Economic models; one opinion

I’ve always been somewhat interested in economics, and the recent crisis gave us a fascinating insight into the profession.  When the crisis really hit, the actions of Bernanke, Geithner et. al. did not appear to be motivated by any particular economic school, but rather consisted of throwing enough money at the system to prevent the financial markets from grinding to a halt. So, I somewhat logically asked; “why weren’t their decisions really informed by economic theory?”   Turns out that, to give the Devil his due, Bernanke had learned the key lesson from the depression; that the banks must be protected.  If the US had not done so, the results would have been even more dire.  The way they did it was certainly not fair, and they didn’t bargain very hard on the public’s behalf with the bankers they were bailing out, but in preserving the system, their actions were decisive.

For an excellent discussion as to how the Americans saved the world economy, take a listen to a podcast by British economist Paul Ormerod, author of The Death of Economics.  Its called, “Have economists gone mad?”  and in the last ten minutes he neatly sums up what Bernanke and company did,(the right thing but perhaps the wrong way) which had absolutely nothing to do with any of the untrammeled free market evangelism that caused the mess in the first place.  He also points out that AIG sponsored Britain’s Manchester United Premier League Soccer team (to the tune of $100 million or so)  and should perhaps have changed their shirts from the AIG logo to that of the U.S. Federal Reserve Board after the bailout. http://www.bath.ac.uk/news/2009/12/08/ormerod/

I will add to this narrative from time to time, building up from the following brief description of my thoughts and concept for economic modeling:

Brief Notes on a Dynamic Camber Line economic model

( Feb 2011.  Thanks to a generous grant, the model is under more development, and so I have removed some outdated and less precise information from this post.  See Blog Post “Projecting Inequality” for more information, and there will eventually be a project site.)

@ John Hulls                                                                                               5 July 2010

What follows is a brief description of a concept I am developing for a ‘camber line’ model, which uses the properties of the boundary layer of a gas flowing over a surface to model wealth generation and distribution and system dynamics.  In my work on wings and wind turbine blades, I have been struck with the similarity between the curves of pressure and velocity distributions across a lifting surface, and the wealth distributions shown by Pareto and Pareto-Boltzmann analysis.  While such statistical analysis shows that a combination of distributions can be used to approximate a given wealth distribution curve, it tells remarkably little about how the distribution and resultant state of the economy might change over time, or how sociological pressures might influence such changes. More importantly, they fail to show unemployment and underemployment as they influence the economy.

In developing the concept of the camber line model, one of the constraints was that it must be consistent with human behavior, keeping in mind Stiglitz criticism at the recent INET conference, and must demonstrate how the model might be controlled.  In the conceptual stages, this has been accomplished as the model shows that there is significant performance difference between conditions that benefit specific segments of the population as opposed to maximizing overall economic gain.

John Hulls

5 July 2010

Point Reyes Station, California