There's a problem with this macho "zero-tolerance" concept also. No situation is ever 100% black and white clear. Zero-tolerance plays into the fantasy that things are just that, so we'll enforce the rules like God... yeah it is a bit all twisted and biblical.

No, instead you're working your ass off to pay for the collapse of the financial system. Personally I'd rather chip in a bit to make sure everyone in my neighborhood has decent accomodation.

As for the theft of labour argument, hahaha, what are you? A Marxist? Cause that's exactly what Marx says your boss is doing. The big wake up call from the current crisis is that you're going to be taxed regardless. So, you can vote for your taxes to pay for bombs and bailouts, or houses and hospitals....

The wider question is why people were looking to take out mortgages and other types of household credit in the first place. A bit of spend on some reasonable social housing so those that couldn't really afford it didn't need to turn to the credit system for a decent place to live would have been much cheaper than the bailout.

There were some other structural issues. The so called "death" of monetarism people called because the money supply was rapidly growing and inflation was staying low may have been premature. The money (credit) had to go somewhere, and it went into assets. A speculative boom being the result.

Just a few thoughts...

Yeah, but are you on THEIR side, or OUR side..?

Hi again, been busy and away sorry. I wanted to post a reply sooner... Anyway,

We do have Behavioral Economics, and its very interesting. Sadly, much of what they have to say is boxed off into a little side field. It doesn't make much impact on mainstream academic economists and as for undergraduate teaching.... Micro every year, Behavioral and other hetrodox micro focused topics a third year elective, if lucky.

Still even if things are being cleaned up slowly, the idea of a self equilibrating, stable, free market is still a corner stone of our policy making apparatus, even if not made explicit. This is what I'm getting at when I talk about sacrilege. I made a simplification here, true, but there is a sense in much of economics that gov interference is the "least bad option" and that if we just had the guts to stick it out, Pareto efficient market allocations would result.

Haha, yeah we do tend to have a different outlook on that. What bothers me slightly about what you have written, is the faintly mocking tone "ranting about the powerful". Do you really think this isn't an issue? Economics over its history has a tendency to espouse ideas that legitimise (there's another one for the spell checker) the current distribution of income and wealth in society. In this, it acts in the interests of the powerful. Don't think I'm someone who wants to "tear it all down", but unless we are honest about the nature of the distribution of power, and its corresponding capacity to shape debate, we will be unable to level a rounded critique. Part of the baggage of classical and neoclassical economics is an attempt to put this kind of critique off the table. It places much of the economic fabric of society outside human agency, leaving you in a position akin to criticising gravity for someone falling off their roof.

When we move outside the west to the situation facing developing countries, this power aware discourse becomes even more important.

No, I can't name a serious economist making an impact today, but I'm not really writing about economists, my points were more an attack on the wider understanding of economics in society. So, yeah, I concede that point. Your point about Friedman, sadly homoeconomus made a return post Friedman. Lucas, Sargent, Prescot all working in 70, 80s made big use of the rational expectations hypothesis and Walrasian general equilibrium. An even more extreme position that that taken by the monetarists. The New Keynesians, Mankiw, Romer, have taken on much of that thinking.

So, overall, much of what you say is reasonable, but don't be fooled, much of the classical concept of utility maximising, rational actors working with equilibrating, optimising markets is still out there and going strong.

Nice thread, thanks for taking the time for a chat.

Not talking about the finance modelers, I'm talking about classical economics and its offshoots. Particularly new classical economics. Building your models (here I mean any mathematical treatment, not just computational models) based around things like utility maximisation and rational choice theory are fine to help you map out the theoretical territory. They are woefully inadequate for explaining any observed market behaviour.

The problem arose when this kind of economics led to policy making that sought to adjust the real world to fit these models. For instance, unions are inherently bad because they cause the market to deviate from perfect competition. Or, developing countries should focus on agriculture because that exploits their comparative advantage. In a banal sense statements like this are true, but only at the level of a very crude first approximation. There is no accounting for the social and historical specificities of the situation. When the mathematical treatment rules, the social side of the problem is abstracted away.

The economic ideas that become accepted "truth" in any period are those which serve to validate the position of the powerful. In prerevolutionary France, the physiocrats stressed the primacy of agriculture, these days we stress the natural, impartial action of the market, interference in its workings a sacrilege. Well that is until the wealthy are looking at losing serious money, then all the state interference necessary to mitigate this is suddenly allowed. I'm not saying that saving the banks isn't the right thing to do right now, we haven't really got a choice, and that is another big issue, but its interesting to see how quickly the economic rhetoric can shift when its the rich that start to hurt.

Yeah, its a big step in the right direction.

Oooh, yeah, thanks, I am interested in that. Its on my "todo" list to get more acquainted with some more innovative modeling techniques. Its pretty clear we need to model differently, more feedback being the first thing that springs to my mind. There is way too much tuning of the assumptions to get the results desired in economics at present.

Its interesting you should say that. The split in political economy when the practitioners in the field got high on maths basically created sociology. I think that idea comes from JK Galbraith.

The way I think about it, is that we're trying to take a scientific mindset and methodology into sociology. An attempt to uncover some of the relationships that drive our social and economic behaviour. I don't subscribe to the "its all crap" mantra (obv) but I do feel that the very maths heavy, rational agent optimisation way of doing things is a bit of a misstep. It should really be a minor subfield of maths that deals with rational decision making. A bit like game theory. Helpful in mapping out the theoretical territory, but of limited application to the analysis of real issues in society.

There is some light in the tunnel however. As more and more of wider society see that the neoclassical emperor has no clothes, the stranglehold of that school on economic thought loosens. The financial crisis is going to help this, people have already stopped looking at you funny when you talk about wealth redistribution. What's next? Will we be able to talk about class antagonism? ......

Ooops, went too far...

Part of the problem is that "the geeks" got hold of economics and constructed their big, deterministic, agent based models. Models can be illuminating true, but in the case of economics, when reality and models parted company, the economists bemoaned the inability of the real world to match theory.

What is desperately needed in economics is a more reality based outlook that attempts to truly deal with the social and economic problems of wider society, rather than a bunch autistic, antisocial, arrogant geeks who don't even realise they're only allowed to keep doing what they're doing because it serves the interests of the powerful (and they're not getting in the way too much).

IAAE

The thing is, this "we deregulated too much" answer to the crisis is a bit of a red herring. The real issue here is the march of supply side, right wing politics in the west, from both "sides" of politics since Reagan and Thatcher. The lack of provision of basic essentials of human life for the poor. No state, or subsidised, housing, education and health, means that more and more of society is exposed to the credit system simply in order to have a decent standard of living. Combine that with an advertising (propaganda) campaign by the banking sector to move into household lending and here we are. The first major financial crisis where the debt burden is higher in the household sector than industry. Should be interesting.

Yeah, and a rudimentary introduction to economics will also teach you that there are many and varied types of organisation that may arise through the operation of the market, some very far from optimal.

There is also a little thing called equity that some of us think is important as well, but you need to be a little less antisocial to understand that one.

Nice post.

Yes, and those people would be wrong. The market is inherently unstable, despite the fine propaganda effort to convince us its gods gift to man and somehow a state of nature for the human race.

Oh, I see what you mean. Well, here's the thing. Sometimes the economy finds itself in what's called a "less than full employment equilibrium", a recession. The big problem is that the business sector will not produce at full capacity because there are less people with sufficient income to purchase the output. Their lack of production (and sales) means that people who could be working for them aren't. Taken in aggregate, these people who aren't working are the ones who don't have sufficient income to buy the stuff. Chicken and egg situation.

if the state steps in and spends on a big infrastructure project, all of a sudden those people who were sitting idle are now working and earning an income. They spend that income, stimulating business activity. Now, thanks to something called the multiplier, this actually generates more business activity than the amount the gov spent on the make work project, as the funds go round and round the economy. The idea being that when the stimulus is ended there is demand in the economy for more workers, the ones who were working on your big project.

So the state has got the economic engine running again, and you've got some infrastructure which will help you to be even more competitive. This is what they mean by "create jobs" not the directly created jobs, well they play those up, but in an economic sense its the new employment generated by the stimulated activity that's really important.

As to why gov doesn't do it all the time. Well they do sort of. In the US military spending is a big pump primer for the economic system. Also, welfare is sort of like an auto stimulus. As people are put out of work, due to a downturn, gov spending rises automatically, propping up demand and hopefully preventing further unemployment. Lastly, the economy is a complex beast, sometimes it fixes itself, sometimes it doesn't. This latest downturn is going to give us lots more real world data to play with, especially since different countries will tackle it in different ways. Come back in about 5 years, I'll be able to give you a better answer then :)