletsky apparently liked Stiglitz's answer:

Amazingly, these economic models with no banks are still the main analytical tool used by most central banks. Peeling away further layers of the theoretical onion reveals something even more bizarre: an inbuilt assumption that the economy is self-stabilizing.

See? Kaletsky's going for the bizarre -- the overly dramatic, I said -- rather than the relevant. And he's going for the zinger. Kaletsky finishes his thought with a zinger:

This means that virtually any policies the central bank may choose to follow will lead automatically to full employment — in the forecasts, if not in the real world.

Zingers are fun. But they don't solve problems.

So, so far, no: economists don't "contribute anything useful to our understanding of politics, business and finance in the real world".


geerussell said...

Things that yield improvement when replaced with nothing: derelict structures, bloodletting as medical treatment, economic models which ignore banks and assume a self-stabilizing economy.

Just reaching the point where it's understood the approach leads actively to doing harm is progress.

The Arthurian said...

You set the bar low.