The Ignoble Prize for Economics

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The Real World Economics Review Blog--which is run by PAECON, the "Protest against Autistic ECONomics"--has just launched "The Igno­ble Prize for Economics“.

The intent is to select by pop­u­lar vote the “three econ­o­mists who con­tributed most to enabling the Global Finan­cial Col­lapse (GFC)”.

Nom­i­na­tions are now open, and any­one can nom­i­nate up to three indi­vid­u­als by vis­it­ing this page and leav­ing a comment.

As it is cur­rently stated, the prize is open for posthu­mous award; this may change if there are sim­ply too many dead econ­o­mists who get a guernsey.

Nom­i­na­tions should include a rea­son, and if a nom­i­na­tion you’d like to make are already there, you can add a com­ment sup­port­ing the case for that person.

If you’d pre­fer to make an anony­mous nom­i­na­tion, you can send an email to pae_news@btinternet.com.

After roughly a month, nom­i­na­tions will be closed, the top dozen nom­i­nees (based on both the num­ber of votes and the evi­dence given) will be selected, and a vote will be con­ducted using Poll­Daddy to select the three win­ners (this will ensure that each IP address can vote only once).

So please get in there and add your nom­i­na­tions, or your evi­dence. We are more than two years(!) into the cri­sis, and the level of self-examination by the eco­nom­ics pro­fes­sion about its fail­ure to antic­i­pate it remains piti­ful. It’s time to turn the torch of pub­lic opin­ion onto it.

The cur­rent list of nom­i­nees (and some of the evi­dence given in favour of them) is:

Alan Greenspan

… for per­pet­u­at­ing a finan­cial bub­ble that should have burst in 1987.

Alan Greenspan pro­moted the view that free finan­cial mar­kets are effi­cient while he was the Chair of the Fed­eral Reserve Sys­tem from 1987 to 2006. In a “mea culpa” tes­ti­mony before a Con­gres­sional Com­mit­tee on Octo­ber 23, 2008, Greenspan stated: “This cri­sis , how­ever, has turned out to be much broader than any­thing I could have imag­ined…. [T]hose of us who looked to the self-interest of lend­ing insti­tu­tions to pro­tect shareholders’s equity (myself espe­cially) are in a state of shocked disbelief…In recent decades, a vast risk man­age­ment and pric­ing sys­tem has evolved, com­bin­ing the best insights of math­e­mati­cians and finance experts sup­ported by major advances in com­puter and com­mu­ni­ca­tions tech­nol­ogy. A Nobel Prize was awarded for the dis­cov­ery of the pric­ing model that under­pins much of the advance in deriv­a­tives mar­kets. This mod­ern risk man­age­ment par­a­digm has held sway for decades. The whole intel­lec­tual edi­fice, how­ever, col­lapsed”. In response to ques­tions from Con­gress­men, Greenspan stated “I still do not fully under­stand why it happened…”

Ben Bernanke

… for believ­ing the the­o­ries of Mil­ton Fried­man about what caused the Great Depres­sion and thus lead­ing us to the brink of the next one, and for sup­port­ing Greenspan’s delu­sional belief in the effi­ciency of finan­cial markets.

… for his poor under­stand­ing of finan­cial cri­sis, which not only, as Mr. Keen points out, was over­sim­plis­tic, but who’s been rewarded with a polit­i­cal influ­ence and con­trol of eco­nomic poli­cies that is keep­ing the econ­omy away from recov­ery and job creation.

Larry Sum­mers

Tim­o­thy Geithner

Edward Prescott

… whose flawed method­olog­i­cal inno­va­tions on cycle the­ory or econo­met­rics; along with a ultra­l­ib­eral pol­icy strat­egy (of which he remains a tenet dur­ing the GFC) are guilty of ruin­ing both the econ­omy and most of the uni­ver­sity courses in macro­eco­nomic issues for two gen­er­a­tions (I am young enough to know).

Eugene Fama

Chief pro­moter of the “Effi­cient Mar­kets Hypothesis”.

Paul Samuel­son

Paul Samuel­son is the major econ­o­mist respon­si­ble for abort­ing Keynes’s Rev­o­lu­tion­ary gen­eral the­ory argu­ment that the cause of unem­ploy­ment is nested in the oper­a­tion of finan­cial mar­kets and the demand for liq­uid­ity on the part of savers.

Paul David­son pro­vides the empir­i­cal evi­dence using direct quotes from Samuel­son to show “Why Keynes’s Ideas Were Never Taught in Amer­i­can Uni­ver­si­ties” , [ pp 162–178 of the book THE KEYNES SOLUTION: THE PATH TO GLOBAL ECONOMIC PROSPERITY (Palgrave/Macmillan, Sep­tem­ber 2009). Samuel­son is quoted as stat­ing that he found The Gen­eral The­ory “unpalat­able” and not com­pre­hen­si­ble. Samuel­son then goes on to say “The way I finally con­vinced myself was to stop wor­ry­ing about it [under­stand­ing Keynes’s analy­sis]. I asked myself why do I refuse a par­a­digm that enables me to under­stand the Roo­sevelt upturn from 1933 till 1937… I was con­tent to assume that there was enough rigid­ity in rel­a­tive prices and wages to make the Key­ne­sian alter­na­tive to Wal­ras oper­a­tive”. In 1986, Samuel­son still held to this line when he stated “We [Key­ne­sians] alweays assumed that the Key­ne­sian under­em­ploy­ment equi­lib­rium floated on a sub­struc­ture of admin­is­tered prices and imper­fect com­pe­ti­tion”.
In other words, Samuel­son prop­a­gated the view that Keynes’s analy­sis relied on the rigid­ity of wages and prices , even though Keynes, on page 257 of THE GENERAL THEORY wrote that the clas­si­cal the­ory assumed that “the self adjust­ing char­ac­ter of the eco­nomic sys­tem [rested] on an assumed flu­id­ity of money-wages, and when there is rigid­ity to lay on the rigid­ity the blame for maladjustment…..My dif­fer­ence from this the­ory is pri­mar­ily a dif­fer­ence of analysis”.

Thus Samuel­son, who pro­claimed him­self as the chief Key­ne­sian after the war, pro­mol­gated a false basis for Keynes’s the­ory– and in ascrib­ing rigid­ity of prices and wages as the cause of unem­ploy­ment made his brand of ‘Key­ne­sian­ism’ an easy tar­get for peole like Mil­ton Fried­man. The result was Keynes’s poli­cies were killed by Fried­man et al and politi­cians such as Rea­gan and Thatcher were able to paraded out Nobel Prize win­ning mon­e­tarists, etc as strong advo­cates for their free mar­ket philosophy.

Fis­cher Black [deceased] and Myron Scholes

(Nobel Prizes 1997) for devel­op­ing the Black-Scholes for­mula that led to the explo­sive growth of finan­cial derivatives.

Some Dead Nominees

Leon Wal­ras

Although Wal­ras was not THE found­ing father of neo­clas­si­cal the­ory (Menger and Jevons made it before him to the press), he is today, per­haps, the most remem­bered of the three so it is in order to nom­i­nate him in rep­re­sen­ta­tion of the 3 peo­ple who did most dam­age to the dis­ci­pline. True, oth­ers fol­lowed suit with their failed physics-turned-economics pur­suits, but the orig­i­nal 3 (akin to the not-so-good, the bad and the ugly) were Menger, Jevons and Walras.

Mil­ton Friedman

… for mis­lead­ing the eco­nom­ics pro­fes­sion with a naive method­ol­ogy and an equally naive the­ory of money.

…  his insane and fun­da­men­tally flawed mus­ings on mon­e­tary the­ory (espe­cially the assump­tion that dou­bling money in a sys­tem would result in a sim­ple dou­bling of prices) led his neo­clas­si­cal acolytes to believe in a chimera that has been dis­as­trous in the first place and that promises to be even more dis­as­trous now fol­low­ing the GFC.

Leon Key­ser­ling

Noth­ing in the remit for this prize said it couldn’t be posthu­mous. Key­ser­ling vir­tu­ally invented mil­i­tary Key­ne­sian­ism with his advice to NSC-68 author, Paul Nitze and, later, advice to AFL-CIO hon­chos, George Meany and Wal­ter Reuther. It’s been a long (60 years), strange trip but the GFC is Keyserling’s Cold War guns and but­ter chick­ens com­ing back home to get fried.

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235 Responses to The Ignoble Prize for Economics

  1. hopetobedrjoe says:

    MMitchell @ 217,

    Again though the idea of ‘legally requir­ing’ us as ‘con­sumers’ to ‘care’ about what is impor­tant puts the onus on the con­sumer. My point is that this is mis­placed — the ‘con­sumer’ is likely to care (even for purely self­ish rea­sons) about impor­tant things like, for instance, prod­uct safety, but is ill equipped to deal with them. The onus must be placed on the pro­duc­ers of the prod­ucts who have spe­cialised knowl­edge on them to ade­quately dis­sem­i­nate that knowledge.

    Re: pro­tec­tion­ism, I think that the issue is more com­pli­cated than it is made out to be. In Aus­tralia we have a rel­a­tively well func­tion­ing gov­ern­ment and econ­omy (the worst except for the rest, as Churchill might say) such that even the unem­ployed among us are much bet­ter off than many peo­ple work­ing 80–100 hour weeks in other coun­tries. If giv­ing peo­ple in those poorer coun­tries jobs improves their lot then that is poten­tially a good thing. The prob­lem is in the exe­cu­tion — com­pa­nies are so dogged in their pur­suit of the bot­tom line that they refuse to pay these peo­ple even a liv­ing wage. If some sys­tem were in place which required that they were paid a decent wage — if for instance there were a global agree­ment requir­ing that com­pa­nies out­sourc­ing labour be forced to be paid a min­i­mum wage by some mea­sure of pur­chas­ing power par­ity, then com­pa­nies could still save a lot of money, con­sumers could still pay less than they oth­er­wise might, and the (for­eign) work­ers would ben­e­fit from bet­ter stan­dard of liv­ing. Of course, this still leaves a prob­lem of dein­dus­tri­al­i­sa­tion and unem­ploy­ment (of var­i­ous degrees of per­ma­nency) of the orig­i­nal devel­oped coun­try (eg Aus­tralia). I don’t have an answer on this.

    Thanks for cor­rect­ing me on the nature of ‘organic’, though it’s likely prein­dus­trial agri­cul­ture may also have had those other conditions.

    Philip @ 220

    Hard to agree more. Iron­i­cally, Fried­man has quoted John Stu­art Mill to (erro­neously) sup­port his posi­tions, while Mill in his Prin­ci­ples of Eco­nom­ics actu­ally has some­thing insight­ful to say about the role of trade unions: that they are not an inter­fer­ence in the mar­ket, but the ‘nec­es­sary instru­men­tal­ity’ of the mar­ket: that is, strong trade unions are needed to make the free mar­ket for labour actu­ally work.

    I will have to have a look at Dean Baker’s book. If I remem­ber cor­rectly he had some insight­ful things to say on the cri­sis in the real-world eco­nom­ics review.

  2. BrightSpark1 says:

    hopetobedr­joe @226

    You make some good points re the ben­e­fits which may accrue to the poor coun­tries but I can not see that this is now rel­e­vant. We are not talk­ing about poor coun­tries here.

    The wild card here is Com­mu­nist China. The coutry, for which all of the neo­clas­si­cal econ­o­mists who are paraded on the main­stream media in Aus­tralia, are Cheer lead­ers “China will save us”. How much more “pinko” could those “econ­o­mists” be?

    China runs a com­mand econ­omy with which the west is meant to “com­pete”. They peg the exchange rate at 8% of its real value (if we take the cost of labour as a yardstick),making that impos­si­ble. Now this Com­mu­nist mea­sure has pro­vided vir­tu­ally free cargo for the west and a line of credit for the token pur­chase of this said free cargo. This credit has con­tributed to the debt bub­ble and caused the pro­gres­sive dein­dus­tri­al­i­sa­tion of the west. That these neo­clas­si­cal econ­o­mists have cham­pi­oned this course reveals their real agenda, per­sonal greed the same as the moti­va­tion for the com­mu­nist Chi­nese polit­bu­reau members.

    ak

    The Euro­pean Com­mu­nists were incom­petant and they were only a threat to their own coun­tries and peo­ples. The Chi­nese com­mu­nists are com­petant and far more of a threat to the west.
    When greedy incom­pe­tents com­pete with greedy com­pe­tent peo­ple it seems that the out­come is never in any doubt. But the imbal­ances which have devel­oped will more likely result in mutu­ally assured eco­nomic destruction.

    cheers

  3. PETER_W says:

    Still, Mr. Buf­fett did offer one tough gen­eral opin­ion: make sure the bosses of fail­ing banks — and their spouses — pay very, very dearly. “If I was run­ning things, if a bank had to go to the gov­ern­ment for help, the C.E.O. and his wife would for­feit all their net worth,” he said. “And that would apply to any C.E.O. that had been there in the pre­vi­ous two years.”

  4. stf says:

    Com­pletely agree, Mahaish

    I would just add that OF COURSE we con­sider the polit­i­cal side. If you’re propos­ing a pol­icy alter­na­tive that nobody’s really con­sid­er­ing or every­one is oth­er­wise not pay­ing much atten­tion to, as we all are here, what other rea­son could there be for it not being con­sid­ered besides the realities/prejudices/particularities/mismanagement (in our view, of course, as this is mostly rel­a­tive) of the polit­i­cal process? It should there­fore go with­out say­ing that we rec­og­nize all this, but for what­ever rea­sons we get that all the time.

    Best,
    Scott

  5. Gamma_home says:

    Scott @ 222

    MMT is a the­ory of aggre­gate demand and any dis­cus­sion relat­ing MMT and infla­tion is about AD. It NEVER sug­gests that you can’t have other sources of inflation.”

    This does not seem to be con­sis­tent with Bill’s writ­ings on Zim­babwe for exam­ple, and I would be inter­ested to hear your thoughts.

    My impres­sion from read­ing http://bilbo.economicoutlook.net/blog/?p=3773
    is that the Bill does make the case that infla­tion in Zim­babwe was due only to the changes in aggere­gate demand / sup­ply for goods, and NOTHING to do with the change in demand / sup­ply for money.

    That is, the infla­tion was caused only by a decrease in real out­put (with­out a cor­re­spond­ing decrease in aggre­gate demand) and not the mas­sive increase in sup­ply of money.

    How­ever the infla­tion rate in Zim was in the order of hun­dreds and thou­sands of per­cent per year, and in 2009 prob­a­bly mil­lions of per­cent. The decrease in sup­ply was between 5 and 10 per­cent per year over this time.

    Some­thing does not add up in this the­ory, and the miss­ing link is that the huge increase in the sup­ply of money in this cir­cum­stance did have a big effect on prices.

    But this is a prob­lem for MMT, because MMT would sug­gest that an infla­tion prob­lem can­not occur while there is unem­ploy­ment, which was sky high in Zim­babwe at the time.

  6. stf says:

    Hi Gamma

    Bill’s point is that, with out­put falling so much, you would have had high infla­tion in Zim­babwe unless you had reduced AD very sub­stan­tially. He’s not argu­ing that the rise in gov­ern­ment deficits wasn’t hyper infla­tion­ary, but that no rise in gov­ern­ment deficits would have been very infla­tion­ary, too (though less so, of course, than with the deficits added). There­fore, the sce­nario has lit­tle to do with the MMT view and those who use it to cri­tique MMT don’t under­stand MMT. Rather, the MMT view tech­ni­cally would have sug­gested a reduced deficit in Zim­babwe (unless the deficit could also some­how raise capacity–might be pos­si­ble, but beside the point for now since obvi­ously Zimbabwe’s deficits didn’t do this), not an increased deficit, since MMT argues that the only rele­veant cost of deficit spend­ing to con­sider is the poten­tial infla­tion­ary impact.

    Best,
    Scott

  7. stf says:

    Quick edit:

    Meant to say “with CAPACITY falling so much” in the first line, not “output.”

    Also, MMT doesn’t argue that you can’t have infla­tion with unem­ploy­ment high. It argues that increas­ing AD doesn’t raise infla­tion (at least not enough to really worry about) if there is sig­nif­i­cant unuti­lized capac­ity. Very dif­fer­ent points. Of course, this leaves some­what the con­cept of “unuti­lized capac­ity” some­what squishy (for instance, I would argue that a neg­a­tive sup­ply shock could reduce unuti­lized capac­ity … Bill’s mak­ing this point with respect to Zimbabwe).

    Best,
    Scott

  8. Ramanan/superpoincare says:

    Good inter­views here. Long ones — touch all top­ics .. Bill Mitchell and Randy Wray

    http://e1.newcastle.edu.au/coffee/education/MMT_interviews/

  9. hopetobedrjoe says:

    BrightSpark1 @226

    As great as China’s gdp and eco­nomic growth are I would still clas­sify most of the peo­ple there as ‘poor’. And they aren’t the only ones mak­ing things sold in the west — there are many in Asia and else­where who have noth­ing like China’s growth. The dif­fi­culty of com­pet­ing with them isn’t just that they have a semi-command econ­omy (there is much that is cap­i­tal­ist about China) but the fact that they do have such low wages (and their peo­ple aren’t empow­ered to ask for higher ones).

  10. MMitchell says:

    #226 hopetobedr­joe

    Sorry for the late reply (I have been tend­ing some other com­mit­ments). I don’t think that peo­ple should be legally made to con­sider aspects of what they buy and I do believe that the pro­duc­ers have oblig­a­tions there (although I am pre­pared to debate how pre­scrip­tive some of those oblig­a­tions should be) what I per­son­ally lamented was why so few peo­ple actu­ally do care about aspects of what they buy (and I acknowl­edge a fair bit of hypocrisy here). I am not sure what Schu­macher really thought either, as far as I can tell he was just com­par­ing prop­erty laws with other require­ments of consumers.

    I am no expert, but to me it is not clear that what is hap­pen­ing in China is really to the long term ben­e­fit of the Chi­nese, if West­ern indus­trial soci­ety is on a destruc­tive path, then join­ing that path seems a dan­ger­ous idea. This is a civil­i­sa­tion that, until recently, suc­cess­fully sup­ported, in rel­a­tive wealth, more peo­ple than any other cul­ture on earth ever has. They would prob­a­bly be bet­ter off look­ing to their tra­di­tional roots rather than poi­son­ing them­selves and their envi­ron­ment to pro­duce crappy waste­ful goods of lit­tle long term value. It is all a huge gam­ble any­way, as you point out, there are plenty of other cheap labour coun­tries which can be moved to if their cur­rency or wages increase so China could be locked into this pat­tern for some time. There must be bet­ter ways to develop coun­tries (Schu­macher dis­cusses one possibility).

    I acknowl­edge in turn your point on the other aspects of tra­di­tional agri­cul­ture — of note though is that Chi­nese agri­cul­ture was far more advanced in this respect (appar­ently) than West­ern ag (both was and is), which never had to deal with such inten­sive demands on its resources, and when it did resorted to imports (from India, US and Oz among oth­ers) and fos­sil fuel based approaches.

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