Are Economists to blame for the Crisis?
Published by Michael Greinecker on Wednesday, October 08, 2008 at 04:42To a large degree: Yes. At least that´s what Stiglitz said at a presentation at my beloved university. You can watch the stream here.
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:-( I don't have an hour now. :-(
(I ended up watching anyway. Damn internets!)
So, are you in any of the shots?
Re: the content, fair enough, I suppose, but then again there being potential for welfare improvement through policy doesn't mean that we know which policies we need (leaving the issue of whether government would implement them aside).
If you take models and assumptions literally, then yes, nothing is efficient. So what?
I think it was Bhagwati who pointed out that, given a model with many markets, all distorted by adverse selection or market power or whatnot, no one has an algorithm to figure out which policies are welfare improving by using observables only.
I´mnot in there.
I think he answers your question somehow when he talks about some tidbits he thinks are uncontroversial improvements.
Economists weren't the ones behind mortgage securitization. But they were definitely oblivious to what was going on.
Here's a question. Is this crisis a failure in the explanatory power of "modern" macro, i.e. RBC and its descendants?
Blame is simple. Asset price histories that look like cocaine intoxications -- are kept well-away from the people's attention!
See first chart here
http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html
and for my credibility, see this from 3/30/1999 WSJ
http://homepage.mac.com/ttsmyf/begun.pdf
and this in 8/27/2006 NYT
http://www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html
THEN: the above fool-ability of the people is ample precedent, in our representative democracy, for all kinds of deception ...
Here is one economist who appears to have warned against part of the problem
http://www.stls.frb.org/news/speeches/2005/1_13_05.html
Michael, I listened to it again, to be sure, but I find no hint of an answer to my question...
There is no model of the entire economy, featuring various imperfections in different markets (informational or otherwise) that can inform policy.
Most models out there that feature imperfect competition or asymmetric information are partial equilibrium and even coming up with optimal policy in those is nontrivial, if you restrict the planner's information set in a way that's sensible.
Sure, Stiglitz has some suggestions that seem obvious to him. Maybe. But that doesn't address the issue of the fact that people use models that are in some ways unsatisfactory because they have no alternative.
If people had to choose between Arrow-Debreu and a tractable, more general, multi-market model incorporating large scale asymmetric information issues, they would choose the more general model. But they don't have that choice.
The other day I was talking to someone who consults on antitrust trials and I asked about issues of aggregation and the like and his view is that it's better to have an imperfect answer, maybe a wrong answer rather than no answer at all.
So, with the risk of beating dead horse, what does Stiglitz wants us to do practically?
(The same question I would ask abut Arrow's later day repudiation of "rationality", by the way.)