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Stumbling in the dark

In his Op-Ed column at the NY Times Paul Krugman writes:

A few months ago I found myself at a meeting of economists and finance officials, discussing — what else? — the crisis. There was a lot of soul-searching going on. One senior policy maker asked, “Why didn’t we see this coming?”

There was, of course, only one thing to say in reply, so I said it: “What do you mean ‘we,’ white man?”

Krugman goes on to explain that, while people like to call the current financial crisis “unprecedented”, there were lots of warning signs.  Some were obvious – it seems like everyone was aware that the housing bubble was a bubble.  But, shockingly, the banks and rating agencies didn’t seem to realise that house prices might decline.  And we all know what the collapse of the real estate markets in Japan did to the Japanese economy.  No, most people don’t recall what happened in the early 90s.  But economists and policy makers should.  That’s kinda their job.

While the Japanese example is solidly cemented in my mind (thanks, in a large part, to Krugman’s Op-Eds almost a decade ago), I wasn’t familiar with the implications of the collapse of the hedge fund Long-Term Capital Management in 1998.  I remember it being a big deal at the time, and every time I hear the word “hedge fund” something stirs in my memory.  But I had no idea that it “temporarily paralyzed credit markets around the world”.

Krugman goes on to talk about the triumphalism that characterised the recovery from the 1997-1998 crisis and the collapse of the dot-com bubble, and how the fact that the world managed to step back from the brink made people more complacent.

In fact, both the crisis of 1997-98 and the bursting of the dot-com bubble probably had the perverse effect of making both investors and public officials more, not less, complacent. Because neither crisis quite lived up to our worst fears, because neither brought about another Great Depression, investors came to believe that Mr. Greenspan had the magical power to solve all problems — and so, one suspects, did Mr. Greenspan himself, who opposed all proposals for prudential regulation of the financial system.

People on the brink of disaster are often blissfully unaware.  Point it out to them and their reaction tends to be one worthy of a teenager; as Krugman said, “nobody likes a party pooper”.  Talk about the housing bubble, or the dot-com bubble, or the looking climate crisis, and people accuse you of fearmongering.  Or they simply do nothing because the implications are too disturbing to deal with.

Conservatives, liberals and adaptationists

I am always annoyed by the fact that everyone has an opinion on evolution.  Regardless of whether they can explain the first thing about how it works, they know whether they “believe in it” or disbelieve.  Many people, especially in the US, use their disbelief in evolution as a basis for political action.  Others will attack the “scientific orthodoxy” and claim the “evolutionists” are ideologically driven.  The whole idea of the scientific method and the tentative nature of all scientific knowledge escapes these people.  But when it comes down to it, if the average person doesn’t choose to have opinions on real scientific controversies, why jump in about fake ones?

Over the last few weeks it has begun to dawn on me that I should be awfully grateful that the general public isn’t more invested.  I should be grateful that I am not an economist.  Most people can describe themselves in terms of political ideologies, and those political ideologies are usually linked to economic “beliefs”.  Many of the most loudly expressed beliefs are “conservative”…belief in the power of the free market, belief in lower taxes, opposition to redistribution of wealth (except, of course, when it comes one’s own way).  Political parties are based, in a large part, on political ideologies.  Ideologies.  Not scholarly work.  Not data about how the world really works.  Ideologies.

Supply-side economics is a failed idea.  It’s been tested, it has failed.  The unrestricted free market has failed and failed horribly; Enron was one test, the “mortgage backed securities” scam was another.  But political ideologues are unmoved by data.  It was the failure of human nature, not of the system.  Hmm…where have I heard that before?  Oh yeah…communism.  Great idea, if only it wasn’t for human nature.

It’s bad that biology has become a political issue.  People take a biological question like “when does life begin?”, impose an arbitrary answer on it, and use it as a motivation to go and pass laws restricting how doctors can care for their patients.  But at its worst, the political appropriation of scientific ideas pales in comparison to what has happened with economics.  “I’m a fiscal conservative” says the average person who knows little about economics.  “I’m an adaptationist myself”, one might answer.

The Theory of Interstellar Trade

Paul Krugman, in his blog at NYTimes:

Thirty years ago I was an oppressed assistant professor, caught up in the academic rat race. To cheer myself up I wrote — well, see for yourself. Joshua Gans of the University of Melbourne scanned a copy of the thing I wrote — back then academics did their work with typewriters, abacuses, and stone axes — and was good enough to send me a copy. Ladies and gentlemen, I give you The Theory of Interstellar Trade.

Via Markos.

Krugman raises an interesting question

[H]ow should interest charges on goods in transit be computed when the goods travel at close to the speed of light?  This is a problem because the time taken in transit will appear less to an observer travelling with the goods than to a stationary observer.

Quite frankly, I rather doubt that science fiction authors have taken this factor into account.  How do the Ferengi deal with this?  Wouldn’t the later incarnations of Star Trek have been a much better if they’d had writers that were smart enough to wonder about questions like that?  Krugman ends his intro with

It should be noted that, while the subject of this paper is silly, the analysis actually does make sense.  This paper, then, is a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics.