Republicans are locked in a passionate embrace with a corpse and won't let go

[Joanne98]

Efficient market theory dominated economic thinking from the days of Ronald Reagan to the collapse of 2008. It was the rationale for deregulation, the cause of a massive transfer of wealth and income from the middle class to a tiny number of the very rich. Now it is dead and gone but Republican politicians won’t let go, and many in the media show no understanding of the issue.

The Chicago School--why does anybody still listen to it?

By Henry Banta
[e-mail]


In his meeting with the Republican caucus in Baltimore President Obama repeatedly invoked the opinions of economists, and at one point, specifically referred to “credible economists,” and later referred to a "consensus among people who know the economy best.” Shouldn’t we be asking who he is talking about?

This is obviously a very important question. But if it is an important question for the President, it is an equally important question for the media and the public. A very strong case can be made that the Great Recession resulted from a blind faith in an economic theory that was simply wrong. It is no longer possible to treat economic theory as an arcane academic matter of no interest to practical people. If it was a bad theory that got us into trouble, maybe we need another theory. Of course the Republican opposition is clinging to their old faith like grim death. At stake is the very essence of their political philosophy. But the media show no understanding of what is at issue.

It has long been fashionable for journalists to finesse the question of whose opinion they should take seriously by taking an informal poll of a selection of economists in hope of finding some kind of consensus. This method has an advantage: it requires a minimum of work, needs little thinking or judgment, and there is very little risk of confronting dissent from the conventional thinking.

This is not an easy problem for most journalists. Surely some economic opinions are better than others, but which? Over the last two years events have done a lot of sorting out for us. I suggest that a useful beginning can be made by looking at what the economic collapse has done to the profession and the credibility of its various practitioners. We can start by dividing economists into three groups.

First are those employed by Wall Street and various commercial interests. These are the ones the media usually turn to. They provide most of the “expert commentary” on cable television, and many fine, competent economists are among them. They seem to be pretty good at doing the math on specific short term issues. But I suggest that this is the wrong group for anyone looking for an impartial policy judgment. It is unfair to ask anyone for an unbiased opinion when an honest answer could be inconsistent with the interests of an employer or important client. Indeed, the opinions of this group are usually well-reasoned, articulately expressed, and totally predictable. They represent the interests of their employers.

The first group has a lot of overlap with the second, which has even less claim to credibility. These are economists whose work has been grounded on the “efficient market hypothesis,” and until the financial collapse of 2008 their views dominated in large parts of the academic world and almost all of the political. Central to their thinking is the idea that markets will always accurately, rationally and efficiently value assets. The concept of a “bubble” is unthinkable: since it can’t happen, it therefore didn’t.

Even before the collapse the theory was badly damaged. The failures of Long Term Capital Management, Enron, WorldCom, the stock market crash of 1987, and the collapse of the dot-com bubble had left it in serious trouble. But after 2008, as Alan Greenspan, one of its main proponents for many years, told a Congressional committee, the “whole intellectual edifice collapsed.” The “efficient market” still has its hard core defenders but their ranks are in disarray and suffering notable defections. This has been described in considerable length by Justin Fox in his book “The Myth of the Rational Market.” A shorter version is in Ken Davidson’s “Reality be Damned, The Legacy of Chicago School Economics” in The American Interest, November/December, 2009. More recently the story has been given a gossipy treatment in a recent article in the New Yorker by John Cassidy (January 11, 2010). Perhaps the most devastating is the remarkable mea-culpa by Judge Richard Posner in the New Republic: “How I Became a Keynesian,” (September 23, 2009).

continued>>>
http://www.niemanwatchdog.org/index.cfm?fuseaction=background.view&backgroundid=00431&stoplayout=true&print=true&stoplayout=true&print=true

[Raster]

1. I thought the headline referred to Raygun Ronnie.

[Xipe Totec]

2. Playing the role of Juana la Loca

After the death of her husband, Philip the Handsome, Juana kept the body and never burried it. She would periodically have Philip's casket opened so that she might embrace his decaying body.

[Wilms]

3. .

[bemildred]

4. There has never been a shred of credible empirical evidence for the "efficient market hypothesis".

History shows it to be flatly wrong, over and over. It is and always has been a dogma, a faith-based theory.

[yowzayowzayowza]

5. Clue Phone - 2007 Nobel Economics Prize: Mechanism Design Theory

Nobel(pdf)

http://www.guardian.co.uk/business/2007/oct/15/ukeconomy.economics2

In its statement announcing the award, the Nobel committee said: "The theory allows us to distinguish situations in which markets work well from those in which they do not. It has helped economists identify efficient trading mechanisms, regulation schemes and voting procedures."

While highly abstract and mathematical, mechanism design theory has concrete applications in the real world. It can provide important justifications for government intervention in the operation of markets such as health care, as well as helping to construct rules that attempt to avoid the disparity in information between groups of buyers and sellers.

http://en.wikipedia.org/wiki/Mechanism_design

[glitch]

6. Not limited to RepubliCons - certain DemoCons frequently cut in on that dance.

That corpse's dance card is always booked.