Economists Agree: Economics Is a Mess

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The NewCo Daily: Today’s Top Stories

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Brexit, Britain’s exit from the European Community, was supposed to tank the British economy. But so far it hasn’t. In fact, Britain had a great 2016, economically speaking. The economists called that one wrong, just as, a decade ago, they failed to predict, or help us prevent, a massive financial crisis and recession.

Why do economists get so much wrong so often? John Lanchester (The New York Times) looks at the current crisis of confidence among economists, as represented in recent papers by the chief economists at the World Bank (Paul Romer) and the Bank of England (Andy Haldane). The problems cluster around macroeconomics, the discipline that studies the workings of the economy as a whole. As Lanchester puts it, macroeconomists would like us to view them as plumbers, behind-the-scenes tinkerers with reliable systems. But in practice they are more like a bomb disposal squad, summoned in emergencies to prevent catastrophes like the Great Depression.

Macroeconomics is busted, Haldane and Romer argue, because its models fail to incorporate irrational human behavior and, weirdly, don’t properly account for the roles of the financial industry or the monetary supply. Also, economists are “insular and self-referential” (Haldane’s words) and haven’t been open to learning from other disciplines. One ray of hope, Lanchester suggests, is the advent of “agent-based modeling” — a newer technique that builds systems full of independent actors whose interactions shape the model’s outcome. Let’s cross our fingers the economists figure at least some of this out before the next crisis.


Microsoft Says We Need a “Digital Geneva Convention”

Cyberspace is the new battlefield, and it needs new rules, says Microsoft president Brad Smith, who addressed the RSA security conference in San Francisco this week (Elizabeth Weise in USA Today). As our computer networks become a zone of conflict, Smith called on governments to establish a new “digital Geneva Convention” defining the ground rules for countries, companies, and individuals and “committing governments to protecting civilians from nation-state attacks in times of peace.”

Smith’s proposal (Microsoft has posted a full version here) comes on the heels of a U.S. election marred by Russian hacks and email dumps. But those are only the most recent incidents in a line stretching back to the Sony Pictures hack of 2014 and beyond.

In a world where nation-states are increasingly willing to play rough with companies and individuals, Smith wants tech firms to “operate as a neutral, digital Switzerland.” That’s an admirable goal, particularly in a geopolitical environment that’s tilting toward nationalism everywhere at the moment. A legal framework will probably only get us partway there — but at least it’s a start.


Even With a Blockchain, You’re Going to Have to Trust Somebody

Many developers and investors view the blockchain — the distributed-ledger code that underlies Bitcoin — as an important foundation for new technologies of decentralization. But bringing blockchain-based systems to life, and to end-users, has been tough. Ethereum, one of the most ambitious and highest-profile efforts to date, suffered a major setback last year when a $150 million “decentralized autonomous organization” built on Ethereum got hacked. Ethereum’s founder Vitalik Buterin then endorsed a “hard fork” in the Ethereum code — essentially rolling back recorded transactions to the pre-hack state. That led to a schism in the Ethereum community, because some participants felt that sort of corrective intervention contradicted the blockchain philosophy.

So yes, the world of the blockchain is still complex and risky and not for the faint of heart. But if you want to understand it, Aeon has a good summary of Ethereum’s crisis by E.J. Spode. The story’s moral, according to Spode, is that we can never create a financial system that eliminates the need for trust, somewhere along the line. Blockchain-based tech like Ethereum just moves that trust requirement around: “Instead of trusting our laws and institutions, we are being asked to trust stakeholders and miners, and programmers, and those who know enough coding to be able to verify the code.”


Amazon’s Eye Turns to the Shipping Business

Shipping — the international kind that generally involves actual ships — is still a friction-filled undertaking. Shipping containers were a huge step forward, but the business still depends on the relatively arcane work of “freight forwarders” (Adam Minter in Bloomberg). They are a kind of sherpa for the complex and tradition-bound world of boats and ports and rail or truck connections that globally traded goods must pass through on their way to you.

Freight forwarding is a business that for the most part has not been digitally transformed — yet. Amazon has a growing business in helping Chinese suppliers sell goods to its online customers in the U.S. and elsewhere, and now it’s begun experimenting with managing the shipping process for its merchants more directly, helping them move goods faster and more cheaply. China’s Alibaba is engaged in a similar effort. While the Trump administration threatens to put obstacles in the way of global trade, businesses aren’t going to stop trying to streamline it.

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