Thursday, March 1, 2012

"Economists don’t understand the financial system....."

or at the very least they WAY over-simplify, and that includes people like Jeff Sachs and Paul Krugman who should know better.

This from a great post by blogger Cathy O'neil at the Blog Mathbabe (via Naked Capitalism) on a "panel discussion on the GFC with Paul Krugman, Edmund Phelps, Jeffrey Sachs, and George Soros" . Click on over to her fantastic post and show her blog some love!

Only George Soros (a non-economist) had something more interesting to say:
He started by saying that we should all acknowledge that, as nice as it would be to think we can model the economy and feel control over the situation, this is a pipe dream and we should get used to not really knowing what will happen when we do one thing versus another. He suggested that we should instead work together to develop a theory, or perhaps even an philosophy, that assumes uncertainty itself.
My thoughts: 

In your humble scribbler's opinion, Soros as long understood Keynes', Popper's and Taleb's "Uncertainty as unquantifiable, uninsurable, and unmeasurable Risk". Similarly, his theory of  "Reflexivity" jives well with notions of markets as (at times)  non-self-correcting entities that tend towards disequilibrium and instability. In contrast, the Neo-Classical synthesis orthodox "mainstream" left or right all assume at least long-run stability/ equilibrium and only debate "short run" market inefficiencies.

The sooner we get over our Control Illusion and accept true uncertainty and the perils of complexity - none of which will be solved by perfect markets or perfect central planners -  the sooner we can properly implement what Hyman Minsky recommended, a solid system of buffers, stabilizers and shock absorbers.

Once again, show Mathbabe some traffic love by checking out her most fab post! 

UPDATE: My thoughts on the nomination for World Bank President


  1. I think an equal pipe dream is eliminating the notion of certainty (or at least a quantifiable distribution) when assuming certain outcomes. In any financial transaction there is risk and (at least in theory) that risk is compensated with reward --- with individual actors seeing economic rent through any means at their disposal.

    People/organizations engage in assuming some degree of certainty because NOT doing so would paralyze any action. My suggestion is not in your main premise (downside risk needs to be mitigated), but rhetorical: don't argue that you can't be "certain" .... argue that you can be "certain" about the downside exposure if appropriate precautions are taken.

  2. Good thoughts, but I believe we are several eons away from worrying about an "over reaction" to control illusion, seeing that the economy is run by financial engineers who peddle over simplified models/metrics that are given near super-natural authority by "decision makers" looking for oversimplified answers