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Tuesday, March 13, 2007

Comments

Will Davies

Your criticism of my blog posting is pretty circular: in response to my attempt at a cultural analysis of the UK housing market, it accuses me of not understanding that the economy is fundamentally about supply and demand after all. To put it another way, I have said "shall we dispense with economics for a moment?" and you have replied bluntly "no".

Thanks to having read Foucault and Latour, I am all too familiar with the short-comings and delusions of sociology; I suspect that the same is not true of you in your relationship with economics.

jon livesey

No, the key word here is "uninformed". There are two glaring faults in your article. One is the claim that economics "demands" that people behave as what you call homo economicus, but it has long been recognized by economists that they don't. The whole point in Kindleberger's "Manias, panics and crashes..." is that at some point in the creation of a bubble, investors lose track of underlying value and simply bet on momentum, at which point they become speculators. And this insight goes all the way back to seventeenth century Holland, and the phenomenon has been repeated several times since, so it's not recent or rare.

Your second blunder is the claim that the implosion of the bubble in 2000-1 was not predicted. But it was. The Economist magazine, for example, devoted a large part of an issue to comparisons between 1929 and 1999. Did that dissuade the speculators? No, it didn't, because that's part of what makes a speculator a speculator. It's also what makes some short sellers such rich people.

Sociology may have something to say about something at some point - I am keeping an open mind on this - but "predicting" the imminent end of the housing bubble, and claiming this as a sociological insight is larcenous. I get predictions like this from any broker's newsletter I care to subscribe to, and many of them have a great deal more command of the technical underpinnings - especially liquidity and interest rates - of a bubble and its end than your piece does.

I think that it is one of the misfortunes of the UK that economics is so poorly taught that any energetic bluffing on the subject gets a respectful hearing.

New Economist

Will

I had a long reply that somehow got gobbled up by Typepad. So here's a shorter one:

Claim 1 - I am unfamiliar with the short-comings and delusions of economics.
>> Hardly! I have been reading critiques of mainstream economics, and agreeing with much of what they have to say, for decades. On key issues I side more with Joan Robinson or Deidre McCloskey or Sam Bowles than with, say, Robert Lucas or Paul Samuelson. My point was that basic economic concepts (affordability, rising demand, supply restrictions) are capable of explaining the current UK housing market. Occam's razor would suggest no need to look for ancillary cultural explanations...

Claim 2 (from your weblog) - I am suggesting "there is nothing cultural going on".
>> Not at all. Clearly there is an important cultural element to the housing market. The London chattering classes talk about little else. But that is not the same thing as arguing that culture is the key driver of housing prices. I don't believe it is. If you do, what is your evidence for this claim?

Claim 3 (also from your weblog) - I am suggesting "there is nothing speculative going on".
>> Nope. There is obviously a speculative element to the current housing market, though I don't consider we are in a bubble, nor believe speculation is the main driver of higher house prices. As Jon Livesey's comment points out, asset bubbles and manias are well known economic phenomenon. Economist have written hundreds of papers on the subject, and there are event a few housing econoblogs.

Sometimes supply and demand DO drive markets. You don't have to be an economic fundamentalist (or reductionist) to accept that. The UK housing market is one such example. Most warnings of imminent housing price crash are by people who don't seem to understand why economic forces are driving prices higher. (Sadly, that includes a few economists - such as Roger Bootle and Martin Weale - who really ought to know better).

As I said in my original comment, barring either a recession or the Bank of England going berserk, it is hard to see what could trigger a crash. Speculation is a possible thidr trigger, but if it was going to happen we should have seen it already, before interest rates were ratcehted higher.

Lafayette

Doesn't this discussion revolve about the well-known and caustic naming of economics as the "dismal science".

It's pretty dismal because, employing highly sophisticated mathematical techniques; it purports to "predict" economic variables that result from human behavioral patterns. Much of this behavior is irrational, yes. And, market bubbles are the most pertinent example of this irrationality.

I submit that were micro-economics paid 1/1000th of the attention attributed to macro-economics then economists would understand better the latter. Macro-economics is (mostly) the aggregation of individual consumer behavior.

Unfortunately, micro-economics is ... er, not a particularly interesting part of the economic spectrum within which to do research. (Though some of the work in production systems is interesting ... methinks.) Human behavior is fairly unpredictable. And, we have to aggregate it to understand that consumers behave like sheep ... they all make more or less the same purchases based upon more or less the same information available at any given time. (Let's keep market bubbles aside; they are such rare exceptions to this rule.)

People (like you and me) measure "value", and particularly asset-value - in highly personal terms. That is, relative to their own. So, either a house or a stock portfolio has inherent value relative to its purchase cost. People should, but really don't give a damn about deflating its value for inflation - even over the long-term. Bankers, on the other hand, with their intricate programs do precisely that as they look for the best possible return on their (our?) money.

So, I have to agree with the New Economist (sorry!) about this one. There may very well be a sociological aspect to economics that is waiting to be discovered. But, there is also no Generalized Theory of it pointing its pretty head on the horizon.

Anyone looking for a Nobel Prize? Go for it ...


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