Bob Cropf

Academic economists behind the curve in current situation

In Free-market, Keynesianism on March 5, 2009 at 1:14 PM

Economists from academic departments are behind the curve when it comes to their classroom treatment of the current economic crisis, according to an article in today’s NY Times. Most mainstream economics departments are still in the grips of the free market ideology, despite the failures of said approach to predict the current crisis. More problematic is the near exclusion of Keynesianism as a legitimate object of study in most of the elite graduate economics programs around the country. Keynes is virtually absent from the curricula of economics departments, despite serving as the theoretical underpinnings of the Obama administration’s stimulus package.

The Freakonomics blog also quotes at length a paper that criticizes the economics profession, dominated by neo-classical or free market thinking, with completely missing the current financial mess:

The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.

According to the last article, the problem with the economics profession is its search for elegance (in model building) at the expense of empirical validation. A large reason for the financial sector’s problems, indeed, is the use of sophisticated mathematical models that had little to do with reality.

  1. Speaking of elegant mathematical models that have little to do with reality:
    Pr(Ta<1, Tb<1)= theta{(1/theta)(Fa(1)),(1/theta)(Fb(1)),gamma}

    is apparently the formula that they were using to assess risk on the MBS… if it looks to good to be true, it probably is. This is a little too simple to assess real risk – to many estimates that can inflate your error rate… masquerading as too much certainty.

  2. Good points

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