A few weeks ago, I watched "How the Economic Machine Works" by hedge fund billionaire Ray Dalio on YouTube (see video here). I must confess I found it incomprehensible. Dalio says that consumption drives the economy and for an economy to grow people must consume more and more. I had always thought (as per the Austrian view) that it was savings and investment that drives an economy.
I must also make another confession. I did not entirely understand Meghnad Desai's Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One (2015). Meghnad Desai, however, does not seem to be conceptually wrong like Dalio is (Indeed Desai liberally uses Austrian concepts himself). It is only that he goes to such intricate discussions about economic history that I got lost (after all, I am but an engineer, not an economist).
Desai's book is overall well-written and captivating (barring the parts I skipped). Desai recounts the history of economic thought right from John Locke and David Hume and Adam Smith down to Keynes and Friedman and Lucas.
From what I understand, economics started off in a reasonable manner, as in Adam Smith's times. On the way, however, it got highly mathematical and over-confident.
As Desai states, Leon Walras put Adam Smith and David Ricardo's economics in an elegant mathematical form. But it is based on many simplifying assumptions that made it unrealistic. Walras' ideas were later developed upon by Kenneth Arrow and Gerard Debreu to give the present day "Arrow-Debreu economy". In spite of its sheer unrealism it has much appeal amongst economists due to its mathematical elegance. Desai correctly points out that only static studies have been done with the Walrasian equilibrium and it is agreed that the equilibrium is unique. I must add that the stability of this equilibrium has not been extensively studied and probably the equilibrium is unstable or metastable.
Desai correctly attacks Eugene Fama's Efficient Market Hypothesis (EMH) and Robert Lucas's Rational Expectations (RE) theory as being too unrealistic (note: both Fama and Lucas are Nobel Prize winners). EMH denies the existence of bubbles and RE replaces the common meaning of the word "expectations" with a statistical one and assumes that all of us are aware of expectations in the statistical sense.
Friedrich von Hayek emerges as a shining figure in all this analysis. Hayek's arguments seem to be very reasonable and consistent and Desai says that his 1930s theories could be used to explain the Great Recession. Desai states: "There are no permanent laws in economics. Only historically contingent truths." With all due respect, I wish to disagree on this one point. There are economic laws that are as unassailable as the law of gravity. And those who deny that - as the West has done - will come to or cause others to come to a sad end.
I must also make another confession. I did not entirely understand Meghnad Desai's Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One (2015). Meghnad Desai, however, does not seem to be conceptually wrong like Dalio is (Indeed Desai liberally uses Austrian concepts himself). It is only that he goes to such intricate discussions about economic history that I got lost (after all, I am but an engineer, not an economist).
Desai's book is overall well-written and captivating (barring the parts I skipped). Desai recounts the history of economic thought right from John Locke and David Hume and Adam Smith down to Keynes and Friedman and Lucas.
From what I understand, economics started off in a reasonable manner, as in Adam Smith's times. On the way, however, it got highly mathematical and over-confident.
As Desai states, Leon Walras put Adam Smith and David Ricardo's economics in an elegant mathematical form. But it is based on many simplifying assumptions that made it unrealistic. Walras' ideas were later developed upon by Kenneth Arrow and Gerard Debreu to give the present day "Arrow-Debreu economy". In spite of its sheer unrealism it has much appeal amongst economists due to its mathematical elegance. Desai correctly points out that only static studies have been done with the Walrasian equilibrium and it is agreed that the equilibrium is unique. I must add that the stability of this equilibrium has not been extensively studied and probably the equilibrium is unstable or metastable.
Desai correctly attacks Eugene Fama's Efficient Market Hypothesis (EMH) and Robert Lucas's Rational Expectations (RE) theory as being too unrealistic (note: both Fama and Lucas are Nobel Prize winners). EMH denies the existence of bubbles and RE replaces the common meaning of the word "expectations" with a statistical one and assumes that all of us are aware of expectations in the statistical sense.
Friedrich von Hayek emerges as a shining figure in all this analysis. Hayek's arguments seem to be very reasonable and consistent and Desai says that his 1930s theories could be used to explain the Great Recession. Desai states: "There are no permanent laws in economics. Only historically contingent truths." With all due respect, I wish to disagree on this one point. There are economic laws that are as unassailable as the law of gravity. And those who deny that - as the West has done - will come to or cause others to come to a sad end.
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