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It is sometimes saddening to see how Economics is currently being criticized for its failure to predict this and that. While at least economists realize that things are not that simple, non-economists have been really silent in offering concrete alternatives, or at least some that would be workable within a decade. Except for the econophysicists, who have no shortage of wacky ideas. They are always good to brighten your days, making you realize that Economics is after all in much better shape than we think.
My latest read was a paper by Hans Danielmeyer and Thomas Martinetz who have come to the realization that Robert Solow's 1956 growth theory is missing leisure and Economics has been in dire straights ever since. Because, you know, there are only 24 hours in a day. How could Macroeconomics have done without labor demand and supply? How could we have missed that long-term per-capita growth depends primarily on labor hours? Actually it does not. Growth accounting reveals that the labor input plays only third fiddle to total factor productivity, physical capital and possibly even human capital. But wait, Danielmeyer and Martinetz are even more innovative than I thought. They discover human capacity, which is general knowledge embodied through education. Quick, someone call Paul Romer.
This is truly path-breaking work we have here. The consequences are immense. As human capacity is limited, after all we are not omnipotent, growth will come to a halt. I eagerly await the authors' discovery of computers and technical progress. There is even a quantitative evaluation of the theory, which has much broader scope than you would expect. Indeed, it can explain the over-valuation of real estate in Japan, the 2008 banking crash can be traced back to policy makers neglecting the trade-off between growth and national wealth, and we face a "convergence crisis" in the 2040's because of stagnant human capacity. Fascinating.
My latest read was a paper by Hans Danielmeyer and Thomas Martinetz who have come to the realization that Robert Solow's 1956 growth theory is missing leisure and Economics has been in dire straights ever since. Because, you know, there are only 24 hours in a day. How could Macroeconomics have done without labor demand and supply? How could we have missed that long-term per-capita growth depends primarily on labor hours? Actually it does not. Growth accounting reveals that the labor input plays only third fiddle to total factor productivity, physical capital and possibly even human capital. But wait, Danielmeyer and Martinetz are even more innovative than I thought. They discover human capacity, which is general knowledge embodied through education. Quick, someone call Paul Romer.
This is truly path-breaking work we have here. The consequences are immense. As human capacity is limited, after all we are not omnipotent, growth will come to a halt. I eagerly await the authors' discovery of computers and technical progress. There is even a quantitative evaluation of the theory, which has much broader scope than you would expect. Indeed, it can explain the over-valuation of real estate in Japan, the 2008 banking crash can be traced back to policy makers neglecting the trade-off between growth and national wealth, and we face a "convergence crisis" in the 2040's because of stagnant human capacity. Fascinating.
8 comments:
I note your distinct lack of references to back up the progress that Economics supposedly has made since 1956.
Going for the low-hanging fruit again? The physicist on the team is well past retirement, which should surprise no one.
This paper is absolutely hilarious and sad at the same time. Good entertainment!
We want an econophysics tag!
Its not that economics cannot predict this data point or that weekly number -- its that they missed the worst recession since the Great Depression, mostly denying it will even while it was already well under way.
The profession also missed the worst US credit crisis in a century, completely blind-sided by what was obvious if you knew how to contextualize the data.
From political bias to physics envy, it is a profession in enormous need of a reboot.
There is now an econophysics tag. By now there is enough material for it.
I do not think Economics suffers from Physics envy, as I detailed in an earlier post. An it is not like no economist has warned about the dangers ahead of the crisis.
Also, I do not like when a whole profession is dismissed for this. Only a small fraction of economists would have anything to do with what lead to this crisis anyway. I hoped this blog would have conveyed that there is much more to Economics than forecasting the stock market.
The physicists drew on the economists (Pareto) for power law distributions.
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