Three articles in close succession caught my eye last week. The first article was on the discipline of Economics and how students are demanding that the subject be taught differently, following the financial crises of 2008. Their claim is that their subject, ignorant of the increasing disparities in wealth distribution, is out of touch with the realities of the modern, networked, conflicted, and frankly greedy world.
“The real world should be brought back into the classroom” they argue, “as well as debate and a pluralism of theories and methods. This will help renew the discipline and ultimately create a space in which solutions to society’s problems can be generated.”
The intellectual space that the new Economics creates, they argue, could prepare the ground for real change. The students want interaction and engagement between disciplines; they want up-to-date and relevant. No more Nash equilibriums and neo-liberalism for them then; beautiful minds or not.
That economics is out of date is ably illustrated in the second article about Gerd Gigerenzer, whose work on the limitations of human rationality followed that of Herbert Simon. Sorry, Nobel prize winning economist Herbert Simon. The problem of many of his peers, Gigerenzer notes, is that they:
“begin from the assumption that various ‘rational’ approaches to decision-making must be the most effective ones. Then, when they discover that is not how people operate, they define that as making a mistake: “When they find that we judge differently, they blame us, instead of their models!” ”
Oh dear, another black mark for models, this time in Psychology! No students revolting their yet though.
Gigerenzer illustrates this with reference to Goldman Sach’s executives blaming their firm’s 2008 collapse on a ‘25-sigma event’ – something as likely as winning the national lottery 21 times in a row; i.e. something very, very, very, very (keep adding ‘very’s ad infinitum) unlikely.
Certainly not the type of event that would happen, as the aforementioned executives subsequently claimed, five times in five days.
The outdated models of the economists, coupled with the outdated models of the psychologists, have produced a quicksand unfit to generate any type of solution on. A fine old intellectual mess, in other words.
Which brings me to the third article about how to value intangible assets. The article begins:
“The link between economic growth and building things – preferably big things – is irresistible to politicians, but it makes it easy to ignore the less camera-friendly assets, from brands to intellectual property that make a modern economy hum. Spending on intangible things such as intellectual property, brands, software and design now outstrips spending on buildings and machinery in Britain.”
Is it now politicians, with their GDP obsession, who have got their models of growth (possibly given to them by the economists) all in a muddle? Most likely (with a probability far from a 25-Sigma event).
The ‘problem’ that is now slowly being solved is how to accurately value intangible assets, like Intellectual Property.
It is an algorithm that comes to the rescue, not us infallible humans (aren’t alogorithms created by humans? – ed.). Software called Yongle searches worldwide patent databases to work out if an idea is a novel one. Once this novelty is determined the idea can be valued economically. That means that not only can a market in intangible assets start achieving steady growth, but also that a truer picture of what actually keeps the economy ticking along can be gained.
This all sounds suspiciously like another way of making money to me, and I think that is what the students were objecting to in the first place. There are things that are happening now that can’t be valued because they are about the value system itself, not a value in a system of value.
I shall leave Robert F. Kennedy to elegantly express the problem in his 1968 address to the University of Kansas (16:20 – 18:10):
“Too much and too long, we seem to have surrendered community excellence and community values in the mere accumulation of material things. Our gross national product … if we should judge America by that – counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for those who break them. It counts the destruction of our redwoods and the loss of our natural wonder in chaotic sprawl. It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children.
“Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile. And it tells us everything about America except why we are proud that we are Americans.”
The first paragraph has a similar structure to the last paragraphs of James Joyce’s short story The Dead, but it is the second paragraph of the Kennedy speech which strikes the stirring chord. To me it is about better education. How can we appreciate the qualities of life that Kennedy refers to except through better education? The students seem to realise this, and perhaps they are right; it’s time for academics to catch up with the real world.
In 1968 a certain Nobel prize winning economist called Milton Friedman was also giving an address. This time a presidential address to the American Economics Association titled: ‘The Role of Monetary Policy’ in which he concluded:
“By setting itself a steady course and keeping to it, the monetary authority could make a major contribution to promoting economic stability. By making that course one of steady but moderate growth in the quantity of money, it would make a major contribution to avoidance of either inflation or deflation of prices. Other forces would still affect the economy, require change and adjustment, and disturb the even tenor of our ways. But steady monetary growth would provide a monetary climate favorable to the effective operation of those basic forces of enterprise, ingenuity, invention, hard work, and thrift that are the true springs of economic growth. That is the most that we can ask from monetary policy at our present stage of knowledge. But that much-and it is a great deal-is clearly within our reach.”
Hmmm, ‘steady but moderate growth’ – we’ve not seen that for a while have we?