I've argued previously that economics needs to learn from biology and incorporate more of a data-driven, natural history approach. While mathematical models have their uses, it often comes down to those stupid natural history facts. The first example is given to us by Christian Wyser-Pratte by way of Floyd Norris:
....you work at an investment bank for 30 years, have a reasonable draw and cash bonus, build up stock in the firm as most of your bonus, and when you decide to retire you request of the partners their permission to go limited. If they assent, you get to withdraw your money over five years, all the while continuing to expose the balance to the risks of the enterprise.
The new pay system post-Donald Lufkin Jenrette's original I.P.O.: you're a young 29-year-old punk playing with OPM (Other People's Money), taking huge risks for which you get huge bonuses, while the outsiders shoulder the losses on your bets. You make all the money you'll ever need in three years, stay around 15 years to pile up five times as much as you need, and then you retire with your cash hoard, buy a winery in Napa/Sonoma or a huge farm in Connecticut, living above the fray for the rest of your life.
Which system, do you think, makes people consider the downside of their actions?
No theory can account for this. I've also just finished reading The Devil's casino: Friendship, Betrayal, and the High-Stakes Games Played Inside Lehman Brothers.
First, anyone who still believes in the efficient market hypothesis won't after he or she reads Devil's Casino (the fucking morons hypothesis seems more likely). But what that book, like Wyser-Pratte's letter, also points out is how much of what happened really fell into the realm of sociology. If certain key people had been more involved, more aware, or a little less aggressive, Lehman might still exist today (in fact, it could have even blown past Goldman-Sachs).
These questions fall under the purview of social science (Yves Smith is right). Sadly, the social sciences are seen as lacking rigor, if not outright girlie (COOTIES! AAIIIEEE!!!). But I don't see how one can make accurate predictions without having some knowledge of what's really there.
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It's a little more subtle. The usual models assumed things like unbounded borrowing capacity and other unworldly idealizations. They worked reasonably well back in the day, but Congress, the Executive, the Judiciary and the Fed have spent the last twenty years going out of the way to help Wall Street lock in inefficiencies.
SCOTUS (5-4) for example revealed that the metalegal concept of accomplice did not apply to securities fraud. The legislative fix for this was gutted from the current financial reform, so now the stage is set for fraud to be mainlined. Criminal minds just have to arrange for somebody stupid to take the fall, and they won't even have to be clever about it.
You sound as if you are saying the question of whether a feather falls as fast as a stone is a "social science" question. It's not.
Having gotten around to reading ECONned, I was disappointed but not surprised to find Smith to be completely pig-ignorant regarding economics. For example, she relies heavily on Keen, whose criticisms of neoclassical economics are based on his crackpot incompetence in calculus. Smith also criticizes the "average consumer" model of equilibrium commonly seen in Econ 101 as if this were a killer blow, while totally unaware that the professionals have generated an ever increasing array of sophisticated ensemble models of equilibrium since the 1930s.
And she makes ridiculous arguments. She makes a big deal about the fact that numerous regulators have erroneously relied on economists who dogmatically claim that markets are always right. She then claims that less than 10% of all professional economists are that dogmatic. Her proposed cure? Appoint civilians to make economic decisions, as opposed to the more obvious method of picking more mainstream economists. She really thinks Bush 43 would have picked non-supply-side kooks?
I have to say that's a bit of a relief to me. I haven't read the book, but from her web postings, I'm still not understanding her position on why the oil futures market behaves differently from other futures markets.
When we get to the nitty gritty argument over the simple fact that physical oil can only be used, stored, or left in the ground, the arguments get thoroughly hand-wavy. If somebody can bust out a few supply/demand graphs and clearly define the pathways between the spot price and the futures price, then we might be talking. Until then, she's not making much sense.
As one of my econ professors once said, "If you're trying to explain something with a supply/demand graph and the graph turns out to be physically impossible to draw, that's a good indication that it doesn't work that way in reality."