Economics and Finance Teaching Before and After the Crisis

Brian Lucey and I conducted a survey of all university teachers of economics and finance in December 2013. A presentation of our findings is here (.pdf). Brian’s thoughts are here.

The main results from the sample of respondents are:

  • Teaching has not changed much in response to the crisis.
  • Attitudes to newer, or more critical material appear mixed at best.
  • Respondents emphasised the need for broader contextualisation and increased mathematical competence.We find it hard to see how to reconcile these findings.
  • Comments

    comments

    Author: Stephen Kinsella

    Senior Lecturer in Economics at the University of Limerick.

    60 thoughts on “Economics and Finance Teaching Before and After the Crisis”

    1. I am a great believer in the usefulness of mathematics, But used wrongly it can provide a precise answer to the wrong question, when an approximate answer to the right question would be more helpful.

    2. Considering that the Financial Crisis rocked economics to the core its disappointing that Irish economists are ignoring the calls for reform. I had been hoping that Ireland would embrace the growing heterodox movement but it seems too many economists are stuck in the past.

    3. It’s one thing to want economic history taught, it’s another to teach accurate history. For instance standard neoclassical int. economics/trade textbooks insofar as they mention history, fabricate it. I would hazard that the vast majority of neoclassical economists are unaware of the fact that the US and Britain were not only highly protectionist before they industrialised but were, in fact, the most protectionist Western countries of the era and of subsequent eras – much more so than Germany or France. Agree with Robert Nielson – pleasantly surprised to see heterodox economics as desirable by +40%, but unfortunate that it’s seen as unnecessary, especially given that heterodox economists had a much better track record recently in predicting the crisis (Steve Keen, Dean Baker, Ann Petifor to name a few).

    4. One issue is where we expected to see change. As Martin Wolf laid out in a widely cited column a few weeks ago, the core mistake was a laissez-faire attitude to financialization that extended from academia to the financial sector to politicians and regulators. There was a pure academic side to this in terms of the specific theoretical models but more broadly an influential cohort moving through elite academia (mostly US) in 70s and 80s, and then getting into banking and regulatory positions in 90s and 2000s. They convinced themselves that they understood the models and knew how to mitigate the risks. “Principles-based regulation” for example is not anything you’ll find in an academic treatment of the banking sector but it was a dominant ideology among regulators for 20 years, and indeed the creation of dedicated financial regulators was itself a triumph of the financialization ideology.

      The point is that if you go back now and say to the academics, how does your teaching differ from 5 years ago, it’s only looking at modeling constructs and not the broader ideology that was erected around them. People who took the canonical models seriously (e.g Diamond-Dybvig) always knew that the financial sector could spawn some serious disruption to the rest of the economy. But over time, the financial elite was only receiving self-affirming messages: no crisis, they kept moving up in the world, and the risks looked controllable.

      And that mentality is still there. The regulators still think that there’s just a couple more magic Basle regulations that will help, or an EU capital directive, or a sternly worded letter or two to bank bosses. But banks still have access to cheap credit from the central banks — they’ve just been asked to use the tradesman’s entrance to pick it up. A macro or finance course 5 years into the crisis could do a lot worse than having the students think for a couple of weeks about these ideologies, which present themselves as technocratic and “neutral.”

    5. It’s usually hard to teach old dogs new tricks.

      There was a lot of opinion on what should be done or not during the crisis but opinion is easier than the donkey work of collecting data.

      Six years after the crisis, Central Bank economists debunked the common view that German banks had fueled domestic Irish lending during the bubble.

      Seamus Coffey estimated in 2010 that half the value of bank bonds were held by Irish residents.

      As for research relevant to the crisis and future policy, it’s difficult for an outsider to know what of value has been published by academics.

      Philip Lane has had work published as part of international projects and two non-economists come to mind in respect of industrial policy: Seamus Grimes, emeritus professor of geography at NUIG and Chris van Egeraat, a lecturer in economic geography at NUIM.

    6. @Michael

      “As for research relevant to the crisis and future policy, it’s difficult for an outsider to know what of value has been published by academics.”

      The name of the game is power. If you ain’t playing power you are in the wrong place.

      http://www.youtube.com/watch?v=L3vvn2qOh58

      Power assigns value to things.

      Clare Balding, the wonderful BBC sports commentator says
      “Things become important because we make them important.”

      This is not about academia or counting angels in a state of dynamic macroeconomic equilibrium on micro pinheads

      Kevin O’Rourke has plenty of ideas.

    7. Yes – POWER is where it is at: the power of the ‘financial system’ [which has taken over the so called Banking Union debate in the EZ to its own interests and certainly not the EZ Citizenry] and the amazing silence about ‘The Derivative Death Star’ hovering over Frankfurt.

      A MUST READ (and not only for under-graduates):

      JP Morgan Chase had, at the end of 2012, a mind boggling, but only silver medal, $69.5 Trillion with a ‘T’ gross notional Deriviatives exposure . While the gold medal for exposure to Derivative risk goes to …Deutsche Bank, with $72.8 or €55.6 Trillion Gross Notional Exposure. Gross Notional means this is the face value of all the derivative deals it has signed. Which the bank would be very quick to tell you would Net Out to far, far less. Netting Out, for those of you who do not know just means that a bet/contract in one direction is considered to balance or cancel out a similar sized bet/contract betting the other way. But as I wrote in Propaganda War – Risk Weighted Lies and further in Propaganda Wars – Balance Sheet Instabilities ,

      …this sort of cancelling out is fine on paper but in reality is more akin to people trying to swap sides in a rowing boat.

      […] To give you an idea what sort of risk that size of a derivatives book is consider that the entire GDP of Germany is €2.7 Trillion. Remember that Derivatives are what Warren Buffet dubbed “weapons of financial mass destruction.”

      http://www.golemxiv.co.uk/2014/01/on-death-and-derivatives/

      Little wonder that Jens W. has not smiled in years ….

    8. @ DoD

      It’s a pity guardian unlimited was pulled.
      This is from that weekend/Monday morning in 2008

      Now in internet heaven linkwise

      080914 Every chief executive I have spoken to over the last few years has had mounting concern that the financial markets and uncommitted shareholders do not value what business values: research, innovation, motivated people, brand, loyalty, trust, independence. What the markets value instead is the takeover, so many of which go wrong

      080914 What’s the point in banking regulations governing capital adequacy when the greater part of a bank’s business is ‘off balance sheet’ ?

      “Where did it all go wrong ?

      • fair value accounting standards, made impossible because complex derivatives are hard to value.
      Lack of proper infrastructure for default swap market, because markets are based on clarity of information and understanding, and complex derivatives make a liquid market impossible.

      Ill-equipped rating agencies, trying to value and impact of over-complex derivatives transactions.

      Supply and demand for credit derivatives

      Poor product pricing, which is only possible because both buyer and seller don’t understand the products (derivatives) they are buying.

      In short, derivates are very much at the heart of this. Yes the core problem is that people took ridiculous risk positions, and underwrote terrible deals, financed overvalued houses, and over-leveraged themselves to death. But the reason all this could happen is that the assets they produced could be securitized, built into derivatives and packages, and sold on the market because people did not adequately understand the risk profile of what they were buying and selling. And the reason they didn’t understand, is because they are over-complex derivatives.

      The lesson to take away is, never get involved in something you don’t understand. The banks and their shareholders have paid the price, and have learned the lesson far too late.

      • The markets , like small children, need adult supervision. Let children run wild, and you get The Lord of the Flies. Let the markets run wild, and you get the tech bubble, the telecom bubble, and now the housing bubble.

      • The whole derivatives industry is based on a fundamental fallacy which was originally committed by messrs Black and Scholes when they managed to convince the institutions that they could quantify investment risk.
      They can’t. However sophisticated your pricing model, those pesky real-world events keep getting in the way

      • One of the depressing things about the predictable implosion of an over-inflated derivatives market is that it did not have to be this way. Other sectors of the financial industry have been managing risk reasonably well for centuries e.g. re-insurance companies devote a huge amount of effort to making damned sure they are not over-exposed to particular categories of risk. Unlike Northern Rock, for example.

      • Another triumph of the free market. And these are the fools we are supposed to look up to as paragons of enterprise and efficiency?

      • You do not need a PhD in astrophysics to read a graph which shows that a 0.5% increase in default rate of the underlying loans leads to a 40% chance of losing all your money in a CDO squared. This is from a 2005 note from Nomura:
      http://www.math.ust.hk/~maykwok/courses/MAFS521_07/CDO-Squared_Nomura.pdf

      The information was available well before the credit crunch arrived. The products are not the problem – lots of people got paid enormous bonuses for pushing multi-year deals without having any stake in the consequences. There used to be a bridge in Brooklyn for sale… “

    9. Listening to Marian Finucane – and she mentions the ‘ 2 Billion’ on Irish Water that Prof. John Fitzgerlad figured out on the back of a fag box and which has been shown to be ‘conjecture’. John is on the radio panel and has ‘kept mum’ etc …. and Marian mentions the 2 Billion again ……..

      see http://www.irisheconomy.ie/index.php/2014/01/28/hardball-v-equity-sale/#comment-481762

      @seafoid

      ‘… The whole derivatives industry is based on a fundamental fallacy ..’

      One DANGEROUS fallacy. That said, Limerick might be interested in the Brooklyn Bridge – one was just spotted heading out to sea off Foynes ….. and Mickey Hickey et al are probably claiming salvage rights!

    10. Sometimes the best answer but very rare, is “1 don’t know.”

      “What will the world look like in 100 years?” wondered Ignacio Palacios-Huerta – an economist at the London School of Economics – he put this question to other economists.

      This is a transcript of a letter in Saturday’s FT:

      Sir, The eyebrow-raising claim of Ignacio Palacios-Huerta (quoted by Simon Kuper in “The economist’s guide to the future”, Life & Arts, January 25) that economists “know more about the laws of human interactions and have reflected more deeply and with better methods than any other human beings” will be greeted with scepticism by many. That “greater longevity will push us to reshape our lives” is undeniable but the absence of any mention of the potentially catastrophic effects on society of the developing epidemic of age-related neurodegenerative diseases such as dementia is alarming.

      By 2050, it is estimated that 15 per cent of the UK population will be over 75, and between 1.5m and 2m people will be dependent on care from others. Perhaps economists know something that neuroscientists don’t but we are currently struggling to identify drugs that make anything but a trivial impact on dementia.

      To effectively model the future of society rather than play the role of pathologist at the autopsy, economists need to reflect more deeply still and imagine a world where medical science has not yet conquered these problems. We need their help and expertise to persuade our politicians to invest in the science which will ensure a future free of neurodegeneration.

      Kevin Talbot, Nuffield Dept of Clinical Neurosciences, University of Oxford, UK

    11. I do not know why folks bother getting worked up about the inability of economists to have warned us about the 2008 financial crisis, as early as 2002. The data indicating a high probability of a significant financial crisis (future date uncertain) was available then. There is now a deepening crisis ahead (date uncertain), but this time some leading politicians and many senior financial executives are well aware of the problem. It simply suits them to pretend otherwise – they will not have to clean up the mess and the debris.

      It is indeed about power. Unfettered financial power. And unfettered corruption. The financial whizkids in the US are busy constructing a new securities bubble: using the rental incomes from single-family homes as their financial salami. And this will ‘work out’ better than the sub-prime mortgage salami?

      Undergraduate, third-level teaching syllabi usually bear a close relationship to the personal expertise and research interests of the professors and lecturers who teach. Foundation or core subjects are changed, but neither too often nor too much. Electives are quite a different matter. These will change immediately if an existing faculty member leaves or a new member arrives. Academic management also have a few fingers in the pie.

      For the economics faculty to have ‘responded’ in a prompt manner to the 2008 crisis would have been, to say the least, tricky. It might have been possible but it would have been quite disruptive. And that assumes that the faculty understood enough about the crisis, to explain it in ‘undergrad speak’.

      Economists take 4-7 years to graduate. Any educational ‘damage’ has already been done by then and the affects of this damage will be continue as a characteristic of the mindsets and behaviours of the practitioners – though Damascene conversions do happen! Economics needs to return to its political roots – with a modicum of scientific reality included. This is most unlikely.

      Economics reminds me of a tame laboratory bacterium that has been released into the ‘wild’ and has gone ‘rogue’. It has evolved into an infectious and virulent strain. It has infected millions and they are suffering badly. It appears to be able to develop a rapid, and high, resistance to anti-biotic therapy.

    12. back to POWER – and POLITICAL (e)conomy

      On Banking Union – fairly comprehensive and very ‘educational’:

      A Union for Big Banks

      January 24, 2014, Kenneth Haar

      Far from being a solution to avoid future public bailouts and austerity, Europe’s new banking union rules look like a victory for the financial sector to continue business as usual.

      […] The banking union has been oversold as a fix to the banking sector. It may sound appealing that in the wake of the financial crisis, the potential power of EU institutions should be employed to address the dangers of financial markets. But in practise, the model adopted has deep flaws and carries so many risks, that one might ask if the point is to protect the public or serve the big banks.

      The Single Resolution Mechanism too, seems tailored to the demands of the biggest banks. The bail-in tools exempt the most speculative instruments, OTC derivatives, […]

      In sum, the banking union is not a step away from public nurturing of big banks, and it’s not a step away from the imposition of austerity that followed in the wake of the crisis. In fact, it rather looks as if the banking union will seal the status quo and perpetuate the link between irresponsible speculative behaviour of banks and the misery of the majority.

      http://www.irishleftreview.org/2014/01/24/union-big-banks/

    13. Blind Biddy has the spuds on – rugby time – she was a mean open-side in her day and is looking forward to Ireland defending the magnificent grand slam that her heroines achieved last year.

      Wonder why 2 of 3 failed to respond to the survey? Shurely these respondents are promised ‘Anonymity’!

    14. More on Coppers

      One thing that sticks in Spollen’s mind is the crowd itself. “It’s the same thing, 48-year-old bankers from south Co Dublin who are just crazy. No idea of behaving. They drink cheap money on campus or at home, they stock up and have no fear of repercussions. We got out of the club game shortly after. If these people were our customers, we didn’t want to deal with it.”

    15. @ DoD
      Flooding looks very bad in Limerick but the weather doesn’t judge Moyross like the city does, it would appear …
      They must be on higher ground. Thank God for small mercies.

    16. On the apparent contradiction between wanting “broader context” and “more math”, the two are rationalizable easily enough. People might want to drop two prose-heavy-but-specialised economics courses and replace them with the combo of one econometrics course and one philosophy of economics course.

      It’s all the more feasible when you consider the “more resources” request.

    17. @seafóid

      ‘The city’s looking rough when you’re walking on the bridge’.

      It’s the city where we’re tough, there’s no place you’d rath ..er.. [swim]’.

      (Moyross Rappers – slightly edited)

    18. I don’t know anything about how economics is taught but I see the results 🙂

      When the Chicago School strangled the Keynesians in the mid 70s and everything went Milton Friedman, especially after Ronnie and Margaret took over, did much of the material taught to undergraduates change ?

      Is there still a big dose of rational agent (I presume markets in panics are excluded) ?

      How is the latest crash presented ?

    19. Delighted to see an initiative like this so well done lads. The only disappointment are the results and if I could be so cheeky as to ask that the next time such a survey goes out could there be a question on whether or not we should revise the money multiplier idea of banking? That being that banks are intermediaries, as opposed to creators, of the money they lend.

    20. What about being in the EZ and German house rules so house inflation not very likely and debts have to be honoured, no inflating them away a l’anglais

    21. @Tullmcadoo

      Guest comment from Blind Biddy:

      Tull – feeling somewhat flaccid? Try Vi_agra – it’s cheaper!

    22. DOD,
      The big money is in traditional medicine for cancer & MS. But I suppose thieving it is a cultural activity in certain quarters.
      Seafoid ,
      Saw u on TV this morning on RTE with the other doomsday preppers down in TIpp. London is frothy all right due to cash bid from HNWI fleeing kleptocracies like France….

    23. @ tull

      “Saw u on TV this morning on RTE with the other doomsday preppers down in TIpp. ”

      Have you got a link? I have no idea what you are on about

    24. The Chinese New Year was ushered in yesterday with a showcase of Chinese culture in Dublin’s Temple Bar, including a colourful Mongolian Horse Dance.

      The Year of the Horse – the 4712th year of the Chinese calendar – follows on from the Year of the Snake.

      The Chinese New Year Festival will take place in Dublin until February 14, with various events scheduled around the city.

      Further details of the festival are available at http://www.cny.ie

      [h/t Irish Independent]

    25. @David Madden

      To go back to the original subject matter of this thread, some readers might be interested in this contribution from Chris Auld (a Canadian health economist).

      Colour me unconvinced.

      Chris Auld earned a fair bit of stick for his criticisms here of most people who criticize modern economics and I think point six is as much as most people need to read to get a grasp of where he is coming from.

      A sign of bad criticism of economics is….

      6: Uses the word neoliberal for any reason.

      That hyperlink is to Dan O’Brien’s staggeringly disingenuous article on how anyone mentioning the role of “neoliberalism” in the current crisis is trying to distract from the main issues and sure, nobody understands what neoliberalism means anyway. This is the well known top level of chutzpah “Killing your parents and then asking for leniency for being an orphan”.

      Needless to say anyone involved in economics who disputes the existence of neolberalism probably adheres to it.

      Chris Auld also had a blog post explaining how inequality does not produce bad health outcomes.

      Your honour, the prosecution rests its case.

    26. If you do another survey it would be interesting to ask what, if any, other disciplines might have something to add to the mix.

      And economic history would seem to be a must.
      Why does it blow up every 40 years or so ?

    27. Seafoid, for what its worth, I tend to agree with the broad thrust of Auld’s blog on “18 signs you are reading bad criticisms of economics”. He may have gone a bit over the top in some of that piece but I guess that was out of exasperation as much as anything else.

      Regarding the link between inequality and health, as has been discussed on this forum before, there is no doubt that inequality and bad health outcomes often go hand in hand, but there is no convincing evidence that inequality produces bad health outcomes. Auld is not the only person to hold this view. Others include Angus Deaton, Andrew Leigh and Tim Smeeding.

    28. Seafoid, Auld himself expresses this more eloquently than me:

      [There are]… two issues which are conceptually distinct and have different policy implications: the effect of poverty on health, and the effect of income inequality on health. The evidence suggests that poverty reduces health, but there is little solid evidence, and much skepticism in the literature, over the idea that inequality per se leads to lower health, and even more skepticism over the notion that any effect of inequality on health occurs through “stress.” … there is pretty good evidence that an individual’s income causes her health, but this effect is much stronger at low levels of income. There is no good evidence that, holding an individual’s income constant, increases in income inequality decrease that individual’s health.

      The Auld piece on inequality and health is well worth reading in its entirety – although I have gone against my own earlier stricture and gone well off topic!

    29. @ seafoid

      my explanation for the about 40 years is, its a generational thing.

      In order to soak up the whole feel of a bubble developing, you would have to be at least 30, I would say, more like 40 years old.

      Present life expectation at birth for males is like 78, goes up by about 0.1 per year, in former times 0.05, that means that the 75 year olds today had one of 73, or more than half of that birth cohort are already dead. How many are still active. Absolutely nobody remembers the bubble nature of pre 1929 from own experience.

      Wilhelm Röpke 1932 “Crises and Cycles” described it clearly, and that there have been at least 2 more of that before, but who of you has ever read Röpke : – )

      Every cycle is somewhat different, in the 70ties it was runaway inflation, this time real inflation was nowhere to be seen, and the parameter the Fed checks, interest payments households pay, was not out of the ordinary.

    30. @David Madden

      He may have gone a bit over the top in some of that piece but I guess that was out of exasperation as much as anything else.

      I know it is not same article but I think Auld does not have good form on clarity and the suspicion has to be there that he is defending not just the teaching of economics but its usefulness. His comparison between creationism and non mainstream economics is also ludicrously self serving in its broadness (and it tends to make you suspicious about everything else he wrote).

      I found the following article helpful in thinking about the slightly slippery way Auld tends to frame issues, and it seems to apply quite well to his criticisms on the Guardian’s series on the failure/uselessness of much of modern economics at macro level (which is necessarily a criticism of what is taught, right?). Given that since the Lucas critique much of the thrust of economics was building micro foundations and that the macro model was an epic fail you might ask whether the micro stuff is any good either.

      http://www.alexsarchives.org/on-signs-youre-reading-bad-criticism-of-economics/

      The upshot of it all is that you might be tempted to approach people who claim to be defending economics from ignorant and ideologically motivated attacks from the left with a degree of suspicion given that the dominant strains of economic analysis are definitely on the right and that at the macro level the two decade before the GFC were a great flowering of willful ignorance in economics which does not seem to have withered much since.

      Now obviously you are the economist here Prof Madden but the debate on whether economics is internally consistent and whether it works are not the same. To copy Auld’s style it is a bit like astrologers criticizing people who are dismissive of fortune telling because they know nothing about Astrology. Nothing!

    31. Seafoid, the article you reference there certainly takes care in addressing Auld’s 18 signs. Whiloe I have met Auld a few times I don’t know him well, but my guess is that he was lashing out in exasperation at what he considered ill-thought out criticisms of economics. It would be interesting to see his point-by-point reply to issues raised by Alex.

      For my own part, I think that macro is in a bit of a mess right now, in terms of incorporating banking and finance into their models. I think a lot of the work on long run sources of growth forces, stuff on institutions etc is interesting, though neither are my fields of specialisation. My own area of specialisation is the same as Auld, applied micro-based Health Economics and while I am sure you could find criticism of it, I suspect our shortcomings are no worse than many other disciplines. Certainly for microeconomists the casual tarring of all economics with the macro brush can be annoying. Anyway, gotta go teach now (micro, thank God!).

    32. @ David Madden

      “The evidence suggests that poverty reduces health, but there is little solid evidence, and much skepticism in the literature, over the idea that inequality per se leads to lower health, and even more skepticism over the notion that any effect of inequality on health occurs through “stress.””

      http://www.youtube.com/watch?v=ainyK6fXku0

      Inequality results in different resource allocation. Just looking at Ireland all the banking arseholes who drove the country off the cliff that led to the bailout which drove so much hardship – do you have any stats on strokes, depression or suicide post 09 by social class ?

      Could you not try and get a few stats from Limerick ? Does inequality feed the growth of criminality ? Or if Moyross had the right sort of analysis based policymaking would the health outcomes be the same ?

      You can take a longer view

      http://www.nybooks.com/articles/archives/2013/jun/20/stay-out-syria/?pagination=false

      In The Origins of Totalitarianism, Hannah Arendt wrote about the millions of stateless and rightless persons cast up by the early wars of the twentieth century and the imperialist manufacture of new nations before and after World War I. A whole generation of the displaced were brought into the world so lacking in hope, so without access to elementary rights that, for them, to live within the law presented no advantage over crime and for that matter terrorism. “The calamity of the rightless is not that they are deprived of life, liberty, and the pursuit of happiness,” Arendt wrote, “but that they no longer belong to any community whatsoever. Their plight is not that they are not equal before the law, but that no law exists for them.” The disasters of the twentieth century, as she judged them, had proved that a globalized order might “produce barbarians from its own midst by forcing millions of people into conditions which, despite all appearances, are the conditions of savages.” An end no happier, if we do not take care, awaits us down the road of the “carefully choreographed” violence and the “symphony of diplomacy” conducted by the last of the great powers.

      How do you prove that inequality is neutral ?

    33. @David Madden

      Well, thanks for the response – macro is obviously a mess and the Keynesians are not doing so well on integrating finance into the models either. I do not know Auld other than from those two articles but I though there was a little bit of rhetorical trickery going on in both the letter (which was serious) and the blog post (which was more lighthearted).

      I also sensed a certain lack of humility (unheard of on the Internet, I know) which seemed out of place in the social sciences. Perhaps it is just me.

    34. Hi folks,

      Interesting discussion. I would like to jump in for a moment and note, further to David Madden’s comments, that the blog post I wrote on income inequality and health is substantively misrepresented if summarized thus,

      “Chris Auld also had a blog post explaining how inequality does not produce bad health outcomes.”

      Contrast with what I actually wrote, for example:

      “The concavity effect is sometimes referred to as a statistical artifact because it generates correlation between population health and income inequality that only operates through the absolute income effect. However, it is important to note that this is the effect we have the most evidence on, the evidence mostly agrees, and the evidence tells us that redistribution, so long as it does not destroy too much average wealth, will increase average health.”

      http://chrisauld.com/2012/10/07/what-do-we-know-about-the-effect-of-income-inequality-on-health/

      It is also disappointing that Mr. Begorrah responded to my “18 signs” post by calling me a “neoliberal” and dismissing it out of hand. It seems to me that this reaction vividly illustrates the sort of bad criticism the post rails against.

      In retrospect I probably should have added: “Variant: uses the word `communist’ to describe policy positions common within mainstream economics,” as “communist” in such a context is also vague, ideologically-charged, and pejorative. But, at least in the mainstream media and the sorts of scientific and literary outlets I tend to read, I encounter that sort of claim extremely rarely, whereas, as here, claims about the neoliberaliness of economics are very common.

      Incidentally, I did respond to Alex Marsh’s remarks on that post in the comments on his blog.

      Chris Auld.

    35. Despite the financial crisis, the world’s growth model of recent decades remains intact.

      The rise to power of Deng Xiaoping and the collapse of the brutal communist experiment a decade later, were pivotal moments.

      Gideon Rachman in the FT today is correct when he says current problems with some emerging economies are temporary.

      “the factors that have propelled the rise of non-western economies in the past 40 years still apply. These include lower labour costs, rising productivity, huge improvements in the communications and transport that connect them to global markets, a rising middle class, a boom in world trade as tariffs have fallen and the spread of best practice in everything from management techniques to macroeconomic policy. Added to this is the drive of people all over the world – from factory hands to entrepreneurs – who have realised that they are not condemned to poverty, and that a better life is there for the taking.”

      In western democracies, voters have also seen from experience that there are no panaceas in having the “commanding heights of the economy'” run by government officials.

      Allowing the financial sector to dominate an economy is also bad economics.

      Rather than just a problem in economics, in general it appears that change comes ever so slowly in universities.

      The FT’s business education editors wrote recently on MBA programmes:

      “Certainly for those students on the world’s top 100 MBA programmes, very little at all seems to have changed in the past 15 years – or arguably the past 50. They still take a year or more to apply to business school, they study intensely, usually for two years, and they are taught by professors who have a job for life. They build up an address book to die for, and then they use financial donations to ensure nothing changes, preserving their business school experience for future generations.”

    36. Just realised that in my comments on this thread, I have mixed up Shay Begorrah and Seafoid. Apologies to both.

      Anyway, I think this thread (and certainly the detour into health and inequality) has run its course.

    37. Randers (of Limits to Growth fame) has given his projection to 2052

      He has plenty of material and models but it doesn’t make it into the mainframe view despite glaring evidence that the trends forecast 40 years ago are coming true as extreme weather continues to swamp coastal areas of Ireland.

      http://www.2052.info/

    38. @ Michael

      “the factors that have propelled the rise of non-western economies in the past 40 years still apply. These include lower labour costs, rising productivity, huge improvements in the communications and transport that connect them to global markets, a rising middle class, a boom in world trade as tariffs have fallen and the spread of best practice in everything from management techniques to macroeconomic policy.”

      Best practice environmental management ?

      Rachman is a pundit (it’s a Hindu word )
      So is Tom “the world is flat” Friedman

      Sometimes they get the trend right but not the speed.

      Rachman
      16.12.13
      http://www.ft.com/intl/cms/s/0/d4208ae0-641f-11e3-98e2-00144feabdc0.htm

      “A collapse in the peace process could lead to an intensification of the sanctions drive in Europe. But the Israelis have been buoyed by the discovery that rising economic powers seem relatively unmoved by the plight of the Palestinians. One Israeli official notes, with pleasure, that in six hours of talks with the Chinese leadership, “they spent roughly 10 seconds on the Palestinians”, while revealing “an unquenchable thirst for Israeli technology”. The Israelis say that Latin Americans also tend to be more interested in economics and technology than the political issues that preoccupy the Europeans and Americans.
      The re-emergence of Russia as a player in Middle Eastern diplomacy is also now a welcome development in Jerusalem since, on a recent trip to Moscow, Mr Netanyahu got on famously with President Vladimir Putin.
      These converging technological, diplomatic and strategic trends have created a certain cigar-puffing confidence in the halls of power in Jerusalem. I travelled to Israel expecting to find a country that was excessively paranoid. I left wondering whether the problem might, in fact, be excessive complacency.”

      30.1.2014

      http://blogs.ft.com/the-world/2014/01/scarlett-johansson-john-kerry-and-the-mounting-pressure-on-israel/

      Israel has enjoyed a quiet few years. No wars, no intifada, no increase in the international pressure on the Israeli state – and a strong economy. With the rest of the Middle East in flames, it has been hard to make the traditional argument that the Israeli-Palestinian question is the key to solving all other issues – or to argue that the plight of the Palestinians is the most urgent human-rights priority in the region.
      But Israel’s quiet times may be about to end. The Scarlett Johansson controversy is just one part of it – the less important part, in fact. The other really significant element is that John Kerry seems to be about to launch his peace plan. When Kerry does that it will put Israel on the spot and may split its government. And if and when the talks fail (as I’m afraid, they surely will), Israel is likely to get a lot of the blame. The country will be back in the spotlight – and not in a good way.
      And if, despite all that, the peace process struggled onward, the Israelis would be faced with the situation they most dread – a full-on confrontation with the settler movement, as well as the final abandonment of the day-dream of incorporation of the West Bank into Israel proper. Perhaps I lack imagination or am being unfair, but I cannot see any Israeli government being willing to go down that road. However, if the two-state solution is unambiguously rejected by Israel, we will be in a new diplomatic world. Then you really would see a sanctions movement.”

      Sometimes they have no clue

      Friedman

    39. @David Madden

      Anonymous Internet posters are fairly interchangeable so no apology is required (it made me smile, I would like to be mistake for Seafoid). Of course this being the Internet Seafoid, myself and DOCM could all in fact be the same seriously conflicted, almost certainly mentally ill, person.

      @David Auld

      Firstly I did read your more nuanced response on Alex Marsh’s blog before I posted and I understand that you work in econometrics, the area of economics with the best claim to being unbiased and scientific and further that you do not dismiss inequality as unimportant in your work (even if your research does not show that there are strong linkages with health outcomes).

      Secondly I realize it must be annoying and frustrating (and stressful, sorry) to get insulting and judgmental criticism from random lay people when they know nothing of your work (or might as well not do) and have no experience of the community of economists.

      However would you acknowledge that the public perception of the expertise and bona fides of the economics profession is very low? Do you think this is just ignorance and political prejudice or that economics might need to take some time out for a period of reflection?

      It is hard to see Schiller and Fama share the Nobel for economics and not see the discipline as highly politicized and conflicted one and it is equally hard to separate the teaching methods from the people it produces. If economics teaching as a whole is turning out such competent and unbiased micro people then why are the macro people in so much trouble? Laxer hiring standards for lecturers?

      In retrospect I probably should have added: “Variant: uses the word `communist’ to describe policy positions common within mainstream economics,” as “communist” in such a context is also vague, ideologically-charged, and pejorative. But, at least in the mainstream media and the sorts of scientific and literary outlets I tend to read, I encounter that sort of claim extremely rarely, whereas, as here, claims about the neoliberaliness of economics are very common.

      Here is the thing, no one accuses the economics profession of communist sympathies because it is an utterly absurd thing to say.

      However in the EU the German strain of neoliberalism genuinely does inform most of economic thinking and therefore has a vast influence on economics as it practiced here. You can argue whether that feeds back into the way economics is taught or whether its a result of that teaching but in Europe discussing economics without discussing the role of neoliberalism/ordoliberalism is not possible.

      I read your point six as an implicit dismissal of the debate about whether more and freer markets are usually a public good and I think it should not have been on your list at all.

      Also, as someone on the left of the political spectrum, it sticks out to me that your approach to issues of redistribution is whether they can ever be justified (you acknowledge that they always can, to some extent). That seems a rather begrudging approach to the policy set responsible for the biggest improvements made to the lives of the average person in the developed world in the last hundred years.

    40. That 18 points list is a bit watery IMO.

      6. Uses the word “neoliberal” for any reason.
      7. Refers to “corporate masters” or otherwise implies economists are shills for the wealthy or corporations.

      Some economists are neoliberal shills. Doesn’t mean they all are.
      Some economists have the historical perspective while others don’t.

      16. Claims economists ignore the environment. Variant: claims economics falters on point that “infinite growth on a finite planet is impossible.”

      Again some economists have zero interest in environmental externalities. Some economists think tech will save the day. It’s not a royal priesthood, a holy nation, a people set apart. It’s a bunch of regular people subject to the same thinking biases as any other population group.

      18. Cites Debunking Economics.

      Sorry, never heard of it. Point 18 comes across as a tad Scientology . Do not mention Entheta to a scientologist.

      If you don’t like the book come out and hurl it.

    41. Harry Eyres wrote this 3 months pre Lehman

      http://www.ft.com/intl/cms/s/0/6b74f01c-3365-11dd-8a25-0000779fd2ac.html

      Meanwhile, in Brazil, the environment minister Marina Silva has resigned, saying in her resignation letter to her friend President Lula that her efforts to protect the environment and in particular the Amazon rainforest had faced “growing resistance … from important sectors of government and society”.

      This, it seems to me, is in every sense antediluvian thinking and antediluvian politics. It is antediluvian in the sense of hopelessly antiquated and dated, but it is also more literally antediluvian, in the sense of being the kind of thinking and politics that precedes the Great Flood.

      Starting with the antiquated and dated sense, these commentators and politicians seem stuck in the old and much-repeated groove that environmental politics represents a kind of luxury, something like a Gucci bag. This kind of accessory may make people feel good and can be flaunted in periods of affluence, but must be jettisoned as soon as any hard times appear.

      What is lacking is any sense of connection – that at a deeper level, the economic hard times and the environmental degradation and over-exploitation are linked. To take one of the most famous environmental disasters of recent times, what advice would these commentators have given to the cod fishermen (and the politicians regulating the fisheries) of the Grand Banks off Newfoundland in the 1960s and 1970s? Stock conservation might be a good idea if there was a lot of spare cash around, but in straitened circumstances give up on thought for the future and carry on with business as usual, hoovering up any and all cod that can be found using massive factory trawlers with sophisticated sonar and satellite equipment, with no regard for scientists’ warnings about unsustainability? Result: catastrophic and irreversible decline of one of the world’s richest fishing grounds, 30,000 jobs lost and whole communities devastated.

      When politicians, under pressure to win votes and from powerful lobby groups, dilute environmental policies and regulation, I suppose the logic must be that they are leaving things to the market. But since early in the 20th century, enlightened economists, beginning with Pigou, have realised that environmental degradation represents a prime example of market failure. Markets on their own, for a variety of reasons, are incapable of dealing with many, perhaps most, environmental problems.

      Take three kinds of environmental problem. First, common resources such as fisheries tend to be over-exploited in the absence of either social ownership or the limitation of harvest; stocks collapse suddenly, so price signals do not work.

      Second, public goods such as air cannot be divided up in separate parts, which poses a problem for markets. Air pollution costs nothing to polluters, so without regulation there is an incentive to pollute. Third, future generations, who will be especially affected by environmental problems such as global warming, do not participate in markets. Market solutions to problems affecting the future tend to employ discounting – less value is placed on the future than the present. In the case of global warming, most cost-benefit analyses have advocated doing nothing.

      Two years ago Sir Nicholas Stern published his review for the British government on the economic effects of climate change, which he called, in words that sound strong for an economist, “the greatest market failure ever seen”. But Stern’s main point was that this catastrophic market failure could be compounded, to an almost unimaginable degree, by the failure to act to redress it now. Suddenly it seemed as if economics, which had always taken the environment for granted and zero-costed its life-giving and pollution-absorbing capacities, had recognised the debt it owed, not least to Keats’s “moving waters at their priest-like task/ Of pure ablution round earth’s human shores”.

      In the days before the Flood, the Book of Genesis recounts, “the earth was corrupt … and full of violence”. The source of the corruption and violence was in the mind and heart of man: “Every imagination of the thoughts of his heart was only evil continually”.

      God in his fury wanted to wipe His creation from the face of the earth; but one just man, in his ark, carrying the seeds of future life, was saved.

      harry.eyres@ft.com

    42. This is very interesting and might I add, deeply disappointing. I was working at the University of Amsterdam when the crisis hit. The economics department immediately had a full review of the courses they offered. In response, they created a new module, particularly aimed at Finance students on ‘New Keynesian’ economics, and something else along the lines of ‘the limits of mathematics in studying the economy’. This came about because of self-reflexivity among the economics teaching profession and not a demand from students.

      (On a side note, I tried reading the thread but it seems to have went off on a tangent to the initial post so apologies if I missed something).

    43. Apart from the economics subject education, . . . What we do have to seriously consider in Irish education, are our skills and awareness of portfolio management. Namely, we have to deal with the over-influence that banks in Ireland, have in all aspects of the economy, even still.

      Why did so many Irish companies, receive credit from Irish banks to buy property anyhow?

      This goes to the heart of how we approach problems such as providing private pensions in Ireland. For example, where we need to diversify pension fund investment portfolios, away from gambling on stocks, and add a ‘real estate’ element into them. That is why they established things called real estate investment trusts. REITs are created and sell their equity or preferred stock, and some debt on to larger investors such as pension funds.

      What we see when these north American REIT’s operate in Europe building all kinds of factories, hospitals, hotels and office buildings, is they provide the long term financing of debt incurred in building these real estate assets. The shorter term ‘construction only’ loan gets provided to a builder by a local ‘bank’.

      What we can observe in the north American model in regards to ‘property’, is the local bank institution being required to provide a short term, high interest rate/fees construction-only loans, and REIT’s taking care of long term financing of many projects. It then allows the pension fund to offer finance to a REIT, in the form of equity or (rated) hybrid securities at higher yields.

      What do we do in Ireland?

      In the past, we did not treat construction lending as short term, high interest rate lending. Irish banks tried to play the parts of both bank lender and long term finance provider. It is no surprise then, that we ended up with very large Irish banks, with very large concentrated exposures to real estate market risk.

      As if that wasn’t bad enough, Irish banks, grew their swollen balance sheets even more (and concentrated more risk in their balance sheet on real estate markets), by giving loans to viable small business to buy property (using finance from the bank ! ! ! ), so that a small company could supply its members with a pension of some sort.

    44. America banks generally get to score one out of three. They provide short term finance, and roll over that capital frequently to different customers. REITs and other structure geared for the longer term, take the other two components of financing and investment in real estate. Here in Ireland, it wasn’t done like that. It became three-nil to the Irish banks, and REIT’s or anything of that nature did not appear in the architecture of the financial industry at all.

      Irish banks in the Celtic Tiger era were trying to earn the vig, in three different ways (short term financing, long term financing and financing of pension pot speculation too). Because they were allowed to do so, they became very large relative to the size of the Irish economy.

      What is worth mentioning about small company pension pots and investments opportunity such as REIT stock, is that stock in the REIT is liquid. If you don’t like what the REIT is doing, you can sell it and buy something else. When a small company decides to buy property to underpin its pension plan, and you enter into a property market collapse as we did in Ireland, the company gets stuck with illiquid assets (especially if it is commercial real estate or zoned land in Ireland).

      In fact, the small business doesn’t have assets to underpin its pension plan. All it has are debt servicing arrangements, and it can’t sell those.

      We are told that thirty billion euros of SME debt spread across Irish banks will have to be re-organized, and the property stuff ‘parked’ somewhere. But who is asking the question, or is able to ask the question of how we arrived at that juncture? Because I don’t think these questions will be given the importance that they deserve in any Irish banking inquiry for instance.

    45. In reference to court cases going on in Ireland today, in regards to Irish banks who providing (long term) lending to their own clients to purchase equity in the bank. And in reference to the upcoming Irish banking inquiry. I think that to get this story figured out properly, one has to look at the longer term trends in Ireland, and compare those trends to ones happening in other locations abroad, that have well developed financial markets.

      In the couple of comments above, I tried to describe the different capital structure, backing ‘real estate’ investments in north America compared to here in Ireland.

      What I would like to suggest, is that very few of the financial/business minded of our Irish politicians are likely to ask the right kinds of questions in any banking inquiry. For instance, I could foresee a situation where a lot of time in the Irish banking inquiry gets used up on telephone calls between the Taoiseach and the leader of the coalition Green party. But what the focus of a banking inquiry should be, is on figuring out what the longer term trends were, that led to the behaviour and actions witnessed. And also, how those trends have been interrupted or not, as the case may be, in the aftermath to the financial crash in Ireland.

      I would like to suggest, based upon my comments above about REIT’s and short term/long term financing of real estate in Ireland, that proving long term finance to Irish bank borrowers to buy equity in Irish banks, was not a weird step to take (giving the entire trend and behaviour of Irish banks in the Irish economy). But in fact, we were always going to end up at that logical conclusion, where eventually, an Irish bank would force their customers to buy equity in the bank itself.

      The reason is, is that the trend in the Irish economy, was always that Irish banks would ‘take a piece’ of any and all ‘action’ that was happening in the financial sector. There were no real independent entities such as REIT’s or pension funds, or anything else, who handled different parts of the process. There were only these large Irish banks, that had their tentacles in everything. The focus of an Irish banking inquiry should be to establish the extent of that trend in general, and to see how we have learned in the aftermath of that ‘system’ going radically wrong within the Irish economy.

      But the truth of the matter is, I don’t really see how our Irish politicians have the insight into the financial industry either in Ireland or anywhere else, to pursue this useful line of inquiry.

      Remember for example, at the time of the conversation about ‘burning the bondholders’ of Irish banks, and we found out that that wasn’t okay. Why? We were told that Irish pension funds and credit unions would become insolvent.

      In summary, we can surmise that Irish banks really did own a piece of everything, and made themselves the focal point of the entire Irish economy. No ‘report’ or no inquiry to date in Ireland, has even explored that avenue. No ‘report’ or inquiry in Ireland, in my understanding will ever bother to pursue this line of investigation and fact finding. No Irish politician, it is my opinion, will even know enough about the capital structures within economies in the modern world, in order to ask these kinds of questions.

      Irish banks were providing short term and long term finance to cover real estate ventures. Irish banks were lending money to small business to support investment in property. Pension funds in Ireland held Irish bank debt. Irish bank borrowers held equity stock in Irish banks. It seems as though in the decade of the 2000s in Ireland, about the only financial instrument that Irish borrowers or investors were allowed to handle, were those created by Irish banks, for Irish banks. And nothing else.

      The unfortunate thing, is I don’t know of anyone in Ireland with any real level of expertise, who has ever asked any significant or serious questions about that.

      All we really have now in Ireland, is a sort of legacy mission statement from former minister for finance, Brian Lenehan, who told us that there were these entities known as Irish banks, . . . and that we had to ‘save’ them for some reason, . . . or it would all be bad. And that initial Brian Lenehan ‘mission statement’, has informed most of the debate I have heard, ever since. BOH.

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