Waking up from the nightmare of economics

If you, like me, are consistently struck these days by a kind of unpleasant, inverted sense of numinous awe at the spectacle of economists still occupying major positions of mainstream power and respect in our culture instead of walking around in hairshirts and beating their breasts with heads bowed in unbearable shame, then Columbia University professor Todd Gitlin has an excellent piece at the Chronicle of Higher Education‘s Brainstorm blog (a consistent source of insightful posts about trends and ideas in academia and elsewhere) to help cleanse your spiritual palate. In “Have Economists Learned from the Great Recession?” (June 12, 2012), he pulls together various pieces of data indicating that economists truly haven’t learned anything from their epic failure to foresee the great financial collapse of 2008. Notice that I didn’t say the piece is comforting or mollifying, but just cleansing. As I’ve mentioned many times here, there’s much of value in seeing someone do an able job of articulating and substantiating your own running insights and intuitions.

And even more than that, there’s something positively liberating, in the sense of being conducive to spiritual-philosophical-psychological-cultural awakening, in seeing the misshapen outline of this beast laid bare.

Gitlin writes:

If an unanticipated earthquake measuring 9.0 on the Richter scale had just sunk the island of Manhattan, I’d like to think that departments of geology worldwide would be feverishly reexamining their research priorities, curricula, and syllabi. But I have the impression that no such urgency is evident in the profession of economics after most of it resoundingly failed to anticipate the global meltdown of the last decade (and continuing).

He then collates, quotes, and parses a number of essays, articles, and reports from various sources to establish and illustrate this point, including the following, which I present with my own annotations and chosen excerpts:

FIRST:Mumbo jumble: The underwhelming response of the American economics profession to the crisis” by Notre Dame historian and philosopher of economics Philip Mirowski (openDemocracy, February 28, 2012).

Mirowski’s opening paragraphs lay out his message:

Neoclassical economists, having worked hard to convince the world that everything was hunky-dory circa 2005, and concurrently having invented the rationales and the theories behind the financial time bombs that went off across the landscape, don’t seem to have suffered one whit for the subsequent sequence of events, a slow-motion train wreck that one might reasonably have expected would have rubbished the credibility of lesser mortals. Individually and collectively, they have only become more dominant in academia and in government. They are even tapped to usurp the position of democratically elected leaders in periods of crisis. The economics profession can only seem to have escaped scot-free from the crisis because certain fundamental intellectual trends and supportive institutions conspired to maintain it in the face of screaming headwinds.

And although Mirowski observes that “The armory of defense mechanisms will only become apparent with the fullness of time and the diligent efforts of future serious intellectual historians of economics,” for the time being he  suggests four major sources of economics’ apparent imperviousness to criticism: the immunity granted by the financial sector and the federal reserve, the immunity conveyed by the neoliberal restructuring of universities, the denial by neoclassical economic theory that markets can ever be corrupt, and the fact that “agnotology” is the economics profession’s best friend. Regarding the last, he writes,

If we define “agnotology” to be the analysis of the intentional production and promotion of ignorance, then it has been the Fourth Horseman of the Absolution from Apocalypse for economists. Whether it be in the context of global warming, oil depletion, “fracking” for natural gas, denial of Darwinism, disparagement of vaccination, or derangement of the conceptual content of Keynesianism, one unprecedented outcome of the Great Recession has been the redoubled efforts to pump massive amounts of noise into the mass media in order to discombobulate an already angry and restive populace…[T]he promotion of doubt over “what orthodox economists really believe” has proven a convenient smokescreen behind which the profession can evade the pitchfork-wielding populace, all the while pursuing its conventional practice of telling its patrons what they want to hear.

SECOND:The great crash of 2008 and the reform of economics” (pdf) by British journalist Geoffrey Hodgson (Cambridge Journal of Economics Vol. 33, No. 6, 2009).

As Gitlin summarizes, Hodgson tries in this piece — unsuccessfully, mind you — to find any economics courses at top universities around the world in which anybody is required to read or has even “been paying attention to John Maynard Keynes or Hyman P. Minsky (who, in Hodgson’s words, ‘argued that financial capitalism has an inherent tendency to instability and crisis, due to speculation upon growing debt….[and] gave a number of warnings about the severe consequences of global financial deregulation after 1980).’ ”

Hodgson also focuses on the “fetishization of mathematical models” (Gitlin’s term) and the “cult of metrication” (Hodgson’s term) that has come to dominate the profession, and that continues to endure despite the screaming fact that renowned mathematical models have repeatedly failed to predict major crises and disasters. He points out that economists and the culture at large have forgotten, or rather buried, the fact that there is a distinction between risk and uncertainty, the latter being an irreducible part of complex and open financial markets. Uncertainty, by definition, cannot be accounted for in the risk modeling that economists nowadays are required to conduct. “But few mainstream economists ponder on the difference any more,” he writes, “partly because it is difficult to fit non-quantitative uncertainty into a model. It is a concept banished from mainstream economic theory.”

In other words, the entire system is still dominated by the so-called “quants,” the quantitative analysts who rose to prominence beginning in the Reagan era and eventually brought the entire economy to its knees. See an article at IEEE Spectrum titled “The Rise and Fall of the Quants” for more detail, and for points that expand on all of the above:

When the U.S. financial system melted down, fingers were quickly pointed at the “quants”—the physicists, mathematicians, and engineers who had devised the computer programs, statistical tools, and financial instruments that were supposed to help investors manage risks. Critics said that it was the flawed assumptions of those financial models that brought banking to the brink of Armageddon. You might guess that Wall Street is now shunning physicists, mathematicians, and engineers, but you’d be wrong. Talented people with quantitative backgrounds are more welcome than ever…The quants’ mathematical machinations didn’t so much dilute risk as hide it. And then came the breaking point, one that quantitative models did not take into account: record numbers of subprime borrowers defaulting on their mortgages…Despite the role that physicists and engineers played in the economic crisis, the relationship doesn’t seem to have soured. Quants aren’t being recruited less or fired more.

— Prachi Patel, “The Rise and Fall of the Quants,” IEEE Spectrum, August 2009

Predator NationTHIRD: Predator Nation:  Corporate Criminals, Political Corruption, and the Hijacking of America (published May 2012).

The author of this book is Charles Ferguson, the same provocateur who wrote and directed the Oscar-winning documentary Inside Job. Gitlin reports that Ferguson uses the book to elaborate on his documentary by “cit[ing] chapter and verse on criminal activity in the financial sector — activity that, at the very least, seems worthy of federal prosecution.” He also reminds us of Ferguson’s words in his 2011 Oscar acceptance speech: “Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that’s wrong.”

FOURTH: A 2008 broadcast of the BBC program Thinking Allowed

Gitlin refers to an episode of Thinking Allows in which host Laurie Taylor “asked his listeners to name an economist who had predicted the bursting of the credit bubble.” Gitlin writes that “At the top of the list was an obscure financial economist named Richard S. Dale, who in a 1992 book ‘argued that the entry of banks into speculation on securities…precipitated the 1929 crash, and that growing involvement of banks in securities activities resulting from incremental deregulation since 1980 might precipitate another financial collapse.’ ” A little poking around by yours truly turned up a webpage containing the excerpted portion of the program in question. Visit the page and look to its right-hand column for the audio player under the title “Predicting the financial crisis” to hear Dale lay out his position.

Not incidentally, and by way of a more recent reality check from an economist who similarly stands among the minority who accurately predicted 2008’s collapse, three days ago Nouriel Roubini published a piece about our economic prospects for the rest of 2012 and 2013. Its title: “A Global Perfect Storm.”

* * *

The Making of a CountercultureSo what, in the end, does this all add up to (if you’ll pardon the quantitative metaphor)? Among other possible upshots, I think it means that our culture-wide obsession with the quantification of all experience, interlaced with the less pleasant and more destructive aspects of the non-rational drives and motivations that go a long way toward defining us as human beings, has created a kind of Frankenstein economy in which our worst impulses are loosed to wreak global havoc. To switch metaphors, our collective outsourcing of the living and managing of life to a technocratic cult of “experts,” not just in economic matters but in everything, has led to a situation of systemic instability, since the fluidity of life intrinsically escapes, overflows, and filters through the net of hyperrationality and universal quantification that we attempt to throw over it — and yet we’re collectively blind to this because of our reigning cultural reality principle, which tells us that only what is visible to the objective eye of scientific rationality and quantitative measurement is really, ultimately true. Yes, this sounds like a critique dredged up and dusted off from the countercultural philosophical salvos of the 1960s (see, for example, Theodore Roszak’s The Making of a Counterculture and Where the Wasteland Ends for the two most elegant and still hard-hitting examples), but in fact it’s still entirely contemporary here in the second decade of the 21st century. We never really integrated the challenge posed by the likes of the visionaries and culture critics who told us four decades ago that our collective reality principle was failing us and killing us. And today that same reality principle is still killing us, and on an even larger, more comprehensive scale, with the realm of finance and economics serving as one of its major theaters.

In the final paragraphs of “Have Economists Learned from the Great Recession?”, Gitlin notes a telling fact: that although Predator Nation is published by Crown Business, “which is not chopped liver,” still he “can’t find a single review of it published in a daily newspaper or magazine outside the precincts of the Left. Not one.” His assessment of this situation? “The academy is busy protecting itself. Journalism is busy avoiding ideas. Public media are besotted by Personalities. All this in a nation founded upon ideas.”

As always, and as I stressed in “Is the spiritual counterculture doomed?“, the necessary locus of waking up and remaining awake to the reality of what’s really happening lies within each of us individually. You’ll never find it in external sources, least of all in our metrication-mad culture with its quant-controlled economy.

About Matt Cardin


Posted on June 18, 2012, in Economy and tagged , , . Bookmark the permalink. Leave a Comment.

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