More on freshwater economics
by Linda Beale
I just discovered (via Mark Thoma’s Economist’s View) an economics blog by Maxine Udall (self-styled “girl economist”–which just goes to show how much our image of economists is one of hirsuted males forging through the marketplace…oops, I meander) that may be worth a read. I’ll add it to my “progressive sites of interest” blogroll, which, as readers are probably aware, is rather selective. One advantage of not trying to make money on my blog and of having a free hand because it is mine (and not my employer’s or mine together with a bunch of friends) is that I get to recognize whomever I want. So I’ll indulge.
Anyway, the posting that drew my attention today is “The Price of Casino-Like Finance is Higher Than We Think (jan. 2, 2010), in which Maxine “marvel[s] at the disconnect between what her economics textbooks assert and the realities.” Markets are supposed to provide us efficient information about prices and wages, so that resources are allocated to the best use, improving individual and societal well-being. But instead we see cyclical downturns from “irrational exurberance”, “casino-like behavior aimed at capturing high short-term gains” which substitutes for “sober, sound, long-term business investment supporting long-term corporate growth and survival.” Part of the reason markets don’t work this way, she says, stems from the economics profession itself. This part is worth quoting. The https://www.slotsformoney.com/casinos/baccarat/ is where many go to gamble and have fun these days as it is more convenient.
[A]n entire cottage industry called the economics profession sprang up, firmly anchored on the shores of Lake Michigan, aimed at creating cultural narratives and myths about how “markets” (meaning some abstract aggregation of semi-rational, often ill-informed, but definitely self-interested points of light) would magically “know” and act rationally and with perfect foresight. In many ways, the birth of the cottage industry known as freshwater economics is a testimony to the power of markets. There was and is a lot of money to be made in that cottage industry, especially if one was willing to drink the “business as usual,” “just ignore the man behind the curtain,” “the business of business is business” kool-aid that until recently has characterized Maxine’s profession.
One under-recognized effect of distorted price signals in a frothy economy is the distortion of intellectual curiosity and endeavor. While a course correction, championed by Keynes, Robinson, JK Galbraith and others in the past and now led by such notables as Paul Krugman, Brad Delong, Joe Stiglitz, Mark Thoma and many others is underway, Maxine believes that considerable damage has been done. Not least because most non-economist Americans are unwittingly under the sway of several “defunct economists.” The defunct economists have provided a convenient narrative in which government of, by and for the people can never act as a countervailing force against large corporations, but instead is viewed as promoting individual freedom only when allied with and strenuously promoting the financial well-being and increased power of those very same large corporations.
Note that phrase “convenient narrative.” That is an apt description of the facility with which economic models have been used to influence thinking. I probably mentioned this in an earlier post, but it reminds me of the first year that I taught tax law after leaving practice. I had a class of about 50 students. They were still searching to make sense of the legal world and their place in it. One of my students–a third year who was at first provoked and then, apparently, convinced by my discussions of fairness and distributional concerns as the fundamental question underlying how to tax to raise a certain amount of revenue–told me about his course in the fall of his second year in “law and economics.” It was an eyeopener, he asserted. He had been at sea, trying to figure out what grounds underlay the legal world. He didn’t have any philosophy to tie it to, and none of the classes had given him any sense of what justice was all about. All of a sudden in “law and economics” he had found a theory that claimed to explain everything based on what was asserted as intuitively appropriate self-interest rationales–not just why markets are important, but also how tort law should work, and contracts–efficient breaches are fine, even if you do break your solemn word–, and even constitutional law (Gary Becker’s unconvincing work suggesting that discrimination will disappear if one only trusts in markets). With that theory in hand, he had stopped asking questions and just started applying. It made it all so easy. Greed is go; fairness is in the eye of the beholder; efficiency is king. Wealth shouldn’t be condemned; instead, condemn the lack of responsibility in the freeloaders who beg for handouts. Bigness isn’t a problem–corporations wouldn’t get so big if the market didn’t make it possible, and since they are big, the markets have spoken. When this student had my class in tax, he suddenly found that there were bucket-sized holes in the dyke set up by free marketarianism. For every ready one-liner response he’d learned from efficient market theory, I had another question. (This often was in discussions we had after regular class, so sometimes we talked for a half hour about these ideas.) Finally, by the end of the course, he had concluded that the law and economics theory that he’d been sold was, in fact, pretty much a sham–at least in terms of holding ready answers, with precise mathematical models to show how scientific it was, to every legal question. A good tool for thinking about things from a particular perspective, but not God’s Truth.
This is the problem we face today. Free marketarianism has been accepted as God’s Truth for decades. And the financial crisis has shown it to be a bunch of hocus-pocus, with the rabbit up the magician’s sleeve accounting for the magical interlude. Complete focus on self-interest results in casino banking, corporate interests that ravage the environment for a penny more’s profits, and managers/CEOs who are so out of touch with reality that they think, e.g., that it is absurd to suggest that a half a million for being an investment banker is sufficient pay. So we’ve got a lot to do to counter this casino speculation. Treasury and Congress putting my proposed New Year’s resolutions into effect would help. (See Jan 2 posting.) Educators spurring students to think more deeply rather than accept trivialized views of human society would help. And a stiff bill of financial regulation that takes the casino out and puts the safe back in would be a really important boost towards evening the balance between casino-thinking corporate powerhouses and ordinary people.
crossposted at ataxingmatter
I see fresh water economics as just plain economics.
Here is a small paper by Robert E. Hall that describes the dichotomy between salt water and fresh water economics and came up with the labels.
Fresh water economics is only “just plain” economics to those who are fresh water faithful. Otherwise, the dichotomy is actually pretty clear, and makes clear that fresh water is a school of economics, not the whole of it.
Oh, and by the way, in a post-feminist, watch-it-with-the-sexual-denigration era, what’s this”hirsuted males” business?
As a hirsuted male, I must strongly object. First, the use here seems to indulge in a now-common cultural bias – that body hair is somehow objectionable. Tacky, tacky. Second, this seems to reduce men to a single characteristic. Sort of like calling a woman a “piece of tail”. (There is a rhetorical term for this. Anybody remember what it’s called?) Women are more than their sexual parts, and men are more than their apparently objectionable fuzz. Having engaged in various sports with various economists over the years, I can assure you that not all of them have a great deal of body hair. In fact, I dated a girl once who…well, never mind about that.
Read Robert’s thoughts on the matter.
Here is the link to Hall’s paper.
http://www.stanford.edu/~rehall/Notes%20Current%20State%20Empirical%201976.pdf
June 1976… Thomas Sargent. As a document in history I appreciate the reference, but how is that relevant to the discussion of today with so many players who have added their thoughts and prestige to the discussion on many sides?
http://online.wsj.com/article/SB126334299214726955.html?mod=WSJ_hpp_LEFTWhatsNewsCollection
Here is another take on the matter.
Rdan,
The 1976 post is to a short paper by Robert Hall. If you look at the history of economic thought the Keynesians fell out of favor in the 1970s because their models did not explain the data. The list of economic Nobel Prize winners is replete with fresh water economists becasue they were the ones coming up with new ideas in the face inadequate explanation coming from the Keynesians.
Has rational expectations really fallen from favor. Is Lucas’s critique or econometric models somehow no longer valid? He said that economic agents anticipate policy changes into their decisions and any prediction of the affect of a new policy would likely miss tha mark if it did not include how the policy changed the behavior of the actors involved.
Today we have a crisis in banking, is this not a supply side crisis. And the banks are making huge profits. Perhaps they anticipated the policy changes in the face of a breakdown that they are today profiting from. Is this not ratonal. Now on the other hand the Keynesians told us that the massive stimulus bill would keep unemployment capped at 8 percent and it went to 10. The keynesians got it wrong again so why don’t get rid of them and replace them with more level headed non ideological fresh water economic policy makers?
Dr Stiglitz won his Nobel in part for his work on how information flows “asymmetrically.” His work though seems not to be well understood so in my own humble and uneducated way maybe I can simplify what he made “not quite clear” about rational behavior.
The brain-trust at Goldman Sachs knew early on that the AAA securities (MBS) were “toxic”. So they not only rid their portfolio of these, but they also bet against MBSs with derivatives that were later made famous when AIG was made to pay these off at 100 cents on the dollar. The GS brain-trust had asymmetrical knowledge not only that the AAA MBSs were fraudulent, but that they had a special friend at the Treasury, and who knows how many other use-full bits of knowledge they have that the trading public is not privy too. “Asymmetry” is then a euphemism for what is not always technically corruption, but an unfair advantage; and “irrational exuberance” is in part what allows economists to pretend that markets are not manipulated.
Another good example, that shows how the laws of supply and demand are well short of being “laws”, is this: if all of the oil tankers now being used as storage vessels were put end to end they would stretch for 26 miles. But of course this oil is not counted as supply until it is off-loaded. So consider that each tanker holds about one hundred million dollars worth of oil and that it will be speculators who will decide when that oil should enter the market and that decision becomes an unfair advantage, or asymmetrical information. Or what Dr. Stiglitz has called “the invisible, invisible hand.”
Naturally, market manipulations are not intrinsically immoral, this for me is just whether it is done in the interest of common good or otherwise. But it is not possible to understand economic and social dynamics without first understanding that “free markets” do not exist in any form. Every factor is manipulated in some way. Subsidized staple good costs influence labor costs, and labor costs influence the cost of everything. (it is important to know that all developed nations, and even some undeveloped nations, subsidize ag goods)
“The freshwater school holds that fluctuations are attributable to supply shifts and that the government is essentially incapable of affecting the level of economic activity …” Robert Hall 1976
Is this a joke of some sort?
rl love,
Where is the asymmetrical information in your oil tanker example. It seems given the wealth or economic data anyone can look at the futures market price for oil in the coming months, the cost of borrowing money, and day rates on tankers to compute the profit on a cash and carry oil arbitrage — and its reverse cousin.
That fact that some people can’t perform simple financial calculations is not a valid example of asymmetrically information.
FEMALE Maxine Udall, Ph.D. in economics quick (is she a new Ph.D?) ability to discern the distortions of a planet wide economic view supports my (cabdriver) sociobiological theory that females are able think for themselves — think in the FIRST-PERSON — while males (NO MATTER HOW HUGE THEIR IQ’S) cannot; males must by profound evolutionary imperative (PACK hunter) reflexively think in the THIRD-PERSON; must check in with the whole planet before they will discuss a novel approach to a communal problem.
If the new idea is not found in the planet wide discussion — it goes in one ear and out the other making no interaction with their brains.
Maxine gives me a further extension of my cabdriver theory (Ph.D.: NY, Chi, SF): the first to produce a planet wide theory (assuming there is not one) automatically wins — with males.
***********
Maxine complains in her essay that America’s best brains have been diverted from useful fields to complex and ultimately productivity-less financial strategizing. The true tragedy is that American labor has forgotten all about the need to effectively withhold its contribution from the workplace to get all the market would be WILLING to pay — which has led to a disappearance of the middle class as the effective and powerful political core in this county which in turn ALLOWED the predominance of finance in the warped political economy. Being a superbly intentioned and educated progressive economist she of course is completely out of touch with everyday labor market life which would have told her that in the clearest terms.
Now we just have to get some progressive economists to hatch their own bargaining power restoring planet wide theory (THIS WOULD BE THEEE PERFECT OPPORTUNITY WHILE THE OLD THEORIES ARE WANING).
Myself, corporeally representing impoverished American labor — I found, discovered, accidentally came upon the perfect modality to re-balance America’s labor market about 5 years ago which I could not — IN MY DESPERATION FOR AN ANSWER — fail to recognize the moment I saw it — the answer all around the better paid majority of the OECD world and even places in the second and third worlds: sector-wide labor agreements.
Maybe we need to pay — male — economists half or only a third as much until they see the perfect solution to their own dire need and hatch a perfectly timed new theory for the planet to win the day for it — with males anyway.
FEMALE Maxine Udall, Ph.D. in economics quick (is she a new Ph.D?) ability to discern the distortions of a planet wide economic view supports my (cabdriver) sociobiological theory that females are able think for themselves — think in the FIRST-PERSON — while males (NO MATTER HOW HUGE THEIR IQ’S) cannot; males must by profound evolutionary imperative (PACK hunter) reflexively think in the THIRD-PERSON; must check in with the whole planet before they will discuss a novel approach to a communal problem.
If the new idea is not found in the planet wide discussion — it goes in one ear and out the other making no interaction with their brains.
Maxine gives me a further extension of my cabdriver theory (Ph.D.: NY, Chi, SF): the first to produce a planet wide theory (assuming there is not one) automatically wins — with males.
***********
Maxine complains in her essay that America’s best brains have been diverted from useful fields to complex and ultimately productivity-less financial strategizing. The true tragedy is that American labor has forgotten all about the need to effectively withhold its contribution from the workplace to get all the market would be WILLING to pay — which has led to a disappearance of the middle class as the effective and powerful political core in this county which in turn ALLOWED the predominance of finance in the warped political economy. Being a superbly intentioned and educated progressive economist she of course is completely out of touch with everyday labor market life which would have told her that in the clearest terms.
Now we just have to get some progressive economists to hatch their own bargaining power restoring planet wide theory (THIS WOULD BE THEEE PERFECT OPPORTUNITY WHILE THE OLD THEORIES ARE WANING).
Myself, corporeally representing impoverished American labor — I found, discovered, accidentally came upon the perfect modality to re-balance America’s labor market about 5 years ago which I could not — IN MY DESPERATION FOR AN ANSWER — fail to recognize the moment I saw it — the answer all around the better paid majority of the OECD world and even places in the second and third worlds: sector-wide labor agreements.
Maybe we need to pay — male — economists half or only a third as much until they see the perfect solution to their own dire need and hatch a perfectly timed new theory for the planet to win the day for it — with males anyway.
OPPS; THERE SEEMS NO DELETE FUNCTION ON A GUEST POST — DID NOT SIGH IN AS ME.
OPPS; NO DELETE FUNCTION. FAILED TO SIGN IN AS JS-KIT FIRST TIME.
OPPS; NO DELETE FUNCTION FOR A GUEST. FAILED TO SIGN IN AS JS-KIT THE FIRST TIME.
THE “GUEST” IS DDREW2U. FAILED TO SIGN IN AS JS-KIT THE FIRST TIME.
THE “GUEST” IS DDREW2U — ME. FAILED TO SIGN IN AS JS-KIT THE FIRST TIME.
There’s a review of a Galbraith paper called “Unperson Economics”. The Galbraith article about the economists who got it right on the GFC and the causes of the GFC, whose methods Galbraith can fathom. It is a very short list. The blog posting is http://openeconomicsnd.wordpress.com/2010/01/05/unperson-economists/ . Galbraith’s article is labeled TA09EconomistGalbraith.pdf. He urges universities and societies to rebuild economics departments from the ground up since economists don’t seem to want to acknowledge that their discipline for the most part is fatally flawed.
So Keynes checked with the rest of the world before kicking off a revolution in thought? Kepler checked with the rest of the world before telling anybody he had a notion about planetary motion? Stravinsky checked polling data before writing those funny ballet scores?
There is a reason you are driving a cab. Sexism is sexism, no matter which direction if runs.
ddrew2u,
If we were to flood the “economist” labor market I think your “ pay — male — economists half or only a third as much until they see the perfect solution to their own dire need and hatch a perfectly timed new theory for the planet to win the day for it — with males anyway,” could, not only be realized, but meet other needs as well. We could alter our immigration laws so that only male economists are allowed to enter the country. This will not only teach them about labor market oversupply, but those who are put out of work will get some of the practical work experience that they lack so desperately. Some provision will be necessary to restrict their access to alternative income via investment options, although, if the undermining of collective bargaining taught us anything, it is that “where there is a will, there is a way.”
k,
Over a billion people are currently malnourished, so whether Keynes “kicked” us in the right direction is presumptuous. Whether we are better or worse off due to the influence of Keyne can never be anything more than a matter of bias. Your comment therefore becomes nothing more than partisan din, and you are intelligent enough to rise above that.
And drew’s comment was clearly confined to the field of economics.
Your correct that “Sexism is sexism, no matter which direction if runs.” But as a middle-aged, white male, I find it hard to ignore that we may have a karmic bill to pay.
~ray
Your correct that
No; the rest of the MALE world heard Keynes and then checked in with the rest of the world to see if it was already on the agenda and mostly forgot about Keynes (I’m sure the factor in my theory had something or much to do with that).
When Keynes was under fire during late 70s stagnation was when the foolish “Washington Consensus” to which Udall alludes was hatched. My instinct explanation is not the alpha and the omega of how that consensus gathered so much power — my point is mostly about how evolved hunting pack instinct traps our best male brains like no censor ever could.
I see pack minded males as more interested cooperation than what they are cooperating about – couldn’t catch a small animal one on one.
As a Chicago cab driver I learned about my powerlessness as an American worker thus:
Between 1981 and 1997 the administration of the “city that works” (strictly and only for the upper middle class) allowed one 30 cent increase in the taxi meter mileage rate…
…at which 1990 midpoint the city began
(a) building subways to both airports
(b) allowing unlimited limos
(c) putting on free trolleys between all the hot spots downtown…
[fine; progress]
…and adding 40% (now on the way to 50%!) more taxicabs.
By early 1997 I was cabbing in San Francisco where they are so liberal they treat you like you have a union even if you don’t (minimum wage there just short of LBJ’s 1968 minimum too!).
Some labor market when you have to move 2000 miles (not from the Ozarks but from America’s second city) to drive a taxicab.
jb,
Thanks, and I second the motion. But use the link at the Notre Dame sight and go to the Galbraith article itself. It is more than worth the time.
Cantab,
You probably listen to those oldies stations on the radio because your thinking is trapped in the 1970s. Believe it or not, the world and economic thought has moved beyond Sargent, et.al.
Has rational expectations really fallen from favor. Is Lucas’s critique or econometric models somehow no longer valid?
Those things are now being put in better perspective. The evidence is against the strong versions of rational expectations. The evidence is against the strong version of the Lucas critique. The evidence is against the strong version of Ricardian Equivalence. Those are the underpinnings of freshwater economics as applied to the macro world. Those economists made some valid points in the 70s, but it is easy to overstate the case and that’s what you seem to be doing here.
Today we have a crisis in banking, is this not a supply side crisis.
I’m not sure what you mean here. Seems a little garbled.
Now on the other hand the Keynesians told us that the massive stimulus bill would keep unemployment capped at 8 percent and it went to 10.
Of course, according to freshwater economics there’s no such thing as unemployment; recessions are impossible; and Say’s Law always holds. Keynesians also said that the stimulus would take effect in June 2009 (correct); freshwater economists denied that the stimulus would have any positive effect (they were wrong).
Do yourself a favor. Get new clothes, dial it to a new radio station (my daughter has me kind of hooked on Lady GaGa) and place an order on Amazon.com for a current textbook on New Keynesian economics.
kharris,
And just as I scolded Cantab for living in the 70s, your comment about freshwater economics and the sexual identity of economists sent my mind racing back 30 years ago to Deidre (then Donald) McCloskey. 🙂 McCloskey was quite the rising star at UC and the smart money had him winning a Nobel Prize.
Cantab,
It seems given the wealth or economic data anyone can look at the futures market price for oil in the coming months
And according to freshwater economics there is no point in doing that because all of those factors would be perfectly incorporated into the market price. So there’s no reason to go to the effort…economic profits will be zero. The fact that people do go to the effort and the fact that very different sophisticated investors come to very different conclusions about price ought to tell you that some of the assumptions about freshwater economics are not entirely valid even in the world of microeconomics. And if it has problems in the micro world, to which it is well suited, then why would you pay it any mind in macroeconomics?
As to asymmetry of information, no one really knows how much oil is in the ground and without that key piece of information you cannot maximize profits using a Hotelling rent model. Not that Hotelling rents ever really described the oil business anyway…
slugs,
Thanks for putting things in perspective, I get it now! The speculators are paying day-rates on tankers for altruistic reasons. That explains why fuel costs rose while retail sales fell during a year with 10% unemployment. The money spent altruistically left investors unable to buy retail goods; and, with so many people out looking for work the fuel use was up instead of down.
A perfect picture of the Chicago school can be had by reading the very recent inteview of Eugene Fama of the Booth School at U of Chicago. There is a link in Krugman’s blog to the interview. One comes away (at least I came away) thinking Fama had simply trashed his reputation with his nonsense in the interview. If an economist can be a nihilist, he is it. Basically he was arguing that catastrophic recessions like the recent one “just happen” and we haven’t a clue way, nor is there any way to prevent them, or foresee them, or…..anything. Like Rummie re the thousands of Iraqis killed “things happen.”
Yeah, and morons breath too.
Meant to write “clue why”
MM,
At least Fama grudgingly admits that recessions happen, which is more than other bright lights like Gary Becker can manage to do. But then again, in Becker’s world economic thought stopped with Frank Knight.
Part of the problem is that freshwater economics has become more and more dominated by finance economists who are overawed with their elegant equations. Lord knows I’m not against math models in economics, but the math should be used to illuminate and help to clear thinking. A lot of the freshwater guys just use math as a way to bury economics.
Slugs,
I am glad to see that you went and read the Galbraith article.
Slugs,
The fresh water versus salt water economics issue is really dealing with views on macro economics. What you are really eluding to is the efficient market hypothesis that is most closely linked to Eugene Fama who is at the University of Chicago and is on anyone’s short list for the next Nobel Prize in economics. But he’s really specializes in finance and not macro economics so I would not call him a fresh water economist.
Here is the key point on the efficienct market hypothesis. The market does not become efficient by itself, rather arbitrageurs seeking profit from inefficiency exploit all the profits down to the point that the cost of seeking more profit opportunities exceed its value. So the fact that you see arbitrageurs engaging in arbitrage is actually a sign of the market working and not of market failure which you seem to be implying.
As for hotelling there is no point in the last 75 years where his work on natural resources ever predicted oil prices. His model has never worked.
Buffett, who is probably smarter than most economists (he has a lot of good sense) said lapidarily “Beware geeks bearing formulas.” One of the most penetrating and memorable quotes of the last decade.
rl love,
I get it now!
I don’t think you do
The speculators are paying day-rates on tankers for altruistic reasons.
N0, they’re doing it to make money for themselfs (you got a mountain to climb to understand the first welfare theorem of economics).
That explains why fuel costs rose while retail sales fell during a year with 10% unemployment.
You have a global market with a cartel outside of the U.S. manipulating the market (add learning about the oil market to your learning curve).
Cantab,
The fresh water versus salt water economics issue is really dealing with views on macro economics.
Yes…but only if you mean that freshwater economists deny the validity of macro. Don’t forget, in its infancy freshwater economics emphasized its micro foundations. The point is that freshwater doesn’t understand or even recognize the concept of aggregate demand in anything like the macro sense of the term.
A lot of the freshwater econ guys specialize in finance…that’s a point that is frequently made. Fama is hardly unique there. And in some interview that I read, Barro admitted that he got much of his inspiration from finance.
As to the efficient market hypothesis, you can’t have freshwater economics without EMH lurking in the background. It is a necessary assumption for all freshwater types. The only question is whether it is also a sufficient condition.
Agree that hotelling hasn’t described the oil market (except for a very brief period), but that sort of undercuts your argument for freshwater economics, doesn’t it.
rl love,
I get it now!
I don’t think you do
The speculators are paying day-rates on tankers for altruistic reasons.
N0, they’re doing it to make money for themselves (you got a mountain to climb to understand the first welfare theorem of economics).
That explains why fuel costs rose while retail sales fell during a year with 10% unemployment.
You have a global market with a cartel outside of the U.S. manipulating the market (add learning about the oil market to your learning curve).
Slugs,
My main point on that last post was the workings of arbitrage — I see you left this one alone.
By the way looking at the profits some banks are earning today today I would say this is an example of rational expectations working again. The banks anticipated government policy and engaged in behavior that was rational. This was the whole point of the lucas critiqe of policy based on models that don’t anticipate the effect fo the new policy on behavior; and the results being orders of magnitude off on the actual outcomes.
Margery,
If an economist can be a nihilist, he is it. Basically he was arguing that catastrophic recessions like the recent one “just happen” and we haven’t a clue way, nor is there any way to prevent them, or foresee them, or…..anything.
Fama was correct. How many economist or other people that have you heard of who “knew” and made a killing in the futures market based on this knowledge.
Fama is not going to live long enough to get the bank prize. People are tired of the anything and everything that happens confirms my theory.
Cant tab,
Your not recognizing that my reply to Slugs was sarcastic is difficult to rate in terms of stupidity but it is up there pretty high. On a scale of 1 -10, it is probably about a 7 or maybe an 8. The first advise offered “welfare theorem”, that is a 5, and I’ve worked in the oil and gas industry, as did my father, so this might seem unfair, but I also know that Morgan Stanley owns some of that stored oil, and so you get a 7 on that one, but consider yourself lucky that I am too lazy to dig for more information.
rl love,
So did you wash the windows while you’re dad pumped in the gas.
Another good example, that shows how the laws of supply and demand are well short of being “laws”, is this: if all of the oil tankers now being used as storage vessels were put end to end they would stretch for 26 miles. But of course this oil is not counted as supply until it is off-loaded. So consider that each tanker holds about one hundred million dollars worth of oil and that it will be speculators who will decide when that oil should enter the market and that decision becomes an unfair advantage, or asymmetrical information. Or what Dr. Stiglitz has called “the invisible, invisible hand.”
Oil speculators decide when oil should enter the market based on being pushed by the invisible hand pushing the parameters on their oil market arbitrage. So get back to me when your thinking clears up.
Cantab,
If only that had anything to do with what I said. Your inability not to understand something does allow you to decide what MY side of the arguement is about. Go away.
False argument. Numerous economists didn’t foresee the severity of the recession, but that is not the same as saying we can’t now analyze and undeerstand why it happened. Do you not understand why it happened? If you don’t, I have to laugh at you. It is quite clear in retrospect. What he said was the we have no idea why it happened. That is stupid. And nihilistic. I’d be careful whom I support. It reveals who you are.
One might note that Fama published his thesis in 1965 that argued that stock prices are unpredictable and random. The idea seems to have been taken up by Malkiel in 1973 in his Random Walk Down Wall Street. I doubt many people, after the recent recession, think the stock market is unpredictable or random. How far it will fall and precisely when might not be crystal clear but only a fool by mid 2008 would have thought that stock prices were ‘unpredictable.” Those who didn’t make a ton by shorting the market. No wonder Fama now wants still to believe in his fantasy. It is what identifies him so even reality won’t make him give it up.
Margery,
You can’t win this argument and if you could you would be a fool to do so rather than be out there making millions or even billions in the futures market.
Margery,
It reveals who you are.
This is me on a hill top but replace free market conservative for “Ricola”
http://www.youtube.com/watch?v=_dDFIHfTFqg
KHarris is obviously looking for something to pick on. Because the blogger that I was quoting calls herself “girl economist”, she is herself making a statement that she thinks it unusual for women to be economists. Which is what my parenthetical about our “image” of economics as being “hirsuted males” picks up on. Is that being sexist–don’t think so. It is merely pointing out the presupposition of the “girl economist” that being female and an economist is an unusual mix.
As far as fresh vs salt water, I don’t think there is much question that these are distinct schools of thought. Not to distinguish would be to have only a vague idea what theories one was talking about. So these labels are helpful in understanding the general location of a person in economic thought.
As far as the success of Keynes vs freshwater economists, I am reminded of another law school experience. Remember that Enron failed after several years of being treated (by freshwater economists) as the toast of the town, the proof of the viability of nonregulation and the “new” information economy. A colleague of mine at the time (who had come to Illinois from George Mason), told me that Enron’s ultimate failure was “proof that the market worked and that we didn’t need any government intervention”. The fact that the failure only came years after the company was a fraud and after many investors and ordinary workers lost everything by buying the fraud and only after a whistleblower and government investigation didn’t deter his belief that Enron “proved” the correctness of the “efficient market” hypothesis.
I can only say that if that is success I can’t imagine what failure would look like.
Give the financial mess all the catchnames you can come up with, the essence of the problem, which is still with us, is that the casino operators are/were able to play with 30x leverage. When the bets went against them the Treasury and the Feds came in and saved them. Now, that was ok at the time but their stock values should have been completely wiped out which they weren’t. The financial market was probably properly saved but the risk takers and their bond holders should have been wiped out. Because they weren’t they are back at it, and who can blame them.