A new virus in economics

From Elgaronline via Steve Keen:

A new virus, known as ‘Reality’, has started to afflict Mainstream Economists, causing them to reject the ‘as if’ arguments they used to use to justify their models. There is no known cure for the virus, and complete avoidance of ‘Reality’ is the only effective strategy to prevent infection.

The WHO today warned of a virulent new virus affecting vulnerable groups in the Mid-West and Eastern USA. The outbreak, which began in the Mid-West’s extensive Great Lakes ‘Freshwater’ river system, has recently jumped the ‘Saltwater’ barrier, meaning that the entire population of its target species – ‘Mainstream’ economists – is now at risk.

Speaking on behalf of the WHO, Dr Cahuc explained that the virus works by turning off the one genetic marker that distinguishes this species from the rest of its genus, the Human Race. This is the so-called ‘Milton’ gene (Friedman 1953), which goes dormant in other Humans as they pass through puberty. Its inactivity reduces their imaginative capacity, making it impossible for them to continue believing in such endearing infantile fantasies as the Tooth Fairy and Santa Claus. While regrettable, this drop in imagination is necessary to prepare Humans for the adult phase of their existence.

‘Professor Milton Friedman found a way to re-activate this gene during PhD training, using his “as if” gene splicing technique’, Dr Zylberberg elaborated. ‘This enabled a wonderful outpouring of imaginative beliefs by Mainstream Economists, which gave birth to concepts like NAIRU, Money Neutrality, Rational Expectations, and eventually even DSGE models. This wealth of imagination was regarded by Mainstream Economists as a more than sufficient compensation for returning to the child-like phase of the Human species.’

The Milton gene conferred other advantages on Mainstream Economists, which have been highly important to their success in competition against their rival species, the Heterodox Economists. ‘Being endowed with a child-like nature, the arguments of Mainstream Economists were treated with the low level of critical evaluation that adult humans normally reserve for conversations with their infant stage’, said Dr Cahuc. ‘This made their policy recommendations much more likely to be adopted, instead of the more complicated proposals put forward by their niche rivals’, he said.

The new virus – named ‘Reality’ – de-activates the Milton gene once more. ‘Consequently’, Dr Cahuc warned, ‘the very beliefs that define this unique species are at risk. Unless we are very careful, it may become extinct!’.

Unfortunately, there is as yet no known cure to this virus. ‘The WHO therefore recommends complete avoidance of “Reality” as the only effective strategy for those wishing to remain as Mainstream Economists’, Dr Cahuc concluded.

There’s more at the source to read, but one wonders if real scientists and mathematicians will one day takeover mainstream economics from the political ideologues masquerading as experts.

Cue The Kouk of course, whose professionalism always reaches new highs to embiggen other ideologues to join the cue of “market economists”

Comments

  1. omg koukoulas is a lumpy little odious man.

    less time at teh twitter and on teh line and more time exercising body and mind fatty!

    • Play the ball, not the man.

      I have a problem with Kouk’s lack of professionalism when dealing with his economic peers (and superiors, of which he has many), that is where the criticism should lie.

    • Philip Soos responded to him. I just added that the only reason why Oz RE still booming is that Oz, 13 years later, are yet to implement AML. Reality is there are no fundamentals in our RE and if dirty money stop we crash. We are nothing more than a large launder machine for Chinese nationals.
      I know not all Chinese bring dirty money and have nothing against anyone of them. But under the new Chinese law, I think, it is illegal to acquire RE overseas. Fair or not fair that is their law. I bet Oz Gov will not be playing along and help the Chinese Gov to implement this.

      • It’ll be interesting to see the effects of this new law. The potential for CCP instigated divestment/confiscation pressumably will have some impact.

      • @ Nikola “I just added that the only reason why Oz RE still booming is that Oz, 13 years later, are yet to implement AML.”

        And that’s enough reason never to implement it. The govt is only too willing to be complicit in dirty money propping up prices. Why would this change when our Ponzi scheme is bubbling along so nicely?

      • bolstroodMEMBER

        Today the Trump machine is going hard on theSouth China Sea man made islands. If the conflict escalates there could be no more dirty RE money from China.
        A nice conundrum for our agile government.
        Trump or China?

    • +1 Superunknown. Too many Keftedes for Koukoulas, he’s no Greek God, that’s for sure… what an embarrassment to our people.

      • Just looking at the roll call. David McWilliams at #9.
        Much like Prof Keen, he was derided until proven correct about the Irish housing bubble.
        Would love to hear his commentary on the Australian housing bubble.

        Meanwhile what does the Kouk stand for, exactly?

  2. “The economic model is perfect. The fact that it produce the wrong result should be detracted from the perfection of the economic model”

  3. Kouk is a contemptible rotund twat.
    He makes a living near out of providing cover to the economic gutting of Australia’s youth and poor.

  4. Economics is not science and dressing it up in lots of equations based on unattainable assumptions is classic GIGO (Garbage In, Garbage out).
    The social (and therefore also political) impacts of changes in financial circumstances and the impact of fear and greed are totally complicating in the real world.
    Having said that, there is benefit to understanding a lot of economics across a broad spectrum of schools of thought and also to understanding how a fiat currency works (which totally undermines the credibility of a lot of economic text books as their assumptions on how money and banking work are so totally false).

      • Nailed it!

        Neo-classical economists suffer from “physics envy” — they wish it were a natural science, however, it’s not even close.

        You can tell these morons 1000 times that tinkering with a few variables in flawed models based on flawed theories will make the world a better place but like the zealots they are, they refuse to accept that they have essentially wasted their entire academic/professional lives learning and preaching quackery.

      • mild colonialMEMBER

        No, that’s not entirely true, an ex-Secretary of Treasury once said to me “economics is not a very exact science!”

    • What’s amusing about that – and Keen has written about this – is that few economists are that much chop mathematically (or statistically, not that they care much). Hence they can’t understand their own sums (or analyse data if they decide to try) – or check each other’s work – so what hope has the rest of the world got?

  5. The macrobiz readership is likely the entire Australian audience for this satire.

    The public find these distinctions bewildering. They do know economics isn’t working but lack the means to make it accountable. Even Queen Elizabeth II failed at this.

    http://www.telegraph.co.uk/news/uknews/theroyalfamily/3386353/The-Queen-asks-why-no-one-saw-the-credit-crunch-coming.html

    If economists were engineers whose bridge fell down, there would be real consequences. Instead, they just keep defeating good public policy on behalf of vested interests. Democracy. denied

    • The real problem is that economics has somehow become a ‘science’. Maybe it’s a result of wrapping the discipline up in complex mathematical equations that people assume it has some authority.

      However at every corner of economics there are assumptions, which are of course mostly fueled by the biases of the person assuming, and these assumptions are basically impossible to test individually and even more difficult to test in an integrated fashion.

      • bolstroodMEMBER

        The real problem s that Economics has become a sciece…
        We don’t do science any more in tis country.
        Problem solved.

    • ErmingtonPlumbingMEMBER

      “Instead, they just keep defeating good public policy on behalf of vested interests. Democracy. denied”

      This × 1,000,000

  6. The Kouk assumes the current RBA/APRA/ADI model of banking and money will not be reformed.

    Who has seen any sign that it will?

    A lot of wealthy people have built an entire world view around the operations of the current monetary model and they like it just the way it is.

    Plus they have been smart enough to share just enough with the middle class (with a large dollop of fear mongering about any form of reform) to maintain political support for their preferences.

    The Kouk is more likely to be right than wrong as long as he maintains that basic assumption.

    Of course there will be another bust in due course because it is baked into the current CB/ADI monetary model but we have had plenty of those before and people are very easily diverted away from the real causes. Common diversions include Leaners, pensioners, bludgers, pollie rorts etc.

    The little people suffer but the dysfunctional model survives and rolls into another asset aquisition, concentration and consolidation cycle.

    The model will be preserved at any cost.

    • Jumping jack flash

      Its not a bad model in and of itself.

      Over time however many of the checks and balances have been watered down or removed. Whether this was intentional, I don’t know. Maybe they just found loopholes and now they’ve been exploited so much and by so many the loophole is just how its done?

      If they just put a bit of self-regulatory feedback into the right sections we would never have these problems. If there was a debt bubble secured against an asset class causing its price to rise exponentially, interest rates would rise as well and nip it in the bud. (for example)

      The problem with this is it would affect the human greed and laziness aspects, and require people to, you know, actually work and produce something to earn real money instead of just getting someone to hand them a pile of debt for doing nothing.

      But who in their right mind wants to do that? Eww…

  7. As much as Keen runs rings around the oaf intellectually, Kook has a point on the outcomes side. Keen isn’t naive, but the system is designed (and adapts) to keep house prices high – e.g. FHB grant during GFC, opening floodgates to temporary residents. The reaction function of government needs to be built into any model predicting a crash.

    • Jumping jack flash

      “… the system is designed (and adapts) to keep house prices high…”

      Indeed! Its a marvelous system.

      House prices are the thing that the trillions of dollars’ worth of debt that makes up the debt bubble we call an economy is secured against, therefore it is paramount that house prices are maintained.

  8. Jumping jack flash

    Only really two things you need to consider when applying economic theory and developing models: what you think should happen, and, what will actually happen. And for the latter there are, conveniently, only two aspects to consider: human greed, and human laziness.

    If you consider these things, then you could probably discount most of the “models” they use, except for the ones that maximise greed in the shortest amount of time possible.

    There’s nothing much faster, and requiring less effort than having some rube borrow a mountain of debt and hand it over to you.

    Construct a system to maximise the amount of debt available to the rube to transfer, minimise the amount of time and effort required by the rube to obtain a debt mountain, build in a feedback system where the very acquisition and transfer of debt will increase the total capacity for debt (this bit is very important), minimise the time and effort required to facilitate the debt transfer, minimise the effects of economic and social feedback which would ordinarily regulate this system (this bit is also very important – you don’t want hyperinflation in house prices, or living costs, causing interest rates to increase!).

    And voila, you will pretty much get the current system we have.

  9. DarkMatterMEMBER

    https://www.scientificamerican.com/article/the-economist-has-no-clothes/

    Economists copied 19th century Physics, but never made the leap into the study of dynamic systems. It was not because there was a lack of advanced mathematics in the 19th century either. For instance, the famous Irish mathematician William Hamilton gave us hypercomplex numbers – the quaternion – which was used in quantum theory, and is used now in every 3d game to rotate models. 19th century mathematics was not simple.

    In dynamic systems (which economics is), there are always problems with using steady state models and equilibriums. A + B + C = 0 seems sensible, but it is not. There is a famous problem that used to be presented to engineering students towards the end of their course that was probably meant to knock them down a peg or two. In physics, a capacitor is a device made of 2 plates that can accumulate electrons (charge) to store energy. The capacitance is simply proportional to the area of the plates. Obviously, if you put 2 identical capacitors side by side and connect the plates, then you have doubled the plate area and so doubled the capacitance. This concept of a simple linear system should be familiar to economists – since this is where their models came from. The 2 equations that govern the capacitor are also quite simple:-

    V = Q/C – the voltage, or potential is the charge divided by the capacitance
    E = 1/2 C * V^2 – the energy stored in the capacitor is proportional to the capacitance by the square of the Voltage.

    Here is where we can make a paradox. Take two identical capacitors (C), one with a charge so its voltage is V and the second (C) which has no charge

  10. DarkMatterMEMBER

    https://www.scientificamerican.com/article/the-economist-has-no-clothes/

    Economists copied 19th century Physics, but never made the leap into the study of dynamic systems. It was not because there was a lack of advanced mathematics in the 19th century either. For instance, the famous Irish mathematician William Hamilton gave us hypercomplex numbers – the quaternion – which was used in quantum theory, and is used now in every 3d game to rotate models. 19th century mathematics was not simple.

    In dynamic systems (which economics is), there are always problems with using steady state models and equilibriums. A + B + C = 0 seems sensible, but it is not. There is a famous problem that used to be presented to engineering students towards the end of their course that was probably meant to knock them down a peg or two. In physics, a capacitor is a device made of 2 plates that can accumulate electrons (charge) to store energy. The capacitance is simply proportional to the area of the plates. Obviously, if you put 2 identical capacitors side by side and connect the plates, then you have doubled the plate area and so doubled the capacitance. This concept of a simple linear system should be familiar to economists – since this is where their models came from. The 2 equations that govern the capacitor are also quite simple:-

    V = Q/C – the voltage, or potential is the charge divided by the capacitance
    E = 1/2 C * V^2 – the energy stored in the capacitor is proportional to the capacitance by the square of the Voltage.

    Here is where we can make a paradox. Take two identical capacitors (C), one with a charge so its voltage is V and the second which has no charge and connect them together. In a steady state world compare the energy of both cases.
    1. 1/2 CV^2
    2. 1/2 2C (V/2 ^2) – half of case 1.

    No charge was lost, yet half of our energy just disappeared!! This is very hard to explain. The steady state equations don’t work and we can’t explain how energy was destroyed – it doesn’t make sense. In fact, the solution to this problem can only be understood with dynamic theories of elecromagnetism. Connecting the 2 capacitors together, with different charges actually results in a theoretical infinite current flow. A singularity. In practice, the energy would be dissipated in a spark or similar. If we did have super conductors, then the instantaneos current flow would create an expanding magnetic field that would hold the missing energy – which would then cycle back and forwards between the 2 capacitors and the the magnetic field.

    The summary of this is that steady state models of dynamic systems can be incomplete and misleading. I would bet that there are analogs to this particular paradox in economic model, although I am not sufficiently familiar with them to say exactly.

  11. Models and economics do not mix — how can you ‘model’ human behaviour?

    “If we lower interest interest rates 25bps, people will do X and if we alter this variable people will do Y. People ARE the economy and whole populations are not inherently predictable. I call BS on all this. Economics should be confined to classroom and not used as an excuse to meddle in the real world.

    • MediocritasMEMBER

      In my opinion all economics departments at universities should be disbanded and absorbed into psychology.

      I love it that this psychologist won the “Economics Nobel” (not really a Nobel) for essentially proving that economists are totally full of shit when they model humans as rational agents: https://en.wikipedia.org/wiki/Daniel_Kahneman

      I love it even more (sarc) that, after being shown to be full of shit, the economics profession didn’t change at all.

    • I always had zero interest economics, but after 2008 I became fascinated how a bunch of dodgy loans in the US could cripple the world.
      That’s when I started reading MB and other resources. Now I know I’m not the sharpest tool in the shed but after years reading about economics I’m still not sure I know what it is.

      Economics seems like a mirage. Like something you can see on the horizon if you squint hard enough. But as you get closer all you find is politics.

      I’m starting to think economics should be a chapter in a human behavioral science text book. Or maybe just a paragraph.

      I don’t understand why we don’t test their models more often by changing macro economic settings. Will removing Neg Gearing crash housing? So remove it and see then we’ll know. But no… Again all you find is politics.

      • Junkyard….

        The… how should I put it politely… massively inaccurate risk weighing of lots of credit [not just RE] still was not enough to blow up the payment system… that distinction goes to aggressive and naked shorts [sorta like Russian roulette with a semi auto – you win but]. Not that some knew some SIVs were rigged to blow and positioned accordingly.

        That they saved the payment system and then forgot everyone else – is a separate issue.

      • bolstroodMEMBER

        We used to live in a society that had an economy as an intergral part.
        Thatcher and Regan & Co. managed to make the Economy swallow the society, trapping us in an economic bubble.
        Things will never work in this arse about backwards model.

      • Even StevenMEMBER

        Skippy – it WAS enough to blow up the payments system. But as you then point out – it was saved by governments / central banks to avoid catastrophic failure.

  12. This should highlight the issue….

    “I have already in my last post on the topic outlined why this is a doomed project. Here I would like to raise a more fundamental logical inconsistency in Mises’ project — a logical inconsistency that can be traced back to Kant himself who, of course, was Mises’ inspiration for his praxeology. First let us allow Mises himself to get a word in on what he is trying to do. The following is from page 38 of his Human Action:

    The real thing which is the subject matter of praxeology, human action, stems from the same source as human reasoning. Action and reason are congeneric and homogeneous; they may even be called two different aspects of the same thing. That reason has the power to make clear through pure ratiocination the essential features of action is a consequence of the fact that action is an offshoot of reason. The theorems attained by correct praxeological reasoning are not only perfectly certain and incontestable, like the correct mathematical theorems.

    The idea, as we can see, is to deduce certain constants that take place in human behavior. However, Mises was treading on ground which Kant himself had stumbled near the end of the 18th century. I refer, of course, to his lectures on anthropology. As Michel Foucault pointed out in his famous introduction to his French translation there was a logical contradiction in Kant’s approach. Here is Foucault on the inconsistency

    Thus the relation between the given and the a priori takes on, in the Anthropology, an inverted structure with respect to that which has been employed in the Critique. The a priori in the order of knowledge, becomes, in the order of concrete existence, an originary that is not chronologically primary, but which, as soon as it appears in the succession of figures of the synthesis, reveals itself as already there; on the other hand, what is given is lightened, in the reflection on concrete existence, by soft lights that give the depth of the already operated.

    What Foucault is saying is that in Kant’s original system the a priori is thought to be something that exists outside of time and space; it is, then, something infinite. Yet, in his anthropology Kant says that we can study men as objects. But this is contradictory because if we understand that men carry around with them certain infinite and timeless truths inside their heads and then we try to study them as objects in their finite existence (i.e. in real historical time) then we are committing a fallacy insofar as we are merely examining superficial untruths without seeing the infinite truths lying behind them.

    To put it another way: if we rest our philosophy on an Absolute Subject and claim that such an Absolute Subject inhabits all men, then studying these men as objects in finite time doesn’t make any sense. Either the truth of man lies in a priori principles that are non-empirical, or the truth of man lies in his empirical, finite existence. Kant wants to have it both ways. But he cannot.

    The same criticism, of course, applies to Mises. As the blogger Lord Keynes has pointed out elsewhere Mises slips in empirical observations into his analysis and then tries to cover up what he has done. The reason he has to do this is because of what we have just laid out above: you cannot study human behavior seriously and assign it truth-value and at the same time hold that there are a prioris that lie within the Absolute Subject. You can only have one or the other; you cannot have your cake and eat it.” – snip

    https://fixingtheeconomists.wordpress.com/2013/08/02/why-kants-and-mises-studies-of-man-were-based-on-a-logical-contradiction/

    “Insofar as practical differences between the Austrians and the neoclassicals it is simply a matter of ideology and extremity — not to mention a characteristic incoherence and general sense of confusion on the Austrian side. Take their business-cycle theory, for example. It is actually a Wicksellian business-cycle theory pushed to extremes. The Austrians claim that there is a natural rate of interest and that if the money-rate of interest (the central bank rate, basically) diverges from this inflation and deflation will result. Well, that’s basically the mainstream theory today used by most central banks who use a New Keynesian model with a Taylor Rule attached that essentially contains an implicit idea of a natural rate. The central banks then try to line their target rate of interest up with the so-called natural rate. (My criticisms of the New Keynesian position also apply to the Austrian position in this regard, by the way).

    The Austrians are theoretically orthodox. The only reason they fall outside the mainstream is because they tend to be political extremists and — I’m going to dare to say it — they are usually not very thorough or fastidious thinkers. You can be a first-rate Austrian where otherwise you would be a second-rate neoclassical.” – snip

    https://fixingtheeconomists.wordpress.com/2013/07/29/kant-and-his-categories-versus-mises-and-his-praxeology/

    disheveled….. best part about it – all – this stuff was understood over 50 years ago, then some with gobs of money thought the world was going to shit [democracy – more equality where the lines were not so ***bright*** – et al] and started up ideological boot camps like FEE – IPA etc too push Bernays style memes…. is this what happens when a meme is over done – ???????

  13. My supervisor when I was doing a M.Ec handed me a book by Donald McCloskey, which asked “If you’re so smart why ain’t you rich?”

    It’s always an excellent question for an economist.