"The worldly philosophers" was economist Robert Heilbroner's term for such great economic thinkers as Adam Smith, Karl Marx, John Maynard Keynes and Joseph Schumpeter. Today's free-market economists, by contrast, aren't merely not philosophers. They're not even worldly.
Has any group of professionals ever been so spectacularly wrong? Pre-Copernican astronomers and cosmologists, I suppose, and for the same reason, really: They had an entire, internally consistent, theoretically rich system that described the universe. They were wrong -- the sun and other celestial bodies save the moon didn't actually revolve around the Earth, as they insisted -- but no matter. It was a thing of beauty, their cosmic order. A vast faith was sustained in part by their pseudo-science, a faith from which such free thinkers as Galileo deviated at their own risk.
As it was with the pre- (or anti-) Copernicans, so it is with today's mainstream economists. Theirs is an elegant system, a thing of beauty in itself, as the New York Times' Paul Krugman has argued. It just fails to jell with reality. And unlike the pre-Copernicans, whose dogma posed a threat to those who challenged it but not, at least directly, to anyone else, their latter-day equivalents in the economic profession pose a clear and present danger to the well-being of damned near everyone.
The problem with contemporary economics, at least with the purer strain of free-market economics associated with the University of Chicago, is not simply that it failed to predict the near-collapse of the world financial system last year. The problem is that it believed such a collapse could not happen, that all risk could be quantified by mathematical models and that these quantifications could help us correctly price just about everything. Out of this belief arose the banks' practice of securitization, which put a value on all manner of mortgages and enabled buyers to purchase and swap them with the certainty that such transactions reflected an accurate judgment of the value of the properties and the risks associated with them.
Except, they didn't. So long as economists insisted that they did, however, there really was no need to study such things as bubbles, which only a handful of skeptics and hopelessly retro Keynesians even considered possible. Under mainstream economic theory, which held that everything was correctly priced, bubbles simply couldn't exist.
The one economist who has emerged from the current troubles with his reputation not only intact but enhanced is, of course, Keynes. Every major nation, no matter its economic or political system, has followed Keynes's prescription for combating a major downturn: increasing public spending to fill the gap created by the decline of private spending. That is why the world economy seems to be inching back from collapse and why the nations that have spent the most, China in particular, seem to be recovering fastest.
But Keynes's vision has yet to reestablish itself among economists, who, like the Catholic Church in Galileo's time, aren't about to change their cosmology just because the facts demonstrate that they happen to be wrong. The quants at the banking houses say that they simply failed to sufficiently factor some risks into their mathematical models. Once they do, their system will be corrected, and banks can resume their campaign to securitize everything (as some banks are already doing by establishing a secondary market in life insurance policies).
The problem with that, Robert Skidelsky argues in a new book on economics after the fall, "Keynes: The Return of the Master," is that it neglects one of Keynes's central insights -- that an uncertainty attends human affairs that transcends quantifiable risk. (Skidelsky is also the author of a magisterial three-volume biography of Keynes.) Psychology affects value as much as rational calculation does. Thus the state must ensure against periodic madness in the markets with regulations and social insurance, because madness is a potential threat in markets just as it is in other human endeavors -- because the market is a human endeavor, not reducible to a mathematical construct.
Will contemporary economists ever accept this last precept? In the 1970s, a wry economist named Robert Lekachman observed that economics students had to master so much mathematics that they became emotionally invested in the idea that the math they had learned explained -- had to explain -- the universe. Skidelsky calls for combining the postgraduate course in macroeconomics with another discipline -- history or psychology, say -- to expose young quants to the complexities of human institutions.
If mainstream economics doesn't change, however, it may eventually face the worst of all possible fates: market failure. How many students want to spend their lives quantifying a world that doesn't exist?
Has any group of professionals ever been so spectacularly wrong? Pre-Copernican astronomers and cosmologists, I suppose, and for the same reason, really: They had an entire, internally consistent, theoretically rich system that described the universe. They were wrong -- the sun and other celestial bodies save the moon didn't actually revolve around the Earth, as they insisted -- but no matter. It was a thing of beauty, their cosmic order. A vast faith was sustained in part by their pseudo-science, a faith from which such free thinkers as Galileo deviated at their own risk.
As it was with the pre- (or anti-) Copernicans, so it is with today's mainstream economists. Theirs is an elegant system, a thing of beauty in itself, as the New York Times' Paul Krugman has argued. It just fails to jell with reality. And unlike the pre-Copernicans, whose dogma posed a threat to those who challenged it but not, at least directly, to anyone else, their latter-day equivalents in the economic profession pose a clear and present danger to the well-being of damned near everyone.
The problem with contemporary economics, at least with the purer strain of free-market economics associated with the University of Chicago, is not simply that it failed to predict the near-collapse of the world financial system last year. The problem is that it believed such a collapse could not happen, that all risk could be quantified by mathematical models and that these quantifications could help us correctly price just about everything. Out of this belief arose the banks' practice of securitization, which put a value on all manner of mortgages and enabled buyers to purchase and swap them with the certainty that such transactions reflected an accurate judgment of the value of the properties and the risks associated with them.
Except, they didn't. So long as economists insisted that they did, however, there really was no need to study such things as bubbles, which only a handful of skeptics and hopelessly retro Keynesians even considered possible. Under mainstream economic theory, which held that everything was correctly priced, bubbles simply couldn't exist.
The one economist who has emerged from the current troubles with his reputation not only intact but enhanced is, of course, Keynes. Every major nation, no matter its economic or political system, has followed Keynes's prescription for combating a major downturn: increasing public spending to fill the gap created by the decline of private spending. That is why the world economy seems to be inching back from collapse and why the nations that have spent the most, China in particular, seem to be recovering fastest.
But Keynes's vision has yet to reestablish itself among economists, who, like the Catholic Church in Galileo's time, aren't about to change their cosmology just because the facts demonstrate that they happen to be wrong. The quants at the banking houses say that they simply failed to sufficiently factor some risks into their mathematical models. Once they do, their system will be corrected, and banks can resume their campaign to securitize everything (as some banks are already doing by establishing a secondary market in life insurance policies).The problem with that, Robert Skidelsky argues in a new book on economics after the fall, "Keynes: The Return of the Master," is that it neglects one of Keynes's central insights -- that an uncertainty attends human affairs that transcends quantifiable risk. (Skidelsky is also the author of a magisterial three-volume biography of Keynes.) Psychology affects value as much as rational calculation does. Thus the state must ensure against periodic madness in the markets with regulations and social insurance, because madness is a potential threat in markets just as it is in other human endeavors -- because the market is a human endeavor, not reducible to a mathematical construct.
Will contemporary economists ever accept this last precept? In the 1970s, a wry economist named Robert Lekachman observed that economics students had to master so much mathematics that they became emotionally invested in the idea that the math they had learned explained -- had to explain -- the universe. Skidelsky calls for combining the postgraduate course in macroeconomics with another discipline -- history or psychology, say -- to expose young quants to the complexities of human institutions.
If mainstream economics doesn't change, however, it may eventually face the worst of all possible fates: market failure. How many students want to spend their lives quantifying a world that doesn't exist?
By Harold Meyerson, Washington Post, 30September2 009
More recently, I was walking at night in the wooded California suburb where I spend the summer, trying to think about an essay I was writing. Suddenly, a police cruiser was growling quietly next to me and shining a light. "What are you doing?" I don't know quite what it was—I'd been bored and delayed that week at airport security—but I abruptly decided that I was in no mood, so I responded, "Who wants to know?" and continued walking. "Where do you live?" said the voice. "None of your business," said I. "What's under your jacket?" "What's your probable cause for asking?" I was now almost intoxicated by my mere possession of constitutional rights. There was a pause, and then the cop asked almost pleadingly how he was to know if I was an intruder or burglar, or not. "You can't know that," I said. "It's for me to know and for you to find out. I hope you can come up with probable cause." The car gurgled alongside me for a bit and then pulled away. No doubt the driver then ran some sort of check, but he didn't come back.
In the first instance, I found again what everyone knows, which is that there are a lot of warped misfits and inadequates who are somehow allowed to join the police force. In the second instance, I found that a good cop even at dead of night can and will use his judgment, even if the "suspect" is being a slight pain in the ass. But seriously, do you think I could have pulled the second act, or would even have tried it, or been given the chance to try it, if I had been black? The "Skip" Gates question is determined just as much by what can't and what doesn't happen as it is by what regularly does. (Colbert I. King of the Washington Post once wrote a very telling column about how his parents instilled in him the need for punctuality. The underlining of their everyday lesson was that if you were late, you might have to run, and a young black man racing through the streets could well be detained before he reached his lawful destination.)
I can easily see how a black neighbor could have called the police when seeing professor Henry Louis Gates Jr. trying to push open the front door of his own house. And I can equally easily visualize a thuggish or oversensitive black cop answering the call. And I can also see how long it might take the misunderstanding to dawn on both parties. But Gates has a limp that partly accounts for his childhood nickname and is slight and modest in demeanor. Moreover, whatever he said to the cop was in the privacy of his own home. It is monstrous in the extreme that he should in that home be handcuffed, and then taken downtown, after it had been plainly established that he was indeed the householder. The president should certainly have kept his mouth closed about the whole business—he is a senior law officer with a duty of impartiality, not the micro-manager of our domestic disputes—but once he had said that the police conduct was "stupid," he ought to have stuck to it, quite regardless of the rainbow of shades that was so pathetically and opportunistically deployed by the Cambridge Police Department. It is the U.S. Constitution, and not some competitive agglomeration of communities or constituencies, that makes a citizen the sovereign of his own home and privacy. There is absolutely no legal requirement to be polite in the defense of this right. And such rights cannot be negotiated away over beer.
Race or color are second-order considerations in this, if they are considerations at all. I was once mugged by a white man on the Lower East Side of New York, and then, having given my evidence, was laboriously shown a whole photo album of black "perps" at the local station house. The absurdity of the exercise lay not just in the inability of a half-trained and uncultured force to believe what I was telling them, but in the certainty that their stupidity was helping the guilty party to make a getaway. Professor Gates should have taken his stand on the Bill of Rights and not on his epidermis or that of the arresting officer, and, if he didn't have the presence of mind to do so, that needn't inhibit the rest of us.
