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July 19, 2009


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trivial point, but some blank lines between paragraphs would help me read. and they're free.


The best person I have ever heard on finance and organisations has been a little published man called John Darlington.

I have yet to hear anything useful from economists on economies of flow and systems thinking. John Darlington and John Seddon come the closest.

See the implications of systems thinking in public sector organisations and then rethink your financial and economic models!


Also check out Ecomomies of Scale: It's a myth! (available on ITunes - the systems thinking review as a video podcast.


"But they (we) failed to consider that institutions can be structured so as to filter out intelligence."

Was the FSA one of those institutions?


One is the Austrian angle, which stresses the role of entrepreneurship, of discontinuous innovation. But this played a crucial role in the crisis.

How? Banks using new mortgage derivatives as collateral is hardly entrepeneurship, as meant by the Austrian school. It's arrogance.

Luis Enrique

Yes. As ever, it all depends on what kinds of question you are trying to answer - the black box approach might be OK for some macro questions, but some of the questions macroeconomists should have been tackling do require the opening of black boxes, I agree. Broadly speaking, one of these questions was "what are the sources of the 'shocks' that cause recessions?".

You write that macroeconomics has been led astray, and the accusation that macro was looking in the wrong places, (possibly) constrained by methodological blinkers, obviously has weight. However, I can't help doubting that some of its critics are as familiar with the last decade of macroeconomic research as they think they are. For example, one black box to open might be to replace "expectations are always correct" behavior with rule-of-thumb "learning" by economic agents, which can lead to herd behavior etc. There's a chapter on learning dynamics in the mainstream bible Handbook of Macroeconomics (1999). And a Shiller chapter on irrational behavior. Perhaps the failure lay more in not having got these ideas into the mainstream, and not having transmitted them to policymakers.

What is it that with retrospect we wish macroeconomists had warned us of? If the standard macro model in 2005 had been one of endogenous booms & busts, housing price bubbles etc., would the existence of a "deflate bubbles" macro policy have been sufficient to dodge the crisis?. Would such a macro model have warned us that falling housing prices would cause the financial system to implode? What would have stopped the banks tying themselves up in knots? I don't know.

In some respects bickering over who should have done what is academic in the bad sense - the big picture is that "economics" didn't prevent the crisis (although it's just as well to think clearly about who to blame for what). With the benefit of hindsight, if "the system" (regulatory or otherwise) had taken on board the lessons of principal-agent problems, and really understood how the actions of banks can cause the build up of systemic risk, how in hindsight do you we think that could have been achieved? Why didn't the all the economists who study principal-agent problems ensure policy makers listened to them, for instance?

And while everybody is giving macroeconomists a good kicking, wasn't there a group of people who specialise in the black box of financial markets ... "Financial Economists"? Everybody is focused on narrow risk modeling, but didn't financial economists also study herd behaviour, principal-agent problems, and systemic risk? I'm not familiar with that field, but I know some financial economists were worried about the stability of the system (as in that oft quoted 2005 speech by Rajan).

Previously when making such arguments I have been accused of trying to divert the discussion onto obscure theoretical controversies; on the contrary, I think it's weird how 'economics' has been reduced to 'DSGE + Gaussian copulas'. There's a lot more to economics than that, and a lot more to the story of how we came to be in this situation.

Incidentally, if you are interested in opening the black box of production, you could look at Ricardo Caballero's work on relationship specificity between factors of production, which addresses some of the short comings you mention. Journals like the AER and QJE have been publishing that stuff since the mid-nineties. The now mainstream approach to income distribution of "bargaining over match surplus" in presence of frictions is one I think Marx might have liked, too.

[It's an interesting side question - if somebody asserts "the problem with economics is that it ignores X", how many citations of economists writing about X does it take to change somebody's mind?]


Yes, but even without the micro insights, macro should have seen it coming:


(From Steve Kenns blog -)


Luis Enrique


seen what coming?

1. a recession
2. a recession caused by unwinding of global macroeconomic unbalances
3. a recession caused by falling house prices
4. a recession caused by "too much debt"
5. the implosion of the global financial system caused by banks having got themselves in a position whereby something as commonplace as falling house prices could start a sequence of events that wipes out all their capital and more.

I'm not sure how much credit you get for 1-4. All of those were reasonable positions to hold, but at the same time, during "good times" forecasting "bad times" ahead is always a reasonable bet and at any point in time a reasonable group of people are always forecasting it. A great many people saw 2, 3 & 4 on the horizon, including lots of macroeconomists (mainly 2 some 3).

Frank the sales forecaster

Since my days as an undergrad I have wondered how the concept of operating leverage and the supply part of a S&D curve could exist in the same building. The black box is often desirous of selling more units evan at a lower price per unit(increased ROI), thus giving the supply curve the same downward shape as the demand curve. Additionally, the black box's sr. mangement would rather manage a company twice as big in sales with half the profit margin %(same ROI in both cases, but way closer to a private jet in the bigger sales case.) I always thought it would all get too interdepartmental for anyone trying to bridge the gaps between household behavior (property of the Marketing dept.), company behavior (property of the Finance dept.), and macro-econ's tools.

Peter Luke

Refreshing thoughts. Getting your take on it has really given me some insight I didn’t have before.

rolex submariner

And a lot of it reflects a switch from bank deposits to securities; foreigners “other investments” in the UK, http://www.watchgy.com/ mostly bank deposits, fell by £143.2bn in Q1. And of course there’s no guarantee such buying will continue.

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