Economyths - ten ways economics gets it wrong Part 13

32 s.h.i.+ller, Robert (2009), "Reinventing economics," World Finance, 23 October 2009.

33 Keen, Steve (2001), Debunking Economics: The Naked Emperor of the Social Sciences (Sydney: Pluto Press).

34 "Long View Part 3 - 'Real people' economics," Financial Times (online video), 31 April 2009.

35 Quoted in Moye, Catherine (2007), "All in the mind," Financial Times, 16 September 2007.

36 Ayres, Ian (2007), Super Crunchers: How Anything Can Be Predicted (London: John Murray), p. 50.

37 See, for example: LeBaron, B. (2006), "Agent-based Financial Markets: Matching Stylized Facts with Style," in D. Colander (ed.), Post Walrasian Macroeconomics: Beyond the DSGE Model (Cambridge University Press), 221-35.

38 See, for example: Howitt, P. and Clower, R.J. (2000), "The emergence of economic organization," Journal of Economic Behavior and Organization, 41, 55-84.

39 Buchanan, Mark (2009), "Meltdown Modelling," Nature, 460, 680-82. See also: ftp://ftp.cordis.europa.eu/pub/ist/docs/fet/co-ws-oct07-05_en.pdf 40 An extensive comparison of forecasting techniques found that "simple methods... do as well, or in many cases better, than statistically sophisticated ones." Makridakis, Spyros and Hibon, Michele (2000), "The M3-Compet.i.tion: results, conclusions and implications," International Journal of Forecasting, 16, 451-76.

41 Orrell, David and McSharry, Patrick (2009), "A Systems Approach to Forecasting," Foresight, (14), 25-30. See also the commentary in the same issue by Paul Goodwin and Robert Fildes.

42 1990 presidential address to the American Economic a.s.sociation. See: Debreu, Gerard (1991), "The Mathematization of Economic Theory," American Economic Review, 81, 1-7.

43 Coase, Ronald (1999), "Interview with Ronald Coase," Newsletter of the International Society for New Inst.i.tutional Economics, 2 (1).

44 Derman, Emanuel (2004), My Life as a Quant: Reflections on Physics and Finance (New York: Wiley), p. 268.

45 Quoted in Skidelsky, Robert (2009), "The big squeeze," New Statesman, 7 December 2009.

Chapter 6.

1 Fraser Inst.i.tute, "Index of economic freedom," http://www.freetheworld.com/ 2 Anonymous (2008), "Excerpts: Iceland's Oddsson," Wall Street Journal, 17 October 2008.

3 Ertel, Manfred (2009), "Iceland's Women Reach for Power," Der Spiegel, 22 April 2009.

4 Sunderland, Ruth (2009), "After the crash, Iceland's women lead the rescue," Observer, 22 February 2009.

5 Abraham, Ralph (1994), Chaos, Gaia, Eros: A chaos pioneer uncovers the three great streams of history (New York: HarperCollins), p. 92.

6 Guthrie, W.K.C. (1962), A History of Greek Philosophy, Vol. 1 (Cambridge University Press), p. 252.

7 Wertheim, Margaret (2006), "Numbers Are Male, Said Pythagoras, and the Idea Persists," New York Times, 3 October 2006.

8 Aristotle (350 BCE), Politics, trans. Benjamin Jowett: http://cla.s.sics.mit.edu/Aristotle/politics.html 9 The Pythagorean list of opposites also reflects left-brain (which controls the right side of the body) versus right-brain (which controls the left side of the body) attributes. See Orrell, David (2007), Apollo's Arrow: The Science of Prediction and the Future of Everything (Toronto: HarperCollins), p. 30.

10 Fox Keller, Evelyn (1985), Reflections on Gender and Science (Yale University Press), p. 53.

11 Roszak, Theodore (1999), The Gendered Atom: Reflections on the s.e.xual Psychology of Science (San Francisco: Conari), p. 56.

12 Snow, C.P. and Collini, Stefan (1993), The Two Cultures (Cambridge University Press), p. 103.

13 Roszak, Theodore (1999), The Gendered Atom: Reflections on the s.e.xual Psychology of Science (San Francisco: Conari), p. 88.

14 Nelson, Julie A. (1996), "The Masculine Mindset of Economic a.n.a.lysis," Chronicle of Higher Education, 42, B3.

15 Hillman, James (1975), Re-Visioning Psychology (New York: Harper Perennial), p. 132.

16 According to Freakonomics author Steven Levitt, the vast majority of economists hadn't heard of Ostrom before she won the prize: "I have no recollection of ever seeing or hearing her name mentioned by an economist. She is a political scientist, both by training and her career." Levitt, Steven D. (2009), "What This Year's n.o.bel Prize in Economics Says About the n.o.bel Prize in Economics," New York Times, 12 October 2009.

17 Henderson, Hazel (2004), "The 'n.o.bel' Prize That Wasn't," Le Monde Diplomatique, December 2004. An example was Myron Scholes, who in 1997 won for his work on the very risk models that contributed to the spectacular collapse, a year later, of his employer Long-Term Capital Management. Lowenstein, Roger (2000), When Genius Failed: The Rise and Fall of Long-Term Capital Management (Random House).

18 Senate Banking Committee (1999), "Gramm Wins Senate Approval For Gold Medal Honoring n.o.bel Laureate Milton Friedman": http://banking.senate.gov/prel99/1122met.htm 19 Senate Banking Committee (1999), "Gramm's Statement at Signing Ceremony For Gramm-Leach-Bliley Act": http://banking.senate.gov/prel99/1112gbl.htm 20 Senate Banking Committee (1999), "Gramm Calls Commodity Futures Modernization Act 'A Major Achievement of the 106th Congress'": http://banking.senate.gov/prel00/1215cofu.htm 21 Younge, Gary (2008), "Bad cheque for black America," Guardian, 7 February 2008.

22 It is debatable whether these cost efficiencies were very significant. Paul Volcker, who is chairman of President Obama's Economic Recovery Advisory Board, said: "I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth - one shred of evidence." Any reduction in the cost of mortgages also fed through to higher home prices, which was not universally perceived as a good thing. Hosking, Patrick and Jagger, Suzy (2009), "'Wake up, gentlemen', world's top bankers warned by former Fed chairman Volcker," Times, 9 December 2009.

23 Bannon, Lisa (2009), "As Riches Fade, So Does Finance's Allure," Wall Street Journal, 21 September 2009.

24 Overbye, Dennis (2009), "They Tried to Outsmart Wall Street," New York Times, 9 March 2009.

25 Li, David X. (2000), "On Default Correlation: A Copula Function Approach," Journal of Fixed Income, 9, 43-54.

26 Spreeuw, J. and w.a.n.g, X. (2008), "Modelling the short-term dependence between two remaining lifetimes of a couple" (London: Ca.s.s Business School).

27 Whitehouse, Mark (2005), "How a Formula Ignited Market That Burned Some Big Investors," Wall Street Journal, 12 September 2005.

28 Fox Keller, Evelyn (1985), Reflections on Gender and Science (Yale University Press), p. 141. Philospher Mary Midgley also notes that "social scientists ... have often pursued a very powerful and confused notion of 'objectivity' as requiring, not just the avoidance of personal bias, but a refusal to talk or think about subjective factors at all. The word 'subjective' then becomes a simple term of abuse directed at any mention of thoughts or feelings, and the word 'objective' a potent compliment for any approach which ignores them." Midgley, Mary (1985), Evolution as a Religion: Strange hopes and stranger fears (London: Methuen), p. 25.

29 International Monetary Fund (2006), "Global Financial Stability Report: Market Developments and Issues" (Was.h.i.+ngton, DC: International Monetary Fund), April 2006, p. 51.

30 Whitehouse, Mark (2005), "How a Formula Ignited Market That Burned Some Big Investors," Wall Street Journal, 12 September 2005.

31 Another example of this, apart from VaR and the Gaussian copula, is the famous Black-Scholes formula which played a key role in the Black Monday crash. See Triana, Pablo (2009), Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets? (New York: Wiley).

32 Committee of Government Oversight and Reform (2008), "Testimony of Dr. Alan Greenspan," 23 October 2008: http://oversight.house.gov/doc.u.ments/20081023100438.pdf 33 Baker, Peter (2009), "The Mellowing of William Jefferson Clinton," New York Times, 26 May 2009.

34 Haldane, A.G. (2009), "Rethinking the Financial Network," speech delivered at the Financial Student a.s.sociation, Amsterdam, April 2009, available at: http://www.bankofengland.co.uk/publications/speeches/2009/speech386.pdf 35 The same pattern is true for Paulson's successor: "Some of Treasury Secretary Timothy Geithner's closest aides, none of whom faced Senate confirmation, earned millions of dollars a year working for Goldman Sachs Group Inc., Citigroup Inc. and other Wall Street firms, according to financial disclosure forms." Schmidt, Robert (2009), "Geithner Aides Reaped Millions Working for Banks, Hedge Funds," Bloomberg, 14 October 2009.

36 Tett, Gillian (2009), "Lunch with the FT: David Hare," Financial Times, 25 September 2009.

37 Zehner, Jacki (2008), "Why Are Goldman's Women Invisible? (Asks a Former Goldman Sachs Partner)," The Huffington Post: http://www.huffingtonpost.com/jacki-zehner/why-are-goldmans-women-in_b_139650.html 38 Triana, Pablo (2009), Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets? (New York: Wiley), p. 88.

39 Is.h.i.+kawa, Tetsuya (2009), How I Caused the Credit Crunch (London: Icon), p. 177.

40 Haug, Espen Gaarder (2007), Derivatives: Models on Models (New York: Wiley), p. 32.

41 Zehner, Jacki (2008), "Why Are Goldman's Women Invisible? (Asks a Former Goldman Sachs Partner)," The Huffington Post: http://www.huffingtonpost.com/jacki-zehner/why-are-goldmans-women-in_b_139650.html 42 Tarr-Whelan, Linda (2009), Women Lead the Way: Your Guide to Stepping Up to Leaders.h.i.+p and Changing the World (San Francisco: Berrett-Koehler).

43 Groom, Brian (2009), " 'Shocking disparity' in gender pay revealed," Financial Times, 6 September 2009. The shocking part here, in my view, is the amount that the males are overpaid.

44 Campbell, D. (2009), "Male doctors earn 15,000 a year more than women, study reveals," Guardian, 10 November 2009.

45 Apicella, Coren L., et al. (2008), "Testosterone and financial risk preferences," Evolution and Human Behavior, 29 (6), 384-90.

46 Sunderland, Ruth (2009), "Woman's touch helps hedge funds retain their value," Guardian, 19 October 2009.

47 Hong, Lu and Page, Scott E. (2001), "Problem Solving by Heterogeneous Agents," Journal of Economic Theory, 97, 23-163.

48 See: Klein, Naomi (2008), The Shock Doctrine: The Rise of Disaster Capitalism (London: Penguin).

49 "Women are starting to make as much, if not more, than men, especially in third- and fourth-tier cities," according to Shaun Rein, managing director of China Market Research Group. Voigt, Kevin (2009), "Women: Saviors of the world economy?" CNN, 26 October 2009.

50 Sunderland, Ruth (2009), "After the crash, Iceland's women lead the rescue," Observer, 22 February 2009.

51 Coates, J.M. and Page, L. (2009), "A Note on Trader Sharpe Ratios," PLoS ONE, 4(11): e8036. doi:10.1371/journal.pone.0008036 52 A version was recently proposed by the Obama administration. Bowley, Graham (2010), "Strong Year for Goldman, as It Trims Bonus Pool," New York Times, 22 January 2010. Veks.h.i.+n, Alison and Sterngold, James (2009), "War on Wall Street as Congress Sees Returning to Gla.s.s-Steagall," Bloomberg, 28 December 2009.

53 This idea was suggested by John Maynard Keynes and is sometimes known as a Tobin tax after economist James Tobin, who also championed a version of it. Most bankers say that the system is too complex to be regulated in such a naive way - but they would say that, wouldn't they? Rodrik, Dani (2009), "The Tobin tax lives again," World Finance, 23 October 2009.

54 Rumsfeld, Donald H. (2002), "Secretary of Defense Donald H. Rumsfeld speaking at Tribute to Milton Friedman (transcript)," US Department of Defense: http://www.defenselink.mil/speeches/speech.aspx?speechid=216 55 Jay Griffiths, for example, describes "chance, caprice and unpredictability" as things that "for good and for bad, have been a.s.sociated with the female." Griffiths, Jay (2004), A Sideways Look at Time (New York: Tarcher/Penguin), p. 167.

56 Triana, Pablo (2009), Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets? (New York: Wiley), p. 163.

57 Fox Keller, Evelyn (1985), Reflections on Gender and Science (Yale University Press), p. 22.

58 Horkheimer, Max and Adorno, Theodor W. (2002), Dialectic of Enlightenment: Philosophical Fragments, trans. Edmund Jephcott (Stanford University Press), pp. 4-5.

59 Pareto, Vilfredo (1897), Cours d'economie politique (Lausanne: Rouge).

60 As Na.s.sim Taleb put it at Edge.org: "I urge all you scientists to go take your 'science' where it may work - and leave us in the real world without more problems. Please, please, enough of this 'science'. We have enough problems without you." Taleb, Na.s.sim Nicholas (2008), "Can Science Help Solve The Economic Crisis?" Edge.org: http://www.edge.org/3rd_culture/brown08/brown08_index.html#taleb. Understandable under the circ.u.mstances, though somehow I've never thought of finance as being the real world.

61 Ferber, Marianne A. and Nelson, Julie A. (eds) (1993), Beyond Economic Man: Feminist theory and economics (University of Chicago Press), p. 65.

62 Green, Tom (2009), "Lourdes Beneria," Adbusters, 15 July 2009.

63 See: http://www.unpac.ca/economy/unpaidwork.html. See also Waring, Marilyn (1988), Counting for Nothing: What Men Value and What Women are Worth (Wellington, NZ: Allen & Unwin/Port Nicholson Press).

64 The phrase was probably coined in: Jacobs, Jane (1961), The Death and Life of Great American Cities (New York: Random House).

65 Bernstein, Peter L. (1996), Against the G.o.ds: The remarkable story of risk (New York: Wiley), p. 46.

Chapter 7.

1 Jevons, William Stanley (1879), Theory of Political Economy (2nd edn; London: Macmillan), p. 86.

2 Fama, Eugene F. (1965), "Random walks in stock-market prices," Selected Papers, 16 (University of Chicago, Graduate School of Business).

3 Friedman, Milton (1962), Capitalism and Freedom (University of Chicago Press), pp. 109-10.

4 Browne, M.N. and Quinn, J.K. (2008), "The Lamentable Absence of Power in Mainstream Economics," in John T. Harvey and Robert F. Garnett (eds), Future Directions for Heterodox Economics (University of Michigan Press), pp. 240-61.

5 Coser, Lewis A. (1977), Masters of sociological thought: Ideas in historical and social context (2nd edn; New York: Harcourt Brace Jovanovich), p. 404.

6 Pareto, Vilfredo (1897), "The New Theories of Economics," J. Pol Econ, 5, 485-502.

7 Quoted in Kimmel, Michael S. (1990), Revolution, a sociological interpretation (Philadelphia: Temple University Press).

8 Davies, James B., et al. (2006), "The World Distribution of Household Wealth" (World Inst.i.tute for Development Economics Research of the United Nations University).

9 Phillips, Tom (2008), "High above So Paulo's choked streets, the rich cruise a new highway," Guardian, 20 June 2008.

10 Smith, Adam (1759), The Theory of Moral Sentiments (London: A. Millar).

11 Reich, Robert (2008), Supercapitalism: The battle for democracy in an age of big business (London: Icon), p. 108; Wilkinson, Richard and Pickett, Kate (2009), The Spirit Level: Why Greater Equality Makes Societies Stronger (London: Bloomsbury), p. 242.

12 Campbell, Dakin (2009), "Blackstone's Schwarzman Tops Best-Paid Chiefs With $702 Million," Bloomberg, 14 August 2009.

13 Clark, Andrew (2009), "Ma.s.sive bet on RBS and Lloyds helped financier earn $2.5bn," Guardian, 22 December 2009.

14 Sawhill, Isabel and Haskins, Ron (2009), "5 myths about our land of opportunity," Was.h.i.+ngton Post, 1 November 2009.

15 Romano, Lois and Warren, Elizabeth (2009), "Voices of Power: Elizabeth Warren," Was.h.i.+ngton Post, 8 October 2009. As the Economist magazine observed in 2006: "every measure shows that, over the past quarter century, those at the top have done better than those in the middle, who in turn have outpaced those at the bottom." Anonymous (2006), "The rich, the poor and the growing gap between them," Economist, 15 June 2006.

16 Clement, Douglas (2007), "Interview with Eugene Fama," The Region, December 2007.

17 A study by McKinsey & Company showed that "from 1991 to 2000, market and industry factors drove about 70 per cent of the returns of individual companies, company-specific factors only about 30 per cent." De Swaan, J.C. and Harper, Neil W.C. (2003), "Getting what you pay for with stock options," McKinsey Quarterly (1). See also: Bebchuk, L. and Fried, J. (2004), Pay Without Performance: The unfulfilled promise of executive remuneraton (Harvard University Press).

18 International Labour Organisation (2008), "World of Work Report 2008: Income inequalities in the age of financial globalization": http://www.ilo.org/public/english/bureau/inst/download/world08.pdf 19 Ariely, Dan (2009), Predictably Irrational: The Hidden Forces That Shape Our Decisions (London: HarperCollins), p. 183.

20 Ariely, Dan (2009), Predictably Irrational: The Hidden Forces That Shape Our Decisions (London: HarperCollins), p. 16.

21 One study showed that directors of Fortune 1000 companies formed a small and highly connected group, bound together by the approximately 20 per cent of directors who serve on more than one board. Newman, M.E.J., Strogatz, S.H., and Watts, D.J. (2001), "Random graphs with arbitrary degree distributions and their applications," Physical Review E, 6402, 6118.

22 Cleeland, Nancy, Iritani, Evelyn, and Marshall, Tyler (2003), "Wal-Mart wrings efficiency from Third World factories," Los Angeles Times, 28 November 2003.

23 "The World's Billionaires 2009," Forbes, 11 March 2009: http://www.forbes.com/lists/2009/10/billionaires-2009-richest-people_The-Worlds-Billionaires_Rank.html 24 Source: http://en.wikipedia.org/wiki/List_of_companies_by_revenue 25 Anonymous (2001), "Ways and Means: Harvard's Wage Debate," Harvard Magazine, November-December 2001.

26 Mankiw, N. Gregory (2008), Principles of Economics (Cincinatti, OH: South-Western College).