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The economist's new clothes

Stephanie Flanders | 17:59 UK time, Monday, 2 November 2009

Economists, at least the macro variety, didn't have a good financial crisis. And they're not having much of a recovery either. Much like the UK.

You may remember that I wrote about the dismal state of the dismal science back in the summer. There's been a lot of talk about economists' role in causing the financial crisis, and it's an interesting debate. But not nearly as interesting, to me, as the question of where economics goes from here.

Somehow, somewhere, large parts of the profession seem to have lost their way - or at least lost their connection to the world as it is.

I've been talking to some heavy hitters inside and outside the profession to find out what economics needs to find its way back. You can hear the results of those conversations in a Radio 4 Analysis programme that first airs on 2 November.

I spoke to Professor Myron Scholes. He was pretty unrepentant, even though he won his Nobel Prize for helping to make modern financial derivatives possible. He also started a hedge fund, Long-Term Capital Management which created a mini credit crunch of its own, running up losses of more than $4.5bn in just four months in the summer of 1998.

But Charlie Bean has had to experience the gaps in modern economic thinking first-hand over the past few years, first as chief economist, now deputy governor of the Bank of England. He says you don't need to devise a lot of fancy new economic theories to explain what went wrong. But he does think that economists need a greater understanding of history - and their own limitations.

John Maynard KeynesFor Lord Robert Skidelsky, Keynes' biographer, it's all been further proof that economists lost their way when they departed from the master. Keynes understood uncertainty. If economists want to catch up with the way the world works, he thinks they're going to need to find a way to incorporate it too.

Large chunks of economic life could not be reduced to a set of probabilities. That, in turn, means they can only imperfectly translate into mathematical models.

" order to get determinate results, you can't have unknowns. And therefore to make the maths possible have to theorise on the basis of perfect information and prices always being correct and so on. Now just... reduce the amount of maths in the subject and you get closer to real life."

In other words, the stuff you can count isn't necessarily the stuff that counts.

But for me, the most interesting contributions came from Richard Thaler, the leading behavioural economist, and Michael Sandel, a distinguished political philosopher at Harvard who taught me many years ago.

Thaler and his fellow travellers have had a good crisis. Ever since he co-wrote Nudge, politicians and policy wonks have been rushing to incorporate Thaler's ideas into policy - for example, we've had more discussion today of forcing people to decide whether or not to be organ donors. That's the fruit of experiments showing that we make different decisions when we are forced to choose, than if we can simply follow the path of least resistance.

Thaler had a good take on the failings of mainstream economics going into the crisis, particularly financial market economics. He said it partly grew out of a failure to distinguish between easy problems and difficult problems:

"We have the idea that people optimise, and they optimise regardless of how hard the problem is. So let's contrast two problems. One is figuring out how much milk to buy when you go to the grocery store. Now you know that's an inventory problem, we could write down the mathematics of it, but most families pretty much know how to do it and they do it through trial and error. So that's an easy problem in part because there's lots of opportunities for learning. Now compare that with, say, playing chess. No-one plays chess perfectly, even Gary Kasparov - otherwise the game wouldn't be interesting, it would be solved - and most of us play horribly. Now a theory that says we buy milk and play chess equally well is just preposterous. We need to accommodate degree of difficulty.
Now the way this relates to the banking crisis is that being a banker has just gotten a lot harder. If you go back to the world of the banker in that Christmas movie... It's A Wonderful Life, you know that guy was making loans to people he knew in his town. And you know that's a pretty easy problem. Now if, if you're buying and selling mortgage-backed securities, that's pretty hard. And if you're running a bank that has a hundred divisions, each of which are engaged in highly complicated transactions, the job of being a CEO has become immensely difficult..."

On this view, it's not just that the financial deals themselves were getting more complex - it's also that the economic models were assuming they had gotten easier.

"The models kept assuming people were smarter and smarter, but the world was getting harder and harder and so the models were getting further away from reality. So if banking was like in It's A Wonderful Life, then the old models might be fine. But when you have Citibank selling liquidity puts and the vice chairman of Citibank admitting later that he had never heard the term 'liquidity put', then you know you're dealing in a completely new world."

It's a great critique - but, as Thaler would be the first to admit, it is more a critique than a competing theory.

Useful though it is, you're not going to be able to base the future of economics on behavioural economics alone. Why? Well, for one thing, it doesn't lend itself very readily to concrete advice. Politicians like their economists to tell them what to do, even if they ignore them afterwards.

Behavioural economics isn't like that: it shows you that it matters how, exactly, a policy is designed - what the default options are, or how medical evidence is presented. We'll opt for an operation if it has a 90% success rate, for example, but not if the chance of dying on the table is 1 in 10. But it doesn't tell you which to choose. Economists who like to draw a sharp line between objective economic analysis and subjective value judgments think that's a big problem.

Funnily enough, outsiders like Professor Sandel thinks that's the great strength of that kind of economics (he's not a big fan of the other types). It brings the value judgements to the surface, rather than burying them deep in the assumptions of the models.

For similar reasons, Sandel has clearly enjoyed the recent popular uproar over bank bailouts and bankers' bonuses:

"I was interested in the economists [in the Obama Administration] who were making this critique. They said it's terribly greedy. What I wish the journalists had asked them was is there a distinction between greed and self-interest, do you think?
Strictly speaking, no mainstream economist would recognise any such distinction, and yet for political purposes they attack greed as if it's a thing independent of self-interest... Citizens generally who looked at this - at the bailouts and the bonuses and been outraged - they believe there is a difference between greed and self-interest. But there's no way of capturing that intuition in economic analysis because, according to economic analysis, in any case one is deploying self-interest or greed, which is simply self-interest squared, to serve a social purpose. That's what the economic model says. And you have to introduce some normative assumption about what is excessive pursuit of gain in order to make sense of greed as a vice independent of the self-interest that all of the economic models presuppose. So I think there are intuitions in everyday life that people have that the economic models simply don't capture, and greed is one of them."

I suspect that it will take more than a financial crisis to make Wall Street economists want to think about the quest for justice as well. But the economics being taught at universities around the world this autumn has already been changed by the events of the past few years.

It will change even more in the years to come, though don't expect it to happen quickly.

Professor Thaler reminded me of an old line: that "science marches on funeral by funeral". Most economists don't like admitting they've changed their mind about anything.

Analysis is on Radio 4 at 2030 on 2 November (repeated 2130 8 November) and will be available online to listen again for a week.


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  • Comment number 1.

    Actually the "Green Shoots" brigade don't need economists. For example, it was reported last week that the American economy emerged from recession in the third quarter of the year, growing at a better-than-expected "annualised pace of 3.6%." So no doubt all the spivs in the New York Stock Exchange and the City of London will be awarding themselves fat bonuses while unemployment, repossessions and company liquidations continue to rise. But what's all this nonsense about an "annualised pace of 3.6%" ? In reality, the US economy grew by 0.9% over 3 months, staring from a low base. Yet all of a sudden, by transposing that rate for a further 9 months ahead, we're told growth is at 3.6%. What a load of nonsensical sophistry, spread by greedy people who can't wait to get their noses back in the trough - or rather, keep their noses in the trough even more than they do already - at the expense of the rest of us. Hard nosed economists, whatever they're wearing, are the last thing these City opportunists want. Caledonian Comment

  • Comment number 2.

    Stephanie wrote:

    " Somehow, somewhere, large parts of the profession seem to have lost their way - or at least lost their connection to the world as it is. "

    Can they find the job centre?

    Economists seems to know what was going on twenty years ago. They seemed to understand a bit about how the system worked.

    My opinion is that the city has been funding economists in a rather similar way as Alan Johnson looks upon scientific advisers. The city only wanted economists that told it that maximising greed was the best of all things in the best of all possible Worlds. This led to manipulating public perception so that the public would take on unsustainable levels of debt - this led directly to what I call the mortgage/house affordability trap. This was always a perversion of the 'science'.

    We must also blame the economics schools and colleges (e.g. Harvard, Balliol etc. etc.) These educational institutions all took the money to produce these fake economists who have no, or at least very little, clue. These poor mis-educate individuals are now floundering. I would put the start of the problem way back to Milton Friedman's time. It will take a couple of generation fro economics to correct itself - in the meantime my best advise is that the current crop best look for a new job.

    [This whole business looks a bit like the IPCC - twenty years ago they though they knew what they were doing and blamed CO2 - now that the politicians have at long last started taking notice they seem not to be so sure about the culpability of CO2, but as politicians (just like Alan Johnson) stick to their prejudices so the scientists are stuck with it!]

  • Comment number 3.

    Honesty, or integrity might be a place for economist to start. Crunching all the numbers from a point of view to maximize returns without any calculations related to possible soical outcomes is a cycnical game. This has never been about the numbers. Certainly the manipulation of numbers but not about numbers. You make this sound like the financial crisis was a misclculation in math. It was a conceived strategy by banks and financial institutions based on insuring loans without collateral. Like buying ancient Chinese relics on e-bay, thinking the buyer should know better so the deception is somehow justified. The system failed, you really don't need to know much more. The academics failed to point out the falacy of the system, the elected officials failed to provide proper over-sight, the bankers failed to tell the truth and the economist justified it all to sell books and obtain conference fees. Academics and economist are such poor thieves and took cumbs to justify the stealing of billions, they were simply look-outs for drug dealers. This was not some academic exercise, it was the failure of the fundementals of captialism. It was simply about ethical behavior at many levels and all failed. Math doesn't make one honest. It's not the model, it's the people. But we are in an age of no personal responsbility, except for the petty criminal. Rather than recognize the reality, the old system is being shored up until it fails again and everyone will shake their collective heads and wonder why while the next generation of bankers makes off with the money. Nothing has really changed.

  • Comment number 4.

    " In other words, the stuff you can count isn't necessarily the stuff that counts. "

    Not quite, Lady Flanders.

    As Dirk Bezemer noted in several papers, the macro economic models that did get it right are the stock-flow conditioned models. ( On the net, try ; in book form "Monetary Economics" by Godley and Lavoie is the leading text.) These models count carefully and all their figures are held in an accounting framework which has to balance. Counting works. The trouble with mainstream macro-economic models is/was two fold: they fitted an equilbrium which was not necessarily there, and they did not require that the figures balanced.

    Young economists seem to be picking up Wynne Godley's conceptual model as soon as they get to hear of it. Their seniors, mostly, are indeed more reluctant to learn from failure.

    "We'll opt for an operation if it has a 90% success rate, say, but not if the chance of dying on the table is 1 in 10."

    And while we are at it, doesn't this behavioural economics finding simply prove, as the bookies know, that most of us are much more at home with statements of odds than percentages? And don't most statements about where the economy is now and where it is going need to have odds attached to them if people are going to act rationally on the statements?

  • Comment number 5.

    Mainstream economics offered descriptive, predictive ability largely because it's models were commonly agreed on. Dissent was in the small minority. It was prescriptive. People adhered to it's descriptions. If it said the markets would rise, so they would as people jumped onto the bandwagon of investment in that direction.

    Now it fails because people do not trust it. People do not invest where it tells them to invest. People are paying down debt, the money supply is contracting, businesses and consumers do not believe that it is safe to take on more debt, so banks simply hoard what new money the governments produce. Sometimes there is loss of faith in the currency being held, and as a consequence we have a blip in the market, a blip in commodities, before currency rises and markets fall back to where they were.

    Mainstream economics failed to describe and predict because it was never any good at really describing (as opposed to prescribing). In order to generalise over individuals and produce a descriptive model of social behaviour (macroeconomics), the only real way is to have three things:
    a) good descriptions of individual behaviour
    b) agent based models that apply those descriptions effectively
    c) heavy use of supercomputers

    Economics of ye olde simply did not have these things available.

    There is one more problem. By the time model is operational, the effects of the model must be incorporated in the model. This is the only real way of avoiding the problem of reflexivity, where the predictions may become self-fulfilling again.

  • Comment number 6.

    As an addendum, one thing is for certain: the prevailing system is dying and the core of that system is the USD.

    Two large dollar cycles are the main cogs of the global economy - the OPEC oil/USD cycle and the Asian export cycles. Both result in huge current account surpluses in dollars, which are reinvested largely in the US or in USD instruments.

    No party is interested in a rapid undermining of the dollar, either by dumping t-bills or uncoupling the USD from oil. All parties are interested in a smooth, slow undermining of the dollar.

    This is where it is going - away from the petrodollar. What will take THAT's place is the real question.

    I believe we will see the emergence of either
    a) an enhanced IMF/World Bank institution that has the responsibility of maintaining a global base exchange currency with disincentives against trade imbalances
    b) two or three (eg: Asian, American, European) type IMF/WorldBanks dealing with regional reserve currencies (eg: Yuan for Asean+N economic trade zone)

    but along with that will emerge new energy infrastructure and technology, as oil dies with the petrodollar, and environmental impact will become costed more accurately as renewables become more the norm.

  • Comment number 7.

    We are talking macroeconomics and not the invisible guiding hand et al. The current crisis resulted from a failure of governments to plan the development of the economy at the very top level and to exercise any effective regulation. Left to itself capitalism will periodically lurch towards self destruction. It is the job of governments to anticipate the tipping point and go for prevention. The almost total reliance on the geeks in the MPC to manage the economy is hopefully now seen as largely illusory even naive.

    The problem of economists as indicated by an earlier contributor is that the theories quickly become out of date because of major changes to economic and political structures and to technologies including the economies of global production. For the next ten to fifteen years factor in climate change 'distorting' growth but also think of the consequences of the inevitable climate catastrophes on the insurance and related industries.

  • Comment number 8.

    #7. watriler wrote:

    "For the next ten to fifteen years factor in climate change 'distorting' growth but also think of the consequences of the inevitable climate catastrophes on the insurance and related industries."

    I've been thinking about the economic impacts of policy and realistic expectations of actions related to 'climate change'. My conclusions are that although expenditure will be (erroneously, in my view see other blogs - Earth Watch etc.) directed at carbon reduction and not taking ameliorating actions in the end the consequence on energy efficiency which are a by-product will be probably beneficial anyway. Catastrophe avoidance will still take place - that is my guess. So I don't entirely agree that climate change economic policy redirection will be bad at all.

    In essence economically the effect of climate change policy redirection may be beneficial due to efficiency gains although the effect on the climate will be zero. (CO2 does not drive the climate! The evidence is that the climate drives CO2, but not the other way round - they have messed up the causality!)

    There will be efficiency losses too such as not using inexpensive coal etc, but my guess is that reducing pollution may offset the extra costs. (I haven't the numbers yet to do the sums, but I am working on it - a thesis in development! The sums are very hard as the data sources are absolute rubbish and full of error both structural and systemic - economic asymptotics!)

    #4. Diversities wrote:

    "...behavioural economics..."

    seems to be for the innumerate according to your examples of application. It is really sad that economists can't do sums (or keep accounts) any longer! I blame their education.. They got an 'ology' I an afraid and all it is good for is shelf stacking! Behavioural economics - pseudo economics for the terminally numerically challenged!

  • Comment number 9.

    'I suspect that it will take more than a financial crisis to make Wall Street economists want to think about the quest for justice as well.' On that note l offer an interesring snippet - sorry for the inherent poor language which may offend but...... business is the business. This is pretty cool.

  • Comment number 10.

    10 - The debt/affordability trap, is what happened. It was and is a sustainable proposition. Like everything that works well, it became popular, profitable and fashionable in the sense that it attracted every facet of society. It came to be dominated as everything wealth is, the prurient minds went to work and fear - fear that fortunes would be lost got to work and a set of rules were dreamt up. Those rules remain, they are pure poison. GAAP is poison. Economics was sound, the implementation brought about a feeding frenzy and wealth protection that was worse than immature. The interest rates were the problem, the cost of finance. Had people paid down debt rather than the gravy train of revenue from interest that was allowed, things would still be rolling along. The basic economics were good. Those putting it into practice and making fortunes will blame everyone else but themselves. Interest rates were to high, finance is too expensive and some real nut jobs are on the policy and accounting aspect of things. Honestly, look some time at the wonder that is GAAP.

  • Comment number 11.

    Bernard Madoff operated a Bank but was not subject to banking regulation. Study the total losses from his venture, the total exposure and the sum recovered so far. Also where the sums recovered came from. That is the real world problem and it has absolutely nothing to do with economists. You are not to blame but truly must find a way to incorporate mechanisms of control that are fundemental to process. You did not fail, you were abused, just like the rest of us.

  • Comment number 12.

    Truly, my finale. It's a powerplay going on, dwarf's and gnomes messing about in complicated complicatedness that they believe requires their very specialised expertise, insight and weirdness. The accounting rules morph, responsibility for them is pass the parcel, they are gods who indulge our leaders, know not what they do and quite frankly are not. Frank that is. Well folks, tata, or DA Ta! :) You've been wonderful allowing my foibles, watch out for those li'l guys - they are determined in their cause and are changing the world. They are highly error prone and incredibly secretive. I realise fully my rant is ultimately at the gnomes and this is not their home. My axe is blunt, you all keep those swords shapened and your shields handy.
    Here is some of what the future holds - nb - he didn't know the CC was coming, ok. He didn't know.

  • Comment number 13.

    The only school that is prevailing throughout all of this is the Austrian school, particularly as the resource shortages are starting to become apparent. However, as a people, we have been conditioned to believe that the fundamental economic problem of scarce resources and infinite wants is solvable by 'money'. Until that changes, then economists will continue to misrepresent the dismal science.

  • Comment number 14.

    Can I mention Evan Davis on this blog, Ms Flanders. It was that series of BBC TV programmes that my poor wits could encompass. I honestly am not up to you posts - understanding wise but hey.
    Those mentioned above be they all everso distinguished and winners of Nobels - i wished I got the feeling a few more would learn from the mistake made all over the world in the financial arena. Us down here feel I think that "they" are in the most part unrepentent and the fault lies elsewhere - NOT collectively.
    Thought of the Moment:
    At bottom, every man knows perfectly well that he is a unique being, only once on this earth; and by no extraordinary chance will such a marvelously picturesque piece of diversity in unity as he is, ever be put together a second time. -Friedrich Nietzsche, philosopher (1844-1900)
    Yeah, Nietzsche - that too is misunderstood by "they" too!

  • Comment number 15.

    "At bottom, every man knows perfectly well that he is a unique being, only once on this earth; and by no extraordinary chance will such a marvelously picturesque piece of diversity in unity as he is, ever be put together a second time. "

    I no longer agree with this. Unique in what regard and for what aim? People are remarkably similar, behave similarly, and ought to be fairly predictable (at least at group levels). We are spoonfed lies such as "choice" and "freedom", but they are just illusions. Some think we have choices, yet most of us ending up following the same old patterns... Do we really have control over ourselves? Not really.

    This is why there is still scope for predictive economics.

  • Comment number 16.

    Does society mirror economics?

    In the news is the 'shocking' story that parents are willing to be selfish, tell lies and cheat for the sake of their children. Why the shock, this is the precise process that has been so praised by economists (who are financed by the city etc.)!

    This societal hypocrisy stinks - these people are only following Mrs Thatcher's dictum that there is no such thing as society (and the common good).

  • Comment number 17.

    The problem in simple terms is that being an economist is more respectable in the prevailing culture than seeking a real job in industry and commerce. Let's face it, an academic discipline which involves books and stuff is far less vulgar than adding value to the economy.

    The great difficulty with this view is that what is needed in the economy is value rather than a load of blokes and blokesses reading books and stuff.

    There is no rationale in having a point of view if you are not prepared to go out into the cruel world and test it under harsh conditions. I can assure all these academic folk that to put your views to the test, measure the outputs and know that your opinion is both successful and right is very satisifying indeed. If you have also in the process added value to others in both quantitave and qualitative ways then all the better. There is no fault in being generous.

    What has been missing the past twenty years or more has been any knowledge of history and perhaps more significantly; historiography. I suspect there has been much reading about the Great Depression and the causes of the Second World War but nothing else. There was a world before the Thirties and much like today it was a muddle with no real idea as to how things work. We had the Whig Interpretation of History and the Idea of Progress but no real understanding that these were only intellectual constructs to interpret past events: they did not predicate the future.

    We like to think these days that with our huge computer processing capability we are so much more brainy than our forebears, but it is not the size of the processing unit which matters but the criteria used in creating and defining the parameters of the programme. Without a deeper cultural understanding of our predicament the programmer and the system output will remain constrained.

    My suggestion to the economists is to study economic history (Nial Ferguson is a good starting point), examine the harsh morality of the early puritan capitalists (RH Tawney is another good starting point) and above all else; keep it simple. I appreciate that the Devil is in the detail but the Devil created complexity in order to trap the foolish.

  • Comment number 18.

    "Professor Thaler reminded me of an old line: that "science marches on funeral by funeral". Most economists don't like admitting they've changed their mind about anything."

    And doctors can bury there mistakes.

    What can bankers do?

  • Comment number 19.


    I would be ffascinated to know how modern Economists readilly dismiss or ignore Marx's critique.
    It seems there is a big leap from the theories of Dialectical Materialism and the modern day Economics - without there being a track to follow.

    The ideas of the marginalists are as strange as the 'invisible hand' to which Adam Smith referred to.

    It seems clear to me that the only source of profit is from the worker, and as a result the Capitalist system is prone to chasing a diminishing profit - hence boom and bust.

    The idea that central banks or floating exchange rates are controlling this surely must be consigned to the dustbin. The tampering with interest rates merely blunts the force of Capitalism, it doesn't stop it - and in today's case it seems to have 'saved up' to make it worse.

    Just because everyone is afraid to face the fundamental change that would be required to rid ourselves of capitalism, it doesn't mean ignoring it is correct.

    If the argument was 'ah well, the pain is worth the gain' then I could understand, but it's not - the claim is (every time) - oh we've fixed it this time - honest.

    .....and yet once again the 'bad builder' attitude of the Government is shown to be wanting. The Tories thought they solved the problem in the 80's with less regulation of the markets and Gormless Brown though he solved the problem with his 'Golden rule' - but the contradictions of Capitalism never left us.

    Talk about groundhog day - Capitalism overshoots, Governments meddles to make amends, worker is expected to pay - and therefore strikes.

    It could be 1974 all over again.

  • Comment number 20.

    I think that there is an undiscovered economic cycle here. I recently got hold of a book published in 1981 - The Crises in Economic Theory - (it was in fact a special edition of The Public Interest - edited by Daniel Bell and Irving Kristol ( in their pre neo con days) Part of the blurb on the cover is worth quoting " ....Today, the failure of economics to provide either reliable guides to policy or a credible picture of reality is painfully clear. The result has been ......-crises in economic theory as economists have been forced to reexamine their basic assumptions......." Contributors by the way included Ken Arrow and Frank Hahn as well as business academics like Peter Drucker.

    Plus ca change

    A good analogy drawn at the time and still relevant is that economists are like fire fighters who, when a fire breaks out are too busy fighting fires in the fire-station (alliterates nicely) to attend to the blaze.

  • Comment number 21.

    Reset the hefalump traps -the search continues for the meta-logic of deterministic behaviour.

    Globalization as Evolutionary Process ( Modelski, Devezas,2008 )
    ISBN 978-0-415-77361-4

    Read alongside Stiegler for the full strength, class A, Pynchonesque mind trip .

  • Comment number 22.

    12. herosrest

    i chuckled at the title of the story about Paulson and Darling.

    dont know where the author has been but his assertion that Paulson was "grinned at" could not be further from the truth it is spin.
    Lehmans was in trouble and it was shorted and bet against into extinction speeding up the inevitable crash it would have had, Paulson being the ex Goldman Sachs man he was , wasnt exactly sorry to see them go. besides all his money was in Goldmans who was he going to save ? no he let AIG get bailed out so the money could go to Goldmans to save them from their hideous hedge bets

    Darling and Barclays did the right thing in walking away , by the morning they would have had more toxic waste in their hands than they already did, and because the Fed provided guarantees for Bear Stearns to be bought by JP Morgan and refusing to do so for Barclays to buy Lehmans.

  • Comment number 23.

    ....and while I'm on the subject of 'bad Economics'.....

    How come that the US (and others) inject huge sums of money into their Economy - and when their GDP (measure of the countries wealth) rises they claim that they are 'out of recession'.
    They get the media (like you Steph.) to talk endlessley about a 'double dip recession' when in fact the reality is very simple. They never actually came out of recession

    The US injected 5.6% of it's GDP into the Economy, it then lauds about it's 3.3% growth in GDP for a single quarter - well duh?
    So when the money runs out they can claim it's a 'double dip' because you media monkeys have already coined the phrase in preparation for the eventual failure of policy - so the public can believe it's not their fault - just like the 'financial headwinds' we encountered last year - which nice weather association implies
    a) We could not predict it
    b) It was a natural phenomenon.

    Joker Economics like this might fool GCSE maths 'George Osbourne' or the ubiquitous "Darling Alistair" (I used to be transport secretary you know) - but it really shouldn't be fooling the highly educated Economic journalists of the BBC.
    It's just like the Professor Nutt - if you don't follow the party line then you will be discredited and promptly fired. If we're going to be totalitarian then lets at least be honest about it!

    Why is the media protecting the Governments of the world in this way? I thought you're always banging on about free speech and the need for an intrusive questioning press - and yet you tow the line like any civil servant would.
    You freedom of speech is pointless if you're going to act in this subservient manner.

    "You cannot lie your way out of recession" - I'm going to get that put on my headstone as a reminder to all the fools who thought you could and make sure I'm buried in the street outside the BBC White City as a reminder to future journalists.

  • Comment number 24.

    "And while we are at it, doesn't this behavioural economics finding simply prove, as the bookies know, that most of us are much more at home with statements of odds than percentages? And don't most statements about where the economy is now and where it is going need to have odds attached to them if people are going to act rationally on the statements?"

    Not quite, Diversities. Research actually shows that it is how the 'risky gamble' is framed that makes the difference. One classic example is having to decide between 'lives lost' with a certain percentage and 'lives saved' with a different percentage. The point of the exercise is that the expected value of both scenarios is the same, but people systematically choose one over the other (normally 'lives saved') even though the outcome is likely to be the same in both scenarios, on average.

    The issue of odds v percentages is a complex one, and certainly not as simple as you have made out. You would need to read the current research on response modes and scale compatibility...

  • Comment number 25.

    the sooner it is made clear that all that happened was the financial institutions were allowed to run riot by the rules that were supposed to keep firms in check being changed , the very same people who dived in and filled their boots where supposed to be keeping an eye on things the better.

    All that has happened is that the poor and the middle classes and some well off people have been shafted and some very very well off people and now very very very well off, and the poor and the middle classes get to pick up the tab

    I have an idea, let them have a run on the banks, let it crash, because the little people have less to lose

  • Comment number 26.

    There are a whole bunch of sciences, from quantum mechanics to structural reliability analysis, that successfully deal with probability and uncertainty. In many ways they are far more difficult than economics. However, they have one huge advantage over economics: they can go a long way without accounting for the influence of human intervention. And human sadly includes all of the idiots, liars, conmen, politicians, bankers, estate agents and self-centred individuals, who generated the economic crisis.

    To quote Bill Jamieson from the Scotsman, 'Economics is not an exact science... it's not even science.' If it were science, it would be one where Maxwell's demon is operating his flap and Schrödinger's cat is suffering in its box.

  • Comment number 27.

    #24. BehaviouralEconomist2009 wrote:

    "The issue of odds v percentages is a complex one, and certainly not as simple as you have made out"

    It is all about innumeracy that highly valued position where all commentators and celebrities are proud they can't do sums!

    I recall (an ex-spouse) graduate social scientist who managed to get a reasonable degree but could not do percentages at all! I also recall trainee maths teachers who were unable to understand proportions (i.e here is a cake recipe for a tin this size what ingredients would you use if you wanted to make a cake in a different sized tin!)

    Don't be shy - these people can't do sums! (and that includes very many 'ology' graduate qualified economists - and quite a lot of those who peer-review papers for publication too, this extends to proper science too - as well as the vast majority of the media!) Our Nation's maths education is now absolutely abysmal and getting worse!

  • Comment number 28.

    One of the frustrating things about economists and statiticians is their tendency to use subjective mathmatical formulas to arrive at certain conclusions and as a result the information they provide is like an abstract painting for people to view and interperate in whatever way they wish. Quite often that information is used by devious people to suit their own hidden agenda and might go some way toward explaining how the bankers are able to use such information to award themselves with huge bonuses and why the financial markets are in such a mess.

    Economists must now learn to adopt a more pragmatic approach towards problem solving in much the same way that people who run successful small businesses do. Likewise the (clever) people who head up large organisations must learn that there is no magic formula that will provide them with the same knowledge and experience that small businessmen have when it comes to understanding how bussinesses really operate.

  • Comment number 29.

    Great article Stephanie.

    two things -

    1) What ever happened to monetarism - quantitive easing equals inflation down the line for those guys.

    2) Does anybody question whether the whole basis of growth continuing is wrong? How about a plan for zero or negative growth which seems to be the only sustainable answer if we can't find a spare planet?

  • Comment number 30.


    Yeah, I have read a good deal of that, and still agree with the bookies. Positive versus negative presentations is another issue; one that has long been familiar from survey and focus group reserch for advertisers.

  • Comment number 31.

    It seems from the sensible and insightful comments made here that the wrong people are advising the Government!

    Stephanie - why are these fundamental questions not being asked of Government by the media?

    We all know they're lying - or sorely mistaken - so why play along?

    I can't wait until the Tories get in - they will make Brown's Economic nightmare seem like a walk in the park.

    I suggest we re-organise our Economy through lottery - that way we can at least apply some 'real maths' to the situation.

    This current bastardised meritocracy is smply not working as all the lightweights are floating to the top!

  • Comment number 32.

    A doting feline tonal of our time enjoys the feeling between her toes.

  • Comment number 33.

    We'll opt for an operation if it has a 90% success rate, for example, but not if the chance of dying on the table is 1 in 10. But it doesn't tell you which to choose.

    Really? So we are all thick then, basically.

  • Comment number 34.

    Sorry Steph but your getting blinded by the terminology.

    It's all very simple there is

    Fractional Reserve Banking


    The casino.

    What you describe as 'liquidity put' or derivative or some other stupid name is equivalent to Horse or Dogs or IN-Play betting. It is just a poker game for those who can bluff the best or take an ill informed punt.

    That why we need to separate the two. Let these institutions gamble as much as they want but not with money from people who have not invested in their game.

    Here is a good economic theory.

    Don't spend more than you earn.
    Don't borrow more than you can service for your earnings.

    It can be summed up by 'Live within your means'.

    Everything else is just window dressing to pull in the suckers.

    I would like to put to you the most important question on my mind.

    As a tax payer how much do I owe and how long will it take me to pay off?

    Is there one of your economists that can tell me?
    I bet you that you cannot find one that can give me a correct answer.

    And if they can't even answer that simple question how can I trust them with anything else?

  • Comment number 35.

    Well said Diversities. Excellent book by Wynne Godley and Marc Lavoie. I hope people pick it up a lot.

  • Comment number 36.

    Isn't a large part of the problem that the "economics" of the past few decades has been designed around how to make money for financial institutions rather than how to run a national economy? i.e lots of theories to predict short term changes in prices, but not a lot of thought as to how the processes for running an economy need to evolve.

    Running an economy doesn't have to be about predicting short-term prices. We don't need these complex mathematical formulae to know that something in the economy is out of balance and will eventually have to be corrected.

    - We know when the balance of payments is in persistant deficit.
    - We know when house prices have become unaffordable.
    - We know when personal and business debt has got out of hand.
    - We know when the gap between rich and poor has got too high.
    - etc

    Without the complex mathematical models (which it turns out don't work all that well anyway) we may not know when these imbalances will be corrected. But we know that they will have to be corrected eventually and that the longer it takes the more painful it will be.

    So the economics we need is one that tells us what processes to set up to allow these imbalances to be corrected as swiftly as possible. A system design for running the economy rather than simply a means of predicting how things will happen.

  • Comment number 37.

    34. At 12:30pm on 03 Nov 2009, PortcullisGate wrote:

    "It can be summed up by 'Live within your means'."

    Agreed - so why is it, from the age of 2 are we bombarded with 'buy this' and 'you NEED this' and 'buying this will make you happy / successful / bright / better' - to the point where a generation has grown up thinking it NEEDS and Ipod - but doesn't NEED and education?

    It seems that the desire to 'make profit' comes above all else - especially before the remit of 'living within your means'.

    As someone pointed out above - why are we obsessed with 'growth'? I mean we've just proven that 'Big isn't better' - and yet we're trying to do it on an Economic scale - not just at a corporate level.

    Interesting dilema - don't you think?

  • Comment number 38.

    As an aside from the discussion on economics...

    John_from_Hendon you don't appear to have any understanding of climate science, CO2 is a greenhouse gas, it acts as an insulator, the science of this is well understood. The better 'insulated' the earths atmosphere is the more of the suns energy is retained in the climate system in the same way adding extra glass to your greenhouse would make your greenhouse retain more heat.
    Without CO2 in the atmosphere, we would be freezing.
    The degree of warming that the extra CO2 we are putting into the atmosphere has is the important question.

    Obviously the climate system is very complex and no climate scientist would claim that CO2 is the only variable and of course all the different systems are interlinked (thats feedback not causality) but it always acts as an insulator so more CO2 more retained energy/heat. Simple physics.

  • Comment number 39.

    The new clothes didn't exist did they? The emperor was naked.

  • Comment number 40.

    'The only function of economic forecasting is to make astrology look respectable'

    JK Galbraith

  • Comment number 41.

    a better solution maybe for economist would be to go do something that adds value, like maufacturing etc.
    The credit crunch was caused by human traits such as assuming you are lucky, greed, ego and envy.
    The whole banking industry was based on the casino philosophy that you will be one of the winners, the losers are soon forgotten. The twist with banking is that the gamble was on such complex commodities that the winners and a lot of other people convinced themselves that the large winings was down to some skill the winners held rather than chance, so they gambled with higher and higher stakes and followed these people into hedge funds etc.
    Most people employed in the banking world were pawns, looking at average people earning zillions, thinking well if they can do it so can i one day.

    There you go problem explained, no economics needed

  • Comment number 42.

    :) Astrology is Castor's dichotomy - Pollux.
    Finance operates as a black hole - this is a simple and correct concept.
    These black holes exists to grow, they grow wealth from an expanding mass of profit, Hail Mary!. It is incredibly inefficient and functions on a probability and applied (arbitrary) percentages. The banking probability = insurance / security.
    Remove, stunt or reverse growth(mass) and the process flips, it contracts. Achieve that by significant proportion and you have our current prospect. 30% or so should be irrecoverable, a fatal error. Both sides of the equation amplify their effects upon mass (it is critical) - its a myriad of pin-ball interactions inflicted on credit. Credit has a dependency which has been drastically re-proportioned at this time - collateral. Credit is a function of time, it has velocity.
    A simple control exists - it is mass. Every so often a dabbling genius simply goes for the negative effect. If that is understood it is prevented. I await the alarm call this time around.
    Borrowing from a respected and lofty Phsycononomist of our time 'Klaus Wef' - 'How can we integrate all this'. My feeling about the proposition lies in the field of lowest common denominator, right alongside the turnips - the answer will be some form of negative critical mass held at the Temple of Lucre where the High Priests practice a dichotomy of thee and me. Jesus died for his sins against the money lenders, that lesson underlies our religion. Don't do that do this. Black holes exist, they make finance work, a few do very well out of it but it should be the other way around.

  • Comment number 43.

    One of the issues surely is that we live in an increasingly mechanised, digital, and even virtualised world. The decline of manufacturing, and the proliferation of globalised service industries, has led to a situation where the attempt to connect subjects with objects, places to people, jobs to places, money to its rightful owners, seems to be well-nigh impossible. Does six degrees of separation still apply? I sometimes wonder...To our so-called "economy", I wonder if that phrase could ever be applied?
    And given that degree of complexity and distancing, it is little wonder that people might prefer resorting to mythology and make-believe when trying to explain economic circumstances. The real hard, material facts are probably there, somewhere, but as Stephanie implies, where?

  • Comment number 44.

    So what is the new theory?

    How do you or anyone else explain economic crises?

    The Keynesians still resort to 'animal spirits' - human behaviour in a capitalist system means markets fail and state intervention is required to save the system.

    The Austrian School seems to blame central banks' monetary policy and since the US dollar decoupled from gold, the resulting fiat monetary regime.

    What are the other explanations?

    Why is it that capitalism is the only historical economic system that reduces production without there being a supply side crisis?
    Feudalism produced less when harvests failed or wars took away labour.
    Capitalism produces less (goes into recession) when the rate of profit falls; it only produces for profit.

    What is profit?
    How is it produced?

    Capitalists own capital, i.e. money with which they can purchase labour power, machines and materials.
    The money capital becomes productive capital.
    The goods that are produced become commodity capital.
    When purchased the capitalist once again has money capital.
    If the money capital at the end of this process is greater than what he started with, then he has a profit.

    So we can see there is a circuit of capital.

    But how exactly is the original capital increased to a larger capital?

    This takes place in production.
    The value created by labour is greater than the cost of the labour power.

    And because all machines and other fixed capital are the product labour, it follows that all profits originate from labour.

    And what factors therefore influence the rate of profit?

    Essentially, the rate of circulation of capital, the rate of exploitation (difference between what goes to labourand what goes to the owners of capital), and the organic composition of capital (basically, capital accumulation itself can depress the rate of profit and cause crises).

    An economic theory that has been around 150 years!

  • Comment number 45.

    There is no crisis - there was a frustration amongst a sect of covetous purists. You can swap 'ile' into the synonym. Collateral (value) was destroyed. People at the time it began raised alarm - they were squashed under foot and lies became the truth. That's it...... it is not difficult to research or fathom. Cold blooded cynicism from the island Moronia - which will be amongst the last to sink, floating in its sea of liquidity. A totally negative effect is underway. It was induced, it is the anti-economy.

  • Comment number 46.

    Influential activists forgot that the credit and not liquidity, produces the wealth. The wealth is produced by paying down debt. Remove that from the fact of life and, i'm afraid, everything falls apart. Destroy value(collateral) and you have applied the tin lid, locking credit into its contract duration and that asset hole is a conveyer belt to ................... let's run that as a quiz. The birthing conundrum. How fast do you have to expand to not to contract?
    Is it all just a matter of time?

  • Comment number 47.

    The 'interested' have some new toys -
    Website of the Inter-Agency Group on Economic and Financial Statistics
    The website presents data for the Group of 20 (G-20) to facilitate the monitoring of economic and financial developments for these systemically important economies. Launched in response to the on-going financial and economic crisis, it is hosted by the IMF, and is a joint undertaking of the Inter-Agency Group on Economic and Financial Statistics (Inter-Agency Group): Bank for International Settlements (BIS), European Central Bank (ECB), Eurostat, the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD), the United Nations (UN), and the World Bank (WB).
    The Inter-Agency Group intends to further develop the site, enhancing the range of relevant indicators available and broadening the country coverage. In this vein, feedback and comments are welcome.

  • Comment number 48.

    Now that the e[MPerrror] connermists [FOGGYTYPES] are down to their PriMall birthday suits, their associated for Keynes silly QE'rs will be working behind the scenes on Brow Near0'sinurgies ,using their dydle doe poker game till the AAAyes are no more[ having played their laaast hand] and the securitAAAyesed pot at the end of the rAAAinbow is gone back to Vaaalhaaallaaa.

  • Comment number 49.

    Let's face it, none of these fancy theories offer any advance in understanding over the time-honoured rule of thumb "if it sounds too good to be true then it IS too good to be true."

    Maths-based economists can write down some fine-looking equations on paper but when you unpick them, you tend to find that they are based on a whole web of underlying assumptions, some or many of which turn out to be rather shaky in various real-life situations.

    If you want to make money out of money then I guess you are better off following the Warren Buffett school of investment, which to my limited understanding of such things seems to consist of asking three central questions:

    1) Does the company I want to invest in have good products?

    2) Is there a healthy market for these products?

    3) Is the company run by sensible, capable people?

    As far as I can see, no amount of mathematical jiggery-pokery will help you to answer any of the above, you'd be better off with a shrewd understanding of character and plenty of time reading quality newspapers/blogs etc and talking to people in the business community, much like Mr Buffett seems to do.

  • Comment number 50.

    Two economists go hill walking in the Lakes. A fog comes down but they keep walking and when the fog lifts they look at the map to get their bearings. After a few minutes trying to make sense of the map, one economist turns to the other and, pointing into the distance, says:

    "Aah! According to the map we are on top of that hill over there!"

    Boom, boom :)

  • Comment number 51.

    38. At 12:48pm on 03 Nov 2009, andrew9999 wrote:

    "John_from_Hendon you don't appear to have any understanding of climate science, CO2 is a greenhouse gas"

    Oh yes I do... It is you that will not read the scientific papers, attend the conferences etc. and look critically at the data.

    1. Tell me how the 29 Giga Tonnes of CO2 that has been produced since industrialisation can effect the 7000 Giga Tonnes of CO2 on the planet.

    2. The measured mean time of re-adsorption of a CO2 molecule is about 5 years NOT 250 years.

    3. Why does all of the IPCC data show CO2 rising AFTER Temperature rise. (and not always then!) How come the effect happens BEFORE the cause?

    4. Why was CO2 up to ten times higher than it is now in the historical record and life still existed throughout the period - your theory would have the place fried and extinguished all life.

    I could go on but instead I would urge you to actually read the papers.

    Oh and by the way without CO2 life would not exist.

    Please do some reading before you spout the received wisdom. CO2 is not the problem - Warming is the problem (and while we are at it explain why none of the Global Warming/Climate Change models that are predicting the warming actually predicted the cooling we have had since 1990?

    I short CO2 is not the problem - warming may be - BUT we have now really conclusive solid evidence about what causes planetary warming or cooling, but it is not CO2. It might be something we are doing that is contributing - for example creating far more mist in the upper atmosphere due to aircraft con trails and water vapour (also see the Solar wind /lunar and solar position and obliquity changes arguments in the literature - they at least predicted the recent cooling.)

    Spouting one liners about global warming is of dubious merit!

  • Comment number 52.

    The key problem behind all macro-economic theories, and one which doesn't appear to have been widely understood, is that the economic system operates according to the beliefs of the economic units in it (people), and that as a consequence of this the operation of the economy depends on how people THINK it operates. This is true both of 'ordinary' people and those who make more far-reaching decisions. Their views affect their actions.
    It is therefore impossible to get a reliable model of the economy unless this takes into account the model's own existance and also the other (possible oudated or fallacious) economic models which key players have.
    This should have become very clear lately, when the beliefs of the bankers (eg about whom ultimately carried risk) had a major effect on both thier own actions and the behaviour of the whole world's financial system.

  • Comment number 53.

    Today, where I am, it stopped raining at the precise time the BBC's weather forecast said it would. This miracle of science was in part achieved by using a supercomputer to run billions of computer simulations to arrive at the most likely outcome based on readings and dynamics of the weather system around Britain. That's very impressive.

    Ironically many of those now involved in pricing contracts such as derivatives come from backgrounds in theoretical physics which uses techniques not entirely dissimilar to those used by the Met Office. the Met Office forecast the weather very accurately for just about every square inch of the country. How come other professions can't forecast their particular futures so well?

    The difference is that the Met Office looks at the weather system holisitically; economists, banks and hedge funds and others see things in much more isolation.

    Surely its time the economy was modelled in just the same way our weather system is; modelling every aspect of the system holistically on a single super computer, using constantly updated readings from the economy with that model open to peer review; just the same way the weather is forecast - or any other chaotic system is forecast such as the formation of galaxies and even the universe.

    This system of economic foreasting would provide the opportunity to test new financial innovations for their effect on the economy.

    Before chemical, pharmaceutical and cosmetics companies are allowed to launch new products on to the market they are required test their drugs for safety - to ensure they don't harm or even kill those using them.

    If I had my way financial institutions would be required to use a supercomputer model to generate simulations to test their new product for safety, to ensure that in reality should they introduce the product we won't get a repeat of crises like 1929 or 2008.

    The top people working in finance and banking spend much of their time on planes or being driven around in limosines and of course demand that the planes and cars they use to have been tested thoroughly and awarded safety certificates.

    Surely its time their own products were required to undergo similar safety testing to ensure their products never endanger the economy (again).

    Ironcially Mark Twain once said "A banker is a person who will lend you an umbrella on a sunny day, and take it back when it rains."

    I think he was on to something.

  • Comment number 54.

    44. At 2:15pm on 03 Nov 2009, duvinrouge wrote:

    Hear hear!

    "An economic theory that has been around 150 years!"

    Ssshhh - don't mention it's name - for it will be associated with the 'C' word switftly followed by the 'S' word.

    Unfortunately Economics suffers the same plight as all things in today's frivolous society - it's not new and flashy and pantsy - so people are not interested. Economists want to talk about surreal things like 'money supply' and 'marginal utility' - neither of which are relevant to the crisis we're in now.

    There is no alternative explanation - merely theories which have all proven to be wrong.
    The characters have changed, but the play remains the same. Just because the theory relates to 'industrial production' does not mean it's not relevant today (the means of production have shifted - less obvious to see, clouded by shareholders and joint stock companies)

    My favourite is the old tired Capitalist reasoning that without Capitalism we would still be in the dark ages with regards to technology (conveniently forgetting all inventions from the wheel - up to the end of Feudalism)

    Once again these theorists have all gone quiet - I went to an LSE lecture on the crisis and I was (less than) surprised to hear that not one of the Economists present (which included an ex-MPC member) had any answers for how, why and what to do next.

    If these are the brains of our country - then we are truly doomed.

    "Never have so many been fooled by so few"

  • Comment number 55.

    Just as an addendum to my earlier post (53) it strikes me that we can spend billions of pounds on the Large Hadron Collider creating mini-black holes to find the Higgs Boson (and other such ultra-expensive experiments that absorb the world's greatest minds) but it seems somehow that nobody ever thought to invest in forecasting the economy the way I've proposed.

    You have to wonder if this is just ineptitude on the part of economists or wilfil neglect on the part of certain shadowy vested interests.

  • Comment number 56.

    I'd like to see more coverage of the predictions, explanations and models made by Steve Keen.

  • Comment number 57.

    Just as another addendum to my earlier post (53)it strikes me that the baks, hedge funds etc have actually been using you, me and everyone else in the economy as crash test dummies - that has got to stop.

  • Comment number 58.

    No 8 "They got an 'ology' I an afraid and all it is good for is shelf stacking! Behavioural economics - pseudo economics for the terminally numerically challenged!"

    Now, now !! Be kind !! They can still count on their fingers and toes !! :-)

  • Comment number 59.

    "After the financial crisis, where now for economics? "

    The fact that you think the financial crisis is over says it all.

  • Comment number 60.

    No 18 "What can bankers do?"

    Repackage them and flog them to the unwary by marking them as AAA++ assets !! QED (Quod Erat Demonstrantum or Quite Easily Done, as we used to say in school) :-)

  • Comment number 61.

    No 23 "I'm going to get that put on my headstone as a reminder to all the fools who thought you could and make sure I'm buried in the street outside the BBC White City as a reminder to future journalists."

    I'm not sure that's a very good idea !! Considering the number of pubs within staggering range of that vicinity, it's very possible that it will be used "for other purposes" at closing times !! Then again, it could keep your daisies watered !! :-)

  • Comment number 62.

    No 27 "Our Nation's maths education is now absolutely abysmal and getting worse!"

    Maths ?? What's that ?? :-)

  • Comment number 63.


    Good point.

  • Comment number 64.

    No 31 "It seems from the sensible and insightful comments made here that the wrong people are advising the Government!"

    Are you sure about this ?? I thought the "right" people are advising the government !! After all, the "wrong" people, like Prof Nutt, have already been fired !!

    It's a time honoured tradition to kill the bearer of bad news !!

  • Comment number 65.

    An ODe to economists - - Modern economics is a spectacular success, so robust and productive that those responsible for protecting society and the economy were able to relax and stepped off the front foot. Economists today have a rival wearing jackboots, pinstripe suit and weilding the axe. Accountancy has established its micro practice as a dominant economic policy. That is what GAAP is, economic policy, control of wealth. It is utterly biased, it is destructive, it is junk.
    FASB have developed (codified) a set of accounting rules which are accepted and practiced worldwide. The finale to this process was FAS166, 167 & 168 which went live this September. When you have time look them over, they are the new economics. There is a good history to them, worthy of serious research and a block buster film. Michael Stone, where are you now?
    They are as biased and poisonous as the Nazi party was. The work is now completed, various tweaking and amendments are being produced at the moment. FAS157, introduced from the beginning of 2006 brought about the credit crunch, it destroyed value, reduced collateral and that is why the Credit Crunch was called the Credit Crunch by those few who really understood it and what it meant. It is not over yet and the problems to come are larger than those now or past. FAS157 no longer exists, really, it no longer exists and is renamed TOPIC 820 an ongoing workshop of revisions.
    Beyond all this, realise that accountants work numbers, their best are the measure of the finest mathematical and economic geniuses. They are true rivals and they stole the economists playing field, after they devalued your science. Huge damage was done, related problems continue and are just surfacing and a further very nasty egg is hatching just over the next hill.
    FASB developed the global GAAP and will at some stage, already under planning and implementation hand them to IASB, the international comptroller of your bottom line. There are disagreements as to certain detail and practice. FAS157/Topic 820 is going to be amended YET again............. how much more of this has got to go on before people see things for the truth. Accountants are small minded, they fiddle with numbers, they are biased, corrupt by profession and would not address either of the problems which haunt them and our world. Accountants sign off the fraudulent business practice that haunts our wrecked economies. To solve that problem they were handed control of the world economy.
    They are independent, unanswerable and know not what they do, micro playing the macro. Li'l guy trying to grow up. Had they been honest, 'Insurance rebuild' valuations would now be the method of valuing property assets and the derivative markets would have been made transparent and valued properly. The world was DEVALUED by accountants, it is an trick every national chancellor understands. At some time to come, l guarantee that the IASB, once it is sat on its throne will revalue everything again, probably just after the wave of asset stripping that is about to occur, completes. Devalue again, or....... add value. Nice work if you can get it. They play the game.

  • Comment number 66.

    Cheap Finance caused a boom, expensive interest rates then prevented the miracle that would have been increasing general wealth as people paid down on principal. The grifters drifted in, high, low and anywhere they could squeeze the last penny as interest payments for a revenue stream to finance the joke that is secondary banking. It's nought to do with the economic theory. It's practice was flawed, not the theory or people who believe in it. Corruption and largesse, that is what happened, it would have occured to any system in place that produced even a modicum of wealth. We have had an avalanche of the stuff.

  • Comment number 67.

    Hi Stephanie,

    Good post. The Bank of England in October 2008 listed the key issues / lessons to be learnt to increase resilience to systemic shocks :-

    • Macroprudential tools are needed to guard against systemic risk and to ensure banks
    are in a stronger position ahead of the next downturn.
    • Capital levels have been too low and need to rise; and capital needs to be of sufficient
    quality to deliver higher levels of resilience.
    • Liquidity standards have been inadequate and should be strengthened to ensure that
    firms are sufficiently resilient to a range of shocks.
    • The current UK legal framework for depositor protection and dealing with institutions
    in difficulties needs to be strengthened.
    • International arrangements for managing crises at cross-border financial institutions
    should be developed further.
    • Transparency should be improved through more informative disclosure, including the
    provision of more information on potential future balance sheet volatility, to
    strengthen market discipline.
    • The scope for — and potential benefits of — developing centralised infrastructures for
    a broad array of over-the-counter instruments should be assessed.

    How do you stop financial firms competing with each other to expand their balance sheets in lax policy environments and then collectively running over the edge of the cliff. First, dont have a lax policy environment. Second, have proper regulation of markets and firms. Is it such a difficult matter for economists to grasp? These are age-old principles which were understood, then set aside. Bad policy. Bad regulation. What really can economists say about the herd or the missing cowboys?

  • Comment number 68.

    No 40 "'The only function of economic forecasting is to make astrology look respectable'"

    Of course, I'm respectable !!

    - Mystic Ishkandar,
    Fortunes told for a "modest" fee !!

  • Comment number 69.

    No 43 "The decline of manufacturing, and the proliferation of globalised service industries, has led to a situation where the attempt to connect subjects with objects, places to people, jobs to places, money to its rightful owners, seems to be well-nigh impossible."

    Decline in manufacturing ?? Hello ?? Have you had a look at China lately ??

    "The real hard, material facts are probably there, somewhere, but as Stephanie implies, where?"

    Well, they bought passage from the Owl and the Pussycat in their pea-green boat and sailed off East !!

  • Comment number 70.

    No 51 "...for example creating far more mist in the upper atmosphere due to aircraft con trails and water vapour (also see the Solar wind /lunar and solar position and obliquity changes arguments in the literature - they at least predicted the recent cooling.)"

    And, lest we forget, cattle flatulence !! :-)

  • Comment number 71.

    I graduated in economics in the 60s. I was told at the time that economics is the science of analysing man's interaction with money. That statement may need updating for political correctness, but the gist is there. I have watched in horror over time as economics has become more and more complex as larger and larger tin openers are assumed.

    I became ashamed of my degree in the early 80s when over 300 economists wrote that infamous letter and were hopelessly wrong. My degree title is bachelor of science. This is pretentious as a description of economics. It is a black art.

    Stephanie, you know far more about the black art of economics than I do. I cheered to myself as you demolished your profession. At last some sense. Nobody at the sharp end making decisions that add together to be what Samuelson called "dollar votes" has a clue about economics. They do what they think best. Assuming tin openers to summarise what they do and formulating complicated equations may land Nobel prizes, but these are irrelevant to peasants like me trying to make up their minds how to spend their money.

    Good on you Stephannie for your sheer honesty. Rejection of economics as a profession may yet come about.

  • Comment number 72.

    No 53 "How come other professions can't forecast their particular futures so well?"

    Because nature is not as fractious or frivolous as people !!

    "Surely its time the economy was modelled in just the same way our weather system is; modelling every aspect of the system holistically on a single super computer, using constantly updated readings from the economy with that model open to peer review; just the same way the weather is forecast - or any other chaotic system is forecast such as the formation of galaxies and even the universe."

    Until we can model *TRUE* AI, we will never be able to model any individual's behavior accurately all the time !! And it's the holistic modeling of the economies that have failed because they have not taken into consideration human behavior and thinking.

    For example, holistically, we should have let the bad banks go bust and let the other banks pick their bones clean. Instead, we've thrown billions and trillions at them trying to fix the unfixable !!

    As Mr. Spock is alleged to have said, "It does not compute, Captain !!"

    "If I had my way financial institutions would be required to use a supercomputer model to generate simulations to test their new product for safety, to ensure that in reality should they introduce the product we won't get a repeat of crises like 1929 or 2008."

    But first, we have to put your theory to safety testing by asking how you would produce the program to model and test those products. You are making just the same assumptions as those bankers, you accuse, have !!

    Quis custodiet ipsos custodes?

  • Comment number 73.

    Another thought on the economics has gone pear-shaped theme.

    Up until 'recently' the "means of production" was the means of consumption and vice versa. "Say's law" was merely the observation that when entrepeneurs complained that people were short of money and couldn't consume they were unfairly blaming money when they should have been blaming production.

    "The economy" was synonymous with the supply chain really.

    Nowadays this does not have to be the case. The supply chain can be fully or largely automated. The supply chain can be, and in parts actually is, a pretty well integrated machine. As time goes by, as automation proceeds, human production is less and less the source of consumption.

    What about the "real" jobs then involved in production? Well there is maintenance and extension of the supply chain, sure, but increasingly productivity, or contributing to the "real economy", is about decision making and invention; steering the machines and steering the direction of machine development. Now with a single thought a person can make a thousand things. This is exaggerated even further if we are talking about things that can be represented digitally these days.

    Some of the real limiting factors include mainstream economics itself. Technology really can lead to abundances, or "gluts" in the language of Say and the free-marketeers, but if those who operate and steer the machines are motivated only by return on investment, and abundance only dilutes those returns, what would ever motivate them to do so?

  • Comment number 74.

    No 73 "Some of the real limiting factors include mainstream economics itself. Technology really can lead to abundances, or "gluts" in the language of Say and the free-marketeers, but if those who operate and steer the machines are motivated only by return on investment, and abundance only dilutes those returns, what would ever motivate them to do so?"

    Sheer self-interest or FUJIA !! So long the steerers can gain relative to the rest, they will carry on being motivated !! It doesn't matter what the price of beans is, if someone has more beans than someone else, he is relatively wealthier !!

    It's all relative, as Einstein was alleged to have said !! :-)

  • Comment number 75.

    IMHO traditional 'economics' is 'too narrow' in scope and also 'out-of-date'. It has also 'failed' hard-working people and is now effectively 'dead'.

    But attempts to improve it, change it or widen it, will always be resisted. Dr W Edwards Deming, a creative outsider and a real 'leader', uncovered the "System of Profound Knowledge" and referred to the need for a "New Economics" (over 20 years ago) ... but, when terms are so out of date new words/definitions are needed, and for that reason, and for those interested, I am continuing his work ... using the definitions below:

    * Leanomics = People taking responsibility for adding value and continuously improving the situation for others (e.g. customers, communities, overall environment), based upon fundamental values such as trust, honor, responsibility and respect.

    * Ignoromics = People are either effectively ignorant of the situation (e.g. the overall environment) or not prepared to take responsibility to make sure it changes for the better.

    * Poweromics = People using position and power for their own personal gain, based on poor moral values, self interest and greed.

    It is worth noting virtually everything fundamentally centres around 'people' and the 'values' they uphold. It is also worth noting that Ignoromics is what allows Poweromics to flourish, and in my view this summarises the current (and widened) definition of 'economics' that prevails today.

    Why not take a look at what 'leaders' everywhere are doing (e.g. your boss, company, service provider, government, politicians, media ...) and look at how many people understand this and/or prepared to do something about it ... I think you'll find its small ... albeit steadily growing (helped by the internet, and recent activities of banks/MP's etc).

    IMHO the battle of the future is really one of values, and given the above definitions, can be simply summarised as ...

    Leanomics v Poweromics & Ignoromics

    For those interested I hope this is helpful ... and I would certainly recommend the work of Dr. W. Edwards Deming ( as well as ) as a good starting point for looking into this further ... people are still amazed (and learning) how profound his insight actually was ... e.g. he told us far more about the future of economics than Richard Thaler in his lectures and book (I went to one of his lectures in London around the time of release of Nudge). I think you'll find people are still flocking to the latest incremental ideas, not more revolutionary ideas, yet only the economies moving rapidly to the latter will survive and prosper e.g. Singapore's turn-around -

    Whether people like it or not, the clock is ticking away and time is rapidly running out for most economies.

  • Comment number 76.


    It is not accurate to say that people are motivated in general to outdo their neighbour. I do not agree even that people are motivated by, or even see things in terms of "wealth". "Wealth" and greed are, in my experience, the concern of a relative few.

  • Comment number 77.

    Post 74 said - "Sheer self-interest or FUJIA !! So long the steerers can gain relative to the rest, they will carry on being motivated !! It doesn't matter what the price of beans is, if someone has more beans than someone else, he is relatively wealthier !! ... It's all relative, as Einstein was alleged to have said !! :-)

    I couldn't agree more - one of the main drivers of "poor moral values, self-interest and greed" (see post 75) is ENVY ... which drives/motivates people to want more than someone else, particularly those they compare themselves with, hence the term 'keeping up with the Jones's' - it's not absolute wealth that bothers most people, but relative wealth to those they continually compare themselves with, which drives poor moral values, self-interest and greed.

    IMHO only a return of 'fundamental values' (e.g. trust, honor, responsibility, respect) will turn around 'economies' in a sustainable way now, and time is on no-one's side.

  • Comment number 78.

    It would be nice if economists could understand, and predict economic behaviour, but it is naive I think, to proclaim the qualities of theories which are built on assumptions like:

    - People always act in self interest
    - People always know what their self interest is

    People don't act like robots (at least most of the people I know don't). As human beings, we sometimes act rationally, and in our own interest. Sometimes we make decisions based on faulty reasoning, and misunderstanding, and sometimes we make mathematical judgements. Sometimes we are stupid, and sometimes we are smart. Economics provides poor estimations of human behaviour, and although some newer models which attempt to understand this like behavioural economics are useful, they don't seem to make much use of psychological and sociological research, to understand people. The trouble is, economics doesn't understand people very well. People aren't numbers.

    I'd disagree with the statements about being presented with a choice. I'd say the reason people agree to an operation with a 90% success rate, over a 1 in 10 chance of dying is because the first one is presented primarily in a positive light, whilst the second presents the risk, rather than the positive return. The psychological studies regarding rules of primacy are also important here. People don't always make rational choices either. Even stockbrokers, even economists.

    The economic crisis wasn't caused by people acting rationally inside a broken model, it was caused by people acting with too little information, emotionally and irresponsibly. It was caused by normal human weakness, greed, and a lack of concern for the wider effects of people's actions. The idea that all the stockbrokers, private investors and analysts who try to make money on the markets every day are somehow all geniuses is absurd. They have human failings, and make mistakes, just like everyone else. The markets are imperfect, and greedy, impulsive and act like sheep. Just like people do. People don't make sound economic judgement in general, they just do what everyone else is doing, and assume because everyone else is doing it, it must be the right thing to do.

    For some reason, another spurious idea seems to have emerged, that saving money will somehow help us out of recession. How on earth will spending less, cause the economy to grow I wonder? I'm not sure a single economist has been asked that. Economics is widely put on TV channels, with little explanation as to the meanings of terms like derivatives, liquidity, and so on. How are the public expected to make rational economic decisions, if no-one makes any effort to explain economic theory? The trouble is, explaining this theory would show what a ridiculous house-of-cards list of assumptions it was based on.

    With such a large system, all that matters is how the masses act, the workers, the managers, the people who flip burgers for a living, the people who make cars, the 'real' economy as it's called. Unless people buy stuff, produce stuff, and want stuff, the economy won't grow. People don't borrow money if they don't want to buy things. The public sector spending decreases make things even worse - less spending means job cuts, and lower salaries, which means less consumer spending. People spend less and less, causing the cycle to continue.

    The only way out of this is public investment into the real economy. Lending to banks when people are out of work isn't altogether helpful - how about loaning directly to small business and people who actually need it? Why trust the banks to create economic stimulation when they caused the problems in the first place? They are hoarding cash, just like everyone else.

    What really matters in growing the economy, is that people who actually do things, which are actually useful (i.e. not investment bankers) are allowed to continue to do useful things, and continue to keep their jobs. Our economy is far too reliant on service industries, and bean counting. If people were allowed to actually do things, instead of constantly keep servicing the economic system, then the economy would grow sustainably, and in line with actual living conditions and advances in technology. The reason we have an economic problem, is because we spend so much time talking about markets, economic conditions, derivatives, and ways to make money without actually doing anything. Why not try actually basing our economic stability on the realities of day to day life, instead of the out-of-touch, virtual worlds of highly paid bankers and economists? What is the point in making money through investment, if none of that money goes back into the real economy?

  • Comment number 79.

    #71. Henry_Quimper wrote:

    "Rejection of economics as a profession may yet come about"

    Perhaps we need "Economists Anonymous" - rather like AA where economists come to confess their error and addiction and then fight it together. Certainly some from of re-education is needed as the 'education' they have had has been in error.

  • Comment number 80.

    Sorry economists back to the climate science debate or lack of science.
    John from Hebdon, trying to dismiss 30 years of climate science with the expression 'the perceived wisdom' shows a certain level of ignorance of science, this isn't economics. I was attending lectures on climate change at imperial college back in 1988 as part of an atmospheric physics course when the climate change deniers where trying to prove the world wasn't in fact warming, do you remember, you cant argue with thermometers as they say but they tried to, but why would they want to, hmmmm, hard one that, not self interest it couldn't be!
    Now the climate change deniers have now accepted the climate is warming 30 years after nasa scientists first realised it. 30 YEARS!!!
    Since then the evidence and science that it is co2 has grown and grown.
    Why are you desperate to come up with any other theory, WHY?
    Why are you always 20 years behind the science???
    All people like Nigel Lawson and you are trying to do is name call scientists and muddy the waters and slow down any action because of self interest. There was plenty of money available during the 90's to research that it wasn't co2 before you go on about research grants, unfortunately they couldn't prove that.
    Why did that man who made that stupid documentary have to mis represent what the scientist involved said, if this was the truth? Why?

    Back to the science, co2 IS a greenhouse gas, methane also is a greenhouse gas, it holds heat from the sun in the climate system a small percentage extra co2 will trap a small extra percentage of the suns heat in the atmosphere. The power of the sun is of course the main driver of the temperature of the climate as cloud cover effects how much energy is reflected back into space, but a climate with lower co2 will be cooler, more warmer they for the same power of the sun, back to the analogy of your greenhouse, a double glazed one will always be warmer than a single glazed one no matter how strong the sun is shining.
    The warming now is caused by man made co2 other warm periods weren't the other factors have been taken into account.
    The ice cores and co2 and temperature is what i think you must be refering to they aren't proof that co2 causes all warming, what they prove is that a warmer climate creates higher levels of co2 in the atmosphere this is a positive feedback loop, can you understand that and why that is very scary.

    You say there has been cooling since 1990 where do you get this from?
    The artic ice sheet was at its lowest ever level this summer was this caused by your cooling effect????? Why are you ignoring this fact?

    This isn't a conspiracy or the 'perceived wisdom' its just real science.
    Models are worked on and get refined as the understanding improves, the evidence mounts and you choose to ignore it.
    Most scientists are interested in the truth the same can't be said for politicians, don't allow your scientific understanding to be informed by Nigel Lawson et al.

  • Comment number 81.

    #78. Chris Gilbert wrote:

    - People always act in self interest
    - People always know what their self interest is

    Ah yes, the old certainties - let me add two ideas

    1. That the decline in mathematical standards and the consequent reduction in the ability to make rational choices mat relate to the decline in these ideas. Indeed conversely the fact that these ideas seem to be less useful than they used to in understanding the way markets work may also reflect the increase in innumeracy.

    2. Business schools have developed Confusion Marketing and multiple tariffing to such a high degree so as to make any notion of a market vanish as they actively set out to prevent price comparison.

    We could solve the second problem with legislation, but it will take a generation to improve numeracy to the level it was in the sixties and before.

    Without a sound basic ability to do sums almost all logical argument is just a mystery and I am afraid that this is now the condition of the vast majority of the population. They are no more stupid than they used to be but the perceived importance of being able to do sums has diminished so people just don't bother! (And anyway that got a GCSE/A-level so they must be able to do sums - oh were it so!)

  • Comment number 82.

    "Economists, at least the macro variety, didn't have a good financial crisis. And they're not having much of a recovery either. Much like the UK."

    There we go! It is spin time again! What does the UK not have? A financial crisis? Well, it depends how you define financial crisis, I suppose. The UK has created the biggest personal debt and house price bubble on earth, through a joint effort of bankers, estate agents, journalists, homeowners and Gordon Brown over years. This bubble is still there because the government has stuffed our tax money in any developing holes. This is the continuation of the financial madness of the last decade by new, even more lunatic means. It is an act of desperation, it is part of the crisis and it will make this an unforgettable crisis. We are still very much at the beginning!

  • Comment number 83.

    #80. andrew9999 wrote:

    Continuing an arguement about Climate Change with me...

    This really isn't the blog - have you read the Earth Watch: Richard Black blog and the now published papers (see the blog for all the references) given at the seminar (which I attended at Imperial last week) so don't accuse me of being twenty years behind the science!

    Please pay particular attention the the experimental methods to measure temperature and the concerns about the ice core and isotopic methods of historic CO2 and temperature estimation.

    This is not the place to have the argument: But what I will say is that your argument about feedback and CO2 does not hold water at all for if there was continuous positive feedback temperature would have never gone down nor would have CO2 and both of these thing have (probably - given my concerns about the methodologies of measurement) happened in history. (The data about temperature and ice ages is better as it that about warm periods, but CO2 estimation is basically full of unacknowledged systemic and experimental error.)

    Tell me why none of the IPCC models predicted the decline in temperatures since 1999 combined with a continued increase in CO2? The historic ice code data shows higher CO2 in some periods of higher temperature however there are so many errors in the experimental methodology the unacknowledged uncertainties are enormous. But let us accept the data. I cannot overcome the light switch logic. If CO2 drives temperature change why does the temperature change occur before the CO2 changes? (And not always in the same direction!) This is a central causality problem. Please read the papers associated with the seminar at Imperial last week. There is no point in us slanging each other off so please read the latest papers.

    I am quite concerned about Climate Change and a little concerned about methane, but not CO2 and I am not saying things are getting warmer at the poles and higher latitudes but the IPCC's published underlying data does not match their report. CO2 is not in my view, and from the published evidence, the culprit.

    To appease those who want to talk about economics here - consider the economic effects of CO2 being responsible or not and the likelihood of being able to modify the CO2 levels and all the other consequences! I'll stop now as this is really the wrong place for this argument.

  • Comment number 84.

    To everyone who thinks that all economists are in the dark it might be worth reading this book:
    Boom Bust: House Prices, Banking and the Depression of 2010 by Fred Harrison (Author)
    Its basic thesis is that the anglo-saxon method of using houses as future equity and speculation inevitably creates bubbles with an approximate 18 year cycle.
    The solution?
    Tax capital gains on ALL houses even your own house. This will take the steam out of the housing market and people will move as a matter of neccessity rather than speculating. This will take us to a more European approach to housing - ie it should be somewhere to live rather than a pot of future gains.
    The problem?
    Which political party would be brave (or dumb?) enough to propose this and how many people would vote for it? You see the problem.
    My approach will be to try and exploit the cycle to increase individual wealth (greed or self-interest?) in the recognition that I really dont think our system will change.
    Still recommend reading the book though even if it is a bit dry.

  • Comment number 85.

    Everybody knows what everybody knows.....the problem hasn't been the changes in society or business...or's almost always the velocity of the change.

    A lot of economic theorising and discussion (and general history ) for that matter seems to just ignore, or miss, the significance of the velocity when discussing change.

    Most of the people alive in London in 1909 are now dead.

    Most of the people alive right now will be dead by 2109.

    Neither of these facts are causes for worry, tragedy or even much comment.

    But if the prediction is altered to one that half the same number of deaths mentioned above will actually take place in the period 2015 to 2020 with the rest then occur over the remaining 90 years ...not only would it indeed be a subject of worry, tragedy and comment----but the end result by 2010 would also be different.

    The velocity of this change would in itself alter many factual outcomes (lots of people dying in a very short time would dislocate the economy massively and possibly thereby cause even more deaths --- the overall population would be smaller because, of course, so many possible members would never be born as their forebearers were never themselves born)------

    I think it's this accelerating avalanche of events that has left the 'system' almost paralysed and meant the levers pulled simply wobble unconnected to anything that can affect the real world.

    This isn't only a problem of 'economic theory' or analysis, it's a problem of, for instance, 'managing immigration' as well; where 600,000 Eastern European economic migrants isn't of itself a bad things, and may be a very good thing; or, to give another instance, the problem of moving from a society based on the 'conventional family' (I know.... define that term) to one where that is no longer the basis of society.

    In these, as in the basic topic on this discussion board; Economics ---- it isn't the change itself that's ever the problem---- it's the velocity, stupid!

  • Comment number 86.

    The reason our problems are problems is because the cause is not understood. The symptoms present a standard and expected scenario. That is.......... people are seeing what they expect to see, so they know what they are doing. Ho hum............ in the midst of the fiercest battle, the craziest game, you step back and you check it out. One must always doubt the obvious, study the raw data over a coffee and forget it. You will be surprised what pops out from the idle side up top when you least expect it. Nothing is ever quite, what it seems. Curiosity did not kill the cat, it taught survival.

  • Comment number 87.

    #78 Chris Gilbert

    Well put, and I fully agree.

    I would also add, as I mentioned in an earlier post, that public spending is an ongoing increasing necessity because, contrary to what 'the market' is supposed to offer, automation is increasingly pushing people into 'non-jobs' or out of the 'means of production' altogether.

    Without elaborating too much, the automated supply chain needs to be regulated according to energy efficiency. What people should be 'paying' for is the energy required to produce the product or service, thus putting further incentive on energy efficiency and energy source stability and sustainability. Where market-based rationing could come in is in the decision making ability to the current and future choice of products/services that is given.

  • Comment number 88.

    "He also started a hedge fund, Long-Term Capital Management which created a mini credit crunch of its own, running up losses of more than $4.5bn in just four months in the summer of 1998."
    The economics is all about utility and value. Remember? I'd think of the financial assets (FA) as of those bearing the most questionable value. We've got huge funds directly or indirectly invested in FA like bonds, shares, derivatives. Utility of each of these instruments, after all, is based on its ability to produce interest-type income to the holder. But rather than doing so, they(1) became the subject of vast speculation and (2) price ("present value")of these instruments is based upon the expectations (future, promices).
    A substantial part of economic professionals became involved in calculating this PV, lots had a job of selling this PV (or rather FV?) of these FA to the others.
    Efficiency of financial markets (read "fair valuation of FA") is questionable because FA do not bear their utility by themselves, but their utility is 'sold' to the buyers by investment brokers, analysts, management, auditors - and those tend to lie about the real-life situations in the issuer companies and true performance.
    There is no crisis, it's an ordinary case of revaluation (devaluation) of assets and liabilities. It's just a bit hard to accept. But in the end we'll re-start with a rather "modest" balance sheet. That's it.
    The issue is that financial markets fail because information gets greatly distorted in the chain: management, auditors, brokers, analysts. And this is about corporate law, securities law, practices etc.
    It's questionable that Enron-like or Lehman-like cases are avoidable now. The governments seem to be financing those lossy balance sheets rather than facing the truth, writing off the losses and changing the regulatory environment.

  • Comment number 89.

    The devaluation/revaluation that occured was a spook157, people looked at their revalued balances for 07 and realised their trouser legs were wet. The valuations are out of whack and it has got to be fixed.
    Here is an unusuality, this not being a trading place only adds sum. This is a rare thing & free. might come in handy one day.
    Digestive break - answer by noon eft to the North Pole - How large a valuation adjustment to derivative portfolios would be required to undermine their underlying assets.
    Is life a dichotomy?

  • Comment number 90.

    No 87 "Where market-based rationing could come in is in the decision making ability to the current and future choice of products/services that is given."

    We could extend it one step further and suggest that "international credit" be limited to those who can actually have the means to repay the loans !!

    E.g. The US government debt is already several multiples of the entire GDP and the government deficit is making it grow at an unsustainable rate. Add in the amount of "private" debts and the picture is definitely *NOT* rosy !! This should make the US a bad risk (sub-prime !!) Similarly for the UK.

    This will force the "future choice of products/services that is given" !! Governments that try to buy votes with borrowed money will be forced to raise taxes enormously or face starvation and bankruptcy as their credit is withdrawn !! That will certainly not win them any more votes for quite some time to come !!

    Of course, this situation will cause a short term contraction in world trade but that will soon pick up as the more viable countries take up the strain and, soon, it will be back to "business as usual" but without the massively over-hanging debts !!

    The *REAL* economic problem is that most economists are still very West-centric !! Take a look at the postings in the last 50 or so blogs on this and other English language sites !! Quite aside from those postings that ride a personal hobby horse (and I've been guilty of a few of those :-) ) most of the postings seem not to distinguish between local or Western occurrences and global occurrences !!

    For instance, an earlier post bemoaned the massive decline on manufacturing. This might be true for UK but certainly not true for Germany or the US and definitely not true for the likes of China or India !! Therefore, economic models that might map to a decline in manufacturing may work for Britain but will not work for Germany or China !! (See the "Why them and not us" blog). Similarly, debt-driven models may describe the Western economies but certainly not the Middle-Eastern oil economies or the "Tiger" economies of Asia !!

    Japan survived a decade or more of low to zero interest rates because its population (collectively) had massive savings !! In Britain, savings ?? What's that ??

    After more than 2 decades of wandering around East Asia, I've come to appreciate some of their good values. As such, I, too, have some savings; mostly stashed out East in "boring" but safe accounts !! Therefore, in the recent 20 months or so and without lifting so much as my little finger, my savings have appreciated by at least 12% excluding any interest/dividends earned, simply because the £ and the $ nose-dived !!

    This is now a new socio-economic dawn and the sooner that people and, especially economists, realise that, the sooner that plans can be made for recovery and possible future growth !! All else is spin and bovine manure !!

  • Comment number 91.

    No, life is a dialectic :)

  • Comment number 92.

    Accountants signed off the dodgy Enron, Lehman, Madoff, etc. stuff. Madoffs guy is in court now, oooh l was naughty but didn't know about the big scam. His motor cars no. Plate was 'F Troop' :) Really, it really was.
    Accountants were in a rock type hard place with the conflicts of interest and worry for their health. They are though trusted professionals of stature who would not, could not and still will not do their job which includes blowing whistles and/or refusing to sign of accounts. It can be difficult to pick up deceits from the receipts but that is their job/conflict of interest and what did the holiest of holy US SEC do - give the accountants GAAP to design and install and they wrecked the world. That is what happened. It is no good crying over it but they cannot be left to carry on the GAAP - utter folly and we are all signed up to its international incarnation. There are basic and very serious problems with this accounting approach to policing business. We live with its fallout now and more of both are headed our way.

  • Comment number 93.

    No 88 "We've got huge funds directly or indirectly invested in FA.."

    You forgot about some other "financial assets" !! Pensions, life and other insurances, trusts, for instance !!

  • Comment number 94.

    #92. herosrest had a pop at Accountants...

    You are quite right that Accountants need to take some of the blame.

    Auditing is the aspect of their work that is there to protect the investor and shareholder against outright lying and falsehood in the preparation of a company's accounts. Auditors give an opinion that the accounts are a true and fair view of the results for the period being reported and of the balances at the end of the period - however they only do so by interpreting the laws of the land - and under most circumstances this is the limit of their opinion - indeed they limit this by various statements about representations given by the directors.

    The conflict of interest 'problem' has for thirty or more years been denied by the small and smaller number of accounting firms. It has always caused me to be far more concerned than the market's perception. The argument for big firms of accountants is that as there are big companies the firms of accounts need to be big to handle the international aspects of the businesses.

    So I suggest that not only are 'banks too big to fail' many large companies (including banks) are also 'too big to audit'.

    The obvious (to my mind's) conclusion is that the competition authorities around the World have not done their job properly in breaking up these companies and that includes, but is not limited to banks. So it comes back to a failure of regulation and the absence of anything like a 'free market' or anything like a 'market discipline' so a failure in capitalism (inevitable? - see K. Marx)

    (I tend to agree with your views of the supine and compliant nature of the SEC, FSA/Bank of England and GAAP and reporting standards in general.)

    Solutions ?....

  • Comment number 95.

    Can economics deal with opportunism? Daft or frivolous products and services become huge global businesses when someone "spots the opportunity"; popcorn, the hugely profitable cinema staple food, and some financial "derivatives" are examples, of which popcorn is not the baneful one and is said to be the most profitable consumer product (who would have thought it?). There is always chanciness in an economy and economists pore over the smoking entrails, the historic data produced by past business activity. Economies are always going to be vulnerable to the "next big thing" being the next big crash.

  • Comment number 96.

    53. At 5:07pm on 03 Nov 2009, factgasm wrote:

    "If I had my way financial institutions would be required to use a supercomputer model to generate simulations to test their new product for safety, to ensure that in reality should they introduce the product we won't get a repeat of crises like 1929 or 2008"

    Prediction is only half the story, once you know the crash is coming there's nothing you can do about it - the contradictions of capitalism cannot be resolved by a computer.
    (and besides, the computer will make the logical decision that the extended commodities (workforce) can be disposed of to rebalance the Economy - not very humanitarian!)

  • Comment number 97.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 98.

    some good points, but...
    "It will take a couple of generation fro economics to correct itself "(sic)
    surely you mean reach equilibrium?

  • Comment number 99.

    67. At 7:08pm on 03 Nov 2009, shireblogger

    Nice post - but the same old problem rises.

    The solution of 'tighter regulation' just means the regulator gets bigger and bigger - requiring more and more laws passed to control the new ways found to circumvent them.

    This leads to a maasive bill for the taxpayer to run it all - eventually as big as the bailout itself - as well as a raft of rules and regulations which can be handled by huge corporations and their legal department - but which totally floor SME's.
    This is why even tighter regulation will still encourage companies to grow to huge sizes - because once you're big enough you can start to lobby (or threaten) Government with wails of 'job losses if you don't'

    Sadly less regulation and more regulation generally end in similar ways - huge cost to the taxpayer.
    The underlying problem is competition itself - hailed as being effective and efficient - this is only a short term benefit hiding a much bigger long term problem.

    As I mentioned yesterday - why do we need a choice of 30 banks in our high street - we only need 1 which works properly and not 30 competing with each other and none doing the job well.

    The only way to achieve that is to take the profit motive out of development. That upsets a lot of people because they actually believe their ability to make money is a worthy one - whereas for society as a whole - it isn't. Only their individual wants are fulfilled by the motivation of profit.

  • Comment number 100.


    Beyond blaming individuals, e.g. bankers, regulators, politicans, accountants, etc, I don't see any economic theories explaining the crisis on this blog.

    What makes the rate of profit fall so that capitalists reduce production?


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