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Re: (fwd) Why economists need to study psychology

Postings not related to the writing of the Manifesto or policy chapters
are likely to be summarily rejected. Thanks for your understanding. IPI
>By Swaminathan S Anklesariya Aiyar
>1998 should go down as the year when economists proved that they do
>not understand how the world works. It mattered not whether economists
>belonged to the right, left or centre, none of them got it right. 
>Of the many major events of 1998, few were predicted and some were
>regarded as unthinkable. Consider the list. 

Austrian economists say that the future is too uncertain to be predicted.
It turns out this prediction was correct.

>* Economists have long believed you can revive a flagging economy by
>pump-priming, a classical Keynesian remedy. But this solution failed
>totally in Japan. The country has now spent a colossal $600 billion in
>infrastructure projects in the 1990s in an attempt to revive demand,
>but to no avail. 

But supply-side economists have not believed in pump priming all along.
They say demand-side policy is ineffective.  They were correct.

>* Economists have long believed that high-saving countries grow fast
>as a reward for prudence, while spendthrift countries suffer economic
>disaster for their sins. Yet in 1998 the biggest saver of all, Japan,
>collapsed while the biggest spendthrift, the US, went from strength to
>strength. The savings rate in the US turned negative late in the year,
>with consumers spending more than their entire income. Yet this
>profligacy was rewarded with rapid growth, while Japan's thriftiness
>yielded no dividends. 

They forgot ceteris paribus.
Ceteris was not paribus.

>European economies have long been regarded as so structurally decrepit
>that their ailment has been called Eurosclerosis. Yet these supposed
>sclerotics displayed such dynamism in 1998 that were able to shrug
>aside very difficult conditions in Asia, Russia and Latin America.

It's all relative.  Europeans would have done even better without the

>*The price of oil almost halved. Nobody had predicted that, in this
>25th anniversary of OPEC's rise to fame, oil would become cheaper than
>it was at the end of 1973. 

The late Julian Simon was known for his theory that the price of oil and
other natural material resoruces was declining long run.  His prediction was

>*Despite running a record trade deficit, the dollar was one of the
>strongest currencies in the world in 1998. Despite a huge trade
>surplus, the Japanese yen weakened. So much for economic theory, which
>suggests that trade deficits should normally lead to currency
>depreciation, and surpluses to appreciation. 

again, ceterus was not paribus.

>What on earth is happening?

Incomplete knowledge of economics and economists.

> Why is conventional economics suddenly so
>poor at explaining what is going on? The issue is not one of left
>versus right. Economists of all stripes have been exposed as having no

The naked economists are the conventional ones; heterodox ones like Simon,
Austrians, and geo-economists have been consistent with the evidence.

>A recent research paper by Furman and Stiglitz investigates various
>theories put forward to explain why the miracle economies of South and
>South-East Asia suddenly collapsed in very non-miraculous fashion.
>None of the explanations stands up to rigorous examination. Theories
>that seem plausible in relation to one country fail in another.

Evidently they did not check geo-Austrian theory.

>Strong economic fundamentals are no longer enough, it seems, to
>inspire confidence in volatile markets.

What country has "strong economic fundamentals"?  None whatsoever.  The US
will also fall to depression in a few years.

Fred Foldvary 

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