On the non-worthlessness of economists and their ilk
Dan Gross's wonderful account of the strange intellectual habits of economists and business-school profs brings to mind an experience I had back in the bull-market days of the late 1990s.
I had been assigned to write an article for Fortune about what was called "earnings management," the practice by which corporations massaged their quarterly earnings to meet the targets set by Wall Street analysts. In process of researching it, I spent some time reading through the relevant accounting literature. It turned out that lots of accounting professors had noticed the tendency toward smoothing earnings and using suspect means to meet analysts' targets. But because they all started from the efficient-market-based assumption that such shenanigans couldn't possibly affect stock prices (because rational investors saw through all that), they advanced all sorts of unconvincing partial explanations for why corporate executives would engage in such practices--loan covenants, bonus targets, etc. They couldn't bring themselves to suggest that maybe, um, executives were massaging earnings in hopes of goosing their company's stock price.
This was starting to change, just a little, when I wrote the story. I quoted accounting professor Richard Sloan--then at Wharton School, now at UC Berkeley's Haas School of Business--speculating that companies like AOL and Boston Chicken saw accounting as a "marketing tool." And the floodgates really opened after the article was published in March 1997. Dawn Matsumoto, now an accounting professor at the University of Washington, even wrote a Ph.D dissertation examining some of the claims I made, and lots of her peers began looking into possible links between earnings management and stock prices.
What I took away from this experience was that (a) inhabitants of the finance/accounting/econosphere can be awfully slow on the uptake and stuck on assumptions of human rationality and market omniscience, but that (2) they do eventually get around to taking reality into account even if it doesn't square with their theories. And however flawed and bassackwards their approach at times seems, it yields insights that history-and-narrative-obsessed journalists such as Dan and I would never come up with. Economists and their ilk are useful. They just shouldn't be allowed to entirely dominate the conversation.
How many accountants have received the Nobel Prize in Economics?
July 16, 2009 8:59 AM | Reply | Permalink
(0;
None. Too drunk to walk up to the podium after the binge celebrations over their nominations. They already calculated the odds that they would win the prize and concluded that preemptive celebration was rational.
It's called short-term profits.
July 17, 2009 2:16 AM | Reply | Permalink
To draw up progressive policies, in the context of policymaking if progressives really are in the saddle of power (something that some will assume is already the case, but obviously isn't on a whole slew of economic related issues -- better than W Bush or McCain, yes, but short of progressive) economists aren't merely
"nonworthless" but essential.
Progressives need to get a whole slew of PROGRESSIVE economists and other relevant professionals to draw up specifics, at least to assist in presenting options. We clearly need significant additional economic stimulus and soon, but to get the specifics, to know just which kinds of spending will do the most the quickest, and how to formulate the particulars of such spending, we need economists in drawing up not just final policy but political program. Progressives need to insist on the most effective strategies and policy foci collectively, even or especially in the face of glass walls of underground repression; above all, we must not allow discourse and pluralism of political views to be dictated by the very imperial elite against whom it is the very essence of progressive politics to struggle.
But for those with a simplistically negative view of the Obama Administration, it is with full consciousness that this struggle must be waged -- neither submission or reductionist, a positive pluralist approach the puts forward what needs to be done as informed in its formulation as possible
July 16, 2009 9:04 AM | Reply | Permalink
I know a half dozen economists of whom one is not arrogant. They are not really worth the effort.
July 16, 2009 9:58 AM | Reply | Permalink
By the way, my ratio of non-arrogant to arrogant economists is actually quite high.
July 16, 2009 9:59 AM | Reply | Permalink
Yawn....this is old news. Anyone with more neurons in the heads than a lizard knows that Corporations manipulate their earnings with dodgy accounting to beaf up their stock prices.
Why do you think that all of a sudden Goldmans's and JPMorgan Chase have posted such huge earnings after being on the brink of collapse.
And we all know that the Government is well aware of this practice and probably approves of it. Just to prop up the Market. All in the hopes of enticing the naive small investor back. Anyone who would still play the Market these days deserves to become penny-less.
C
July 16, 2009 10:56 AM | Reply | Permalink
My original and still main "paying job" is in computing. In the computing world, we have "benchmarks" that attempt, using an artificial workload, to measure the likely "real world" performance of a system on "real" workloads.
The thing about benchmarks is, while they try to measure reality, they really only measure the benchmark. Naturally, what happens is that when a benchmark becomes popular, selling becomes conditional on benchmark results ... and thus the engineering department is asked to tweak the system to give the best possible benchmark results, often regardless of the effect on "real" workloads.
Eventually, the buyers catch on, and stop using that benchmark. But it takes years, and getting good benchmark tests is difficult, so even "known bad" benchmarks get used.
The same thing happens in accounting. Accounting should measure "real world" results, but because money rides on accounting results, they are deliberately skewed. This should be no surprise to anyone.
July 16, 2009 2:52 PM | Reply | Permalink
I love the title. Non-worthlessness is really praising with faint damns. It's rather like giving the grade of D+, just wee bit too mediocre to be poor.
July 17, 2009 8:35 AM | Reply | Permalink
Who was it who said, if you took all the economists in the world and lined them up end to end, they still would not reach a conclusion.
My guess is Oscar Wilde.
July 17, 2009 12:11 PM | Reply | Permalink