Fakeonomics

Ian Fletcher has noticed that they don't discuss economics much anymore. Instead, we mostly hear something that pretends to be economics but is judgmental lecturing unsupported by any critical thinking. He calls it "fakeonomics," and it goes something like this...

  • Free markets are always right, always and everywhere.
  • Anyone who doesn't believe this is stupid. Smart people not only understand that free markets are best, they like free markets, because free markets mean opportunities to get rich.
  • Or maybe they're corrupt. The opposite of free markets is government. Government is always incompetent. It never does anything right. Ever.
  • Or maybe they're evil. Anyone who doesn't believe in perfectly free markets is a Marxist wannabe or a loser jealous of more-successful people.
  • Free trade is just free markets applied internationally.
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Down with the GDP

In the November, 2009 edition of The Atlantic, Megan McArdle reminds us why we need to wean ourselves of using the GDP as an indicator of economic health. Here's a sample:

GDP does not, and cannot, reflect the waste of enormous effort, and precious natural resources, that went into building something that suddenly no one wants. Moreover, it misses many other aspects of our existence. Strip-mining a picturesque mountaintop, or clear-cutting a primeval forest, shows up in GDP only as a boost to output. Meanwhile, in India’s national accounts, all of Mother Teresa’slabors among the poor would have had only the most minimal possible impact. GDP can record how much money we spend on health care or education; it cannot tell us whether the services we are buying are any good.

So how do you accurately measure a nation's health? One alternative is the HDI.

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Economics evolves into evolutionary economics

The July 2009 edition of Scientific American explores new ways of looking at economics in an article by Gary Stix entitled "The Science of Bubbles and Busts." The article explores the growing acceptance by professionals that people quite often are not rational when it comes to dealing with their finances. We are not homo economicus, as touted by many economists, including Milton Friedman. Our imperfections are many. For instance, we are supremely overconfident. We overrate our ability to make decisions in the market. We are also prone to "herding," following the crowd. We are also overwhelmed by our recall of recent events due to the availability bias. We are creatures who are strictly geared to the short-term. As a result of this mounting evidence establishing that we are not able to rationally deal with the market, new approaches are inexorably working there way into economics. These new approaches include evolutionary economics:

“Economists suffer from a deep psychological disorder that I call ‘physics envy,’ ” [MIT professor of finance Andrew] Lo says. “We wish that 99 percent of economic behavior could be captured by three simple laws of nature. In fact, economists have 99 laws that capture 3 percent of behavior. Economics is a uniquely human endeavor and, as such, should be understood in the broader context of competition, mutation and natural selection—in other words, evolution.

Having an evolutionary model to consult may let investors adapt as the risk profiles of different investment strategies shift. But the most important benefit of Lo’s simulations may be an ability to detect when the economy is not in a stable equilibrium, a finding that would warn regulators and investors that a bubble is inflating or else about to explode.

An adaptive-market model can incorporate information about how prices in the market are changing—analogous to how people are adapting to a particular ecological niche. It can go on to deduce whether prices on one day are influencing prices on the next, an indication that investors are engaged in “herding,” as described by behavioral economists, a sign that a bubble may be imminent. As a result of this type of modeling, regulations could also “adapt” as markets shift and thus counter the type of “systemic” risks for which conventional risk models leave the markets unprotected.

Continue ReadingEconomics evolves into evolutionary economics

Democrats: not the party for economic reform

In an article titled, "The Trouble with Democrats," William Greider of The Nation documents the many ways in which the democrats lack the moral will to rein in predatory lending and enact real economic reform. How about modestly adjusting the bankruptcy code to allow 1.5 million people to keep their houses? Forget it. How about capping payday loans at 35%? No way. You see, most Democrats are scared of payday lenders unless the interest cap is 390%. How about putting meaningful rate caps on credit cards? No way, because the financial services industry doesn't want that. This article is a thoroughly disgusting review of Democrat spinelessness and a reminder about who pulls the strings in Washington. Hint: it's not The People.

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Bank Regulator William K. Black: The best way to rob a bank is to own one.

I’ve often had the thought that our massive meltdown could be figured out if we could only recruit some intelligent and well-motivated people to gather and analyze the evidence. But who would those people be? Who could serve as the template the type of character we seek out in such people? Too bad we don't have 1,000 people like William K. Black. Black is the former senior regulator who cracked down on financial institutions during the savings and loan crisis of the 1980s, pointing fingers at five congressmen including John McCain. Black went about his work with such vigor that he even drew a death threat from Charles Keating. Have you ever gotten excited listening to anyone talking about the economy? In this breath-taking interview with Bill Moyers, Black offers his own carefully studied analysis regarding the "bailout." This is not the intentionally abstruse financial jargon that you usually hear when pundits discuss the meltdown. The theme of the Black’s interview is this: "The best way to rob a bank is to own one," which is also the title to a book he wrote in 2005. Black teaches economics and law at the University of Missouri — Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. This video is required viewing for anyone who is convinced that we are not getting the straight scoop from the corporate media or from our government.

Continue ReadingBank Regulator William K. Black: The best way to rob a bank is to own one.