Quick What the Fuck
Get your facts straight, DeLong:
"Richard Posner, leader of the Chicago School of Economics and Fourth Circuit Court of Appeals judge, uses his new book, “A Failure of Capitalism,” to try to rescue the Chicago School’s foundational assumption that the economy behaves as if all economic agents and actors are rational, far-sighted calculators."
Leader of the "Chicago School of Economics"? Really?
Fourth Circuit Court of Appeals judge? Really?
Encountering two glaring errors in the first sentence of a piece is not a good sign.
"Richard Posner, leader of the Chicago School of Economics and Fourth Circuit Court of Appeals judge, uses his new book, “A Failure of Capitalism,” to try to rescue the Chicago School’s foundational assumption that the economy behaves as if all economic agents and actors are rational, far-sighted calculators."
Leader of the "Chicago School of Economics"? Really?
Fourth Circuit Court of Appeals judge? Really?
Encountering two glaring errors in the first sentence of a piece is not a good sign.
posted by James | 9:47 PM
7 Comments:
I don't think the "Chicago School of Economics" was meant to refer to an actual institution
Doesn't matter - Posner isn't the leader of the "Chicago School of Economics" in any sense. I mean, it's laughable. Maybe you could say that he's the "leader" of the Chicago school of law and economics, but law and economics is a tiny subset of what we mean by Chicago economics.
It's an imperfect analogy, but I think of someone describing Stephen Jay Gould as "the leader of the Evolutionary School" or something. Yes, he was a famous evolutionist (in a sense), but no one who knew anything about the field would attribute its leadership to him.
I figured it was a typo and he meant, awkward though it would be, like this sentence, "Chicago School of Law and Economics." The Fourth Circuit thing really gives the piece a careless flavor, though.
As does the analysis -- I think it's overly general, ambiguous, and, er, shrill. He doesn't do a good job of articulating what exactly he's railing against. It seems that Posner is saying it was rational for poorly-policed bankers to line their pockets at the expense of their firms, and DeLong is saying that the firms behaved irrationally because they overvalued short-term profit. Obviously these assertions are not incompatible. And DeLong seems to get it when he writes, ever so delicately: "Yet while Posner insists on saving the appearance of individual rationality, he is willing to jettison the Chicago School's conclusion that markets are everywhere and always perfect."
But the thing is, both intra- and inter-firm issues give rise to similar collective action and principal-agent problems that must be solved by regulation. So what's the deal? Is DeLong just pissed that Posner doesn't express sufficient contempt for the big bad bankers? Or is DeLong just pissed at the ideological wing of the "Chicago School" and using Posner to fight an illegitimate proxy war? In which case, who's the ideologue?
This comment has been removed by the author.
Moreover, it's important to note that DeLong's alleged examples of individual irrationality are dubious. I don't know much about this, but how about the following explanations? For one, it's not that these executives stopped caring about their personal wealth; it's that they (correctly) figured they'd be rich enough regardless such that they weren't optimally careful from their firms' perspective; like lawyers working on contingency, their fortunes weren't completely tied to their firms'. Second, there was a race to the bottom in that executives who, relative to others, emphasized long-term profitability and robust credit approval departments would have been voted out by dumb boards/shareholders who drooled over the immediate killings being made by competitors. This is obviously an issue of regulating the externalities of individual rationality, like with capital requirements. Even if a regulation can be skirted, if doing so is risky and difficult, good executives can use it as a viable excuse not to take excessive risk. Cf. mandatory second opinions before consenting to certain medical procedures -- patients won't have to worry about insulting their doctors by voluntarily asking for others' advice. Third, the whole "it was stupidity, not irrationality" claim can plausibly be made regarding various parties. Doesn't DeLong's example of ineffective hedging support this?
Basically, DeLong seems too willing to drop the I-bomb. Irrationality -- the failure of means-ends reasoning, or incoherence -- is a serious claim. It's one thing to make a behavioral economics argument (that generally reasonable and intelligent people are systematically irrational in certain ways). It's another to imply that people are basically nuts.
I mean, they weren't, right?
Aw, look at me; I'm ramblin' again.
Regarding the errors at the start of the piece I'll just mention that when this guy blogged about finance, I'd pointed out that he often had no clue about what he was talking about. Now that he's mentioning someone in your profession, you've come to the same realization.
7th Circuit...
But he is the leader of today's Chicago School...
Post a Comment
<< Home