When it is all over, I hope to have added one term to the English language: Budgeism. It came from my interactions with the Missoula financial adviser. I began to notice over time that the bulk of his theories on economics were untestable. Yet he addressed matters with certainty – if only we did x instead of y, z would happen instead y … I shortened it to the following:
I believe my theories will work and yours will fail, in the future. Prove me wrong.
From there it’s easy to see how it works as a debate tactic. Take health care – the European systems are working well, adjusting as they must, and are not in any way threatened or unpopular. They will fail in the future. The US health care system is a colossal bust, with worse outcomes and immensely higher costs while inaccessible to a large portion of the population. In the end, it will work.*
Budgeism is useful in understanding the arguments of economists of the Randian, Austrian, or neoclassical schools. They can’t explain the past or present nor predict the future, and yet get paid for it. If neoclassical economics actually worked, they’d be out of a job, right? Don’t markets eliminate bad products?
The video below is of Steve Keen, a rebel who loves taking potshots at the neo’s while advancing his own theories. I certainly don’t have the chops to evaluate his work, but I do like his attitude and humor.
My favorite line:
Neoclassical economics: The application of bad mathematics to wishful thinking.
26-minute video below fold. Enjoy!
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*The actual person, Budge, favored a better health system, even a guaranteed minimum income, as Nixon once proposed, and so was a little more nuanced than most neoclassical economists (his persuasion was the Austrian variety). However, it is easier to use ‘Budgeism’ than ‘Natelsonianism’ and ‘Smithism’ (Greg Smith, the third writer at Electric City Weblog) could be half the phone book.
Piece of Mindful 
A shallow analysis. Just mocking some textbook simplifications doesn’t negate broad principles: scarcity makes some things more dear; people respond to incentives.
And the alternative? Some vague stuff in the distance based on chaos theory is not much to hang your hat on.
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Uh, this was a 26 minute clip. “Textbook simplifications” are one thing. He is saying that the whole of neoclassical economics has not progressed behind that. And there’s a reason for it – neoclassical economics is nothing more than stealth ideology masked as science.
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Well, when it comes time to push an ideology let me be sure to get out of your way.
Modern economics works well enough within broad guidelines. Part of the problem is that people always want more stuff and better predictions, and failure to deliver brings demands for a head.
Again, what framework of discussing the economy do you have that has better predictions? Why don’t you use it to better your or other’s lot in life?
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Keen wrote a book back around 2003 or so in which he predicted the coming crisis – at that time we were just coming off dot.com fiasco. It’s wasn’t a stopped-clock kind of prediction you often get in economics, but rather a reasoned account of why our economy could not withstand debt inflation.
He re-issued Debunking Economics and I read it last year, but oddly cannot find it. Must be Kailey!
Neoclassical economists were telling us prior to 2007 that debt did not matter. In fact, the neo’s don’t even figure banks and debt into their grand scheme, since for every dollar borrowed is both owed to and from and so cancels out. However, Keen saw an error in this judgment, saying that debt indeed does matter … if it is not paid back.
So I watch his blog, Debtwatch. He says we are creeping back into troubled waters, by the way, debt is climbing, sub primes are back.
I am not an economist, but I do recognize the smell of shit even if I’m told it is Shinola.
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And Keen was making his predictions based on…Marxism? Classical economics? Crystal ball?
Much of this depends on the assumptions made, e.g. the big problem in the ”08 crash was that most economists assumed people would keep paying their mortgages. It never occurred to some that people might quit paying. Like steel construction. We make assumptions about the expected load placed upon bridges and buildings, but sometimes the public doesn’t play nice.
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I don’t know what to tell you – I read his book, I’ve listened to him this afternoon as I worked, and he makes quite a lot of sense. But again, this was 26 minutes, and the guy has been doing this stuff for 40 years. So I suggest that you read him or explore him in more depth rather than merely dismiss him.
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Yes, I’m dismissive of this. Am I brainwashed by mainstream thought? Do I need to re-examine my premises?
I skipped through the video initially. So I sat down to closely watch the whole thing. Painful. Regarding current economics, he tosses out phrases like “absolutely absurd”; “ludicrous”, “insanity”. He then announces that political processes are a superior way to distribute goods versus a market economy. Then there is a painful foray into linear algebra, and he announces that the Perron-Frobenius theorem shows that neo-classical economics is inherently unstable. What hogwash! This was about a 1/4 of the way through. I had to stop watching. Freedom! The freedom of the stop button! I fear a totalitarian future where I will be in a cell with only this to watch.
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If you could only entertain 7 minutes of counterintuitive thought before your indoctrination forced you to stop watching, I’d say yer beat, Luke, stay down.
There’s a reason why I said that economics was stealth ideology – even though neoclassicism is pure bunkum, it favors concentrated wealth, and so its practice is subsidized and aided by Heritage and all the think tanks – ‘treetop’ propaganda, it’s called, or aimed at the leadership class. It doesn’t work – if the 2007 debt bubble did not teach you that, you’re unreachable. But it doesn’t have to ‘work’ so long as our tax and banking [and especially regulatory] systems remain as they are.
So listen to you – you just said that the ‘political processes’ are evil (not that word but that was the drift). What are they but complicated interactions in civil society? Who would oppose them but those who stand to lose – oligarchs, aristocrats?
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Just because something is counter-intuitive doesn’t mean it is correct, or better than what we have now.
“You don’t have to eat the whole apple to know it’s rotten.”
neoclassicism is pure bunkum
I’ll agree it has limitations, but that is a weird statement.
2007 collapse: if you make a bunch of bad bets, and lend money to people who blow it, you become poorer. Seems predictable under current theory. That private rich people had the public sector give them money to cover their losses, well, I rage on about that, and I have a list of names.
I’m not against organizing society along the lines of purely political processes, but that often doesn’t work out too well. Let’s not be too naive here.
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Just because something is intuitive (“common sense”) does not mean it is right.
Neoclassicism is pure bunkum. For instance, how many of them foresaw the 2007 collapse – one or two? And your notion that the collapse was caused by people who blew their money challenges credulity. First, it was the banks who engaged in massive fraud in placing so many mortgages, causing the housing bubble, which could not sustain. Then they made bets and counter-bets on those funds, insuring and cross-insuring those bets. It was a neoclassical house of cards because remember, neoclassicism does not count debt or pay any regard to banks.
Neoclassicism also tells us that that there is an inverse relationship between tax rates and economic activity. False by evidence. They tell us that governmetn deficits are bad, even in time of recession, also false. They tell us private debt doe snot matter. False.
Bunkum.
Of course there are conflicts in politics. OF course it doesn’t always work out well. But tell me, can it be worse than we have now?
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Things are pretty good now. Don’t kid yourself. It could be a lot worse.
Listing all the things you don’t like and then attributing them to neoclassical economics is not a sound way to argue.
You look at economics in purely ideological terms. It should be a science that goes on no matter the ideology.
The banks made the loans, but someone had to be on the other side promising to pay. Is the public unable to order their affairs? Maybe so, but that becomes the problem rather than if we are making policy based on neoclassical economics or Marxism.
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The FBI found that the banks were fraudulent in 80% of those cases where fraud was involved in making loans. The incentives were all screwed up – banks were extorting unseemly fees, and then turning around and dumping the mortgages into traunches that were converted to securities that become the CDO’s. They insured themselves against loss, but the derivatives exceeded the original mortgages many times over. Consequently, when the underlying mortgage failed, everything that derived from it failed, and the house collapsed.
These is the basics of the collapse. I very high percentage of the mortgages involved people who did not even take occupancy of the house, so careless were the banks. These were people who should not have been offered a mortgage, but it was the banks who had dispensed with due diligence. But then, they got bailed out.
Is neoclassical economics at fault here? Absolutely! The “sciences” says that debt does not matter, and does not even factor banks into its equations. So Bernanke was blissfully ignorant of the oncoming debacle, as his philosophy/science could not embrace it.
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You are saying here that neoclassical economics (n.e.) gave banks permission to engage in fraud. ??? Not the case. There is no blanket statement from n.e. saying that debt doesn’t matter. Debt for personal consumption just raises the price of that consumption. Debt not payed back is capital consumption, something you seem to favor under other circumstances.
We need a primer on economics here.
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Neoclassical economics deregulated the banks by repealing Glass Steagall, and fraud followed like the little lamb followed Mary. Soon began financial betting with OPM, incomprehensible financial products cross-insured like a house of cards, money making money on money, the opposite of investment, which had long been untethered from the real economy via Reaganomics.
NE also flatly states that debt does not matter, as repeated by Bernanke during the runup.
Here’s where ideology comes in: NE has no predicative value or explanatory power. However, it does favor concentrated wealth via low taxation and absence of regulation. Ergo, concentrated wealth funds NE via think tanks and university chairs, so it is virtually the only economics taught. The ideology is mere aristocratic privilege, if it can be called such. There is no concentrated wealth that favors other schools. Only intellectuals like Keen.
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NE says that regulation distorts the market. But I don’t see why market distortion is always a bad thing.
For that matter, much of the mortgage meltdown was from regulation the other direction: the central planners were pushing for more home ownership; and through mechanisms like the Community Re-investment Act they pushed for all these lovely loans to be made. Some of the biggest cheerleaders during the run up were regulators like Barney Frank and Franklin Raines.
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No one who has studied the issue places any stock in the idea that CRA had anything to do with it. The data does not support it. It was a bank job beginning to end, their fault in all aspects, especially in removing penalties on the ground for bad loans. Incredible fraud – I’ve read that as many as 30% of new loans in the closing days before the meltdown where ghosts – no one even occupied the properties.
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… places any stock in the idea that CRA had anything to do with it.
Maybe such people are serving power, and we should be suspicious of this conclusion. Some in the know have come to have a different point of view.
When the fed gov’t pushes these easy loans for their pet constituency, it lowers standards for everyone.
I was in southwest Florida during this time. I’d joke that there were no used car salesmen in south Florida: they were all selling real estate. Plenty of sleaze all the way around, but there were willing parties on both sides. Acquaintances were madly refinancing their homes for party money. The greed was palpable. I pointed out the absurdity of the fine print to one person: a 50 year interest only loan with a balloon payment at the end. “How can you go into such a thing? You probably won’t even live that long. You are building no equity. All you have is an overpriced rental with a 50 year lease, and at the end they come and take all your stuff.” Answer: “It doesn’t matter. The price is always going up on this real estate. They are making no more land. I’ll just keep refinancing every couple of years to maintain myself in the lifestyle to which I have become accustomed. In the long run we are all dead.” The gist, anyway. This particular person ended up walking away when the SHTF. The house sold out of foreclosure for a price from ten years ago.
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None of the behaviors you speak of are n any way related to CRA. We rely on bankers to be gatekeepers in the housing market, and not to loan money to bad prospects. With the repeal of Glass-Steagall, the culture slowly shifted from diligence in lending to placement of as many loans as possible, high fees, low standards, loans going out the back door as soon as they came in the front, traunches and derivatives … You are right about the people on the receiving end, by and large. They are not the problem, however, as they did not make the loans. Bank behaviors made it all happen. They proved to us how important it is that we regulate their activities.
We bought our house in 2010 down here. We underwent intense scrutiny in every aspect, going back in our credit over ten years, verifying every detail. Had it been 2007, the mere fact that we were breathing would have been enough.
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The biggest flaming stone in the mortgage meltdown probably was Countrywide financial.
Plus GW pushed minority home ownership via no down payment as a way to raise living standards of that cohort. I’m not saying that minorities cratered the economy, but the lax lending standards drawn up in that catering mentality degraded standards across the board.
Don’t forget that the more liberal types in Congress pushed for lax lending standards. Of course, ’cause liberals love to give other people’s stuff away. The more conservative types in congress pushed for more oversight of this lending, but of course they were demonized and called names.
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Countrywide was a bad player, as were Wall Street Banks. FannyMae and SallieMae were late comers playing catchup. The best summary I’ve read was a book that SK gave me, “All The Devils are Here, McLean/Nocera, which chronicles and timelines everything. The authors are business journalists.
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McLean & Nocera’s book? Why are you torturing me?
Wall Street prices, sells, and manages assets of all types all day long. Things went spectacularly bad with home mortgages circa 2008. Hmmm. I wonder why. And the Street had been dealing in such for many years before. Hmmm. I wonder what changed. I don’t think it was because bankers all of a sudden became more greedy. I tend to think that our politicians were stomping harder on the gas to get the vigorish of campaign financing, economic growth, and folding minorities/immigrants into the mainstream.
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It wold be useful if you would do more than speculate based on bias.
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The literacy rate is so low in both science and economics it’s hard to debate either in a public forum. We are exposed constantly to post hoc rationalizations of decisions already made in our name without our knowledge or consent. By design this excludes meaningful public participation and debate to protect state-within-a-state structures that operate outside Constitutional authority. Obsession with the perception of authority is the natural enemy of the free individual and all organized forms of free individuals. Deregulation and privatization is all about control, not economics, or even “ideology” for that matter.
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Looks like you badly miss Dave. His writing was spectacular. The internet is greatly diminished without his postings.
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He is indeed the best writer I encountered out there. But his economics was Natelsonian bunkus.
And don’t kid yourself. He’s around. He reads this.
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