Lord Myners calls time on 'greed is good' bank culture | Business | The Guardian .
The Guardian reports:
Lord Myners, the City minister, has called for an independent review of the investment banking industry and the "greed is good" culture that he says has permeated many areas of society.
Which is great. But I presume he knows this means abandoning just about everything that is taught in undergraduate economics as a result, which underpins the flawed logic of Anglo-Saxon capitalism as a whole - not just banking?
Let's start with what goes:
- Profit maximisation. This is a complete nonsense. Economists think it discounted future cash flow, accountants a measure of the past, and no one can measure either.
- The idea of markets being efficient. This requires profit maximisation to be true. But we don't profit maximise and those who seek to do so just abuse others by extracting monopoly rents, which is inefficient. It also requires us all to be clairvoyant, and there is some evidence we are not.
- Ignoring externalities - the fact the market assumes we can abuse the planet as a 'free gift of nature'.
- The idea that wealth is created by markets. Wring, wealth is created by people - the means of ownership of the structure in which they work has little to do with the value of what they do - but efficient management has. there's no evidence that efficient management is the exclusive preserve of the private sector - although there's ample evidence of bad management in all sectors.
So Lord Myners, I agree - but let's sweep away the whole destructive nature of neo-conservative economics and move on. Let's not tinker at the edges. And let's be clear about what we're doing. Nothing else will do.
As I said last week:
Obama has set out an agenda for changes on Wall Street that will be the making or breaking of his Presidency, and maybe the rest of us as well.
I stand by that. This is a battle we have to win. But don't underestimate what it means.
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Richard: externalites. They are not ignored in modern economics. They are taught at GCSE level for goodness sake let alone undergraduate level.
The other points are similarly ignorant of what modern economics actually studies. Really, Grade F, must do better.
@Tim Worstall
Tim
It’s very hard to take someone seriously who argues as you do
As a matter of fact if you do not subscribe to the basic elements of economic theory – noted fairly above – then you have no hope of teaching it, getting a job in any economics department or getting a paper published in it
Of course I simplify – this is a blog, after all
And of course lip service is paid to the weaknesses in the assumptions in basic courses
And then they carry on using them
But perhaps I’m wrong. Perhaps you don’t think business profit maximises, people utility maximise, perhaps you do think all externalities are properly priced by markets or are compensated for exactly by tax, perhaps you do believe economic and accounting profit are the same thing and can prove it, perhaps you think markets can produce optimal outcomes which cannot be enhanced in conditions of imperfect knowledge
Who knows. maybe I misjudge you. But I sure as heck to do not misjudge economics.
Richard
“Perhaps you don’t think business profit maximises,”
Of course I don’t. I do think that they attempt to do so often enough for us to take it as a useful guide to their behaviour.
“people utility maximise” ditto.
“perhaps you do think all externalities are properly priced by markets or are compensated for exactly by tax”
Of course not. Whether you’ve noted it or not I’ve been writing extensively about climate change and what we ought to do about it. Continually and consistently make the point that there’s an externality there which is not properly internalised into market prices (and in some cases it already is as well). So therefore we should work to make it so.
“perhaps you think markets can produce optimal outcomes which cannot be enhanced in conditions of imperfect knowledge”
“can”? Of course. “will?” “every time?” of course not. But then this is true of absolutely any system in conditions of imperfect knowledge. Because, umm, there’s imperfect knowledge.
This is one of the things that so irritates me about your comments upon economics. You never quite carry it all the way through. You’re entirely happy to pick up on an entirely neo-classical concept like externalities (Alfred Marshall, the father of neo-classical economics, from the 1890s) but then you adamantly refuse to look at what people have been doing about this in the century since. Pigou, Coase, for example. Or the entire debate about climate change which is an admission that there is an externality: OK, so, how do we deal with it?
Tim
I know the later work
But i also note it just treats these things as aberations
Same as your ‘approximates to’ is assumed to be near enough ‘the same as’
No they’re not
The whole thing is as absurd as assuming that a market entrant has no impact on price – a necessary condition for perfect markets – but they do, it’s just tiny. trouble is tiny behaves completely differently from zero
And so does ‘close to’ behave very differently from ‘same as’
One produces the abuse we see
the other may produce a perfect outcome – except it is unattainable
So there is no point assuming it
And that’s what you just don’t get – the assumptions are flawed and nothing overcomes that
Lord Myners passes judgement on “greed”. Oh the irony!
Richard,
Don’t know if you read much investment research, but this is really good stuff- last 2 pages in particular.
http://www.gmo.com/websitecontent/JGLetter_ALL_4Q09.pdf