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Worrying signs of “new thinking”

YC Zhang

posted on 12 April 2010

During the spectacular financial market crashes and the resulted recession, there has been a renewed assault on the Efficient Market Hypothesis (EMH) and its theoretical basis—mainstream economics. George Soros announced in Oct. 2009 that he will put 50 million dollars over ten years to establish an “Institute for New Economic Thinking”. We remember that in 2003 he has committed 3-5 millions to try to get George Bush not elected. Soros the financier probably knows that the effort to dethrone the dominance of the mainstream economics would be a much harder challenge. Despite being discredited many times over the past century, mainstream economics still prevails in most leading economics departments around the world. Soros the philosopher’s new battle will have little chance of success if the allies and opponents are not identified. For our small community of scientists working on economic and financial problems, Soros's gesture is a much welcome signal as there is chance that fresh ideas and methodologies may get attention and we may feel emboldened to take on the root causes of the current old economic paradigm.

However, our initial enthusiasm is quickly disenchanted as the INET board members and speakers list are set up, they are the most prominent members of the establishment, though most have a progressive bend but their methodology is deeply rooted in the neoclassical theory. The first event of INET was to launch the initiative in Cambridge over the past weekend with much fanfare and press coverage. Given the majors players of the INET, the event may look comic—as if in the last years of Soviet Union, Gorbachev knowing the rotten dogma couldn’t continue any longer, set up a committee with the mission to overthrow the old paradigm, but invited mostly politburo members and Red army generals! Can we seriously believe they have any interest to study the ways how they’d be buried? The same thing now with INET, by inviting mostly the multiple decorated economists are we serious to dethrone the Old Thinking and replace it with a New Thinking?! Indeed, as Paul Ormerod (author of Death of Economics) blogged on this forum, precisely the old thinking dominated the Cambridge meeting, as we feared.

In the blog section, readers will find some feedback from attendees (they were not invited to speak) of the Cambridge meeting, below I posted also the first draft of our open letter. For a more polite, politically correct open letter please see the special section where some sample work is posted as well.



(1st draft of Open Letter to Soros)

Dear Mr. Soros,

As the members of the so-called Econo-Physics community, we are heartened to learn your initiative of “Institute of New Economic Thinking”. As you may know already, about a couple hundreds of physicists since more than ten years have been trying to crack into the field of finance in particular, socioeconomic phenomena in general, and we feel this trend is unstoppable as economy is too important to leave to economists alone.

We decided to write to you directly as we see this as an important milestone, that your initiative as a call for multi-disciplinary research to dethrone the moribund Neoclassical Paradigm, finally to replace with something new. Some of us have heard your Budapest lectures in 2009 and we believe that human endeavors must be treated differently than “hard sciences”, and reflexivity idea you’ve been advocating must be an important element in the New Paradigm that may emerge.

But we are so far frustrated that the forthcoming inaugural event at Cambridge is dominated by the mainstream economists and few outsiders are represented. In particular, no representatives from the Econo-Physics community are invited, despite our initial contact with the organization.

Mainstream economists, even the very progressive ones that will be massively present at the Cambridge meeting, are still deeply rooted in the old paradigm, despite many are very critical of the current economic outcomes and complaining about the dominant theory. The stakes are too high for the highly acclaimed economists who spent most of their careers with the neoclassical methodology (utilities, maximization etc), it’s unrealistic to expect radically different approaches can originate from the stakeholders. To take but one example, in their recent book “Animal Spirits”, Akerlof and Shiller (who otherwise command our highest esteem for their pioneering work like information asymmetry and behavioral finance) blamed the subprime crisis squarely on the “crazy & greedy” speculators. Since Adam Smith’s time we know that bankers are by profession must be greedy, if the market fails system wide, it’s the regulator who deserves the blame (Greenspan was “shocked to learned” that that bankers were so much for selfish gain in his Senator hearings).

The highly acclaimed economists at the end of their glorious careers are not particularly apt to learn new tools and switch to “new thinking”, even as progressive thinkers they tend to strongly to differ with market fundamentalism and their good social conscience often urges them to defend public interests. However if we look at their core work we may have the impression that often their innovative work is piecemeal repair work of the mainstream economics, of those present at Cambridge across them there five new economics textbooks, invariably still heavily rooted in the Neoclassical Paradigm. We can understand the reluctance to go back to the drawing board to start with a clean slate.

As physicists by training we know better the pitfalls of mechanic-analogy, it is especially misleading to mimic 19th century physics to human endeavors. The under-signed have been probing various social-economic phenomena, though nothing yet earth shaking come from our community, but initial efforts start to bear fruits. Our methodology is varied, and models are more rooted in empirics, high theory has less space than understanding forces behind.

We firmly believe that we can make significant contribution in your new initiative and our community, having no stake in the mainstream profession, can act as a independent balance for the multi-disciplinary challenge.

Discussion

I completely agree with Mr. Zhang's remarks. It is the perfect time to bring together an interdisciplinary group to bring non-equilibrium thinking to economics. The conference agenda and speakers were, however, more than disappointing--the high priests of the current economic order. I hope to see a much different, and more interesting, cast of characters at the next meeting.
John Rutledge
Senior Research Professor of Economics
Claremont Graduate University
www.rutledgecapital.com

I think my project on Transfinancial Economics may be of interest. See my p2pfoundation entry on the subject.................

Apologies problem with link I think..

http://www.p2pfoundation.net/Transfinancial_Economics