All entries for Sunday 03 May 2015
May 03, 2015
A recent conference organised by the New York Review of Books entitled "What's wrong with the economy - and economics?" had some interesting contributions about the state of economics after the crash.
Especially I thought the following contributions to be very stimulating and insightful for anyone with an interest in current debates.
- Philip Mirowski in the session "Who and where are the economists?" (from 48:00) gives a very entertaining talk in which he argues that the real problem is not with macro - which has been the subject of a lot of discussion since the 2008 crisis - but with micro. Micro today has changed fundamentally from what it used to be: it used to be primarily concerned with the efficient allocation of resources. Today it is all about markets as information processors - which have greater capacity and power than any human being or group of humans - and are consequently a threat to democracy and truth.
- Andrew Graham gives another very entertaining and stimulating talk called "Rethinking the teaching of economics" in the session "The education of economists" (from 45:25). He points to the danger of simplistic application of mathematical functions in economics, illustrated with the Phillips curve.
- Paul Krugman argues persuasively that there is nothing wrong with macro theory as such. Keynes' General Theory plus Hicks' IS/LM apparatus from the 1930s fits the present circumstances very well. The problem is not with economics but with policymakers not understanding basic economics and not listening to economists. This is in the session "Economics after the Crash: A Discipline in Need of Renewal?" (from 24:15).
- Robert Skidelsky argues the opposite (same session from 38:45). Much of what he says he has said before (and need saying again) but he makes what seems to me to be a particularly insightful point I have not heard before against methodological individualism, an assumption that is widely used and has caused a fundamental change in the way macro is done. In the past macro and micro could be studied separately - macro could be, and often was, taught first in principles courses. But now the focus is on micro-foundations and, with methodological individualism, macro is seen simply as a matter of aggregating individual decisions. He quotes Keynes who argued strongly against this saying that the economy should be viewed as an 'organic unity' rather than simply a collection of Robinson Crusoes.
This article, "Why are error margins ignored in LDI?", in the latest edition of IPE Investment and Pensions Europe, should be required reading for anybody involved in - or with an interest in - occupational pension schemes. It argues that, in order to be of practical use in guiding decisions, valuations of assets and liabilities should be estimated with a margin of error. This point - that is good science but actually little more than common sense - is directly relevant to the current debate about the universities pensions scheme, the USS, whose trustees seem to be ignoring it completely.
The article says that pension schemes rely too much on financial mathematics for valuations, with its precision leading to a false sense of certainty, and fail to learn the lesson from experimental physics: that margins of error in measurements are just as important as the measurements themselves. We could also say that it is a problem in economic thinking due to too much reliance being placed on the idea that competitive markets are in equilibrium - leading to a belief in precise valuations taken as having the status of fact. Such thinking forgets that in the real world there is everywhere statistical error, which is often a very wide margin. An approximate figure with a wide margin of error is often a more accurate description of reality than one presented with spurious precision.
The article begs the question: why is this issue not being actively discussed by everybody involved in running pension schemes, actuaries, accountants, trustees - and the regulator and the government?