Paul Krugman: How Did Economists Get It So Wrong?

http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?em



Long article, but worth the read.

The notion of rational expectations is leftover modernist nonsense that has been thoroughly discredited by virtually the entire field of human/social sciences. And yet it remains the foundational premise from which all classical and free market economics bases itself.

One needs to ask whether or not this refusal to address the glaring problem - that being that all classical/free market economic theory rests on a false assumption about human nature/behavior - is due to the fact that the assumption serves the interests of those most benefiting from this broken system. That seems likely to be why there's so little honest acknowledgment of the foundational flaws.

Great (though lengthy) article about this here:
http://www.openleft.com/diary/14935/a-different-america-the-situation-of-economic-polarization

Quick Excerpt:


And:

:)

:thumbsup:

"Situationism" is not the safest of concepts. I'm trying to think of a different way to put it, and all I'm getting is the image of a pinball machine. I understand the concept but I don't like the term and the formulation of the concept.

What we both know is false, is this:



What I think you are afraid of, is that the alternative being suggested by "situationism" or the dangerous potential, is something like this:

But actually, what is being suggested, is this:

Note that "situationism" - for better or worse, is a formalized term that will show up in a great deal of academic literature. So even if you think there should be a better word, just remember the term if you ever run across it.

seems more like a product of abstract power relations among people. But thanks for the info.

Even here on DU, where there are Harry Reid & Diane Feinstein & Chuck Schumer defenders

when we "Nervous Nellies" were warning our fellow DUers, & getting pilloried for being "Doom & Gloomers" :rofl:

would lead the economy downhill (best case) and over a cliff (worst case) in his last year in office.

It seems like the Bush era was some kind of bizarro timewarp where the obvious was ignored.

GHWB planned the menu, Clinton hired the cooks & put out the food, GW & his crew tried the "tablecloth" trick to amaze the diners & of course all the food ended up on the floor, with the broken dishes & smashed stemware..then he split with the pre-payments..

Obama's the cleaning crew..but the guests are still hungry, and they're the ones who paid bazillions of dollars per plate:(

Now, they're all reacting to the economy in an attempt to "do something" about it..no matter how ill-conceived or just plain stupid it may be.

They remind me of the joke about the flea on the elephants head thinking he's steering.

that Big Oil, Halliburton, Blackwater etc made record profits during the Bush era...

Ed: spelling

have cleaned up their predecessors' messes & have filled up the piggy bank.. why steal an empty piggy bank:(

Krugman's 2001 article was also a long article in the New York Times Magazine. He said that our nation doesn't produce much wealth so our elections were about how that wealth would be distributed. George W. Bush won the election so wealth would be distributed to the wealthy.

Today, instead of talking about how badly economists got it, he should be talking about how the rich got richer and screwed our country over with this Wall Street fiasco. They did a poor job with the wealth "dimson" Bush gave them. Look at all the waste of dimson bush.

IMO

What ye need to know: There are two kinds of industries in the world. One group is "wealth creating" industries, the other is "wealth transferring."

There are exactly four wealth creating industries: mining, forestry, agriculture and manufacturing. There can never be any more. Please understand that these four industries can expand--for instance, before 1823 there was no petroleum industry because there was no practical use for its product. In 1823, petroleum lamps were introduced on a large scale, and the mining of crude oil began in earnest.

All other industries are wealth transferring industries.

Ronald Reagan's administration caused the great sea change that led to the current collapse, and he did it by emphasizing wealth transferrence over wealth creation. Look at the Dow. For most of its existence the only companies on it were at least partially in the wealth-creation sector. Sears was on there, but Sears used to manufacture some of the things it sold--it made its own power garden tools, for instance. Now? Twenty percent of the Dow--six out of thirty companies--are either financial or retail establishments.

We shall now examine one of the wealth-transferring businesses on the Dow Jones "Industrial" Average, Walmart. About ten years ago, Walmart had this huge ad campaign going on called "Bring It Home To The USA." They bragged about all the product they sold that was made in the US, and how many American jobs were being created by Walmart's largesse. This was at the time when Walmart was outsourcing its ass off, even worse than they do now--I read at the time that of every 20 shipping containers that was brought into the United States, one of them was going to Walmart. There were big hanging signs on every Walmart's racetrack showing all the American-made products they sold, and the number of American jobs created by each. What killed the "Bring It Home" campaign was one rather innocuous-looking ad, in which they extolled this line of really nasty plastic measuring cups--you know, the kind of cup that lasts about three months before milady gets scared of the germs lodged in the cracks and throws it away. The manufacture of these cups brought six jobs home to the USA. They put it on there in a figure a foot high--we brought home 6 jobs to the USA. There was a huge picture of six old ladies all wearing the same lipstick holding up one of these under-$1 plastic cups and beaming at the wonderful relation they had with Walmart. Printing the sign and shipping it to all the stores probably "brought home to the USA" more jobs than this cup did. That was the end of the campaign.

Back to the point: Wealth is created by making things and selling them to other people. You can sit in your back yard making million-dollar cars for years, but so long as you ship them all straight to your mom you'll never become a millionaire. During Reagan's administration we stopped shipping cars to other people's moms--with predictable results. Couple the end of American large-scale manufacture with all the "classical" economists saying how good outsourcing was because it cut down on the cost of labor (who buys the stuff in the first place, as we know), and you will understand what happened.

What ye need to know: There are two kinds of industries in the world. One group is "wealth creating" industries, the other is "wealth transferring."

There are exactly four wealth creating industries: mining, forestry, agriculture and manufacturing. There can never be any more. Please understand that these four industries can expand--for instance, before 1823 there was no petroleum industry because there was no practical use for its product. In 1823, petroleum lamps were introduced on a large scale, and the mining of crude oil began in earnest.

All other industries are wealth transferring industries.

Ronald Reagan's administration caused the great sea change that led to the current collapse, and he did it by emphasizing wealth transferrence over wealth creation. Look at the Dow. For most of its existence the only companies on it were at least partially in the wealth-creation sector. Sears was on there, but Sears used to manufacture some of the things it sold--it made its own power garden tools, for instance. Now? Twenty percent of the Dow--six out of thirty companies--are either financial or retail establishments.

We shall now examine one of the wealth-transferring businesses on the Dow Jones "Industrial" Average, Walmart. About ten years ago, Walmart had this huge ad campaign going on called "Bring It Home To The USA." They bragged about all the product they sold that was made in the US, and how many American jobs were being created by Walmart's largesse. This was at the time when Walmart was outsourcing its ass off, even worse than they do now--I read at the time that of every 20 shipping containers that was brought into the United States, one of them was going to Walmart. There were big hanging signs on every Walmart's racetrack showing all the American-made products they sold, and the number of American jobs created by each. What killed the "Bring It Home" campaign was one rather innocuous-looking ad, in which they extolled this line of really nasty plastic measuring cups--you know, the kind of cup that lasts about three months before milady gets scared of the germs lodged in the cracks and throws it away. The manufacture of these cups brought six jobs home to the USA. They put it on there in a figure a foot high--we brought home 6 jobs to the USA. There was a huge picture of six old ladies all wearing the same lipstick holding up one of these under-$1 plastic cups and beaming at the wonderful relation they had with Walmart. Printing the sign and shipping it to all the stores probably "brought home to the USA" more jobs than this cup did. That was the end of the campaign.

Back to the point: Wealth is created by making things and selling them to other people. You can sit in your back yard making million-dollar cars for years, but so long as you ship them all straight to your mom you'll never become a millionaire. During Reagan's administration we stopped shipping cars to other people's moms--with predictable results. Couple the end of American large-scale manufacture with all the "classical" economists saying how good outsourcing was because it cut down on the cost of labor (who buys the stuff in the first place, as we know), and you will understand what happened.

Not seeing the obvious is their job.

Your article is a reminder that the occupational hazards of academia have real world consequences, especially when the fields in questions are social sciences. Some of these hazards are:

1.Forgetting that theories are abstractions and mistaking them for the reality they abstract from;

2. Fetishizing abstract mathematics to the point of forgetting that it is supposed to be a tool and not an end product;

3. Desiring novel theories to the point of throwing out what works because novel theories get tenure, prizes, research dollars and respect;

4. Allowing the interpersonal relations--often irrational and juvenile--between academics themselves to affect (or even dictate) the status of theories.


Add to this that the formative life experience of the typical academic is mostly or entirely the ivory tower, and that the academic is not humble enough to be aware of this as a limitation.

What you end up with is the danger of ignorance and a possibility of theoretical zealotry that rivals that of the most ardent fundamentalist religious fanatic.

And our most important governmental and financial institutions are in the hands of such academics.

I guess that's supposed to make me a happy camper.

I used to watch Milton Friedman on the McNiel Lehrer Newshour back in the early 1980s. I was convinced that he was full of crap then for all the same reasons Mr. Krugman cites now. When the economic philosophy of an administration supplants analysis empirical evidence with bold assumptions of rational people and perfected markets, bad things are inevitably in the offing.

It was very much like the revulsion I felt when listening to PNAC stuff during the run up to the Iraq war. In fact, both stem from the same basic delusion. This delusion was writ large in Reagan's speeches about "restoring" some glorious "main street USA" society that only ever existed on certain movie sets, broadway musicals, and TV (Andy Griffith, Ozzie ahd Harriet, Father Knows Best)... The notion of rational people and perfected markets fits this curious vision too perfectly.

What actually existed was far better captured by the Honeymooners, and Death of a Salesman, and Upton Sinclair's "The Jungle".

I just started reading The Shock Doctrine about a week ago and this compliments my reading really well. When the book was recommended to me I had doubts I could stay interested in it, but I tell you I'm so PISSED by some of the bullshit that has been done. Right now I'm about 1/3 of the way through it.