Crisis forces “dismal science” to get real

Nice article on state of economics.

In September 2008, the same month that Lehman Brothers collapsed, the Argentinian ants became the unwitting stars of a German television show that set out to illustrate collective efficiency. To the frustration of the show’s producers, the insects ended up showing how easily rational expectations can go awry.

The ants – Linepithema humile – had a choice between a long route and a short one to get to a pile of food. In theory, their chemical communication and millions of years of evolution should have led them to work out the short route. They chose the long one, and most kept using it even though some had found the shorter path. “The Germans were furious,” said economics professor Alan Kirman, whose neuroscientist friend and colleague Guy Theraulaz ran the experiments in the south of France.

Kirman, professor emeritus at Aix Marseille University and France’s Ecole des Hautes Etudes en Sciences Sociales, has started to use the footage in a talk he gives about modern economic thinking. The insects were far from efficient, he said, but reached their goal in the end. “I think the economy is a lot like that.”

It seems European econs are waking up to the crisis:

As the euro zone crisis deepens, economists in France, Germany and Italy have been forced to turn away from classroom theories and look at the real world – from insects to financial markets, from banks to brain scans – to better understand what’s going on. An increasing number of teachers argue that the textbooks, some by experts who didn’t see the crisis coming, are divorced from reality, inconsistent, dull, and, in a crisis that has gripped the globe for more than four years, even dangerous.

“A crisis is a wonderful opportunity in some sense,” said Kirman. “If it weren’t for the fact that millions of people are suffering as a result, what better time to be an economist, because now you can see what’s going wrong with our theory.”

Challenging classroom environment:

Francesco Saita, dean of Bocconi’s Graduate School and professor of financial markets and institutions, said teachers are bringing newspapers and academic papers into class, and Bocconi has invited leading bankers and economists to address students. “Students need fewer economic models and more methods to understand the uncertainty,” said Giovanni Valotti, professor of public management. 

Alessandro Cofano, a third-year economics student, said questions are constantly raised about why the formulae and graphics published in the manuals cannot be found in real life.

Most textbooks are flawed.

The drive for change is also evident in Germany, where Professor Peter Bofinger is passionate about the shortcomings of the main texts. Bofinger is head of monetary policy and international economics at the University of Wuerzburg and one of five “wise men” who formally advise Chancellor Angela Merkel.

He also thinks most text books are dangerous. The author of a textbook himself, he didn’t bother to read the modern texts, he said. But last year, he did a systematic analysis, and what he found shocked him. “To me the most astonishing thing was that all these textbooks do not find an analytical explanation of unemployment,” he said. “I was really amazed.” 

Up to one in four people can’t find work in parts of Europe, and the reality of people who are unemployed without choosing to be is one of the biggest holes in mainstream theory, for Bofinger and others. In orthodox teaching, supply and demand in the labor markets should fix unemployment leaving just those people who choose not to work in the dole queue.

Bofinger also finds it incredible that the standard model does not allow for people to behave in a way that reflects uncertainty about the future. According to the theory, a Spanish person losing their job today, for instance, would act as if they knew they would find another job within a year. In reality, it may take far longer: one of several truths economists say is ignored by the main theory.

“It’s so terribly flawed,” said Bofinger. “If students of medicine would learn such rubbish, you would be afraid to go to your doctor, no?”

The irony is demand for economics and its practitioners has never been greater…

 

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