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Archive for December 4th, 2008

Economics and the art market:

The world is in crisis and the art we are bringing this year reflects that

I have always found the art world fascinating: the complex and contradictory meeting of classes, ideologies, and representations.  This is an interesting article about the effects of the crisis on art buying.

Addendum (12/06): Layoffs at Hirst’s factory

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I find this article from Nature magazine confusing. The main gist of it is that the current model-driven approach to economics and finance has gotten us into this mess, and some sort of intellectual revolution is needed in economics or else it will happen again. The article grabbed my eye because it delineates arguments that should be encouraging for the heterodoxically inclined.

Classical economics is built on very strong assumptions that quickly become axioms: the rationality of economic agents (the premise that every economic agent, be that a person or a company, acts to maximize his profits), the ‘invisible hand’ (that agents, in the pursuit of their own profit, are led to do what is best for society as a whole) and market efficiency (that market prices faithfully reflect all known information about assets), for example. An economist once told me, to my bewilderment: “These concepts are so strong that they supersede any empirical observation.” As economist Robert Nelson argued in his book, Economics as Religion (Pennsylvania State Univ. Press, 2002), the marketplace has been deified.

Great. I agree with this 100%. These ideas are things we talked about from day 1 at QUEST meetings. It continues:

Reliance on models based on incorrect axioms has clear and large effects…We need to break away from classical economics and develop completely different tools. Some behavioural economists and econo-physicists are attempting to do this now, in a patchy way, but their fringe endeavour is not taken seriously by mainstream economics.

Is that really the answer? More complex modeling? At least they offer this for us weary of laissez-faire:

While work is done to enhance models, regulation also needs to improve. Innovations in financial products should be scrutinized, crash-tested against extreme scenarios outside the realm of current models…

Regulation should improve. Duh. Financial whiz-kids will lead us off the cliff. I get it. What I don’t get is this finishing statement:

Crucially, the mindset of those working in economics and financial engineering needs to change. Economics curricula need to include more natural science. The prerequisites for more stability in the long run are the development of a more pragmatic and realistic representation of what is going on in financial markets, and to focus on data, which should always supersede perfect equations and aesthetic axioms.

Is being more data-driven the answer? I guess my main problem is that the same breed of financial whiz-kids who used their simplifying models to earn outsized profits for years until the crash are the same whiz-kids that will be developing the new models. Can models really develop “a more pragmatic and realistic representation” of admittedly “wild” markets? I don’t get it. This article very clearly identifies simplistic quantification and modeling as what got us into this mess. And yet their solution is to just be better at that same discipline. Give me a break. Acknowledge markets are imperfect. Regulate like hell so that this stuff doesn’t happen again. But don’t lapse into a false sense of security because you think the next set of models will suck less. I think humility is the better path for economics, not a newfound sense of arrogance on better models that will work until the meltdown of 2015.

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