Doctor Science Knows

Tuesday, December 02, 2008

Economicsts' mistakes

Brad DeLong posted Why I Was Wrong. In the comments, I said:

I basically agree with Barry. The people who caused this mess appear to have been *flawlessly* rational actors: they have been personally enriched to a truly astounding (one might say "obscene") degree without taking any personal risk or suffering any personal consequences.

When Brad says, for instance, that he didn't expect:

"(3) the discovery that banks and mortgage companies had made no provision for how the loans they made would be renegotiated or serviced in the event of a housing-price downturn."


"(8) the failure of highly-leveraged financial institutions to have backup plans for recapitalization in place in the case of a major financial crisis"

I submit that he was wrong because he was expecting those organizations to act like single entities, for the people within them to work (generally speaking) for the good of the institution. Instead, to Barry and me it looks as though the most powerful people in those organizations were acting as libertarian individuals, concerned only with their own ends -- which is exactly the philosophy they claimed to admire. And it certainly seems to have worked for them, so why were you surprised?

When Alan Greenspan said "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms." I didn't believe him. How could The Compleat Randian *not* expect individuals to be looking after their personal interests first?

But the fact that Brad, whom I think is less likely to prevaricate than Greenspan, says the same thing leads me to believe that maybe Greenspan was telling the truth. You-all believed on the one hand that people are and should be rational, self-interested, selfish and greedy actors -- but you also believed the people *you* know personally, the smart and the wealthy and the powerful and the well-connected, aren't "like that".

mike: The "fat cats" are not losing compared to everybody else. In relative terms, they're still on top. In absolute terms, they're even more secure: they don't face unemployment, homelessness, loss of medical coverage; their children will not be eligible for reduced-price school lunches. They suffer no direct personal suffering.

"because of the egos and attitudes of the main participants, and as such it was not predictable"

My argument is that the ego and attitudes of the main players were *entirely* predictable, especially given that economics is about predicting human behavior. The collapse of Lehman specifically might be contingent, but that institutions without enough insider support would fail was completely foreseeable.

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  • You know more than me eh? Well, I know how to spell "economists"


    By Anonymous Anonymous, at 12:51 PM  

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