Central banks: human behavior, bubbles don't exist!

Excellent article today at Naked Capitalism on Central Banks flawed macroeconomic models:

Macroeconomics is about systematic fluctuations in output, employment and prices. Macroeconomics is also about social interactions between agents who do not understand very well how the world functions. As a result, they watch each other to get clues of what is going on in the world. This leads to herding and group behaviour. This social behaviour is at the core of macroeconomic fluctuations. Keynes gave this a name, “animal spirits”.

All this is absent in [Central Banks' macroeconomic models]-models where agents who understand the complexity of the world, behave in an atomistic way. There is no need to learn from others, since each individual’s brain contains the full information. Everybody understands the “Truth”.

As a result, they completely miss bubbles and have constantly been surprised by the inevitable fallout.

Fancy that! The most widely accepted view of neoclassical economics fails to account for actual human behavior, and its models suffer in the real world as a result. Whodathunkit?!?

Or, put another way, neoclassical economics does not have any concept of "regret". Not for "rational consumers" and not for neoclassical economic theorists, either.

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herd behavior

We certainly see this with the rush to offshore outsource every job. They didn't think about the results, they just bought in and something like 60% of those projects failed.

The CEOS, executives out of any class to me act like a herd of cattle and all it takes is one to drive them to stampede. They also do not seem to be able to add.

For example, now that energy costs are going up, I guess none of them bothered to analyze their global supply chain in terms of that. All they looked at was cheap labor labor, never the stupidity of making some rinky dink part that weighs a ton in China and shipping it back, where the costs of shipping exceed US manufacture.

Lots of examples like this.

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Prof. Mark Thoma

of Economist's View, offers a rebuttal, here.

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