Wednesday, December 17, 2008

Real-world treats

As ever, there's plenty to chew on in the latest Real-world Economics Review (formerly the Post-Autistic Economics Review). Unsurprisingly, it's a financial crisis special, with three papers each on responding to the crisis itself, and on what it means for the study and teaching of economics. No less inevitably, there's a certain element of 'We told you so...'

The punchiest paper is from JP Bouchaud of Capital Fund Management, who's done some seminal work on the failures of standard market models (eg, "An Introduction to Statistical Finance", Physica A, 313, 1, 238-251). Here, in an expanded version of a short paper first published in Nature in October, Bouchaud outlines the fundamental case for a more scientific approach to financial economics -
Of course, modelling the madness of people is more difficult than the motion of planets, as Newton once said. But the goal here is to describe the behaviour of large populations, for which statistical regularities should emerge, just as the law of ideal gases emerge from the incredibly chaotic motion of individual molecules. To me, the crucial difference between physical sciences and economics or financial mathematics is rather the relative role of concepts, equations and empirical data. Classical economics is built on very strong assumptions that quickly become axioms: the rationality of economic agents, the invisible hand and market efficiency, etc. An economist once told me, to my bewilderment: These concepts are so strong that they supersede any empirical observation. As Robert Nelson argued in his book, Economics as Religion, the marketplace has been deified.
[JP Bouchaud, “Economics needs a scientific revolution”, real-world economics review, issue no. 48, 6 December 2008, pp. 290 - 291,]

Elsewhere, there's an intriguing paper by David George of LaSalle University, in which he studies the changing meaning of the words 'competition', 'monopoly' and their variants from 1900 to date -
Paradoxically enough, the firm that manages to become the only seller (an economist’s “monopolist”) or the firm that manages to be one of just a few sellers (an economist’s “oligopolist”) now qualifies for the title of “very competitive firm” since it’s the only one (or one of a few) that managed to survive the competitive struggle. Amazingly, the firm that is least able to be described as “competitive” by the old definition (a single firm in a sea of many firms) now is most able to be described as “competitive” by the new definition (a “victorious” or “most able” firm). This is a coup d’état writ large.
[David George, “On being ‘competitive’: the evolution of a word, ” real-world economics review, issue no. 48, 6 December 2008, pp. 319-334,]

To download the entire issue (530KB PDF), click here.



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