Paul Samuelson, Nobel Prize winning economist, MIT professor and innovator of the mathematical approach to economics passed away last month. See NY Times obituary. Economics: An Introductory Analysis is still the leading textbook for introductory college economic courses. Samuelson’s mathematical approach was the antecedent of econometric modeling wherein economic theory is combined with statistical methods to analyze and test economic relationships. Many of Obama’s advisors are proponents of mathematical modeling. Unfortunately, the real word is messier than Dr. Samuelson and his protégés would have you believe.
Economics and Hubris
An ivory tower economist who mixes math, economics and high powered computers as likely as not cooks up a stew full of hubris. I have a friend who studied with Lawrence Klein, another Nobel Prize winner. Econometricians believe that if one has enough statistical inputs and a big enough computer we can predict and control the economy. From the public pronouncements of Obama’s economic team and endless reassurances of recovery, this hubris is alive and well in Washington.
The Human Equation
Mathematics overlooks the human element, with all its unpredictability: fear, greed and yes – hubris. We over borrow and take excessive risks in good times and over save avoid risk and hoard in bad times.
We have just had the financial equivalent of a heart attack. What would an economic doctor prescribe to a post-heart attack patient?
- Rest – save, don’t spend
- Go on a diet and lose weight – get out of debt, don’t take on new debt
- Exercise – engage in economically productive activities; don’t speculate, merely trading in financial claims
- Quit smoking and drink in moderation – banks should avoid toxic lending and regulators should prosecute predatory lending practices
You Can’t Fool Mother Nature
Administration policy makers believe that their technocratic skills can immediately revive the economy. Since the economy is the sum of human actions, it is perhaps more organic, lifelike and anthropomorphic than policy makers would like. Armed with mathematical models and Keynesian dogma, technocrats believe they can accelerate recovery without harm to the patient. Their prescription is to add more debt at every level, inviting our “patient”, the consumer and the profligate financial institutions return to their errant ways. These habits caused the financial heart attack in the first place.
Instead the Administration could have encouraged the patient to do the hard work of economic rest, weight loss and exercise, creating a path to long term recovery and preventing a relapse. We came close to the second Great Depression. The actions of the Administration in short cutting much needed lessons can only lead to a worse and this time possibly fatal financial heart attack.
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