Home > Uncategorized > Dumb and Dumber — the Chicago version

Dumb and Dumber — the Chicago version

from Lars Syll

dumb_aA couple of years ago, in a lecture on the US recession, Robert Lucas gave an outline of what the New Classical school of macroeconomics today thinks on the latest downturns in the US economy and its future prospects.

Lucas starts by showing that real US GDP has grown at an average yearly rate of 3 per cent since 1870, with one big dip during the Depression of the 1930s and a big – but smaller – dip in the recent recession.

After stating his view that the US recession that started in 2008 was basically caused by a run for liquidity, Lucas then goes on to discuss the prospect of recovery from where the US economy is today, maintaining that past experience would suggest an “automatic” recovery, if the free market system is left to repair itself to equilibrium unimpeded by social welfare activities of the government.

As could be expected there is no room for any Keynesian type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. No, as usual in the new classical macroeconomic school’s explanations and prescriptions, the blame game points to the government and its lack of supply side policies.

Lucas is convinced that what might arrest the recovery are higher taxes on the rich, greater government involvement in the medical sector and tougher regulations of the financial sector. But — if left to run its course unimpeded by European type welfare state activities — the free market will fix it all.

In a rather cavalier manner — without a hint of argument or presentation of empirical facts — Lucas dismisses even the possibility of a shortfall of demand. For someone who already 30 years ago proclaimed Keynesianism dead — “people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another” — this is of course only what could be expected. Demand considerations are simply ruled out on whimsical theoretical-ideological grounds, much like we have seen other neo-liberal economists do over and over again in their attempts to explain away the fact that the latest economic crises shows how the markets have failed to deliver. If there is a problem with the economy, the true cause has to be government.

Chicago economics is a dangerous pseudo-scientific zombie ideology that ultimately relies on the poor having to pay for the mistakes of the rich. Trying to explain business cycles in terms of rational expectations has failed blatantly. Maybe it would be asking too much of freshwater economists like Lucas to concede that, but it’s still a fact that ought to be embarrassing.

shackleIf at some time my skeleton should come to be used by a teacher of osteology to illustrate his lectures, will his students seek to infer my capacities for thinking, feeling, and deciding from a study of my bones? If they do, and any report of their proceedings should reach the Elysian Fields, I shall be much distressed, for they will be using a model which entirely ignores the greater number of relevant variables, and all of the important ones. Yet this is what ‘rational expectations’ does to economics.

G. L. S. Shackle

  1. José M. Sousa
    April 5, 2020 at 6:17 pm

    Economists like Lucas, or Nordhaus, should be viewed as criminals, not so much dumb. Unless their are useful idiots in the hands of the powerful!

    • April 5, 2020 at 11:31 pm

      I agree with your assessment of criminality, José. There are a lot of criminals running the government of a military empire that amassed great fortunes in slaves, guns, liquor, oil and opium, etc. Now they deal in austerity.

    • April 6, 2020 at 8:45 am

      No, they are not criminals. They just live their theories as utility maximising individuals. Their objective functions just does not include striving for knowledge.

  2. April 6, 2020 at 3:38 pm

    Lucas, et. al, have their Nobel Prizes to look after. Their reputations are built on mainstream theory.

  3. ghholtham
    April 6, 2020 at 7:35 pm

    There are circles of hell, according to Dante and it is very harsh to put Nordhaus in with Lucas. One of them at least pays some attention to real world data.

    The Chicago economists are without shame so the best course is to proceed to develop alternative theory and not to wast time arguing with them. I have come to think that macroeconomics must be seen as the study of emergent phenomena based on the behaviour of a large number of disparate individuals. Individual behaviour can only be understood probabilistically and macroeconomic phenomena are often the convolution of a large number of probability distributions. We can observe empirical regularities and the hope must be that we can find a combination of widespread behavioural tendencies (confirmed by observation at micro level) and statistical mechanics that will “explain” those regularities. Unlike physical systems, economies cannot generally be expected to be in statistical equilibrium. However statistical distributions (such as that characterising wealth distribution for example) generally evolve slowly so understanding could be possible. We shall learn more by computer simulation than by solving over-simplified models analytically.

  4. Calgacus
    April 8, 2020 at 3:47 am

    Lucas is convinced that what might arrest the recovery are higher taxes on the rich, greater government involvement in the medical sector and tougher regulations of the financial sector. But — if left to run its course unimpeded by European type welfare state activities — the free market will fix it all.

    Lucas is insane. Were his idiocies as much in charge as he thinks they are – they cannot be – the saying would change to “In the short run, we are all dead.”

    If there is a problem with the economy, the true cause has to be government.
    But here, he is right. The true cause is that people let their governments listen to the Lucases – who should only be approached by psychiatrists.

  5. Norman Roth
    April 8, 2020 at 4:49 pm

    Well said, Mr. Holtham ! Especially in your understanding of Emergent properties as a cornerstone of the role of complexity in economics. As I put it in TELOS & TECHNOS: “The events are the time”. AND as Ludwig V. Mises once said: “Case probability is not Class probability”. Maybe he got that from his brother, Richard V. Mises, who among other achievements was also a mathematician with a keen interest in the concept of Probability.

    TELOS & TECHNOS must be taught as the advance guard of a new curriculum in Economics, especially Business Economics, wherein the role of TIME, case histories, and the rich literature of complexity {Veblen, Keynes, Hayek, Michael Polanyi, Mises, the Biologists who introduced Complexity into their own fields} etc. But, I think the root cause of all the polemical confusion & sanctimonious indignation expressed in these blogs, lies in what the great Roger Penrose said, as quoted on the 4th page of TELOS & TECHNOS, (197 page edition, not the 256 page one}:
    “CONSCIOUSNESS CANNOT BE COMPUTABLE”.

    Please GOOGLE: {1}Norman L. Roth {2} Norman L. Roth, Technological Time {3} Norman L. Roth, Current Conception of the standard of life {4} Norman L. Roth, Economics of Work

    • Meta Capitalism
      April 10, 2020 at 9:38 am

      Norman, I just finished your book. The citation you are referring to above is on page vi and the Front Material to be exact. I find your thesis and arguments cogent and true. Indeed Roger Penrose (along with Henry P. Stapp, and Turing, Gödel, Church) provides a cogent argument that consciousness is not computable. I note the following and have some questions if you would be so kind to answer:
      .

      In Norbert Wiener’s “God and Golem” 1964, the following trenchant comment appeared which sums up the mindset of the neoclassical straight-jacket.
      .
      “The success of mathematical physics led the social scientists to be jealous of its power without quite understanding the intellectual attitudes that had contributed to the power.” As Wiener explains further: “The mathematical physics of 1850” (this early date may be especially unkind cut on his part) became “the mode of the social sciences.” Wiener goes on to say that “very few econometricians are aware that, if they are to imitate the procedure of modern physics, and not its mere appearances (perhaps the unkindest cut of all), a mathematical economics must begin with a critical account (i.e., rigorous definitions?) of these quantitative notions and the means adopted for collecting and measuring them.” Since Wiener spent many years on the same premises as the most prominent “imitators” he must have been keenly aware of just how the problem of defining key economic variables to a point where they could be meaningfully manipulated as homogeneous “technical” units had, in effect, defeated their best efforts to attain the “scientific” respectability that only “quantifiability” can bestow. With this perhaps definitive limiting principle on the subject as a subliminal guideline we can, in a humbler vein, pose the following question: Is there at least some procedure that accepts implicitly the subject’s inherent limitations or, more to the point, its own unique nature by actually searching for the boundaries within which some degree of “quantifiability” is feasible, and beyond which this aspiration is merely spurious or being deliberately or unwittingly abused? This is the same as asking how far we can go with many of the traditional operations of economic estimation, calculation, and comparative valuation … or at what point do they cease to convey ordinal meaning? (Roth 2008, 80-81)

      .
      You note that “Emergent properties as a cornerstone of the role of complexity in economics.” Complexity theory aims to create an algorithmic determinism capable of computer simulation.

      A rather special deterministic process is also worth mentioning: complex systems. Though completely deterministic, complex systems exhibit many features that make them look very much like stochastic or even uncertain processes. The similarity arises from the fact that even very minor changes to the initial conditions may trigger a response of the system that pushes the outcome far away from its initial state. Moreover, complex systems very often do not even permit any reliable statements about what direction of shift is induced by the change in the initial conditions due to the intractability of the system. (Müller-Kademann, Christian. Uncertainty and Economics (Routledge Frontiers of Political Economy) (Page 6). Taylor and Francis. Kindle Edition.)

      Economists were early to notice the relevance of complex systems (Alchian, 1950; Sonnenschein, 1973; Mantel, 1974; Debreu, 1974; Ormerod, 1999, without any claim to completeness) for economic analysis. Complex systems arise, for example, by “simply” aggregating individual demand curves (Sonnenschein, 1973). Although it may seem tempting to liken complexity to risk or even uncertainty, it has to be stressed that they remain purely deterministic and all their seemingly non-deterministic properties are merely owed to the fact that so far, we lack the means (information) of uncovering their exact mechanisms. (Müller-Kademann, Christian. Uncertainty and Economics (Routledge Frontiers of Political Economy) (Page 6). Taylor and Francis. Kindle Edition.)

      To be very precise on the last point, complex systems in economic models may give rise to multiple solutions, or multiple equilibria in the language of economists (Cass and Shell, 1983). This multiplicity seems not to fit the definition of determinism. However, a close inspection of complex system shows that the particular, unique solution can indeed be determined if the initial state of the system is exactly known. Therefore, handling complex system hinges on knowing the initial state and all dependencies within the system. (Müller-Kademann, Christian. Uncertainty and Economics (Routledge Frontiers of Political Economy) (Page 6). Taylor and Francis. Kindle Edition.)

      Therefore, the major restriction that narrows down the general case to the definition we are using for capturing determinism is the uniqueness of the final state. If, by contrast, the final state is not uniquely defined we deal with chance, ambiguity or uncertainty. (Müller-Kademann, Christian. Uncertainty and Economics (Routledge Frontiers of Political Economy) (Page 6). Taylor and Francis. Kindle Edition.)

      .
      From my studies in theoretical evolutionary biology I note that this understanding of determinism qua complexity, which is common in econophysics and certain stochastic Ultra-Darwinian circles, is distinct and different from the the idea of Emergent Properties that require a non-reductionist non-deterministic approach to understanding evolution. In other words, while mechanism is there the organism is not a machine! The idea that organic evolution is contingent and path dependent and unfolds on a hierarchy of emergent dimensions, includes the dimension of Telos & Technology.
      .
      Some (e.g., Gerald Holtham) have implicitly claimed that anything that doesn’t fit into the econometrics mould of “quantifiability” is merely anecdote and literature. Yet, ironically, also admit there are “deeper” causes which are rooted in telos (means and ends) than mere “proximate” causes open to “quantifiability.” The proximate vs. deeper distinction seems to me to be rooted in your idea of telos and human mind and its ability to distinguish means from ends (or confuse the two) and culture and institutions.
      .
      It seems complexity theory can become a smokescreen for the real underlying telos and causes of economic behavior as easily as homo economicus and econophysics hunt for the chimeras and holy grails of hidden underlying “social mathematics” of the complexity of human economic behavior.

      • Meta Capitalism
        April 10, 2020 at 10:08 am

        So my question is, what exactly do you mean when you use the terms complexity and emergent properties?

  6. April 10, 2020 at 11:48 am

    Meta-Capitalism is listed as making a comment here, but it isn’t showing up. Is this because he is artistically remaining dumb about it?

    • April 10, 2020 at 11:50 am

      That seems to have stirred something!

  7. April 10, 2020 at 12:36 pm

    Norman, your 1964 Wiener quote is splendid. By 1968 Algol68 was showing how to deal with his problem: “nested” definitions of “objects” in terms of operational definitions of how to process them. The key to change is provided by Newton’s equations of motion; the key to localised objectivity is circular motion. Have you ever come across how Arthur M Young, designer of the pioneering Bell helicopter, showed in “The Geometry of Meaning” how changing the acceleration-controlling force applies the equations of motion to a different situation? In a set of objects, changing it for just some of its members creates nested subsets containing objects and processes, with class boundaries evolving in a predictable way: as I’ve been saying recently, like the dimensions in an arabic number. Hence my algorithms and your emergent dimensions.

  8. Norman L. Roth
    April 11, 2020 at 3:44 pm

    {2} In ECONOMICS , ‘Emergent Properties’ are what evolves in real time, {where the “Events are the time”} in a Gestalt way, from an interactive, organic collection of agents. The individual agents taken at random, do not possess this capability. It is related to my explanation of “the root causes of uncertainty” {NOT the only ones!} in Chapters 2 & 3, of TELOS TECHNOS. And it explains why the “Planned Economy” can’t work. {NOT, a prediction of “Will not work”} .And why the resultant System that arises from this evolved process,is a monkey wrench that guts all but the most humble models & dogmas of extreme determinism & ergodic thinking. And, I am in no way condemning the search for some degree of systemic predictable patterns by those who try to pluck even a modicum of low entropy from a baffling universe of Complexity. What George Shackle called “kaleidoscopic”. And He was well versed in Math and the temptations of “spurious quantification” which bedevils ALL of us, as Norbert Weiner warned future generations None of the above can be divorced from the epistemology of TIME, which is a prime feature of TELOS & TECHNOS.to replace REALLY, this stuff has to be developed into a working curriculum that is far beyond the capabilities of “one individual agent”. I’m sure this humble attempt at brevity will meet with a Cyclone of polemic fury. But I’ll forgive & forget. Norman L. Roth

    • Meta Capitalism
      April 11, 2020 at 10:43 pm

      Thank you Norman. Will re-read Chapters 2 & 3 and note.

  9. Norman L. Roth
    April 11, 2020 at 6:19 pm

    Dear Mr. “Meta Capitalism”,

    I tried to answer your questions about what I meant by “complexity” and “emergent properties”, as a courtesy to some one, with whom I may differ somewhat on a variety of issues, but whose knowledge & powers of understanding, I appreciate & respect. Believe it or not, the same applies to Mr. Dave Taylor. BUT, if my responses to your well intended questions have not been published as yet, I tried my best to be “ganz richtig und hoflich” towards you both.

    Enjoy the Easter/ Spring Holiday season. Norman L. Roth

    • Meta Capitalism
      April 22, 2020 at 12:48 pm

      Thank you Norman, I send best wishes your way too. We (wife and I) are weathering the pandemic here in Japan. It seems there different versions of complexity being bandied about and different claims being made about it and what it can or cannot tell us or how we can use its study to inform future actions.
      .
      I have read a lot about complexity and emergence in the fields of cosmology-physics and biology. Emergence, simply put, is the observation that the whole is often greater then the sum of its parts. When scientists forget this, they sometimes engage in a form of greedy reductionism in their quest for mathematical quantification and formalism that actually leads them away from the truth. Examples would be Dawkins misleading and now defunct “selfish gene” dogma and pan-selectionism in evolutionary theory that ignores development and epigentics organisms and evolution, i.e.,

      If the emergentist-materialist ontology underlying biology (and, as a matter of fact, all the factual sciences) is correct, the bios constitutes a distinct ontic level the entities in which are characterized by emergent properties. The properties of biotic systems are then not (ontologically) reducible to the properties of their components, although we may be able to partially explain and predict them from the properties of their components… The belief that one has reduced a system by exhibiting [for instance] its components, which is indeed nothing but physical and chemical, is insufficient: physics and chemistry do not account for the structure, in particular the organization, of biosystems and their emergent properties (Mahner and Bunge 1997: 197) (Robert, Jason Scott. Embryology, Epigenesis, and Evolution: Taking Development Seriously. Cambridge: Cambridge University Press; 2004; p. 132. (Michael Ruse. Cambridge Studies in Philosophy and Biology.)

      .
      On the level of economics and society I believe this means we cannot reduce economics to mere social mathematics (even chaos or complexity theory are deterministic). If we cannot reduce biology to selfish genes and cells because they are part of a larger whole, then it seems reasonable that we cannot reduce economics to “social mathematics” but rather must account for human indeterminacy and free will qua telos; we must deal with the politico-social institutions and how these are configured in laws institutions (lobbyists qua politicians qua think tanks qua corporate board member and so goes the revolving door that must be smashed) and how these serve or don’t serve a just economic system (i.e., creating equity and justice or unjustified inequality, maintaining a sustainable economic-environmental system or poisoning and polluting our biosphere for short-term profits, etc.). When I see a so-called scientist-economist reduce human behavior on both the individual and social level to that of a “social insect”.

      Even such purely academic theories as interpretations of human nature have profound practical consequences if disseminated widely enough. If we impress upon people that science has discovered that human beings are motivated only by the desire for material advantage, they will tend to live up to this expectation, and we shall have undermined their readiness to moved by impersonal ideals. By propagating the opposite view we might succeed in producing a larger number of idealists, but also help cynical exploiters to find easy victims. This specific issue, incidentally, is of immense actual importance, because it seems that the moral disorientation and fanatic nihilism which afflict modern youth have been stimulated by the popular brands of sociology and psychology [and economics] with their bias for overlooking the more inspiring achievements and focusing on the dismal average or even the subnormal. When, fraudulently basking in the glory of the exact sciences, the psychologists [, theoretical economists, etc.,] refuse to study anything but the most mechanical forms of behavior — often so mechanical that even rats have no chance to show their higher faculties — and then present their mostly trivial findings as the true picture of the human mind, they prompt people to regard themselves and others as automata, devoid of responsibility or worth, which can hardly remain without effect upon the tenor of social life.
      .
      — Andreski 1973, 33-34, in Social Sciences as Sorcery

      • Meta Capitalism
        April 22, 2020 at 12:50 pm

        When I see a so-called scientist-economist reduce human behavior on both the individual and social level to that of a “social insect”. … I know I am seeing the scientism of a blind mechanistic materialist.

  10. Ken Zimmerman
    April 20, 2020 at 4:02 pm

    These debates about this theory and that theory won’t change anything. Virtually none of the data we have from direct observations and indirect review of the results of actual actions supports even in the narrowest sense either Chicago economists’ theories or neoliberalism in any of its multiple configurations. Use the data to explain and solve “real world” problems. That will turn lots of heads. Including those of many Democratic politicians and voters, who appear poised to once again take control of the US and its future choices. Hard times like those right now will become much harder over the next few years. Harder times call for working solutions, not theories.

    • Craig
      April 20, 2020 at 6:59 pm

      Correct. Like a 50% discount/rebate policy at retail sale and a no nonsense tax regime that prevents anti-social and market worshiping business executive and theorists who confuse the ethically bereft chaotic thing we call the economy with “free” markets.

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