Readers of this blog are astute and fully briefed on this, the first, fully synchronised global financial crisis in history. You are all aware that yesterday, in an unprecedented move, the Bank of England created £75 billion – out of thin air – to revive the deflating body that is the British economy. You will know that the US banking system is falling apart, and the stock market is spiralling downwards. That the US Labor Bureau has just released unemployment figures showing that more than 650,000 Americans lost their jobs in February.
However, these facts appear to have escaped the attention of the convenors of the Royal Economic Society’s Annual Conference. Here is the agenda for that prestigious event – hot off the press.
Top of the bill is one Pinelopi K. Goldberg (Princeton) who is going to deliver a keynote address on: “Trade and Growth: What can we learn from Micro data?” Next up is David Laibson (Harvard) who will address the assembled conference of economists on “Behavioral Finance, Behavioral Mechanism Design, and Optimal Defaults”. Gilles Saint-Paul (Toulouse, Birkbeck) aims to hit the spot with a lecture on “Endogenous indoctrination”. While Professor Sir John Vickers (Oxford, Presidential Address) will enlighten policy makers around the world with a keynote address on, wait for it: “Competition Policy and Property Rights”.
To be fair to the Royal Society, NIck Stern is on the bill too, and will discuss climate change – a threat greater even than this financial crisis. Sadly, he has not been offered a plenary slot, but instead will be sharing his analysis at a side ‘session’ – the equivalent of a workshop at a civil society gathering.
The ‘generals’ of the Royal Economic Society (complete with medals, see above) march onwards with heads held high. Like their First World War predecessors, they plod doggedly on with micro data , endogenous indoctrination and optimal defaults – regardless of the economic corpses strewn across the landscape or of their relevance to a world crashing down around their ears.
Readers may not be aware that Mervyn King has committed the elementary logical fallacy of affirming the consequent in discussing his
newest intervention the other day. The hypothesis in question is that a policy P if efficacious will lead to result R, in short, if P, then R.
Unfortunately, there is a logical asymmetry between affirming the success of a policy and rejecting it in a testing situation.
If a policy
has never been implemented, then it has never been under test and, hence, there are no empirical results, R, to assess. On the other hand, if a
policy has been implemented, how would one assess its degree of success or efficacy? King has said that we will have to wait and see if P works.
How does he intend to do that?
If R is not observed, then you can conclude that the policy did not work. That is, ((if P, then R) and not-
R, then not-P), by the logical rule modus tollens. If, on the other hand, R is observed, it is committing a fallacy to argue from R to the
efficacy of P. This is the fallacy of affirming the consequent. In other words, ((if P, then R) and R, therefore P) is logically fallacious.
King committed this fallacy when he indicated that the existence of an expected R following the implementation of a policy P would be
sufficient evidence of P’s efficacy and therefore of its success. Unfortunately, this is not the case. To show that it was P that brought about R
and not something else, you need to show some sort of causal connection between P and R. King has yet to supply this link. Since this issue would
have been discussed in the relevant committee of the BoE, the committee itself may be committing this fallacy in their thinking about this policy.
If this is the level of critical thinking at the BoE, then any success we see may well be accidental rather than designed.
The RES are pathetic, if I may say so. Robert Skideslky believes Behavioral Finance to be a dead end. Besides, behavioral finance can
assume many forms. Robert Shiller likes Prospect Theory where people are viewed as rational economic actors behaving in accordance with some
theory of probability, whereas George Akerlof prefers cognitive dissonance theory, developed in the 1950s by Leon Festinger, where rationality as
usually conceived has no place. I know which approach I prefer. And I wonder which version of behavioral finance the RES will discuss. I think I
can guess.
Pygmies.
Just typical of such people in their ivory towers, who may suffer some financial losses, but will still end up with a house &
comfortable lifestyle, unlike the 4 million workers in the USA who lost their jobs in the last 3 months.
I’m not an economist, but could see this one coming years ago. I’m not a climatologist, or a
demographer either, but can see a wicked wind this way blowing.
It will begin with riots and civil strife which will quickly be countered
with the curtailment of civil liberties and the imposition of marshal law. The rapid desertification of large parts of Africa, Asia, and North
America will put irresistible pressures on governments to wage resource wars for arable land and water.
These coming wars should get our
economies going again, and, although there may not be many of us left, life should be sustainable at some level – hopefully.
Nah – I’m just
kiddin’. Everything’s under control. Everything’ll be fine. No – really.
Our whole ruling class does seem stuck in this yesterday mindset. I suppose because so much of their world is predicated on continuing
expansion, one can understand their continued blind adherence to concepts like the Third Runway at Heathrow. Have they asked themselves if there
are going to be enough passengers and planes in ten years time to fill one runway? They are unable to even face up to the fact there is a problem,
let alone start solving it.
As I believe Simon Johnson pointed out recently – who is probably a sworn enemy of yours, Ann – you never get
anywhere with reforming a bust country until you break the ruling class and their ideology.
Simon Johnson interview on The Oligarchs:
http://www.talkingpointsmemo.com/archives/2009/02/the_oligarchs.php
John, Thanks for this comment….and on the contrary, am a great admirer of Simon Johnson….really rate his blog, and his
comments on the Bill Moyers show….