Economyths - ten ways economics gets it wrong Part 15

39 As economist Neva R. Goodwin notes: "every year, 1.4 million undergraduates in the US take an introductory economics course that teaches that only selfishness is rational." Monaghan, P. (2003), "Taking On 'Rational Man' ," Chronicle of Higher Education, 49, A12.

40 The quality and extent of social networks appears to be in decline in many rich countries. One study found that the average number of people with whom Americans can discuss important matters dropped from about three people in 1985 to about two in 2004. McPherson, Miller, Smith-Lovin, Lynn, and Brashears, Matt (2006), "Social Isolation in America: Changes in Core Discussion Networks Over Two Decades," American Sociological Review, 71, 353-75.

Chapter 10.

1 Henriques, Diana B. and Berenson, Alex (2009), "The 17th Floor, Where Wealth Went to Vanish," New York Times, 14 December 2008; Arvedlund, Erin (2009), "How Bernard Madoff escaped detection," Financial Times, 4 September 2009; Frean, Alexandra (2009), "Madoff started Ponzi scheme to 'cover losses'," Times, 30 October 2009.

2 Smith, Randall (1992), "Wall Street Mystery Features a Big Board Rival," Wall Street Journal, 16 December 1992.

3 When these issues are mentioned, it is usually in a kind of pretend-impartial baby language that presents them as beyond the scope of the book. For example, Mankiw's Principles of Economics (p. 610) does acknowledge "the possibility of speculative bubbles" but gives the last word to the efficient market hypothesis: "if the market were irrational, a rational person should be able to take advantage of this fact; yet ... beating the market is nearly impossible."

4 Arlidge, John (2009), "I'm doing 'G.o.d's work'. Meet Mr Goldman Sachs," Sunday Times, 8 November 2009.

5 Farmer, J. Doyne and Geanakoplos, John (2009), "The virtues and vices of equilibrium and the future of financial economics," Complexity, Vol. 14, No. 3, 11-38.

6 As George Cooper notes: "The intellectual contortions required to rationalize all of these prices beggars belief, but the contortions are performed, none the less, in the name of defending the Efficient Market Hypothesis." Cooper, George (2008), The Origin of Financial Crises: Central banks, credit bubbles and the efficient market fallacy (London: Harriman House), p. 10. See also: Pastor, L. and Veronesi, Pietro (2006), "Was there a NASDAQ bubble in the late 1990s?" Journal of Financial Economics, 81.

7 Daly, Herman (1991), Steady-State Economics: Second Edition with New Essays (Was.h.i.+ngton, DC: Island Press), p. 9.

8 Triana, Pablo (2009), Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets? (New York: Wiley), p. 44. This is ironic, since tenure is supposed to protect academic freedom. But in some fields it seems that anyone who doesn't fall in line early in their career won't get tenure.

9 Cohen, Patricia (2009), "Ivory Tower Unswayed by Cras.h.i.+ng Economy," New York Times, 4 March 2009.

10 Jay, M. and Marmot, M.G. (2009), "Health and climate change," British Medical Journal, 339, b3669.

11 Hood, Leroy (2008), "A Personal Journey of Discovery: Developing Technology and Changing Biology," Annual Review of a.n.a.lytical Chemistry, 1. See also: www.systemsbiology.org 12 Browne, M.N. and Quinn, J.K. (2008), "The Lamentable Absence of Power in Mainstream Economics," in John T. Harvey and Robert F. Garnett (eds), Future Directions for Heterodox Economics (University of Michigan Press), 240-61.

13 In 2009, one hedge fund manager even went to the lengths of renting a tanker, filling it with a million barrels of oil, and paying it to float for six months, on the bet that the oil price would go up in the meantime. Note that this type of profiteering, which relies on price instability, is very different from ecologically-motivated schemes to stabilise the oil price within a particular country. Gandel, Stephen (2009), "How Citi's Andrew Hall Made $100 Million Last Year," TIME, 19 October 2009.

14 Testimony of Michael W. Masters, managing member/portfolio manager, Masters Capital Management, LLC, before the Committee on Homeland Security and Governmental Affairs, United States Senate, 20 May 2008.

15 Turner, Adair (2009), speech by Adair Turner, chairman, FSA, the City Banquet, the Mansion House, London, 22 September 2009: http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2009/0922_at.shtml 16 Treanor, Jill and Inman, Phillip (2009), "Banks defend bonus culture as profits jump," Guardian, 3 August 2009.

17 See interview at: http://media.bigthink.com/ideas/17908 18 Ungoed-Thomas, Jon (2009), "Banks resist government plan to publish bonuses," Sunday Times, 25 October 2009. Another complaint was that they would infringe on privacy, but the plan was to release them anonymously.

19 Fabian Society (2009), "Public Att.i.tudes Towards Economic Equality: Report for the Joseph Rowntree Foundation."

20 Ayres, Ian (2007), Super Crunchers: How Anything Can Be Predicted (London: John Murray), p. 147.

21 As London mayor Boris Johnson pointed out, "the leper colony in the City of London produces 9 per cent of UK GDP," and so needs protection. Hughes, David (2009), "Bankers 'vital' for recovery, says Johnson," Independent, 5 October 2009.

22 Another impact is to distort housing markets. In the UK, one 2007 report found that "the average house price in 99 per cent of towns was too rich for the typical nurse." Chisholm, Jamie (2007), "House price rises show signs of slowing," Financial Times, 13 April 2007.

23 Krause-Jackson, Flavia (2008), "Pope Says Credit Crunch Shows Money Is 'Nothing'," Bloomberg, 7 October 2008.

24 Murphy, Megan (2009), "Archbishop chastens City for failure to repent," Financial Times, 16 September 2009.

25 Masters, Brooke (2009), "Turner tells bankers to focus on core roles," Financial Times, 22 September 2009.

26 Orrell, David and McSharry, Patrick (2009), "System economics: Overcoming the pitfalls of forecasting models via a multidisciplinary approach," International Journal of Forecasting, 25, 734-43.

27 Author and environmentalist Mark Lynas described it as "the world's most environmentally destructive industrial project." Of course, coal is a pretty destructive project too, if taken over a country the size of China. Lynas, Mark (2009), "We need to go cold turkey to kick our addiction to oil," New Statesman, 12 November 2009.

28 See, for example: http://www.greenpeace.org/canada/en/campaigns/tarsands; http://oilsandstruth.org/ 29 Weber, Bob (2009), "Oil sands may feel effect of Norway election," Globe and Mail, 9 September 2009.

30 If you don't think the Albertan government can ever be made sensitive to environmental pollution, just try lighting up a cigarette in one of their offices. That wouldn't have been a problem either, not so long ago.

31 For example, in 1965 the Pentagon-affiliated RAND corporation began funding economics fellows.h.i.+ps at Harvard, Stanford, Yale, Chicago, Columbia, Princeton, and California universities. Those inst.i.tutions (plus MIT) have since dominated the field of economics.

32 One example is the Smith School for Enterprise and the Environment, based at the University of Oxford, which conducts research on the public and private sector responses to environmental challenges.

33 Bannon, Lisa (2009), "As Riches Fade, So Does Finance's Allure," Wall Street Journal, 21 September 2009. A 1990 study by economists Kevin M. Murphy, Robert W. Vishny and Andrei Schleifer concluded that: "Some professions are socially more useful than others, even if they are not as well compensated." Murphy, Kevin M., Shleifer, Andrei, and Vishny, Robert W. (1990), "The Allocation of Talent: Implications for Growth," NBER Working Papers, 3530. Adair Turner also pointed out that much of the work performed by the financial sector is "socially useless." Monaghan, Angela (2009), "City is too big and socially useless, says Lord Turner," Daily Telegraph, 26 August 2009.

34 The model for this was students at the Sorbonne in Paris whose revolt against neocla.s.sical economics led to the founding of the post-autistic economics movement. See the student pet.i.tion at: http://www.paecon.net/ RESOURCES.

Here is a partial list of organisations, websites, and books that can serve as a starting point for further investigations into new economic ideas. I will keep this list updated at my personal website: http://www.davidorrell.com A number of inst.i.tutions do research and teaching in the applications of complexity theory to economics. See for example:LSE Complexity Programme: http://www.psych.lse.ac.uk/complexity ETH Zurich Systems Design: http://www.sg.ethz.ch Santa Fe Inst.i.tute: http://www.santafe.edu A good introduction to complexity economics is: Beinhocker, Eric D. (2006), Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics (Boston, MA: Harvard Business School Press) For a guide to network theory, see: Barabasi, Albert-Laszlo (2003), Linked: How Everything is Connected to Everything Else and What it Means for Business, Science, and Everyday Life (Cambridge, MA: Plume) Groups involved in applications of nonlinear dynamics and systems theory to business and economics include:MIT System Dynamics group: http://sdg.scripts.mit.edu Society for Nonlinear Dynamics and Econometrics: http://www.sndeecon.org System Dynamics Society: http://www.systemdynamics.org See also: Sterman, John D. (2002), "All Models are Wrong: Reflections on Becoming a Systems Scientist," System Dynamics Review, 18: 501-31.

Useful and entertaining books on risk and uncertainty in financial markets include:Mandelbrot, Benoit and Hudson, Richard L. (2004), The Misbehavior of Markets: A Fractal View of Financial Turbulence (New York: Basic Books) Makridakis, Spyros, Hogarth, Robin, and Gaba, Anil (2009), Dance with Chance: Making Luck Work for You (Oxford: Oneworld) Taleb, Na.s.sim Nicholas (2007), The Black Swan: The Impact of the Highly Improbable (New York: Random House) The psychology of money and decision-making:Ariely, Dan (2009), Predictably Irrational: The Hidden Forces That Shape Our Decisions (London: HarperCollins) Thaler, Richard H. and Sunstein, Ca.s.s R. (2008), Nudge: Improving Decisions About Health, Wealth, and Happiness (Yale University Press). See: http://nudges.org Frey, Bruno S. and Stutzer, Alois (2002), Happiness and Economics: How the economy and inst.i.tutions affect human well-being (Princeton University Press) To understand the psychology of traders, a fictional approach might help: Is.h.i.+kawa, Tetsuya (2009), How I Caused the Credit Crunch (London: Icon) For information on heterodox economics:Real-world economics review: http://www.paecon.net/PAEReview Heterodox Economics Newsletter: http://www.heterodoxnews.com Heterodox Economics Portal: http://www.open.ac.uk/socialsciences/hetecon For a critique of neocla.s.sical theory: Keen, Steve (2001), Debunking Economics: The Naked Emperor of the Social Sciences (Sydney: Pluto Press). Now also available as an e-book; see: http://www.debunkingeconomics.com For a critique of neocla.s.sical practice: Klein, Naomi (2008), The Shock Doctrine: The Rise of Disaster Capitalism (London: Penguin) Ideas on reducing inequality: Wilkinson, Richard and Pickett, Kate (2009), The Spirit Level: Why Greater Equality Makes Societies Stronger (London: Bloomsbury) See also: http://www.equalitytrust.org.uk For ecological economics, visit the International Society for Ecological Economics, which also has a list of regional societies: http://www.ecoeco.org One of the founders of the field was Herman Daly, who has auth.o.r.ed or co-auth.o.r.ed a number of works, including a recent textbook:Daly, Herman E. and Farley, Joshua (2010), Ecological Economics, Second Edition: Principles and Applications (Was.h.i.+ngton, DC: Island Press) Some organisations that are working to reshape economics and the economy:New Economics Foundation (UK): http://www.neweconomics.org Center for the Advancement of the Steady State Economy (US): http://steadystate.org Global Footprint Network: http://www.ecofoot.net Redefining Progress, US think-tank that introduced the Genuine Progress Indicator: http://www.rprogress.org Pembina Inst.i.tute, Canadian think-tank promoting sustainable energy solutions: http://www.pembina.org Adbusters magazine's campaign against neocla.s.sical economics: https://www.adbusters.org/campaigns/kickitover Ethical Markets Media, a media company founded by Hazel Henderson: http://www.ethicalmarkets.com; also http://www.hazelhenderson.com Oxford seems to be evolving into a hub for groups that promote a multidisciplinary, systems approach to thinking about the economy and the future:Smith School of Enterprise and the Environment: http://www.smithschool.ox.ac.uk James Martin 21st-Century School: http://www.21school.ox.ac.ukInst.i.tute for Science, Innovation and Society: http://www.sbs.ox.ac.uk/centres/insis/Pages/default.aspx Finally, these books are about other branches of science, but the ideas in them also apply quite well to economics:Midgley, Mary (1985), Evolution as a Religion: Strange hopes and stranger fears (London: Methuen) Fox Keller, Evelyn (1985), Reflections on Gender and Science (London: Yale University Press) Smolin, Lee (2006), The Trouble With Physics: The Rise of String Theory, the Fall of a Science, and What Comes Next (Boston, MA: Houghton Mifflin) McGilchrist, Iain (2009), The Master and his Emissary: The Divided Brain and the Making of the Western World (London: Yale University Press) ACKNOWLEDGEMENTS.

Thanks to everyone at Icon Books, especially Simon Flynn and Duncan Heath for helping get the ma.n.u.script into shape; to Karen Milner and the team at Wiley Canada; to my agent Robert Lecker; and to my family.

Thanks also to Emmeline Skinner, Patrick McSharry, and Beatriz Leon for their close reading of portions of the ma.n.u.script and valuable comments.

This book owes much to the work of a large number of "heterodox" economists, who are cited in the text and notes. May they one day be considered, not as orthodox, but as the founders of a richer and more diverse kind of economics, for which words such as orthodox and heterodox have little meaning.