Wednesday, December 01, 2010

Quote(s) of the day... light of the latest search for the economic holy grail:

"What happens at bottom is that a prejudice, a notion, an "inspiration", generally a desire of the heart sifted and made abstract, is defended by them with reasons sought after the event - they are one and all advocates who do not want to be regarded as such, and for the most part no better than cunning pleaders for their prejucies which they baptize as "truths"...this spectacle makes us smile, we who are fastidious and find no little amusement iin observing the subtle tricks of old moralists and moral preachers, not to speak of that hocus-pocus of mathematical form which, as if in iron, Spinoza encased and masked his philosophy - the love of his wisdom, to render that world fairly and squarlely, so as to strike terror into the heart of any assailant who should dare to glance at that invincible maiden and Pallas Athene - how much timidity and vulnerability this masquerade of a sick recluse betrays!- Nietzsche, Beyond Good and Evil

There are many discliplines that produce linear gains in knowledge. The obvious one is Physics, where theory is tested by events that ALWAYS and EVERYWHERE confirm the theory. The humanities obey categorically different generators. Simply dressing them up in math in order to legitimize and make them subject of serious study does not dilute the central fact that the humanities deals with humans, and humans do not always and everywhere obey ANY set rules save base survival.

So the attempt to penetrate the fog of human behavior, particularly in aggregate over cultures, regions, states, and continents, is doomed to fail. Throwing another 1000 economists at the "problem" misinterprets the question. I am reminded again of the sage words of Robert L. Bacon in his book "Secrets of Professional Turf Betting", a book about the sport of Horse Racing and betting:

"There is no danger of the public ever finding any key to the secret of winning. The crazy gambling urges and speculative hysteria that overcomes most players at the track makes that fact a certainty, but, if the public play ever did get wise to the facts of life, the principle of ever-changing cycles would move the form away from the public immediately"

We will always be assailed with attempts to transmogrify humans into bits that answer "yes" or "no" (the picture to this post is "Bit" from the movie "Tron") to attacks upon their consumption baskets and intertemporal budget constraints and savings desires, but what has all this "reserach" produced?

By Mark Whitehouse

Physicist Doyne Farmer thinks we should analyze the economy the way we do epidemics and traffic.

Psychoanalyst David Tuckett believes the key to markets' gyrations can be found in the works of Sigmund Freud.

Economist Roman Frydman thinks we can never forecast the economy with any accuracy.

Disparate as their ideas may seem, all three are grappling with a riddle that they hope will catalyze a revolution in economics: How can we understand a world that has proven far more complex than the most advanced economic models assumed?

The question is far from academic. For decades, most economists, including the world's most powerful central bankers, have supposed that people are rational enough, and the working of markets smooth enough, that the whole economy can be reduced to a handful of equations. They assemble the equations into mathematical models that attempt to mimic the behavior of the economy.

From Washington to Frankfurt to Tokyo, the models inform crucial decisions about everything from the right level of interest rates to how to regulate banks.

In the wake of a financial crisis and punishing recession that the models failed to capture, a growing number of economists are beginning to question the intellectual foundations on which the models are built. Researchers, some of whom spent years on the academic margins, are offering up a barrage of ideas
that they hope could form the building blocks of a new paradigm.

"We're in the 'let a thousand flowers bloom' stage," says Robert Johnson, president of the Institute for New Economic Thinking, launched last year with $50 million from financier George Soros, a big donor to liberal causes who has long been a vocal critic of mainstream economics. The institute so far has approved funding for more than 27 projects, including efforts by Messrs. Farmer
and Tuckett aimed at developing new ways to model the economy.

Some of academia's most authoritative figures say the new ideas are out of the mainstream for a good reason: They're still very far from producing a model that demonstrably improves on the status quo.

"I guess I'll wait until I see these models and what they can and cannot do," says Robert Lucas, an economist at the University of Chicago who won the Nobel Prize for his work on "rational expectations," the concept at the very heart of modern orthodoxy.

New York University's Mark Gertler, who with now-Federal Reserve Chairman Ben Bernanke did ground-breaking work in the 1980s on how financial troubles can trip up the economy, says economists already have many of the tools they need to fix the current models.

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