Sunday, December 5, 2010

The Quest for a new economics modeling framework...

Paul Krugman and Justin Fox are right on track that the search for a new economics framework is nothing new.

But they do not delve into WHY the new frameworks have never taken hold. Let me share with you what I think: 

For one thing, there is a lot of status quo bias and path dependency in the picture. I am not really sure how Economics ended up with its over-mathematical layup, but I guess there was a lot of penis physics-envy involved. But once it is set like this, all the incentives (getting published, tenure, etc) are dependent on sticking with the same old safe framework... Interestingly enough, economists love to talk about these ideas, especially on development. It is surprising that they do not see their own profession the same way, either...

It should not be forgotten that Paul Krugman is a product of the same fraternity, although his models are have not done any harm in obstructing our understanding of Economics. On the contrary, his first ever published paper provided a better understanding of currency crises... But I doubt he would have got the Nobel Prize, at least so soon, if he swam totally against the current....

BTW, I was a research assistant for Bob Shiller (in Justin Fox article), who also ended up as my undergrad. thesis adviser. At the time (95-97), he was already quite well-known for his real estate index with Case, as well as his work on the 1987 crash. But I always felt other academics felt he was wasting his talents, working on weird stuff like behavioral economics... He then went on to predict two more crashes, so what daya know?:)

HT to my ex-trader and socialist FeneVbahce fan (an oxymoron IMHO, but he disagrees) for sending me the Krugman article.

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