INET: Adair Turner interview
February 2, 2011 7 Comments
Institute for New Economic Thinking: Interview with Adair Turner.
Lord Turner amplifies the criticism of ‘undue reliance of ‘sophisticated mathematics’ that he made in the ‘Turner review’. Keynes was forgotten, e.g. herd effects, self-reinforcing phenomena. Hayek, Minsky, Kahnemann and behavioural economics are along the right lines. The ‘sophisticated mathematics’ supported the wrong view, that the economy was largely driven by underlying ‘fundamentals’. In fact, economics is driven by nothing much but ideas. (This may be an exaggeration. DJM.)
After the crisis people were aware that something had gone wrong, and economics had learnt from the ’30s how to deal with a crisis. Some influential people think we should just tinker with the old ideas, and have freer markets. But we need new ideas, with a clear underlying theory. We must not be deluded any longer. We must think about real institutions, not mathematically tractable but unrealistic theories. (Economics has long sought precision, whereas Keynes showed that this was not realistically possible. If we accept imprecision, then Keynes approach may appear tractable. DJM)
Key delusions were:
- The ability (or desirability) of apparent predictability. Knightian uncertainty is key, both within and about any economic theory.
- The assumptions and attitudes that were necessary to yield ‘probability distributions’ were sometimes false. (See ‘reasoning epochs‘.)
- Extrapolation was often misleading. (See ‘reasoning epochs‘.)
- Ignoring the ‘deep uncertainty’ of Keynes’ ‘Treatise on Probability’.
- Ignored Charles MacKay’s ‘Madness of the Crowds’.
The models could not describe the world as it was: we should focus on the world as it yes.
(These views seem appropriate to any open complex adaptive system. DJM)
Lord Turner noted how credit against real-estate led to a self-reinforcing cycle, ‘fueling the fire’. Rather than establish axioms ‘for all time’, building model and then enacting model, one should search the data for self-reinforcing cycles. (Some economists seem to think that the ‘axiomatic’ approach is mathematical, but as Turing etc showed, combined with a need for ‘precision’ it is deeply misguided. The behavourist approach seems to be favoured, but can it cover all the bases? DJM)
Banks have an impact on the real economy, at least in a crisis and possibly long term. (Possibly this is a new phenomenon, following the recent innovations. Whatever assumptions one makes one ought to monitor.) Shareholders and senior managers are cushioned from failure, and so rationally want more leverage than is socially optimal (sensible?). (Following changes to the way universities are funded) banks funded , and hence heavily influenced, academia. Most economists are employed by financial institutions. Academics need to counter-vail the resultant biases, and need to understand potential failure. (The thinking seems to be that behavourists are doing this.) They need to learn from history, and the need to avoid sudden set-backs. (Is this possible? Avoiding small set-backs might lead to worse ones in the long-run.) It is crucial to work out what makes the economy stable. (And in what sense an economy can be ‘stable‘.)
Keynes (1931?) noted that we had ‘failed in the management of a complicated machinery whose workings we did not understand’. Maybe we should just deliver ‘prosperity’ to the poor and then allow (facilitate?) freedom and creativity. (This seems to combine the minimum essential requirements of ‘left’ and ‘right’. But is it enough?) The free market has a tendency to instability. (We may learn to avoid crashes like the last one, but) the next crash will be different.)
The economists look bad. There was no fore-warning. or explanation. (Actually, Brown seemed to supply an explanation.) The field needs to be broadened. It is not enough to model data. We need to (identify and) understand issues, coupling theory to empirical observation. Need to understand self-reinforcing cycles, including institutions, and the potential for dis-equilibrium. (There is a need to build more abstract models, develop concepts of causality, and vigilantly observe/search). (Mentions Kahnemann, Soros, …)