Doyne Farmer

Let me just put an asterisk by this. There are special cases where that doesn't, where you get dynamics. But they're really special cases. If you look at the workhorse models used by the Federal Reserve or any of the people who are actually using models to make decisions about the economy, they're still actually using rational expectations.

Let me just put an asterisk by this. There are special cases where that doesn't, where you get dynamics. But they're really special cases. If you look at the workhorse models used by the Federal Reserve or any of the people who are actually using models to make decisions about the economy, they're still actually using rational expectations.

And those models settle into fixed points absent external stimuli.

And those models settle into fixed points absent external stimuli.

They even have names like real business cycles. Okay. But when you look at them, they don't make business cycles unless they're getting kicked. So I find the name a misnomer. Got it. They're not endogenous business cycles.

They even have names like real business cycles. Okay. But when you look at them, they don't make business cycles unless they're getting kicked. So I find the name a misnomer. Got it. They're not endogenous business cycles.

Yeah. Well, that's one of the things. But unlike in physics, where the work you're talking about builds out of the classical work, the methods used are similar to those used in traditional equilibrium statistical mechanics, here we throw the whole thing out and start over.

Yeah. Well, that's one of the things. But unlike in physics, where the work you're talking about builds out of the classical work, the methods used are similar to those used in traditional equilibrium statistical mechanics, here we throw the whole thing out and start over.

And that's actually the source of the tension within the academic community and why this kind of, this way of doing things is so strongly opposed by the mainstream academic economists.

And that's actually the source of the tension within the academic community and why this kind of, this way of doing things is so strongly opposed by the mainstream academic economists.

Yeah. Again, I'm trying to be nice to the economists. They were doing the best they could. But, you know, yeah, I think there were two key things that happened. One is, I think the 2008 crisis was substantially a non-equilibrium event. Things got out of whack. We weren't sitting at the equilibrium we've been at. Why? Because we were dealing with

Yeah. Again, I'm trying to be nice to the economists. They were doing the best they could. But, you know, yeah, I think there were two key things that happened. One is, I think the 2008 crisis was substantially a non-equilibrium event. Things got out of whack. We weren't sitting at the equilibrium we've been at. Why? Because we were dealing with

financial instruments we didn't properly understand, and they had side effects that we really didn't understand. There were a few people like Robert Shiller who anticipated the housing bubble, that the housing bubble would pop, but almost nobody anticipated was how enormous the side effects on the real economy would be.

financial instruments we didn't properly understand, and they had side effects that we really didn't understand. There were a few people like Robert Shiller who anticipated the housing bubble, that the housing bubble would pop, but almost nobody anticipated was how enormous the side effects on the real economy would be.

And that was because mortgage-backed securities, almost everybody globally was holding them. Foreign institutions were holding US mortgage-backed securities because they were the hot new thing, great investment, low risk, high return, hooray, hooray. But what they didn't realize is when the housing bubble popped, that meant that all those mortgage-backed securities got enormously

And that was because mortgage-backed securities, almost everybody globally was holding them. Foreign institutions were holding US mortgage-backed securities because they were the hot new thing, great investment, low risk, high return, hooray, hooray. But what they didn't realize is when the housing bubble popped, that meant that all those mortgage-backed securities got enormously

their valuations dropped very low, which meant that all these financial institutions holding them were stressed, which meant that they were not in shape to lend money anymore, which meant nobody was lending money to the businesses in the real economy that needed it to construct new buildings and do all the things that we do in the real economy, and the real economy got whacked really hard.

their valuations dropped very low, which meant that all these financial institutions holding them were stressed, which meant that they were not in shape to lend money anymore, which meant nobody was lending money to the businesses in the real economy that needed it to construct new buildings and do all the things that we do in the real economy, and the real economy got whacked really hard.

I would argue it was all an out of equilibrium event, endogenously driven.

I would argue it was all an out of equilibrium event, endogenously driven.