The Future of Economics: Research, Policy and Relevance

That was the somewhat grandiose theme of the Australian Conference of Economists held in Melbourne last week. I was invited to give a keynote presentation and got this as the default topic. It seemed like a challenge and I gave it a go – here’s my presentation (4.8Mb PDF). For those who would just like to cut to the chase, my penultimate slide gives the main story

* The global economic crisis should have produced a crisis in economic theory
* Instead, business as usual
* A path to inevitable irrelevance

I’m using the Dropbox public folder for this. I’d be interested to hear from readers if there are any problems, and also if it went smoothly.

65 thoughts on “The Future of Economics: Research, Policy and Relevance

  1. I am struck by mainstream economists disregard for the physical world of resource depletion, waste accumulation and population increase. In some ways they are like a safe breaker twiddling with the dials of fiscal and monetary policy while failing to ask how they came to be in that privileged position. Hit the right combination and all will be well again.

    I think economists should look at what factors characterised 20th century growth and ask if they can be replicated in the 21st. An obvious factor is cheap oil but an earlier thread hinted at the less obvious example of investment income funding retirement. I think an overarching problem for economists might be to ask what is the least worst scenario for the world in 2050 and what intermediate steps we need to take to get get there relatively unscathed.

  2. Many of the issues raised in the presentation were discussed at ‘Interview with Thomas Sargent’ nearly two years ago where he says:

    1. It is just wrong to say that this financial crisis caught modern macroeconomists by surprise: Allen and Gale’s 2007 book Understanding Financial Crises collects many dynamic models of the causes of financial crises and government policies that can arrest them or ignite them.

    2. Stern and Feldman’s Too Big to Fail doesn’t have an equation in it, but wisely uses insights gleaned from the formal literature to frame warnings in 2004 about the time bomb for a financial crisis set by regulations and government promises.

    3. Two polar models of bank crises and what government lender-of-last-resort and deposit insurance do to arrest them or promote them. In the Diamond-Dybvig and Bryant model, deposit insurance is purely a good thing; in the Kareken and Wallace model, it is purely bad.

    4. Bryant-Diamond-Dybvig model has been very influential generally, and in particular that it was very influential in 2008 among policymakers. Many policy authorities correctly noticed that a Bryant-Diamond-Dybvig bank is not just something that has “B A N K” on its front door. It’s any institution that executes liquidity transformation and maturity transformation – the shadow banks

    5. Policy makers saw Bryant-Diamond-Dybvig bank runs all over the place. The logic of the Bryant-Diamond-Dybvig model persuaded them that if they could arrest runs by effectively convincing creditors that their loans to these “banks” were insured, that could be done at little or no eventual cost to the taxpayers.

    6. The Kareken and Wallace model’s prediction is that if a government sets up deposit insurance and doesn’t regulate bank portfolios to prevent them from taking too much risk, the government is setting the stage for a financial crisis.

    7. The Kareken-Wallace model makes you very cautious about lender-of-last-resort facilities and very sensitive to the risk-taking activities of banks.

    8. The Diamond-Dybvig and Bryant model makes you very sensitive to runs and very optimistic about the ability of insurance to cure them.

    Far from taking the efficient markets outcomes for granted, important parts of modern macro are about a large and interesting suite of asset pricing puzzles about empirical failures of simple versions of efficient markets theories

    p.s. who claims that ‘all productive activities should be undertaken by private sector’? Name names!

    p.p.s. Which Rail-track are you talking off? Hope it is not in NZ.

    The NZ Government has just written down the value of KiwiRail’s land and network assets from $13.4 billion to $6.7b and converted $322.5m of debt to equity.

    Of the $6.7b net asset write down, $4.9b is covered by reversing an existing asset revaluation reserve for the tracks. The tracks previously valued at $1 are now re-valued back to $1. The remaining $1.8b is a write-off.

  3. worked smoothly.
    nice presentation, but what do you mean by “”PhD variation” on established research

  4. A problem for economics is to make the transition to becoming a science. Utility theory which is simply instrumentalist nonsense should be the first to go. Of course, that would mean losing many pretty pretty things.

  5. Paul Krugman thinks mainstream (neo-classical, new and neo Keynsianism, and old fashioned Keynsianism) macroeconomics has come out of the crisis pretty well, and doesn’t need much overhaul. All of its predictions about interest rates, inflation, gdp, and unemployment numbers have been pretty close to the mark. The problem is that business leaders, politicians and financial journalists have consistently ignored mainstream economics in favor of pre-Keynsian classical fallacies.

  6. JQ, thank you for publishing your ppt slides.

    One item is ‘less rigour and more relevance’.

    I would have liked to hear your presentation on this item in particular because I suspect this statement can mean very different things to different people. For example:
    a) Some people may take this statement as approving of the Fama-Fisher-Jensen methodology in the area of the EMH.
    b) Other people may take the Fama-Fisher-Jensen methodoogy in the area of the EMH as being too rigorous and not relevant.

    I am using the EMH as an example because it features in your book and it was the subject of discussion on this blog-site.

    Your thoughts on this topic would be much appreciated, here or at a later time.

  7. @plaasmatron

    PhD variation is common to all areas of academia. The central idea is to take a notable idea, and work a twist on it, small enough to be tractable, but different enough to justify a PhD and a journal article. As a trivial example, you might take a “hot” piece of US research and repeat it with Australian data.

  8. I disagree with Jim Rose’s assertion that many of the issues raised in the presentation have been discussed in the linked interview of Thomas Sargent.

    The interview of Thomas Sargent brings out problems arising from the separation of micro and macro-economics, even though T. Sargent doesn’t put it that way.

    By contrast, J.Q. calls for ‘disequilibrium’ models (sometimes also called non-Walrasian). The existing methodology in this area does not separate micro from macro-economics.

    To illustrate the difference, T. Sargent’s work on rational expectations is well known. It is the macro-economic version of rational expectations and its importance, in the policy area sense, concerns the question: Can the government influence (‘manipulate’) the economy. By contrast, there is the work by Roy Radner from the mid 1970s on the equilibrium of prices and price expectations in an economy with a sequence of markets. This work is not a macro-model; it is a general equilibrium model. This model also contains a type of ‘rational expectations’ assumption, but it is very different from that in the Sargent and Lucas models. While Radner’s model does not contain an explicit statement on its implications for the GFC, the reader will notice that the introduction of even the simplest of financial markets (shares) together with a more realistic market structure causes a problem. There is no government in this model. Hence the reader will notice that there is a problem that cannot be ascribed to ‘the government’. T. Sargent is silent on this point.

  9. Downloads works fine. Particularly enjoyed being reminded of David Gruens analogy on the fin crisis.

  10. @Hermit

    Strangley enough, I think mainstream orthodox economists (neoclassicals) ignore both the natural resources and wastes issue (energy, entropy and the laws of thernodynamics) and also the financial system. The mainstream orthodoxy, in the main, has no concept of limits to growth. It also ignores or miscontrues the role of the banking and financial system in cycles and economic crises.

    More enlightened heterodox economists recognise the role of the financial system, recognise the inherent instability of capitalism and tokenisticly recognise limits to growth and the ultimate limiting influence of the laws of thermodynamics on economics. Whilst they recognise these limits in passing (because they know it is enlightened and empirically correct to do so) they spend 99% of their time theorising (and very interesting theory it is too) without explicitly addressing the limits to growth and how to factor that into their models.

    So basically, all schools of economics other than biophysical or thermoeconomics are living in denial of the real issues now confronting us.

  11. I’ll put it bluntly. Now, all approaches to economics are dead-ends unless they fully incorporate thermoeconomics and include Marxist, Democratic Socialist and Worker-Cooperative critiques of capitalism.

  12. And the way I see it, “schools of economics” (tribes with elders and followers, assisted by PhD variations ) is the problem.

  13. The section of the presentation on growing inequality could have mentioned skill-biased technological change increasing the returns to education and IQ.

    When the rise in returns on investments in human capital is beneficial and desirable, and policies designed to deal with inequality must take account of its cause. Growth in education levels has been a significant source of rising real wages, productivity, and living standards over the past century.

    The initial impact of higher returns to human capital is wider inequality in earnings, but that impact becomes more muted as young people invest more in their human capital.

    As is well know, the rentier class has been replaced by a working rich. That went unacknowledged as well in the presentation.

    The evidence on the top 1 percent is most consistent with theories of superstars, skill biased technological change, greater scale and their interaction.

    Individuals who are really good at making money can now apply their skills to larger amounts of capital, larger workforces and bigger audiences. That favours CEOs, athletes, celebrities, corporate lawyers, successful entrepreneurs and other working rich.


  14. @Ernestine Gross

    Then why are you an economist, Ernestine? How can economics be a school-less, hard science?* (Which seems to be your implication.) Is not economics always political economy and not just economy? Or perhaps you mean economics is a narrower field like econometrics or some other specialist field you can name? Perhaps you are a strict empirical thermoeconomist. I would accept that that field is attempting to be a hard science.

    I really wonder what you are suggesting. Are you suggesting there should not be differing schools of thought in a field that has imponderables and straddles the arenas of hard science and the soft social “sciences”. Are you suggesting there is only one correct school of thought in a field (political economy) with many imponderables? That smacks of dogma.

    To preempt criticism of my position (“Now, all approaches to economics are dead-ends unless they fully incorporate thermoeconomics and include Marxist, Democratic Socialist and Worker-Cooperative critiques of capitalism.”), you will note I include several schools and approaches in that and use the word “incorporate” not the phrase “consist exclusively of”. You will also note I use the word “now” meaning at this juncture in history and with our present state of knowledge.

    We do not yet know what present political economic theory might still meet the challenges of attempts at empirical verification** (in that portion that is equateable and reducible to hard science like thermoeconomics) and what present political economic theory (if any) may be able to meet the challenge of “enabling” (for want of a better word) workable de-growth to a sustainable economy. Hwoever, we do know which theories have been falsified by empirical events. Neoclassical economics has been falsified. Monetarism has been falsified. Equilibrium models of the capitalist economy have been falsified. Even notions that the Soviet and Maoist systems were anything other than totalitarian state capitalism systems have been falsified.

    * Note 1: Even hard sciences (like physics) have “schools” following different research projects at the theoretical cutting edge. String theory comes to mind.

    ** Note 2: I mean verification at the level of “dependable operative knowledge” not absolute certainty.

  15. Oh dear, I seem to have raised your ire at least twice this week. This is a bit odd because on specifics you tend to agree with me.

    The other day you wrote I want to “debunk” macro-economics” (and this is amusing). I wouldn’t put it like that. The interesting aspect for me is that your consistent and persistent critique of ‘economics’ (unsustainable growth) is a critique of macro-economics (all ‘schools of thought’ I know). Isn’t this evidence of total miscommunication?

    You say: “Equilibrium models of the capitalist economy have been falsified.” May I ask you for a reference of ‘an equilibrium model of the capitalist economy’/ I don’t know one.

    It may well be thermoeconomics will provide a handle on how to better deal with the finiteness of the life of planet earth – ‘in the long run’ – but I don’t venture a guess as to whether or not this approach will lead to a theory of everything.

    True, I am not fond of political economy because it is all too easy to become too narrow (eg OECD centric). What about the economy of some tribes on the Amazon? But this does not mean I would discard the work of people who identify themselves as political economists.

    We had a lengthy discussion on Economics straddling natural science (the environment, ‘resources’, technology, and the applications of mathematics) and ‘social sciences’ (your preferred term). I prefer to go straight to philosophy. I had understood there was agreement, particularly regarding methodological implications.

    Suppose, your ideal model of nearly everything will be developed one day. What if people don’t want to conform to it?

  16. @Ernestine Gross

    “The interesting aspect for me is that your consistent and persistent critique of ‘economics’ (unsustainable growth) is a critique of macro-economics (all ‘schools of thought’ I know). Isn’t this evidence of total miscommunication?” – E.G.

    I’m tempted to make a joke. The “macro” in “macro-economics” doesn’t mean the economy has to get bigger. Thermoeconomics is clearly a school that does not presuppose that the economy must grow indefinitely.

    “Dynamic stochastic general equilibrium modeling (abbreviated DSGE or sometimes SDGE or DGE) is a branch of applied general equilibrium theory that is influential in contemporary macroeconomics. The DSGE methodology attempts to explain aggregate economic phenomena, such as economic growth, business cycles, and the effects of monetary and fiscal policy, on the basis of macroeconomic models derived from microeconomic principles.” – Wikipedia.

    Is this a real model and a real “school”? (Which is not to say that it refers to anything empirically real.) Or did the Wikipedia author imagine that this model and school of thought exist?

    “Suppose, your ideal model of nearly everything will be developed one day. What if people don’t want to conform to it?” – E.G.

    This is quite true. People will not conform to ideal models. And “ideal” models are only “ideal” because they are made of ideas and are idealisations. In addition, the ideas and idealisations are usually idiosyncratic and completely debateable. That is why I am suggesting economics be made realistic and empirical so far as that is possible. I realise that extent is limited. There is much that instinctual, emotive, ideational and ideological; much that is properly philopsophy or moral philosophy.

    In addition, any theory of all human existence or a significant part of it like the modern political economies in itself (the theory that is) enters into the totality being theorised about and thus changes it. I am aware of these things.

    However, to question the validity of macro-economics in toto is to (among other things) question the validity of democratic decision making. It is to question the validity of democratic groups making decisions based on “macro” understandings. I pick the example of democratic decision making because it is my apriori position (in the space limits of a blog) that democracy is better than all the alternatives or at least “less worse”.

  17. First the slides downloaded fine and glad to see you are using Dropbox.

    Thanks for the presentation. I am not an economist, but work with several, and think there are three problems:
    – there is a big gulf between academic and consulting or even public service economists IMO. Even in Micro, some of the theories are hopelessly impractical (in my field) due to data problems.
    – the inability of the profession to reach a consensus after the GFC has damaged its credibility
    – I think financial economics is a particular problem, becoming an end in itself, rather than seen as a part of the overall economy. Some of its practitioners seem to prefer to invent jargon rather than increase clarity.

    I don’t think it is all bad, there is a lot of good work done at the micro level. But in macro, no, it is irrelevant – two warring camps who just confuse people, and worse, a lot of ideologues and paid hacks.

  18. JQ, your slide 28 pretty much describes a pyramidal global economy. What is the scam that makes this work?

    It would be interesting to see an economic theory timeline showing the players and their adjustments, and with an overlay of global impacts.

  19. I really think that macroeconomics (good, bad or indifferent) is all but inescapable. As soon as a government, any government, uses macro measures or aggregates, such as those for national income, taxes, expenditures, consumption, investment, unemployment etc. and subsequently frames or attempts to frame policies to achieve certain goals, with these framed policies being based on some model of how the whole behaves, then the government is ipso facto “doing” macroeconomics. The only way to avoid any macroeconomic action would be to abandon government altogether. Thus only anarchism or libertarian anarcho-capitalism could claim to be free of macro-economics in the applied sense.

    I suspect that even libertarian anarcho-capitalism (which still has a coherent political-economic philosophy) takes a stance on macroeconomics at the theoretical level. This stance is that macroeconomic behaviour is best “regulated” or allowed to flourish by a free market unimpeded by state action or interference.

    Unless you are an anarchist or a libertarian anarcho-capitalist is inconsistent to maintain that macroeconomics does not or should not exist as a valid field of enquiry.

  20. Perhaps Professor Quiggin could open up either a Macroeconomic or a Micro/Macro Sandpit for debate centered on what these terms mean, what these fields properly constitute and what it means to posit that different schools of thought do/do not or can/cannot exist in these fields properly understood.

  21. On ‘Macroeconomic theory has proved useless’, it is exactly the opposite now and in the past.

    First, consider the macroeconomic performance since the 1960:
    • There was a more toward more discretionary policies in the 1960s and 1970s;
    • A move to more rules-based policies in the 1980s and 1990s; and
    • Back again toward discretion in recent years.

    In each policy swing, monetary policy and fiscal policy moved in the same direction.

    These policy swings are correlated with economic performance—unemployment, inflation, economic and financial stability, the frequency and depths of recessions, the length and strength of recoveries.

    Less predictable, more interventionist, more fine-tuning type macroeconomic policies caused, deepened and prolonged the current recession.

    the great recession is the result of the great deviation from the policies that underwrote the great moderation


    Secondly, bad government policies are responsible for depressions.

    while different sorts of shocks can lead to ordinary business cycle downturns, overreaction by the government can prolong and deepen the downturn, turning it into a depression.

    short-run policies designed to moderate the effects of a crisis can prolong the crisis if those policies lower productivity and impede the normal forces of supply, demand, and competition.

  22. As a physicist, I find the assumptions and equations used in Economics quite shocking. I looked up the definition of GDP the other day (after reading JQs piece on GDP vs NNI) and almost choked on my Bratwurst. To define national policy around this index is criminal.

    Colleagues of mine at Sydney Uni (, lead by Prof. Manfred Lenzen, have tried to apply physical input-output analysis to economic factors related to the environment and manufacturing. Manfred tells me of the incredible uncertainties in the results, but that is the best we have. I recall Asimov’s psychohistory, and his concept of building a computer to calculate the future of entropy, which required every atom in the universe to be part of the computer (i.e. God).

    The development of the computer has driven the world to attempt place a numeric on quality so that it can be ranked and given a risk rating, for funding or investment allocation. Unfortunately most of the important things in life cannot be given a number, and that is where all models of real systems fail.

  23. Economic models always have error terms. Every economic model is always right; some have larger error terms than others.

  24. Given that John Taylor writes science fiction, popular in some circles, are we next to expect the creation of a church?

    As Mr Cruise appears taken, who can we expect as the new church’s star celebrity?

  25. @Jim Rose

    That paper by Taylor is an April Fool’s joke right? Where does he objectively define what a rules based policy is and what a discretionary policy is? The paper leaves these notions or categories totally vague and undefined. Where does he define a list of objective measures of something’s position on the “rule-ness” to “disretionary-ness” spectrum?

    If the paper is serious (which I doubt), it is typical of that sort of business management school habit of falsely quantifying by defining a vague quality and then assiging it spurious quantitative values.

  26. Addendum to the above. Any real economists like to comment on Taylor’s paper? Can anyone tell how and where he derives the “Taylor Rule” and what it is exactly?

    Or does the Taylor Rule go as follows;

    1. Draw a line on a graph where you want it.
    2. Call this line what you want it to be.
    3. “Prove” your argument.

  27. 2nd Addendum.

    The revisionism of casting the 1960s as a period of poor economic performance and disastrous recessions was pretty humorous too. But I guess he had to say that to make his theory work.

    Then there’s the revisionism that discretionary (interventionist) policy ended the great moderation and caused the Global Financial Crisis. Funny, the actual historical facts are that it was the period of greatest de-regulation (which Taylor paradoxically calls a rules based phase) that led to the GFC.

  28. @Ikonoclast

    The Taylor’s Rule is one which suggests how the Central Bank should set the interest rate, it is based mostly on the variations in inflation rate to target inflation rate, and GDP growth to GDP trend growth.

    I personally disagree with the Taylor’s Rule, although it had described the central bank rate quite well in the US and some other countries; setting a rule that uses inflation rate is unreasonable. Since inflation can happen in recession, due to currency depreciation thus increased price of imports; or simply shocks such as oil price shocks. If the Taylor’s Rule was to be followed even after the GFC, the US Federal Reserve now will face even more criticism. Also, targeting inflation will also limit the Central Bank ability to print money or even QE (if you are a neoclassical economist believing QE in the current US situation will create hyperinflation).

    Basing on Taylor’s recent work, it’s difficult not to classify him as a political hack. He’s paper on fiscal stimulus denial on the US experience in the great recession is very poorly done and have been refuted by a lot of Keynesian economists such as Christina Romer etc.

  29. @Tom

    Thanks Tom, you pretty much confirm my suspicions. My bulldust geiger counter (a first rapid heuristic assessment) was clicking off the scale when I read that paper. I could see a number of my preliminary rules of thumb (heuristics) to test for general empiricism and objectivity being violated left, right and centre by that paper.

  30. As noted, Taylor is a writer of science fiction. His depictions of how an economy works are not of this universe.

  31. @Ikonoclast
    I see you focus on the taylor rule, and not on points such as is just wrong to say that this financial crisis caught modern macroeconomists by surprise: Allen and Gale’s 2007 book Understanding Financial Crises collects many dynamic models of the causes of financial crises and government policies that can arrest them or ignite them.

    The Kareken and Wallace model’s prediction is that if a government sets up deposit insurance and doesn’t regulate bank portfolios to prevent them from taking too much risk, the government is setting the stage for a financial crisis. The Kareken-Wallace model makes you very cautious about lender-of-last-resort facilities and very sensitive to the risk-taking activities of banks.

    Most of all, you ignore U.S. interest rates going to 1% at the behest of the Fed.

  32. Taylortology, not “the Butler did it” (in his science fiction novellas) but, “the government did it”. Predictable, maybe, but some like there fiction predictable. Predictable is comforting.

  33. With a swarm of models that predict every possible outcome you always had a correct opinion. Problem though. Before the fact. You never nkew which model is right.

  34. On ‘Comparable to Great Depression in worst-hit countries’, but who is to blame for this mass unemployment? the original shock or government responses?

    One-third of EU unemployed are in Spain: Cahuc et al. estimated that Spanish unemployment would be 45% lower if Spain adopted the less strict French labour laws! differences in their employment protection legislation account for nearly half of the dramatic rise in unemployment in Spain from 8% to 20%+.

    Why did Financial markets produce catastrophic mispricing? Loose monetary policies?

    Why was Australia’s (and Canada’s) relative immunity from the global financial crisis and bank failures not investigated as sources of policy lessons?

    I agree that we need to ‘Understand success and failure of post-war Golden Age’. The Menzies era was built on low taxes, balanced budgets and small government.

  35. Great presentation thanks John. Do you have any more on NZ as an extreme case of the miseries of privatisation? A lot of what I read from conservative sources seems to mention the Helen Clarke years as the cause of all the misery. They would say that, of course.

  36. @Ikonoclast
    @ Ernestine
    @Jim Rose
    Here is

    ABSTRACT (78 words)This paper presents evidence that accounting (or flow-of-fund) macroeconomic models helped anticipate the credit crisis and economic recession. Equilibrium models ubiquitous in mainstream policy and research did not. This study identifies core differences, traces their intellectual pedigrees,and includes case studies of both types of models. It so provides constructive recommendations on revising methods of financial stability assessment. Overall, the paper is a plea for research into the link between accounting concepts and practices and macro economic outcomes.

    It does include Marxist critiques and role banking and financial sistem plays in economy and crisis

  37. @Freelander

    Or perhaps as the distinguished statistician seems to have put it “Essentially, all models are wrong, but some are useful” . This actually seems a paraphrase but seems close to his intent.

  38. @jrkrideau

    Usefulness seems a rather harsh criterion by which to judge models!
    Setting the bar that.high would would greatly thin the ranks of economic theorists gainfully employed..

  39. @Robert in UK
    As far as NZ goes, fondly known as the land of the long white shroud, the neoliberal great leap forward started in 1984 and had greatest great damage, wailing and gnashing of dentures by 1990. That and Don Brash Reserve Bank created recessions then made things even worse. Helen Clarke was to late on the scene and too insipid to be able to claim much responsibility. Besides, for some unknown reason she was focused on gay rights, rather than achieving a functioning economy ..

  40. @critical tinkerer

    You talk about ‘equilibrium models’ and you are critical of these models. The term ‘equilibrium’ is treated as if there would be only 1 equilibrium concept. But the concept in the serious theoretical models depend on the model of the economy and the properties of the solution to the model also differ. Compare:

    1. Walras equilibrium
    2. Radner equilibrium
    3. Dreze equilibrium
    4. Incomplete market equilibrium, with or without a government sector
    5. Non-Walrasian equilibria
    6. Nash equilibrium
    7. Sub-game perfect equilibrium
    8. Approximate equilibria
    9. Temporary equilibrium
    10. Overlapping generations model equilibrium
    (This may suffice for a start)

    Further, may I point out that the balance sheet identity also constitutes a type of equilibrium condition, namely A-E-L must be equal to zero. The double entry book keeping rules are nothing but a mechanism to satisfy the balance sheet identity.

    Incidentally, the balance sheet identity is one of several conditions in the definitions of the equilibrium concepts I have listed. But, in contrast to the equilibrium conditions I have listed, the balance sheet identity does not cater for something that is of great concern to Ikonoclast, namely real resource constraints. Thus, it only deals with commercial transactions. (And macro-economists don’t seem to get out of this straightjacket.)

  41. @critical tinkerer
    Allen and Gale’s 2007 book Understanding Financial Crises collects many dynamic models of the causes of financial crises and government policies that can arrest them or ignite them.

    see An autopsy of the US financial system: accident, suicide, or negligent homicide by Ross Levine

    Findings – The evidence is inconsistent with the view that the collapse of the financial system was caused only by the popping of the housing bubble (“accident”) and the herding behavior of financiers rushing to create and market increasingly complex and questionable financial products (“suicide”).

    Rather, the evidence indicates that senior policymakers repeatedly designed, implemented, and maintained policies that destabilized the global financial system in the decade before the crisis.

    Moreover, although the major regulatory agencies were aware of the growing fragility of the financial system due to their policies, they chose not to modify those policies, suggesting that “negligent homicide” contributed to the financial system’s collapse.

  42. Libertarian economic mishap mysteries are such boring reads. In their novellas it’s not the Butler did it but always Government did it.

  43. @Jim Rose

    “A controlled disintegration in the world economy is a legitimate object for the 1980s.” – Paul Volcker, 1978

    Read Yanis Varoufakis’ The Global Minotaur.

  44. financial crises are not a new phenomenon – they have been around for centuries. the Bank of England was formed in 1694 in response to a crisis as was the Fed in 1913.

    There are two longstanding explanations of financial crises:
    1. Panics
    2. Fundamentals

    Banks issue liquid liabilities in the form of deposit contracts but invest in illiquid assets and this mismatch results in frequent banking crises

    Friedman and Schwartz (1963) among other things, argue that banking panics can have severe effects on the real economy. In the banking panics of the early 1930’s, bank distress developed quickly and had a large effect on output.

    Friedman and Schwartz argue that the crises were panic-based, and offer as evidence the absence of downturns in relevant macroeconomic variables prior to the crises.

    Calomiris and Mason (2003) say that fundamentals during the first three banking crises in the USA in the early 1930s, suggesting that panics did not play a significant role

    There is a vibrant literature on financial crises in what to do about them in modern macroeconomics. If it is in a monetary history of the United States, it is problematic to argue that modern macroeconomics has not taken it on board and is studying it in detail.

  45. In the middle ages, they had been studying how the universe worked for thousands of year. Nevertheless, that is not to say that their then modern theological theories provided any guidance.
    The naive ideas of Friedman and friends have not survived the recent reality tests anywhere as well as the ideas of Keynes .. That said, there has been the usual reluctance by libertarians to acknowledge the evidence.

  46. @Freelander
    From reading a bit about Galileo and his trial, I believe the scientists in the middle ages had more reason to trust Aristotelian science. Even Galileo had not completely discredited it.

  47. Aristotle was part of the scientific tradition. The scholastic approach taken by the theologically inclined in the middle ages was not. They based their approach on appeal to authority, authority in the form of popes and princes, and in the form of ancient sacred books like the Bible and the texts of Aristotle and others.

    Aristotle’s speculation’s based often on careful observation and study were remarkable for his time,but the approachhis speculations were often in need of replacement. Unfortunately. Aristotle’s approach to knowledge died, or went up in flames at the time of the book burning that ushered in the ascendancy of the Jesus cult.

  48. Thanks John, This was a good read and it downloaded fine.

    Following on from the complaints from a few green fellow travellers about a lack of attention to environmental externality issues, limits to growth etc. I was wondering about what your thoughts were in regard to several matters relating to environmental economics. Having part read your book I know you are genuinely interested in these matters unlike I fear many colleagues siloed away their academic departments or worse being employed as destructor beasts in organizations like IPART with a mandate to ignore environmental issues altogether in traditional neoclassical economics style. Anyway here are the issues:

    1. (as an outsider) I’ve recently become aware of the Jevon’s Paradox that suggests that all our future efforts aimed at reducing resource impacts via efficiency gains are doomed.

    2. It strikes me – and this also relates to the crash of 2008 – that the demands for short term profits are perversely preventing long term rationality and investment prevailing in respect to both the environment and conventional markets. And frankly I cant see any way out of this trap of people wanting money now rather than less tangible benefits in the future. As I understand it it means in practice we really dont value to the environment or our future at all, platitudes aside and the. How can we escape this vice in the future. On this line I gather you support the Stern review – but does the very low asset depreciation used really make sense?

    3. Tim Jackson as you are undoubtably aware argues for ‘Propserity without Growth’. While I sympathise and support notionally, he doesnt seem to offer any mechanism for achieving this. Any comments on how to do this in the future especially given the Jevons paradox and as I understand it your support for growth through a return to Keynesian economics.

    4. Recently we witnessed the debacle of Rio20+ which you dont mention. Did it register with any economists at the meeting or do such talk fests operate in a different universe?

    5. Regarding ‘sustainable growth’ one person who apparently popped up at Rio20+ was former PM Gro Brundtland of the famous report. I hadnt realized it but she is pushing for an increase in the real global economy by a factor of 4-5 on the basis of being realistic. As a limits to growther I was stunned by this. It appears she expects efficiency to solve things in the future but I worry about the reality (see above).

    6. Your focus for change seems to be on the economics separate from ideology. David Harvey’s book ‘A Short History of Neoliberalism’ suggests your profession is deeply embedded in a much larger paradigm which will be challenging to extricate itself from. The dominance of Neoliberalism would seem to explain why there has been the lack of change in economics that your talk was on. Care to comment?

  49. As a completely disilliusioned/bored undergrad economics student, it seems to me that economists in general completely ignore what should be THE overarching and urgent research project: How to increase (or maintatin) the wellbeing of a society without necessitating the production and consumption of stupid shiit we don’t need. I don’t think it’s overly dramatic to say that it’s really a now or never question for the survival of humanity through this century and into the next.

    An example of what I’m talking about is the Australian govt’s response to the GFC. As far as the alternative of doing nothing, I’m very much of the opinion that the stimulus was the right action to take, but if we think about it for a second, what was the theory behind the stimulus? People need to buy supid shiit they almost definitely don’t need, so that people can keep their jobs making stupiid shit that people almost definitely don’t need – because that is the only way we can maintain peoples’ welfare. This is a flaw so fundamental and urgent that I’m quite sure most people who read this comment will regard it as the naive and idealistic rambling of an undergrad who’ll soon grow out of it.

    I’m not sure, and I’d like to ask here, if this is something that economists recognise as a fundamental problem but ignore in favour of easier problems regarding the theoretical details within the current framework, or is it not considered an issue at all?

    In my opinion the work the most economists are currently doing could safely be flushed down the toilet and erased from all memory without any negative impact on society whatsoever, and very probably a very positive impact, thanks to the chance it would give future economists to look at the world around them and formulate theory and policy recommendations based on the reality of a species more than half way through destroying it’s own habitat and therefore chances for long term survival. I don’t think the same could be said of any other ‘sicence’, social or hard.

  50. Priyvet – as an older and more cynical person embedded for the moment in academia I’d counsel a little patience without being patronising – And maybe trying to think about it differently. I’m similarly dismayed by the direction of current economics but dont mean to suggest that what you are learning or indeed that conferences such as John’s one are useless. They emphatically arent. Some quick illustrations why you should keep at it:
    – while the dominant economics seems to be leading us to environmental holocausts its principles do offer many insights into the behaviours of people which set up these problems – for example patterns of resource exploitation and why designing the globe to allow future generations some comforts as well as ensuring ecological sustainability is proving so intractable.
    – economists dont exist as isolated units but rather as social groups and even collectives which are very much in evidence at conferences. This moderates the rate of innovation/change in ‘the dominant paradigm’ you seem to be looking for. There is a lot of literature on the philosophy of science which works to explain this – Lakatos and Kuhn are the two names which most pop up.
    – Theory crises such as at present definitely promote innovative and critical thinking which economics clearly needs – and it is unlikely to come from the older generation but rather people like you who get on top of things.
    – You say you are bored with class room economics. The precorporatization function of universities was to get people to think for themselves. Why dont you do this as well? Your access to the primary literature present and past is now at level us older farts could only dream of. Alternatively there are many books around dealing with the sociology of economics as it were which places your learning in context – John’s book or something more populist but still technical like ‘Extreme Money’.
    – Finally in the future you will probably start accumulating some cash – But what to do with it? Your knowledge will be useful I guarantee – if you use it. Its just the answers might be dismaying – like leaving your cash in a term deposit but such is life.

  51. @Privyet

    Although I’m not suggesting any political ideology here, but to answer your questions and thoughts about economic theories you have to look at it from various perspectives.

    To start off, you have to understand how the capitalist system (the one we’re living in at the moment) works. How the demand and production of ‘useless things’ ‘creates’ economic growth and thus keeping the population employed; along with understanding how the economy works and the effects of economic policies.

    Then you have to understand the problems under this system, these include cultural problems (capitalism is a famous cultural killer); the change in the ethic of the society due to the change in the competitiveness of the society; the problems inequality creates such as the ability under the capitalist system to influence the mainstream media and politics thus even influencing academia such as science, law, economics; the issues of finite resource; and environmental problems such a system can create.

    Then you can look at the alternative systems and economic theories along with the problems they might have as well.

    The academia economics is heavily influenced by neoliberalism, so understanding all this might actually be problematic for you doing your degree as it did for me.

  52. @Privyet

    You’re absolutely right.

    I’m undertaking a masters in political economy and I’m really interested in two things:

    -financial crisis
    -the ecological limits to growth

    Whilethe first is interesting and important in the short- to medium-term, with some longer-term corollaries, the second is the big question. An existential and moral question, the likes of which we have never dealt with. I don’t feel economics, mainstream or otherwise, is making anywhere near the contribution it could and should to its answers.

    One problem with orthodox economics is the unit of analysis being the individual. In this case, such a focus is wrongheaded and will not cut it.

  53. @Privyet – I totally agree with Tom and add a couple of points related to the academy.

    – What you see in courses is presented as solid but in reality many ideas you are encountering are works in progress reflecting disparate perspectives.

    – All social sciences are hard because objectivity is harder to approach than in the ‘hard’ sciences – which still generate diverging views at their edges.

    – Many tools you get from economics e.g. modelling, statistics and dealing with complexity have other applications in harder sciences. Learning them will help you understand arguments and uncertainties over climate change, the Queensland floods and much else.

    – The academic search for alternative economic systems has been going on for >200 years . The problem is to find better alternatives which work in reality and can be achieved without bloody revolution. One theme which illustrates this isnt easy and relates to your social concern and you might be interested in exploring is that of ‘Sustainable Development’. Some ‘thought leaders’ notably Gro Brundtland consider we need to grow the global economy by a factor of 4 to 5 to achieve equity because we need a ‘realistic’ path to lift all out of poverty . On the other hand limits to growth proponents e.g. Tim Flannery argue we are already well over a sustainable. Exploring the issues around this contrast with the tools you get from economics will illustrate why a sane middle road has been hard to find and capitalism still rules.

  54. @Privyet

    “An example of what I’m talking about is the Australian govt’s response to the GFC. As far as the alternative of doing nothing, I’m very much of the opinion that the stimulus was the right action to take, but if we think about it for a second, what was the theory behind the stimulus? People need to buy supid shiit they almost definitely don’t need, so that people can keep their jobs making stupiid shit that people almost definitely don’t need – because that is the only way we can maintain peoples’ welfare.”

    Some people may have used the stimulus money to pay off debt, others may have used it to give a present to their grandchildren, some people may have used it to pay electricity and other utility bills (instead on increasing credit card debt), etc. I don’t think it can be presumed, as you do, that all of this money was spent on unnecessary ‘sh*t’.

    You ask for the theory behind it. The GFC is still ongoing. In the first instance there was an almost total collapse of the wholesale debt markets which potentially affects every aspect of ‘the economy’ (globally in this case); a catastrophic point where, by definition of such a point, prediction of anything, even the value of say an exchange rate one hour ahead is impossible. The then Head of Treasury, Ken Henry, a PhD in Economics, advised move fast and go for households. It was good advice IMO.

    If you have come across the Edworth-diagram by now, then a total collapse of the system is equivalent to looking at a blank page. (The economic ‘stuff’ can be interesting too for some minds.)

  55. This is the answer: “when university administrators combine ecological economics with evolutionary psychology into a truly transdisciplinary curriculum”

    This brilliant observation is only one of the gems I found in a review of the book, “The Evolutionary Bases of Consumption.” by Joseph Vogel, Department of Economics, University of Puerto Rico

    Full text of article

    Has anybody read the book?

  56. @Newtowniar

    I’m afraid at 25 I’m a bit older and a whole lot more cynical then the average undergrad. I started late and haven’t always chosen the quickest path through the degree. When I was just starting in 2009, I found a copy of Steve Keen’s ‘Debunking Economics’ which I read and, despite not understanding a lot of the detail, found very invigorating. So I wrote to him and he was kind enough to reply in detail, recommending that I

    ‘do as many straight maths courses as you can in your electives. The key courses are linear algebra, introductory calculus, and differential equations. With those beneath your belt you’ll be better equipped than 99% of economists (heterodox ones included) in being able to contribute to developing a dynamic economics.’

    And since I’m fascinated by mathematics (despite not having a great talent for it) I was happy to take his advice, adding another year at least to my degree.

    I appreciate the advice. I know that it’s necessary to understand completely the current orthodoxy in order to challenge it and propose alternatives. I’ve been kind of resigned to it from the start, but it has been very hard to maintain interest enough to get the good grades I need if I’m to do anything useful with the degree in the future. As it’s taught, economics’ perfect mix of difficulty and complete pointlessness, together with it’s dry subject matter, is just right for sucking the joy out of study. Reading books like John’s is the only way I keep myself interested.

    In your last point there are you suggesting that economists can use their knowledge to make better investment decisions? I though the famous irony was that economists more often than not make terrible investors?


    Like I said in reply to Newtowniar, I accept the need, as a student, to go through the whole process of learning about current theory. I do think there’s a bit of irony in that we have to learn this body of theory that most economists recognise as largely discredited, precisely because it is the orthodox and therefore perpetuating its status as the orthodox…if that makes sense. Anyway, my argument refers more to the work that academic economists are doing. So much of it just seems (to me) so absurdly irrelevant in the face of the problems we’re facing.


    “I don’t feel economics, mainstream or otherwise, is making anywhere near the contribution it could and should to its answers.”

    Exactly my feelings.

    @Ernestine Gross

    Actually all of those examples of ways people might have spent the stimulus money are perfect examples of the stimulus’ purpose of maintaing/increasing consumption levels. I’m not arguing with the effectiveness of the stimulus. My argument is with the philosophy that says that consumption, regardless of actual need, is necessary in order for our society to prosper. It’s a philosophy that will change, and we have to decide if it will be a conscious change or the result of natural limits being reached (and the resulting chaos and suffering).

  57. @Privyet

    Thanks for the comments. Regarding my last point about personal investment decisions some comments on why these matters have a personal as well as wider dimension.
    – I understood that Keynes famously did quite well for himself and his college.
    – The current superannuation system forces everyone if they are in work to make investment decisions which are active or passive (do nothing and effectively trust the fund managers, banks and financial swindlers). As Thatcher famously said ‘there is no alternative and in this respect she is currently correct as neoliberal ways of doing things go from strength to strength despite the last 5 years of crisis.
    – In the years leading up to and following the crisis I was forced to consider this choice seriously. I had an extensive understanding of risk, some understanding of economics and little of finance except I’d been burnt about 20 years back – not badly but enough to want to know more before following the herd into problematic stocks or what we now know to be dodgy CDO based investment. In hindsight that little knowledge and a risk averse outlook saved me.
    – When something is personal it has a way of focusing the mind which is never a bad thing.

    – Something different but on topic – suggest you have a read of – it seems student disatisfaction with economics teaching is widespread.

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