Supply and Demand
Although mainstream economists prefer to think of their discipline as a "science" akin to engineering it is in fact rife with internal inconsistencies. There is no overarching set of physical rules that connect one individual to another, or to a market, or to a corporation. If anything economics more closely resembles Talmudic law in its efforts to systematize such relations, but it has one modern advantage: mathematics. And at the heart of mathematical economics is its conceit of an individual preference function which can be aggregated into a description of optimized social welfare. Essentially, today's neo-classical economics rings the changes on a tautology: what's good for the individual, aggregated across individuals, is best for society, and what's best for society is optimal for an individual.
The math is key. High priests of economics — men who pride themselves on being able to invert large matrices in their heads — use the most complicated math they can glom on to, not to clarify, but to obscure. Why exactly they do this is something of a mystery but the end result is not: a pseudo-scientific cult that worships money.
Mainstream economics might be little more than a curious aberration of intellectual history except that it has assumed a central role in our lives. Its false and misleading theoretical constructs have stunning real world consequences, most specifically in propping up the lie that massive wealth disparities are not a normative political problem but instead a virtue of the "invisible hand." Nonsense garbed in science is still nonsense, but the cult manages to attract and to hold huge numbers of people.
It's helpful, then, that Paul Krugman inveighs against the abuse of math by economists, but one wonders how much this may be a defensive rear-guard action? Krugman isn't challenging the pillars of the discipline, only its now obvious excess. And where was Krugman for the past twenty or thirty years? The problems he describes are certainly not new.
More to the point is Jane Smiley's comment on Krugman, that he and other economists are extraordinarily naïve to assume benign "rationality." Or to make Smiley's argument another way, it takes a theory to beat a theory, and it's time that the theory of neo-classical economics was knocked off of its pedestal.
Posted by George Kenney on September 5, 2009 10:45 AM 
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Comments
Hi George,
Jane's comments regarding the blinders which the economists wear is correct as far as it goes. However, IMHO, the problem is more basic in that the top 0.1% of the economic elite determine those economists to which they are willing to listen (if any). In the book The lost science of money. The mythology of money — the story of power, Stephen Zarlenga presents an interesting history of the machinations of many of the historically powerful people and pretenders who have managed to confuse the issues involving issuance of money. By perpetuating the fraudulent myths confusing money with metal commodities they have succeeding in convincing the naive and those willing to be bought (politicians) that the bankers possess some unique knowledge which allows them to control the issuance of money. Over the past 30 years, we have ample documentation of the incompetence of the economic controllers of our country. Stephen's book has presented documentation that such arguments are intentionally false as they allow the bankers to maintain the aura of authority which they obviously do not deserve. Jane Smiley's analysis is exactly correct in that the crooks and their acolytes have always stayed one or more steps ahead of the fray. There are very good reasons why the robber barons of the late 19th century were so successful in the USA; they, their decedents and friends are/were all crooks whose various talents facilitated their success. Think about it! It is common knowledge that Obama, like the Bushes, Clinton, and other earlier Presidents were selected because they were either members of the elite clans or were pliable (though talented) sycophants. The majority of the members of Congress/Senate fall in similar categories; they enjoy their richness and power and could care less about their presumed roles as leaders of this country. The ending of this situation is such that we are unlikely to see either a revolution or an evolution because the DoD, CIA, FBI, DoJ, SCOTUS and the main-stream-media spokes- persons are all either incompetent, naive, and/or bought off. Whom do you know who is willing to tell the emperor that even though he is recognized to be a crook, he is qualified to continue to pretend to know right from wrong and is qualified to lead? It is an interesting dilemma. While it might be more helpful were I able to offer a palatable solution, I have no idea as to what might comprise a proposal which has potential for being viable. A more important point to consider is how/where might such a topic as reform of the entire society take place?
[Comparisons are always helpful. Other advanced industrial countries manage to get things right, or more nearly right, so there's no a priori reason why we can't as well. If you're unfamiliar with them you might find Simon Johnson's blog notes interesting; I think he frames the financier question exactly the right way. g.]
Posted by: William Wilson | September 5, 2009 8:17 PM
Underlying classical economics is the devout belief that the individual is rational and independent — the Enlightenment faith.
This article from the Guardian describes recent research that gives the lie to this idea, and suggests that it is time that it was put to rest. So it appears we have nonsense founded on more nonsense here — nonsense squared, if you will.
http://www.guardian.co.uk/commentisfree/2009/aug/23/brain-society-politics
[Political economy from Adam Smith up through the late nineteenth century in Britain (the center of the discipline) always explicitly concerned itself with normative questions of distribution. Practitioners never would have made the grandiose claim that a "science" could tell them the answers. But in the very late nineteenth and early twentieth century Alfred Marshall, who coined the term "economics," explicitly, consciously, hived off as much philosophy as he could — there's a direct intellectual lineage from Marshall to Milton Friedman's Positive Economics. And that scientism remains by far the dominant paradigm. What's called ecological economics has started to offer a corrective from the supply side of things but something else — I like the old term political economy — needs to replace or at least compete with demand side conventions. g.]
Posted by: David Ford | September 6, 2009 2:11 AM