Recently, I have made the case for updating economics in an essay and in this podcast with Russ Roberts. As I expected, I encountered resistance from three sources: people who think in terms of models; people who think in terms of Marxist sociology; and people who think in terms of Mises.
Somebody on twitter threw the Diamond-Dybvig model against my claim that economists do not understand modern finance. I get this a lot. People hold up that model and say, “See? We understand the financial crisis! We understand the financial crisis!”
I happen to know the paper, which shows that we can have a bank run in a mathematical model. It’s better than a model that does not allow bank runs. But apart from that, I don’t think that gives them much insight into how financial markets operate nowadays. (I actually prefer another Douglas Diamond paper, on financial intermediation as delegated monitoring.) I happen to think that one needs to understand phenomena related to housing, mortgage originations, capital regulations, mortgage-backed securities, CDO’s credit rating agencies, credit default swaps, repurchase agreements, and other components of modern reality. I say “stare at the world, not at your model,” and they say “stare at Diamond-Dybvig.” We have no common ground.
Other commenters say that everything one needs to know is in Mises. Regarding Mises, there seems to be no middle ground. His detractors under-rate him. His fans over-rate him. I don’t see him as having anticipated the issue of asymptotically free goods, just to take one example.
Finally, you get the folks who say that I am correct to stress the importance of culture in affecting economic behavior and who proceed to claim that this shows that Marxist theories of power explain everything. They don’t.
I agree with you that financial considerations deserve more attention as a structural factor in economic modeling, and the opening thoughts in your discussion with Russ Roberts led to my last post. However I believe financial intermediation to be highly important from a macroeconomic perspective:
https://monetaryequivalence.blogspot.com/2018/03/debt-as-factor-in-output-and.html
The last link doesn’t seem to work. [fixed, thanks]
Finance does not need to be modeled because it’s already a model. The paper print0ut
0f warehouse inventory models the warehouse. Writ large, this is all finance is, a money model of the world. Like any inventory bookkeeping, it tends to get out whack with the physical reality, hence the periodic need to walk down to the warehouse and count things. A financial crisis occurs when too much time elapses between counts or too much reliance is placed on the paper inventory read out.
It may just be that we are exiting a goldilocks like period when economics could provide viable insights. The analog industrial age was just robust and complex enough for stable patterns to form, but now, automated transactions are overtaking manual transactions. The increases in density, speed and inter-connectedness of the economic activity has made many of those economic patterns break down.
1) They don’t deeply understand the “financial crisis”, as will be seen when the next one comes… tho if there isn’t such a crisis in the next X years (20? 10? 5?), they will claim the lack of crisis as proof of their understanding / benign influence. And the influence is most important.
2) Marx is terrible, economically, but his importance is UNDER rated for “political economy”. His socialism helped (again? and again?) destroy the economy of Venezuela. No economist who wasn’t publicly & strongly against multiple of the Chavez & Maduro economic policies deserves any respect.
3) Mises followers, and Austrians in general, are most right about incentives.
I don’t recall much in Mises about the free public goods, but “traditional health care services” don’t seem to fit it like the other digital deliverable goods your link discusses.
I haven’t heard of, nor do I know think it’s causal, but it’s clearly prescient claiming it may “exacerbate the polarization between liberals and conservatives.”