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by Thomas Trares, Mathias Binswanger and Robert
Tuesday, Feb. 28, 2012 at 6:39 AM
Analogous to a mechanical system, neoclassicists understood the economy as a perpetual cycle of production and consumption kept in balance by the price mechanism.
THE AUTISM OF ECONOMISTS
By Thomas Trares
[This article published in: Spiegelfechter.de January 23, 2012 is translated from the German on the Internet http://www.spiegelfechter.com/wordpress/7798/der-autismus-der-okomen. Thomas Trares is an economist and free journalist.]
For several years, the movement of post-autists has been underway in economics. They criticize the one-sided concentration of their discipline in a single school of thought, neoclassical doctrine. Spiegel Online recently reported about neoclassicism. The economics professor Rudiger Bachmann teaching in Aachen commented on this criticism. To many experts, autism was originally a speech for the defense.
At the beginning of his article, Bachmann rightly summarized the criticism of the mainstream economy. “Only efficiency thinking, market fundamentalism and state abstinence are preached. The Homo oeconomicus is worshipped and mathematics overemphasized. But at the same time he shows how seriously he takes these objections… He calls to critics: “Words must first be learned to understand this language. One must first learn Greek to read Homer in the original.” In an earlier article, the Pforzheimer economist Hanno Beck showed there are still economists who imagine themselves in possession of a dominant knowledge that is hardly accessible. He suspects some critics never put their noses in an economics book.
How a fruitful economics dialogue can arise with such a barricade of wagons mentality is incomprehensible. The two economists are on a line with the neoclassical theory that is a clearly delimited self-contained system. This system can be briefly outlined.
Neoclassicism follows closely the classical mechanics of the 19th century that dominated physics at that time. Analogous to a mechanical system that is constantly in motion, the early neoclassicists understood the economy as a perpetual cycle of production and consumption kept in balance by the price mechanism. The British economist William Stanley Jevons once described the national economy as “the mechanics of uses, advantages and self-interest.”
The future seems controllable in such a system. The axiom of ergodicity ensures that. Future values can also be calculated from the past and present data of a system. Thus the future statistics and risks can be estimated. Everything is illumined and graspable with mathematics. There are no dark corners in the system, ignorance or uncertainly that could creep in the rational calculus.
This neoclassical theory does have some relevance. The conditions under which markets can be efficient are derived from this theory. But neoclassical theory becomes problematic when market laws are declared unequivocally applicable or binding and when mono-cultures are cultivated that narrow the focus to one school of thought.
The philosopher and financial mathematician Nassim Nicolas Taleb revealed this sore point in his book “The Black Swan. The Power of Extremely Unlikely Events.” Taleb shows that the risk models of economists only cover normal operations, not extreme events. He illustrates this in the example of “black swans.” Up to the 17th century, Europeans believed only white swans existed until black swans were discovered in Australia. Such “black swans” occur much more often then people think, according to Taleb. The financial crisis and the nuclear catastrophe of Fukushima are current examples. Both events were regarded as nearly excluded according to probability calculations. Therefore Taleb castigates the model Platonism with sharp words: “When you hear the words balance or normal distribution from the mouth of a `prominent’ economist, you should simply ignore him and not argue with him.”
Professor Bachmann can also be counted among the model Platonists. Two years ago he was one of the protagonists in the methodological dispute that raged between law-and-order liberals and mathematically-oriented economists. The conflict is over the use of mathematics, not between different schools.
Bachmann is one of the “autists” of his guild. “It is a myth that a monolithic mainstream suppresses fruitful alternative theories that could be incorporated intellectually with modern economics because these flourishing alternative theories do not exist.” Apparently Bachmann has never heard anything about post-Keynesianism, institutionalism or ecological economics. His statement that every good study of economics treats market power, market failure, information incompleteness and information imbalances puts the crown on the whole thing. When Bachmann derides all this as great cinema, this shows how far the edge of his plate extends. All this is pure neoclassicism. All these phenomena are treated as only out-of-balance weights in the system that can be tackled with the right repair tools – in case of uncertainty with more market.
How he decried the self-critical Hamburg professor Thomas Straubhaar is remarkable. “When my colleague Thomas Straubhaar declares that `micro-economic striving for profit can lead to macro-economic ruin (Long live the Schwabian housewife!), one could ask whether the professor abandoned his study of economics. This is really an old hat.” Bachmann does not enter in the much more exciting questions raised by Straubhaar, who has a very personal interest in the efficiency myth of the financial markets and who profits in the belief in the efficiency of the financial markets.
Two remarks on the normative foundations of neoclassicism are appropriate here. Neoclassicism pretends to be a positive theory. In other words, it only explains how markets function. Action recommendations like “more market” or “Laissez-faire” based on those foundations are only possible when the competition- and distribution-problems are solved. If this is not the case (or if this is already the case!), the whole thing becomes normative. Then the macro-economists make themselves the advocates of those who profit from the status quo. The British political-economist and historian Robert Skidelsky writes about this:
“Apart from a few geniuses, economists formulate their assumptions to be true for the existing conditions and then wrap them in an aura of eternal truth. They are intellectual butlers who serve the interests of the respective rulers, not watchful observers of a changing reality. Their systems lead to becoming caught in orthodox dogmas.”
How little economists speak of current social-political malformations is also striking. Terms like authoritarian capitalism, neo-feudalism and post-democracy already circulate in the entertainment pages and in sociology. Perhaps people would be a little surpr5ised about the trifling resonance in economics if they knew that the “kindly dictator” is the ideal ruler in traditional welfare economics.
HOW UNIVERSITY ECONOMISTS FAIL – THE THEORY OF PROSTITUTION AS A WARNING
By Matthias Binswanger
[This article published in 2011 is translated from the German on the Internet, http://oekonomenstimme.org/a/309/.]
[Matthias Binswanger is a professor of economics at the University of St. Galen, Switzerland. In addition, he was a guest professor at the Technical University of Freiburg in Germany, at the Qingdao Technical University in China and at the Banking University in Saigon (Vietnam). Matthias Binswanger is the author of many books and articles in specialist journals and in the press. His research focal points are in the areas of macro-economics, financial market theory, environmental economics and researching the connection between happiness and income. Matthias Binswanger is also the author of the 2006 book “Treadmills of Happiness” which was a bestseller in Switzerland. In 2010 his most recent book was published “Senseless Competition – Why We Produce More and More Nonsense.”]
An article by Rudiger Bachmann titled “Have University Economists Failed?” was recently published here. In the article, he showed what amazing work economists do today and how unjustified are attacks on the mainstream economy. This tap on the shoulder was obviously necessary since the economics discipline was recently attacked. In the last financial crisis, the economics discipline ignored the reality of the financial markets and started from unrealistic assumptions.
According to Rudiger Bachmann, critics are simply ignorant persons who understand nothing about the economy since they don’t have the necessary tools to describe the crisis phenomena. On the other hand, enlightened economists who dare criticism of their discipline are slandered. Whoever criticizes the assumption of Homo oeconomicus (psychological criticism of the economy) according to Bachmann automatically claims “all people are dumb and irrational.” Does such a relation to critics correspond to a dynamic, open and flexible education system?
The argumentation is very peculiar when Bachmann reproaches his colleague Thomas Straubhaar for being astonished that “micro-economic pursuit of gain can lead to macro-economic ruin.” Modern economics has long known this is possible since there can be niche-balances or multiple balances in certain models. This argument is as convincing as if one would claim it is irrelevant when someone falls ill from the side-effects of a medicine because these side-effects were all described on the package. What is reality when hypothetical model worlds of balance can be created to trivialize or play down reality? Whoever can do this best is regarded as a “great economist” and can be published in the most respected journals.
The following example may illustrate how banal and ridiculous lead to publications in top journals if they are only presented in a formal balance model. In 2002 an article titled “A Theory of Prostitution” was published in the Journal of Political Economy. Two economists Lena Edlund and Evelyn Korn were occupied with a “very interesting” phenomenon. Prostitution is an activity that doesn’t need an education and is mainly carried out by women. The puzzle is that prostitutes are well-paid. How can this be? As a lay person, one could naively assume that attractive and sex-ready young women are relatively scarce and therefore command a relatively high price.
THE COSTS OF PROSTITUTION
What is obvious is naturally much too simple. “Joy in sex with a young woman” as a main motive for the demand is not mentioned in the article. Instead the authors wrack their brains married men go to prostitutes – although they could have sex cheaply at home. To find this remarkable, one must be far removed from real life which is easily possible in an acade3mic environment.
The authors assume joy in diversity of sex partners is stronger among men than women. The authors are not sure that sex with an older woman brings less joy than with a younger woman (p.186). All this is unimportant for Edlund and Korn. The authors have a “brilliant” idea that “solves” the puzzle of the relatively high pay of prostitutes. If a woman works as a prostitute, she reduces her chances on the marriage market and must correspondingly be compensated with a high pay for these missed possibilities. That is the “brilliant” idea that justifies a long article in a top journal.
The two authors inflate their banal research finding into a formal model with 14 mathematical equations filling 19 pages and produce a sex-market balance under co0mplketely unrealistic assumptions (p.144). But nearness to reality is not a crucial criterion for publication in a top economics journal. What counts is presentation of a complex formal model.
…AND ITS CONSEQUENCES
… This example is not a special case but shows in an exemplary way where the problem lies. What counts is the formal presentation of a model and not its substance. In today’s economy, people now remove themselves from reality so far in many cases that what comes out as the result isn’t even important any more. The opposite of the resu9lt could be “proven” in many articles and this wouldn’t change anything. The result is irrelevant. A discipline where this is possible has no reason to praise itself to the skies because it is in a highly concentrated decadent state. But happily there is a glimmer of hope in the form of new initiatives in which we can see how people and organizations act in reality.
DEAD RACE OF ECONOMIC MODELS
By Robert Kurz
[This article published in February 2012 is translated from the German on the Internet, http://www.exit-online.org/druck.php?tabelle=autoren&posnr=501.]
Two camps have long faced one another in the economic ideology of the West: the neoliberal or market radical of the US and the Keynesian or social state/ Europe’s industrial policy called “Rhine capitalism.” Market ideologists emphasize supply policy (cost-reduction including wage cuts at any price) while state ideologists rely on demand policy (increasing consumption through public spending and higher wages). The European model was regarded as finished 30 years ago because the increased state consumption triggered inflation and growth stagnated (stagflation). The collapse of state socialism seemed to confirm this judgment. So the ultra-liberal US concept set out to conquer the world and Europeans including social democrats under Schroeder and Blair were receptive students.
As everybody knows, the “success” of the neoliberal revolution consisted in the creation of unparalleled financial bubbles that fueled global deficit economies for more than a decade. When the 2008 financial crash ended this era, the hangover was great. European governments led by the great German coalition impudently blamed the US and the neoliberal doctrine as though they had not fought through this policy themselves. Now and then it seemed there was an about-face to the European model on both sides of the Atlantic with state bailout packages and economic programs. However the limits of state financing quickly appeared in the form of debt crises. The old debate is now cooked again but with reversed roles. At least superficially the US and its economic elite rely on state stimulation and Europe under the leadership of Merkel on brutal austerity programs.
In truth there is no unequivocal economic model any more. Rather both sides try to cheat their way through. Over there and over here, on one side, one austerity budget for the state budget chases the next. On the other side, the central banks in the US and Europe pursue a policy of the glut of money. The states shou9ld save; businesses should invest. But the banks fed with cheap money hardly give credits but stash the money away with the central banks. Conversely, businesses do not demand credits for mega-investments but continue the old policy of radical cost reduction. Nothing happens any more without state consumption which nevertheless must simultaneously be driven down. Central banks buy government bonds not for real demand but to stop the collapse of these securities and to bailout the banks.
The cheating policy goes back to an intensified version of stagflation. At the moment the US seems to favor the inflationary way and Merkel-Europe the recessive way of financial emergency terror. If a President Romney should carry out the turn, he must adopt a supposedly original American concept of Europeans run down as “socialist.” This is also true conversely for the EU with a turn to the Obama policy. Both will fail. Whoever wants to save the financial system must allow the demand to starve to death. Whoever wants to save the demand must ruin the financial system. The absurd and contradictory mixture of the two economic models as a result of their dead race shows that the common capitalist foundations are crumbling.
Video: John Kenneth Galbraith, 2008, 52 min
Hild, Thorsten, "The Rule of Supply-Side Economists," January 2012
Konicz, Tomasz, "The Crisis Explained," December 2011
Lansley, Stewart, "Managed v. Market Capitalism," January 2012
Mosler, Volkhart, "Capitalism Criticism 2.0," November 2008
Reuter, Norbert, "Stagnation as a Trend," 2009
Rogall, Holgfer, “The Invisible Hand Doesn’t Help Any More,” December 2011
Schulze, Ingo, "Capitalism Doesn't Need Democracy," January 2012
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