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Tuesday, November 04, 2008

Pro-am economics

But there are at least 15,000 professional economists in this country, and you’re saying only two or three of them foresaw the mortgage crisis?

Ten or 12 would be closer than two or three.

What does that say about the field of economics, which claims to be a science?

It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.

James K. Galbraith, 31 October 2008 (htp: Jesse)

And I thought I ought to start reading academic textbooks on economics. It seems that the difference between an amateur and a professional is that the latter gets paid.

12 comments:

Wolfie said...

The explanation is quite simple. Economics professionals and even traders have for some years been hired or have advanced in their career not because of their intelligence or competence but because they have said what other people wanted to hear. Indeed it was in early 2006, shortly after joining credit risk that I approached my boss with evidence that the S&P/Moody ratings were "fantasy figures" and was told almost through pursed lips to keep my bloody mouth shut. This whole mess is not just an economics problem, it’s a social problem. Its about how we evaluate risk, prepare for the future and judge people through prejudicial eyes. Taleb talks a lot about this in FBR.

Nick Drew said...

keep my bloody mouth shut

yes, it's even simpler than Taleb often says (banging on about the failings of log-normal distributions)

in the immortal words of Dilbert's Evil Consultant:

I can show you how to loot this place and escape

John East said...

It's clear to me, a layman who sold his house several years ago in anticipation of this crash, that Galbraith should have said:

"Of the 15,000 professional economists, only two or three were dumb enough to tell the truth. Most of the others kept their mouths shut to keep their jobs."

Unprofessional, and immoral? Maybe yes, but who can blame them?

Senior politicians and regulators were in a much better position to not only cry wolf, but much more importantly to do something about it. This is where the failure lies, with our leaders, not with the troops in the industry.

AntiCitizenOne said...

The failure lies in government creating far too much temporary money (debt) for the economy, primarily by lowering reserve ratios, but also by faking the inflation figures.

Sackerson said...

Wofie, ND - most interesting; JE, ACO - agreed.

James Higham said...

Wolfie's comment is sound but doesn't take into account that this has been induced on an agenda. Economists can't incorporate that into their theories. I've been saying this since 2006 and it is becoming more apparent by the day. 2009 will be a big year for this.

Sackerson said...

What agenda, James?

sobers said...

It's pure psychology. Most people don't want to rock the boat. They don't want to have to put their heads above the parapet and risk getting it shot off. Far better to keep schtum, go with the crowd, keep safe. As it used to be said "No one gets fired for buying IBM". Look what happened to Tony Dye at Phillips & Drew in the Dot Com Boom. He eventually lost his job over his prediction that the market was over valued. Ironically, months after he left, the crash started.
So only a very brave or independently minded economist would dare say the emperor has no clothes. Or someone with no related job to lose - ie us normal folk. But how many of us had the guts (and I realise some did) to act on their theories? Sell their house in 2005/6/7? And wait for the crash? Plenty will have predicted the crash but not had the courage to act.

dearieme said...

I tried to persuade my wife that we should sell in summer 2005. She very reasonably pointed out that if I was wrong - what, me? - we might never be able to afford a decent house again.

DEARIEME said...

Maily DAIL:

The Queen spoke for the nation yesterday when she asked how the credit crunch could have taken so many economics experts by surprise.

She described the financial crisis as 'awful' and inquired that, since the meltdown was so massive, 'Why did nobody notice it?'

The royal concern was revealed at the London School of Economics, where she opened its £71 million New Academic Building.

Professor Luis Garicano, director of research at the LSE's management department, said: 'The Queen asked me, "If these things were so large, how come everyone missed them?".'

Sackerson said...

I've thought of writing to her.

Old Prof said...

Economists are logical, the stock markets are emotion-driven. We haven't been able to model that well, although the Social Scientists tried Catastophe Theory in the 1970's.