Professor Scott,

I'm not sure that I agree with the critique of economics as "unrealistic and over-formalized" or that, as a discipline, economics is increasing unable to "say anything sensible about the state of the world." Nevertheless, your point is well-taken! I think of Paul Krugman's work in international trade theory as particularly insightful regarding increased productivity (and the subsequent loss of jobs) in the manufacturing sector in the advanced world, and comparative advantages of abundant low-skill labor in places like China. Regarding the current economic crisis, again I point to Paul Krugman's take on the rise of a 'shadow' banking system (largely a result of technology, that is, the increased powers of computing supposed risk-spreading equations; but also deregulation) in which investment brokers increasingly acted as (unregulated) banking institutions.

At the risk of sounding like a Paul Krugman disciple (his comment at the AAG about the 'law of diminishing disciples', in reference to Alfred Marshall adherents, was hilarious), I believe his work in the 'new economic geography' offers a promising re-engagement with classical location models and models of agglomeration economies by both economists and geographers. I.e., here is an area - economic geography - where economists are finding fertile material to work with.

Thank you for your thoughtful post!


--
Mark de Socio
Assistant Professor
Department of Geography and Geosciences
Salisbury University
1101 Camden Avenue
Salisbury, MD 21804

+1 410 543 6461 (Tel)
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________________________________________
From: A forum for critical and radical geographers [[log in to unmask]] On Behalf Of AJ Scott [[log in to unmask]]
Sent: Tuesday, April 20, 2010 2:48 PM
To: Mark deSocio; [log in to unmask]
Subject: Beyond post structuralism???

The following article appeared in "The Guardian" on April 5th. Like many
other critical commentaries on economics and economists today, it makes
several well-taken points about the unrealistic and over-formalized
abstractions of the economics discipline and its increasing inability to
say anything sensible about the state of the world. However, a rather
worrying point (for me) about this and most other similar commentaries
that I have seen is that the critics tend to see the way to salvation
primarily by means of incorporating more subtle behavioral/psychological
insights into economics. This, of course, is fine as far as it goes. The
neoclassical assumptions of perfect information, perfect rationality,
optimal decision-making, and so on, certainly do need to be relaxed and
more realistic-cum-flexible approaches adopted. Even so, any conceptual
improvement along these lines still leaves us with an essentially
behavioral, individualistic, and in the end micro-economic "science."
This leaves the way open, for example, to explaining the recent economic
crisis in terms of "short-sighted greed." In contrast to this kind of
unsatisfactory short-cut, I believe that we need a much more
thorough-going structural analysis that pays attention to the underlying
systemic features of capitalism as an expressive set of socio-economic
dynamics. I suppose I need to add the cautionary note that this can
indeed be done without falling into determinism in the strict sense of
invoking a causal link from social relations to mind. It's a long time
since geographers last openly debated what we used to call the
"structure-agency" problem. It seems to me that the current crisis
raises this issue again (in spades), and that we as a discipline need to
recover some of the ground that we have lost in this regard as a result
of various "post-structuralist" turns. Any reactions out there? Allen Scott

*
*

*
*

*Rescuing economics from its own crisis*
*Economists must admit they don't have all the answers and learn from
firefighters, psychologists – and history
*

*By Larry E**lliott*

For economics, it's like Glastonbury only with better food and no mud.
King's College, Cambridge will host the biggest happening for the dismal
science's counterculture in decades when it hosts the inaugural
conference of the George Soros funded Institute for New Economic
Thinking this weekend.

It's a big gig, spread over four days and with plenty of headline acts.
Joe Stiglitz, George Akerlof, Michael Spence and Sir James Mirrlees are
the four Nobel prize winners performing, along with Dominique
Strauss-Kahn, managing director of the International Monetary Fund, Lord
Adair Turner of the Financial Services Authority and Bill White, who as
the former chief economist at the Bank for International Settlements
presciently identified the flaws in the Great Moderation (the apparent
decline in economic volatility in the years before the credit crunch).

The choice of venue is symbolic and deliberate. The great and the good
believe that what has happened over the past three years is both an
economic crisis and a crisis in economics. They want to see new thinking
of the sort provided by Keynes the last time there was such a systemic
shock to the global economy. King's was Keynes's college.

The crisis has yet to throw up a new Keynes and is unlikely to do so,
according to my friend and fellow commentator, David Smith of the Sunday
Times, who has just published a thought-provoking book on the crisis and
its likely consequences*.

In reality, though, there is no need to reinvent the wheel. It's more
important to strip away the layers of complexity that gave big-picture
economics a spurious and dangerous exactitude in advance of the crisis.
The big lesson in economics from Keynes is that we know less than we
think we do, and that there is a vast difference between the output of
economic models and the actual behaviour of individuals.

"Our basis of knowledge for estimating the yield 10 years hence of a
railway, a copper mine, a textile factory, the goodwill of a patent
medicine, an Atlantic liner, a building in the City of London amounts to
little and sometimes to nothing," Keynes wrote. He was unimpressed by
the argument that decisions were "the outcome of a weighted average of
quantitative benefits multiplied by quantitative probabilities".

This, though, is where mainstream economics has ended up. It is possible
to construct beautifully precise models if you start from the assumption
that rational economic agents with perfect information are operating in
free markets that always return to equilibrium. But since none of these
assumptions holds true in the real world, this is a classic case of
"rubbish in, rubbish out".

Even more worryingly, there has been no room in this view of the world
for the heterodox. The prestigious economics journals have been cleansed
of all but the purveyors of highly technical algebra. Economic history
has been removed from the syllabus, because those who yearn for
economics to be a hard science believe the past can teach them nothing.
Truly, the lunatics have taken over the asylum.

The financial crisis has provided Stiglitz, Akerloff and the others with
an opportunity to strike out in a new direction. As Smith puts it in his
book: "Economists, like bankers, discovered they were more fallible than
they thought and for some that was a humbling experience. Occasionally,
that is no bad thing."

There are plenty of suggestions for where the profession should be
heading once it has backed out of its blind alley. Speaking at a Greater
London Authority conference last month, economist Paul Ormerod said a
lesson from physics is that there is kudos to be had from empirical
discoveries. In other words, you don't have to construct an elaborate
model of the economy to be considered good; you could draw important
conclusions from the available data.

An empirical assessment of 250 years of industrial capitalism showed
that violent movements in asset prices and credit markets of the sort
seen in 2007 and 2008 were relatively frequent; those who used models to
assess risk said the chances of a crash were infinitesimal.

Nick Parsons, head of strategy at National Australia Bank, says he
learns a lot by talking to his bank's clients and by simply observing
what people are up to. Sir Alan Budd, chief economic adviser to the
Treasury during the recession of the early 1990s, once said that he had
been surprised at how poor the official figures were for consumer
spending given that the shopping malls appeared to be full of people.
Only when he looked more closely and saw that most were empty-handed did
he realise the truth: people were reluctant to part with their money but
still liked to window-shop.

The Bank of England also sees the merits of the economics of walking
around. It has a model of the economy (which is being updated and
simplified) but interest rate decisions are also influenced by the
reports from a string of regional agents who act as the eyes and ears of
the monetary policy committee and provide top-class information about
what is happening on the ground.

At the same GLA conference, Neil Stewart, a psychologist at Warwick
University, said that people make economic decisions using
general-purpose psychological tools. He used the example of the minimum
payments required by credit card companies. The idea behind these is to
protect the minority who otherwise would make no repayment, but Stewart
said there was evidence that they made other consumers less likely to
pay off their bills in full. The perception of consumers was that the
minimum payment reduced the chance of them getting seriously into debt,
and increasing the minimum payment from 2% to 5% resulted in fewer and
fewer people paying off their bills in full.

As the Bank of England governor, Mervyn King, noted in a recent lecture,
economists can learn about how to cope with instability from other
disciplines, such as ecology or epidemiology. The approach of engineers
to limiting the damage caused by avalanches or forest fires could be
imitated to make economies more resilient to shocks. Questioning the
idea of a rational "homo economicus", he added that there was evidence
that perceptions of risk were affected by recent experience; actions
were influenced by what other individuals were doing; and that people
had excessive faith in their own judgments.

Like those gathering in Cambridge on Thursday, King is wary of the
notion that economics can be boiled down to hard and fast rules.
"Beliefs adapt over time in response to changes in the environment; and
this in turn affects how economic systems behave," he said. "Because the
surrounding environment can affect economic decision-making, there are
probably few genuinely 'deep' (and, therefore, stable) parameters or
relationships in economics. In contrast, in many settings in the
physical sciences there are stable 'rules of the game' (for instance,
the laws of gravity are as good an approximation one day as the next)."

Is it worrying that the governor of the Bank of England freely admits
that economists don't have all the answers? Not a bit of it. There are
things we know and things we don't. Understanding that there is a
difference is the path to wisdom.

--
Allen J. Scott,
Distinguished Professor,
UCLA,
Los Angeles, CA., 90095.

Tel.: 310 825-7344
Fax: 310 206-5976