Saturday, April 04, 2009

Only In It For the Truth - and For Economics To Make a Difference

From Michael Tobis in ‘Only In It For the Gold’ HERE:

Even "mainstream" economics is struggling with it's evident shortcomings:
Robert Solow: Economic History and Economics

"modern economics has an ambition and style rather different from those I have been advocating. My impression is that the best and brightest in the profession proceed as if economics is the physics of society. There is a single universally valid model of the world. It only needs to be applied. You could drop a modern economist from a time machine-a helicopter, maybe, like the one that drops the money-at any time, in any place, along with his or her personal computer; he or she could set up in business without even bothering to ask what time and which place... We are socialized to the belief that there is one true model and that it can be discovered or imposed if only you will make the proper assumptions and impute validity to econometric results that are transparently lacking in power.... Of course there are holdouts against this routine, bless their hearts... Let me recapitulate. If the project of turning economics into a hard science could succeed, it would surely be worth doing. No doubt some of us should keep trying... There are, however, some reasons for pessimism about the project. Hard sciences dealing with complex systems-but possibly less complex than the U.S. economy-like the hydrogen atom or the optic nerve seem to succeed because they can isolate, they can experiment, and they can make repeated observations under controlled conditions. Other sciences, like astronomy, succeed because they can make long series of observations under natural but essentially stationary conditions, and because the forces being studied are not swamped by noise. Neither of these roads to success is open to economists. In that case, we need a different approach."

Or Joseph Stiglitz: There is no invisible hand "Adam Smith's invisible hand - the idea that free markets lead to efficiency as if guided by unseen forces - is invisible, at least in part, because it is not there.... That such models prevailed, especially in America's graduate schools, despite evidence to the contrary, bears testimony to a triumph of ideology over science. Unfortunately, students of these graduate programmes now act as policymakers in many countries, and are trying to implement programmes based on the ideas that have come to be called market fundamentalism... Good science recognises its limitations, but the prophets of rational expectations have usually shown no such modesty

I cannot write it clearer; these two top professionals of the discipline state the true situation of the cul de sac where modern mathematical economics has come to rest (despite, or because of, the feverish activity in our peer-reviewed journals that impose their authority across the board).

That Michael Tobis has drawn his, and now my, and, hopefully, through our readers, many others, to this problem is a remarkable achievement. Congratulations Sir!

In a small recompense of appreciation, Lost Legacy awards its April Prize to you for your magnificent contribution.

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