In a post yesterday, my west coast pal Paul discusses how the Chicago School of Economics Circling the Theoretical Drain:
“In the current issue of the New Yorker there is an alternatively depressing and fascinating piece (Letter from Chicago) by John Cassidy about how the Chicago School of economics – monetarism, rational expectations, efficient market theory, etc. – is circling the theoretical drain. While some economists are abandoning the faith, many are not, and the result is, as Cassidy says, much like what happened in cosmology with Edwin Hubble discovered the expanding universe: Economists have lost their footing and are engaged in everything from rear-guard actions to active peer denunciations, and pretty much everything in between.”
It reminded me of an amusing but true tale of Economics from College. When I started my undergraduate work, I was a double major in Applied Mathematics & Physics. Both disciplines are based upon building blocks of logic, reason, and discipline. All subsequent course work is to a large degree premised upon what came before.
The math/science majors meant that I was obligated to take humanities and other (non-science) course work. So I signed up for (amongst other courses) Economics 101.
It took all of ten minutes into the first class for me to recoil in horror. I asked the prof: “What do you meant that humans are rational? That is obviously not true. How important is this idea to economics?”
The response was, in hindsight, not a surprise: “It is the fundamental building block for all of economics. If you fight that underlying concept, if you do not provisionally accept that premise, you will not be able to understand what comes later.”
So I made what turned out to be one of my very best academic decisions: I gathered my books and walked out the door, and dropped the class.
I am curious if anyone else had similar experiences, either in grad school or under-gradauate work.
Why is the Chicago School of Economics such an intellectually bankrupt line of thinking? It represents two major cognitive errors: First, it attempts to be an all-encompassing ideology, one that tries to explain much of economics via its fundamental constructs.
As history has shown us all too many times, most such ideologies eventually collapse under their own weight. Rather than recognize their own shortcomings and failures, these ideologies rationalize away stubborn facts. EMH does not permit consistent out-performance by managers, so it therefore comes up with half-assed reasons why Jim Simons, George Soros, John Paulson, Steve Cohen have not trounced the averages over their career. “Must be dumb luck” they dumbly rationalize.
Second, it was based on a rather silly and thoroughly disproven notion: That Humans are rational. Everything that follows is therefore premised upon a terribly faulty foundation. How on earth could that edifice come tumbling down?
If you are presently an undergraduate, and you are being taught by someone who believes in the Chicago School, run don’t walk to the registrar and switch to a different econ professor. It is the intellectual equivalent of a tenured Astronomy professor still teaching the Earth is flat following Ptolemy.
I have yet to determine which is worse: A bad ideology, or any ideology at all. . .
RIP Chicago School of Economics: 1976-2008 (December 23rd, 2008)
How Economists Got It Wrong (September 6th, 2009)
Read It Here First: “What Good Are Economists?” (April 25th, 2009)