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Wednesday, August 31, 2011

19th Systemic Breakdown

by digby

Yesterday I wondered if there was some epistomological problem with our elites in light of at least two massive failures of government in the past decade --- first, the Iraq invasion based upon wishful thinking and lies, and now the ongoing insistence among the leaders of the industrialized world that we ignore serious but solvable problems in favor of those that are not acute or even real. I suspect there is a systemic breakdown, but Paul Krugman helpfully supplied the specific economic mistake, which turns out to be the result of specialization --- and something a little bit more mystyfying:

The basic IS-LM model, with its possibility of a liquidity trap, has been a very good guide in these troubled times. And there’s a reason for that: as I wrote long ago, in a piece from the 1990s, IS-LM is basic economics applied to a world in which in addition to production of goods there is both money and a bond market. Aside from the assumption of sticky prices — which is overwhelmingly obvious and supported by strong evidence — it’s your basic, minimal, compelling model. It should come as no surprise that it gets at a lot of what’s going on.

Yet people don’t know this model — which is to say, they don’t have any simple framework for thinking about how money, interest rates, and the real economy interact.

Which people am I talking about? Money managers, obviously; they may know a lot about individual markets and companies, they may have lots of experience, but now that we’re talking about macro issues of a kind not seen since the 1930s, those talents are a lot less relevant than usual. Pimco used to have Paul McCulley, who was very good on the macro, but with him gone, they seem to be making up theories on the fly. And whatever model Paulson is using, it’s not IS-LM.

But economists also don’t know this stuff. We’re living in a dark age of macroeconomics, in which much of the profession has turned its back on past knowledge. There’s also a contingent of economists who have read Hicks, or at least claim to have read him, but seem to have come out of the experience with nothing more than misleading catchphrases and the strange conviction that they have transcended something they actually don’t understand. (Brad DeLong takes on some of this stuff).

So, in this case it's a failure of experts, some of whom just don't know what they need to know and others who have inexplicably decided to ignore what they do know and pretend that they've discovered something more relevant. The first is just simply human failure (as Atkins said yesterday --- we should just stop paying attention to them until they acknowledge their mistake and account for it) the second is a little bit less understandable. How does that happen, and why?

Yesterday, my friend Pastordan offered this:

Reinhold Niebuhr suggested two answers:

1. Humans have "limited self-transcendance," which means we basically have the ability to learn from our mistakes--but not the power to see all the mistakes we make. That leads to overconfidence in our own ability, which must be a particular temptation when you're used to being the smartest guy in the room.

2. We like to think of ourselves as rational beings, but our opinions and insights are more determined thank we'd like to admit by our commitments to the needs of our social group. That goes beyond "groupthink" to moral obligation: the more people we represent, the more obliged we are to represent their interests. So if Bond Traders in general think T-Bills are a bad bet, it's terribly difficult and may even feel *wrong* to think outside that conclusion. This is exactly why the Founding Fathers were dubious about establishing a permanent capital: they were afraid of exactly what has come to pass, which is that national leaders feel more beholden to the Village than to their true constituencies, which are far away and not yammering in their ears all day.

It's also while appeals to fear work. When people think their community is threatened, they're liable to go along with ideas they wouldn't otherwise because they perceive them as necessary to protect the community. Hello, invasion of Iraq.

Niebuhr, who was after all a theologian, believed that Christ provided the only true transcendance to these situations. YMMV, but I think his insights are helpful whether or not you buy his ultimate conclusions, or at least I hope they are. I am, after all, a representative of the Christian community. ;-)

I would suggest that the Wall Street/Economist/political elite mistaken consensus could be the result of an appeal to fear as well. If they perceive their "community" to be under attack, circling the wagons makes sense for them too.

I suppose the herd mentality can account for much of this, along with the natural human fear of being out of step with one's social and professional peers. But I thought academia was supposed to be at least a little bit different. Secured by tenure, it is assumed that scholars would be less subject to such social and professional pressures. Apparently not. Indeed, I think the "dark age" of economics described by Krugman might just be the result of the same sustained, well-financed propaganda campaign that has cowed the press into being petrified of saying anything that might raise the ire of the right wing rabble. It takes a certain kind of person to be able to sustain the kind of relentless attacks that Paul Krugman has sustained. Most people just don't have the stomach for it.

One of the mistakes many newly hatched populists seem to make is to presume that money is the only thing that motivates people. It's true that it's creating the primary distortion in our political system at the moment (and it's going to get worse with the Citizens United decision) but humans are more complicated than that. You don't have to see bribes and graft in every corner to explain motivation. Humans are perfectly capable of being conformist, unimaginative, selfish and cruel without money being involved at all.

To understand what's going on, we might do better to add to our reading of The Shock Doctrine (which I think is invaluable) for a time and re-read The Best and the Brightest --- or maybe Lord of the Flies.

Update: Jesus. I'm not suggesting that there wasn't any crime fergawdsake. I'm just wondering why the people who are supposed to do macroeconomics and economic policy in the US and Europe are getting it so wrong and I don't think it's that every last elite in the world is an outright criminal working on behalf of a very elaborate global conspiracy. I don't think they're that smart...

And yes, for the record, the ones that are criminals should be held accountable for their crimes. I'm all for that. I've only written that 7,597 times.