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Crisis quote of the day…

December 23, 2009 Leave a comment Go to comments

Occasionally, an economist will say something that makes it all clear exactly your position in the food chain. This one was just a link on Angry Bear to an article on still another blog:

“All of our current models prefer people to starve and die.”

A link on the second blog will take you to this article in the Harvard Gazette about a young prodigy – a tenured professor of economics – who has discovered that economics is a load of crap.

What! An economist who admits his field is pure ideological claptrap?

Okay, not actually.

His insight is limited to the conclusion that economic models used today miss something important: reality.

[Raj] Chetty, who just turned 30, is looking for ways to make the serenity of mathematical economic theory more descriptive of the tangle of economics in the real world. “People are not human calculators,” he said, and so sometimes make decisions that defy traditional models of economic theory.

As is to be expected in a profession that is highly politicized by Washington’s pretense that its particular interests are in fact the general interest of society – indeed the world – Raj has set out to fix this problem – and, apparently, he is drawing some attention for it – not by burying economics, but seeking to remedy its defects with some ingenious work around.

In one example provided by the article, Raj explains that the standard models argue against any support for unemployed families in the middle of this economic collapse:

When someone is laid off, should the government provide high benefits? Traditional theory says no, since big benefits seemingly reduce the incentive to find a job. “Standard models predict that we should have no safety net,” said Chetty.

Okay, fine. But then you run into the problem that, eventually, families without any income can’t pay off their debts, mortgages, or rent, buy groceries, clothes, heating oil, 42 inch high definition wide screen televisions, and lose all connection with the economy, and finally die from starvation under a bridge. And, since people who have no income can’t do all of the things we mentioned, banks, shops, landlords, car dealerships, and eventually even Wal-Mart go belly up:

But in reality, higher benefits are more in line with actual needs, because most Americans have so much income tied up in fixed commitments, such as payments for houses, cars, and furniture. “There are a lot of things you can’t adjust in the short term,” he said.

So the traditional economic models that are used to determine unemployment benefits miss a simple fact: People have bills to pay. “You miss certain features of reality,” said Chetty, “when you’re trying to write down simple models of the world.”

The question to be raised at this point is not how this can be fixed, but how anyone, much less a 30 year old tenured professor, at one of the nation’s most prestigious and influential universities, could admit to using a model which fundamentally ignores the fact that a starving population of indebted workers might be bad for business?

Is there, in any other branch of science, a model of the real world that suffers such a defect?

Could medicine argue that the efficacy of some particular treatment of a disease does not depend on whether the patient is alive and breathing, or decomposing in the graveyard?

“He’s dead – too bad! Well, at least we can treat that cold!”

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