A story making the rounds concerns the inaugural conference of the Institute For New Economic Thinking (INET). Yves Smith has a long post discussing the The Origins Of The Next Crisis. Talking about the next crisis is a perfectly legitimate thing to do. It is not idle speculation because we're still in the Doomsday Cycle I talked about yesterday. I poked around the INET website and watched the introductory video What is the New Institute For Economic Thinking? We have the usual good news/bad news situation.
The good news is that these folks understand that things have gone terribly wrong. Orthodox economic models describe a specific world of equilibrium and flows, of perfect competition and rational, intelligent actors who maximize—that is, they choose the "best" of all feasible alternatives. In 2008, all this maximizing blew up the global economy. Everyone praised Ben Bernanke's Great Moderation but forgot about Hyman Minksy's Financial Instability Hypothesis. A quick read of John Kenneth Galbraith's very short book A Short History of Financial Euphoria would have sufficed to alert economists to a disaster in the making.
Thus a problem arises because the world economists describe is not the one we live in, as William White discusses (video below). Also see my Invisible Hand Goes Missing or The Paradox Of Thrift. You are now free to regard almost any Nobel Prize in Economics awarded in the last 25 years as an indictment of the economist who received it. At the INET conference there is a solid recognition that Economics has become fossilized, i.e. unable to evolve or grow beyond the bad ideas it holds dear. You can see all the INET videos here.
There is an assortment of bad news. Here it is—
- The American (and global) economy has gone so far down the wrong path that it will likely take a few decades to sort things out if we start right now. As William White puts it, there are great "imbalances" in the global economy. If this were 1960 or 1980, and not 2010, we might have time to get this ocean liner turned around.
- Unfortunately, there are many reasons to believe we don't have the time required to get this ship moving in the right direction. Most of these reasons have to do with inadequate energy (oil) flows and various types of environmental degradation—economists call these latter externalities.
- Looking over the INET participants, it is easy to see that, however smart & clever they might be, the energy and environmental issues are not on the table. There was only one scientist—she is an epidemiologist, and there are two if you count the mathematician—among the participants.
- Among the many economists at the conference, Ken Rogoff in particular pointed out that economics fails to consider financial history (past bubbles). Rogoff points out that models of how Finance works should be tested (calibrated) by applying them to past financial events (fiascoes). This is precisely what scientists do to test their climate models, e.g. does the model duplicate the effects on climate of the Mount Pinatubo volcanic eruption? Yet there were few historians or scientists at the conference.
I don't find much to be satisfied with here. Regarding America's Imperial Decline, the lack of historians in the group (e.g. Niall Ferguson) guarantees that little discussion of this subject will take place. Worst yet, it is very likely that among a group of mostly economists, no matter how learned and eager to learn they are, the impossible idea of infinite, exponential growth on our finite Earth will not be questioned.
This is going to be an "interesting" century, but not for the reasons these guys think. William White addresses the challenge of short-termism. There a lot of myopia in economic thinking generally, which is simply a reflection of Human Nature. White's thoughts on how short-termism led us to the current economic crisis is also an exercise in short-termism. A profound revolution in our thinking would take a realistic look at unsustainable growth paths in the 21st century. I'm not going to hold my breath waiting for this revolution to occur.
Here's the William White video.
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