Alan Greenspan has been judged the economist most responsible for causing the Global Financial Crisis. He, and 2ndand 3rd place finishers Milton Friedman and Larry Summers, have won the first–and hopefully last—Dynamite Prize in Economics.
In awarding the Prize, Edward Fullbrook, editor of the Real World Economics Review, noted that “They have been judged to be the three economists most responsible for the Global Financial Crisis. More figuratively, they are the three economists most responsible for blowing up the global economy.”
The prize was developed by the Real World Economics Review Blog in response to attempts by economists to evade responsibility for the crisis by calling it an unpredictable, “Black Swan” event. In reality, the public perception that economic theories and policies helped cause the crisis is correct.
The prize winners were determined by a poll in which over 7,500 people voted—most of whom were economists themselves from the 11,000 subscribers to the real-world economics review . Each voter could vote for a maximum of three economists. In total 18,531 votes were cast.
Fullbrook cautioned that not all economics and economists were bad. “Only ‘neoclassical’ economists caused the GFC. There are other approaches to economics that are more realistic—or at least less delusional—but these have been suppressed in universities and excluded from government policy making.”
“Some of these rebels also did what neoclassical economists falsely claimed was impossible: they foresaw the Global Financial Crisis and warned the public of its approach. In their honour, I now call for nominations for the inaugural Revere Award in Economics, named in honour of Paul Revere and his famous ride. It will be awarded to the 3 economists who saw the GFC coming, and whose work is most likely to prevent another GFC in the future.”
Dynamite Prize Citations
Alan Greenspan (5,061 votes): As Chairman of the Federal Reserve System from 1987 to 2006, Alan Greenspan both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation.
Milton Friedman (3,349 votes): Friedman propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of fantasy-based theories of economics and finance that facilitated the Global Financial Collapse.
Larry Summers (3,023 votes): As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), Summers worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also helped Greenspan and Wall Street torpedo efforts to regulate derivatives.
In total 18,531 votes were cast. The vote totals for the other finalists were:
| Fischer Black and Myron Scholes | 2016 |
| Eugene Fama | 1668 |
| Paul Samuelson | 1291 |
| Robert Lucas | 912 |
| Richard Portes | 433 |
| Edward Prescott and Finn E. Kydland | 403 |
| Assar Lindbeck | 375 |
The poll was conducted by PollDaddy. Cookies were used to prevent repeat voting.
For further information and interviews email: pae_news@btinternet.com
“I beg to differ ‘Free Trade’ is the main cause of the problem.”
Really, so your perscription about trade would be what, putting up trade barriers? Sinking all merchantile ships? I notice that you put free trade in quotes. Does that mean that you are really objecting to something other than free trade, because that would be intellectually dishonest.
“The USA, Australia and many other countries have been running continuous Current Account Deficits for several decades even being totally in need of borrowings to cover interest payments for most of these.”
None of those effects are caused by free trade. They are caused by the anti-free market policies of the governments involved. All quite predictable by Austrian economic theory. I think Friedman was wrong in his economic theory but free trade was the one area he was correct.
“These deficits have been obscured behind central bank manipulated interest rates and in the case of China a pegged exchange rate.”
Now you are starting to have a small glimmer of understanding of where the problem lies. It’s not free trade.
“Friedman’s ‘Free Trade’ has never been free and likewise the ‘Free Trade’ agreements between nations have added to the endogenous credit creation opotunities handed to the banksters.”
The current worldwide monetary system is inherently unstable. That is not the fault of free trade. As the Austrians have pointed out time and again a system of fiat currencies with fractional reserve banking is going to move from crisis to crisis.
If your mechanic recommends that you use a catalytic converter for reducing pollution coming out of the tail pipe of your car and then you mix oil into your gas then why should he get the blame.
Again free trade has nothing to do with it. Free trade is good. There are plenty of bad policies that have been followed by governments around the world and the one single policy that is good to move towards and which they did was free trade.
“Free Trade” agreements are effective protection for the banksters.
Free trade doesn’t require agreements. What exactly in the free trade agreements do you think has “protected the banksters?” All the protecting of banksters that I have seen has come from other legislation. It mostly comes from the central banks, something that was already in place and that you probably are in favor of.
“We have been taking advantage of a magic pudding debt source accompanied by a south sea type Cargo Cult. When we can no longer find enough people to pay the interest bills, the magic pudding will rot, the cargo cult will be exposed and we will need to start working on real production.”
What does this vague rant have to do with free trade, and Milton Freidman? I don’t think you even realize why these imbalances occured. This sounds like monday morning quarterbacking without any understanding of why. The why was NOT free trade.
“Friedman was the very worst of the culprits.”
You haven’t supported your case.
I know why the Austrians have a problem with Friedman, of which I could do a run down. They have valid objections, however it has nothing to do with free trade and everything to do with central banking, and government subsidization of market sectors. However, Friedman is no more to blame in this area than any of the rest of the mainstream economists.
Friedman was right in many areas where Keynesian’s were wrong. In toto, he moved things in the right direction worldwide helping many third world countries shed the chains of socialism. He deserves credit for that.
Provide a specific policy he advocated that was the root cause of the imbalances, and where he differed from policy that predated his influence then I might believe you.
What really irks me about those who have been railing against Friedman is that they are using him in an attempt to discredit free markets and move us in the wrong direction. Your rant against free trade being a perfect example.
In fact, it was anti-free market policies which contributed to the current mess. Friedman had many faults in that direction so one would we should be railing against him for being insufficiently free market, not the opposite.
Philip. Indeed. Terminology is confused: handed down and then mixed with moral/political purposes.
Thatcher’s premiership was a great con: while her followers believed the state had shrunk, cutting taxes and allowing entrepreneurial capitalism to return (historian Simon Schama calls it a reversion to the empire of the hard-faced 1920s), the state’s share of the economy was the same. I recall an argument with a Thatcher follower and showing them HM Treasury data to prove that nothing had changed.
Brian Macker,
Can you prove your point not by saying that “something is good” and “Austrians said that” but by giving practical examples showing what is good and what is bad?
I am not against international trade and market economy in general but I would like to understand why free markets are always better for the society than the mixed model involving the markets and the state.
I also would like to know why free international trade is always better than international trade moderated by governments.
Specifically is free trade with a country like China (not a free market economy and even not an open economy) good for a small open economy like Australia?
If we end up having only mining, agriculture, tourism and banking sector left in Australia and everything else is going to be bought from China – is this good or bad for the Australian society?
Brian Macker
I had the “free trade” in inverted commas because I believe that what has been going on is neither free nor trade, for the reasons I explained. Friedman claimed that this was “free trade”.
Could you please explain why “free trade is good”.
“The current worldwide monetary system is inherently unstable.”
I believe that this is so because the so called “free trade” system encourages the endless growth of debt by the CAD countries resulting a very unstable feedback loop. The enormous foreign debt accumulated by continuous Australian CADs over the last 50 years is indicative of the fact that we have not been trading, we have been buying on credit, (the never never). It also indicates that we are, as a country,(as correctly claimed by Barnaby Joyce) insolvent.
Philip,
Re: #26
“… the rhetoric and actual practice of capitalism are at polar opposites.”
100% Agree.
In a sneering tone of voice, a colleague asked me my opinion of our “capitalist economic system” recently. I said I think we should try capitalism before we pass judgement on it.
Brian Macker,
Re: #27
I think it is the bastardisation of the term “free trade” that leads to many of these arguments. The trade deals that have been put in place, such as NAFTA, are anti-free market in nature. Take the issue of Mexican corn production versus subsidised GM corn from the USA. Neither free nor fair trade. It is economic hegemony by another name.
For the record I am for sound money, pro free markets and opposed to any form of central planning and fictional reserve banking.
ak,
Re: #29
I also think Govt should be tightly restricted in its role. The referree and touch judges should not be players as well. These humans cannot be trusted to “moderate” trade when they are so readily subject to the influence of vested interests. I think the founding fathers of the USA had a few things right as in “a nation of laws” not a nation subject to the foibles and failings of leaders.
FWIW anticipating some suggestion that in holding these positions I am oppposed to any form of social welfare, kindly note that I am not. If we returned to the core principals of the business of insurance IMHO we could provide 99% of the social “services” that Govt pretends to provide more effectively and for a fraction of the cost. For a few extra dollars on everyone’s premium every baby could have a fully vested social security insurance policy regardless of their parents’ capacity to pay.
This levy would not need to be imposed. Who would opt out if they risked being denied a subsidised premium in the event of a change in their future circumstances? The additional levy would itself be a form of insurance on uninterrupted access to insurance.
A tale of the woe induced by deflation in Japan:
http://www.atimes.com/atimes/Japan/LB11Dh01.html
And things aren’t great in Latvia either:
http://www.foreignpolicy.com/articles/2010/02/24/latvias_great_depression
I don’t remember exactly who I voted for, but I think it was Lucas (for working to promote rational expectations), Fama (for efficient market hypothesis), and Friedman.
Interestingly (but not surprisingly), the most frequent names to come up on the “Nominations for the Revere Award in Economics” are either Post-Keynes (Fischer, Minsky, and Keen) or Austrian school (Mises, Hayek etc.).
This pairing down of ideas is basically what I expected, given that economists from these two schools were the only ones to consistently predict the current crisis. Of course, the differences between these two schools will have to be addressed if there is to be a successor to neoclassical economics. And I think that many of those differences are irreconcilable, which could lead to some very interesting debate.
@ BrightSpark1 (#20)
“I beg to differ ‘Free Trade’ is the main cause of the problem.”
I agree with you, BrightSpark.
At the risk of stating the bleeding obvious: there cannot be global recessions or global financial crisis… without globalization.
Volatility in world markets is unavoidable as long as the production of Opel Brussels, for example, depends on tyres made in Italy, Czech wind shields, computer chips from East Asia and software from California, to produce cars that will be sold in Kinshasa or Mumbay.
“Globalization… we put the ‘G’ in GFC”. Imagine a male voice-over, neutral voice, no mannerisms, with black and white images of riots in Bangkok, a worker strike in Prague and unemployed car workers in Brussels.
Marco2
Remember the problem is not trade between the nations but a system of international credit which enables some nations to never fully pay their monthly bills (eg Australia for 50 years). A system that allows nations to even borrow to “pay” their interest bill.
The neoclassical economists say this is OK so long as it is not “Government” or “Sovereign” debt. This is the real lame garbage idea, if it looks like a gross mendicant nation and does not pay its bills like a mendicant nation it is a mendicant nation. The creditor nations (eg Japan) which allow this and even enforce its continuation must also suffer when the day to balance the books arrives. If it looks like a usury nation and acts like a usury nation then it is a usury nation. No nations benefit from this, only their banksters benefit, that is of course, until the day of reckoning arrives.
cheers
@ BrightSpark1 (#36)
You are, of course, right on this.
What I was trying to suggest is that “shocks” to the “equilibrium” now don’t have to occur within national economies, but can be “imported”.
This increases the complexity of the environment in which economic agents act.
And this is not limited to the real global economy, but also extends to the global financial markets.
Reposting to clean up unclosed HTML problems.
AK,
“Can you prove your point not by saying that “something is good” and “Austrians said that” but by giving practical examples showing what is good and what is bad?”
Yes, I could. Will I? I’m not sure I want to expend the effort when there are plenty of books and articles already explaining these points. I don’t even know your level of economic understanding. It’s got to be extremely low if you don’t know why trade is good.
Where would I start? Do you even understand why humans trade at all? Some people don’t understand, for example those who advocate self sufficiency.
By “good” I mean having more with less effort. That’s it. The reason why human’s trade on an individual level is because our differences allow for efficiencies to be gleaned via trade. If everyone were homogeneous with respect to every aspect of their lives and over their entire lifetimes there would be no need to trade.
It’s the heterogeneities that lead to the benefits to be had by trade. These heterogeneities can be exploited along all measures of difference. Young people need to save, whereas the old need to live off savings, and thus they can trade. Parents of young children want free time and can trade with those babysitters with no children and with abundant free time. Differences in local can be traded upon, apples do not produce in the tropics, oranges do, so there is trade.
Countries are merely collections of individuals. It makes sense to have free trade between countries for the sam
Have I made my full argument. No, with my level of understanding that would require a book.
For example, angophera’s argument above shows a total misunderstanding of what free trade is. Of course, agricultural subsidies are a violation of free trade. They are in fact an anti-tariff. Furthermore, they are a violation of trade itself within the country. The government has essentially placed it’s thumb on the balance in favor of one producer over another, thus canceling any private determination of the value of the trades being made.
The reason why we use corn syrup instead of cane sugar in the US country is mostly because of tariffs. We tax the hell out of imported cane sugar, to the benefit of local sugarcane farmers. However the same effect of skewing trades towards corn could be accomplished by farm subsidies to corn producers (and actually is). That two would increase the use of corn syrup, however it has the additional effect of punishing local US cane producers. In effect the US government is following to opposing policies (like when they tax cigarettes while subsidizing tobacco farmers).
It harms other market players too like the domestic chocolate and candy industries, which have to pay four times as much for sweeteners.
If left alone the US market would naturally switch to the use of cane sugar precisely because it is a far more efficiently produced sweetener. Three quarters of annual sweetener costs would be saved.
That makes about as much sense as New York deciding to put a tariff on orange production (or subsidize local orange production). Oranges can certainly be produced in new york. One needs only to construct greenhouses. Were NY state to subsidize orange growing by the sufficient amount and tax incoming oranges it could certainly change the market.
I’ve just given you a tiny ice shaving of the vast iceberg of my knowledge on these topics and it is an absolute certainty that a “mixed economy” is vastly inferior to what the free market can produce.
Also you are mistaken in thinking that “free markets” and governments are somehow separate. Free markets cannot exist without a system of law that protects and honors property rights.
“I also would like to know why free international trade is always better than international trade moderated by governments.”
Because, given secure property rights, the people doing the trading are in the best position to have the information on what trades are profitable. Look up Hayek’s and Mises’s arguments on why central planning doesn’t work.
The free market acts like a kind of multiprocessor supercomputer where each person is a processor that has local memory and information storage. Prices act as signaling mechanisms between the processors. There is in reality no single price for any good, and in fact the price of goods are not only fluctuating in space but in time. There is therefore a complexity of price gradients (sort of like Einsteins gravity mollusk where goods instead of planets are attracted to higher prices).
The reason why central planning does not work is because it can’t. The information in the economic system is distributed. There is no efficient way to collect it, by the time it is collected it is stale, collection is prone to error, and incentives to corruption, etc. If it were collected their would be no way to store, or process it. The very people who are best suited to process the information already had it, and the central planning board doesn’t have the expertise.
It is in fact a modern functioning economy that is in the least need of governance of the kind you are thinking, and the most prone to be harmed by it. It is only simple economies, like primitive tribes, that are most suited to central control.
A specific example of the price gradient would be the US gas crisis in the 1970’s. Normally gas is cheap where produced and flows to where it is more expensive. The price gradient must take transportation costs into account, and guess what it naturally does. However the government stepped in and decided that prices on domestically produced gas was too high. So they slapped on a price ceiling. Unfortunately the ceiling was too low (as it was below market) and it no longer made sense to spend an extra ten cents per gallon to drive the gas (or fuel oil) north when the producer could no longer get any more than locally.
The result was people freezing to death in their homes in New England, while people in Texas were heating their swimming pools. In fact, Corning glass (in NY) could not get shipments of fuel to produce insulation even though that insulation would save far more energy than it took to produce.
Not only do prices move goods through space but through time. Interest rates are an important price in that process and government attempts to control interest rates are just as misguided and are in fact the main cause of our current mess.
You can think of this price gradient as a multidimensional set of hills and valleys that spread across the earths surface, and through time. Each separate good has it’s own gradient and each processor moves goods it has specialized in along the gradients in the correct directions, based on the profitability of the movements.
Government subsidies and price controls destroy the workings of the economic supercomputer. It is the height of hubris to assume that a few men elected to office and with no knowledge of most fields, can decide what prices should be, and based on some gross measurements like GDP. That’s like thinking one can decide what the voltages on individual wires of a supercomputer should be by looking at the line voltage coming out of the wall.
“Specifically is free trade with a country like China (not a free market economy and even not an open economy) good for a small open economy like Australia?”
Yes. If you want more goods for less effort.
“If we end up having only mining, agriculture, tourism and banking sector left in Australia and everything else is going to be bought from China – is this good or bad for the Australian society?”
If we only have apple growing in New York and we get all our oranges from Florida is that good or bad for the NY economy?
Sorry for any readability, spelling or other issues with my comment. I think I have spent enough effort on this. Go read some Austrian economists. Their understanding of economics is light years ahead of the competition.
Friedman is and was wrong but other economists such as Keynes bear far more responsibility for the current economic mess. This is merely so because Friedman is right in so many areas where Keynes was wrong. He was right about stagflation for instance, on the fact that there is a natural rate of unemployment, that the central government could not micromanage the economy, that people can realize what the government is doing to neutralize it’s policies (like abandoning a deflating currency), etc.
Sam Harris says we can know Mormonism is less likely than Christianity, because Mormonism is precisely Christianity plus some really stupid ideas. The same rings true for Keynesianism. Keynesianism is just monetarism plus some really stupid ideas. Ideas, like dropping money from helicopters or burying it in holes to let people dig it up would be a good ways to help the economy.
As it happens both Friedman and Keynes are wrong on the issue of the Great Depression. Friedman believed monetary policy could have ended it whereas Keynes argued it would be ineffectual and that it required large scale deficit spending instead to decrease mass unemployment. The fact of the matter is that the experiment was already run and both were either unaware of or ignored that fact. Watch the video titled “Why You’ve Never Heard of the Great Depression of 1920? by Thomas E. Woods to find out what I’m talking about. Both Keynes and Friedman were both proven wrong empirically before either even bothered to pick up a pen.
Note too that we’ve had both the monetary policy both Friedman and Keynes advocated, and the massive deficit spending, yet our economies still are in trouble. Both were practiced in response to the 2001 downturn. Keynes agreed with both and Friedman only one of the policies. Do you think the massive deficit spending done in the US and elsewhere in Keynesian fashion has helped? Is Japan better off now that it’s government has squandered the vast majority of private savings over the last decade in a foolish Keynesian attempt at a turnaround.
What’s disturbing to me is how little of the great store of learning, analysis, and understanding that the Austrians have brought to bear is known by, not only the mainstream economist, but those who recognize it’s failure.
Go to the link at the prize announcement and read my comments on Henry Hazlett and how based on merely propositional logic he was able to predict the effects of the current policies on the housing market. He wrote that 60 years ago. They followed the Keynesian style policies like FDIC insurance, GSEs, deficit spending, etc. that he recommended against and things unfolded exactly as he predicted.
BrightSpark1,
It only confuses your argument, and makes it impossible to discuss the topic. I can’t tell if you are against true free trade or for it.
So you are claiming that Friedman himself, when he referred to free trade, meant things that you mentioned like a) Pegged exchange rates. b) government borrowing to make interest payments c) Trade agreements.
Well in fact this is not true. I’ve read many of Friedman’s books, articles, papers, and he never claimed that free trade was any of these things. You’ve been reading second hand character assinations and not the original Friedman. Friedman has said, “We should move unilaterally to free trade, not instantaneously but over a period of, say, five years, at a pace announced in advance.” His position is that there is absolutely no need for free trade agreements.
I don’t know where you get the other nonsense from. Please cite a reference. I’m getting the same thing over at the other site. Lots of handwaving, general statements, and accusations with no meat.
I gave a partial explanation in my other response. You can also read the original Friedman argument I just linked to. Watch Friedman’s youtube video titled “Free Trade and the Steel Industry”.
You don’t understand the problem then. It’s not due to free trade. Furthermore the growth of debt is a symptom, not a cause. The cause is central banking and it’s interference in market prices, and support of both fiat and fraction reserve inflation, along with government deficit spending. That and other ad hoc policies designed to support our very unfree banking system, like centrally planned deposit insurance, government sponsored entities, and the like.
You are confused if you think that is due to free trade.
Milton Friedman does deserve criticism for believing that a system of freely fluctuating fiat currencies could work but in that regard he is no worse than any Keynesian. Here’s an example of Austrian criticism from Murray Rothbard’s “What Has Government Done to Our Money”.
Milton Friedman only believed in free markets to a certain extent, and it was the areas where he objected to free markets where he was wrong. That area being money. Many critics are trying to use those mistakes to criticise free markets. That would be a horrendous mistake.
Here’s some more Austrian anti-Friedman from the same source. Notice however that the ire for monetarism is balanced by pointing out the Keynesians are in the same boat with regard to monetary policy:
The thing is that this “Friedmanite” system was essentially in place back in 1931, as the prior chapter pointed out, when Friedman was only 19. It was a system that Keynesian economic theory justified. Why should Friedman get all the full blame for a bad system that was in place before anyone even knew who he was? The answer is that he shouldn’t take the full blame. He deserves partial blame. A blame that needs to be shared by all who advocate fiat currencies.
I suggest you read the entire book. It’s free, online and can be polished off in a weekend. I studied this stuff over twenty years so you won’t be where I am. This only covers a portion of Austrian theory. To understand more fully you would have to read other books. You will being to have an inkling of the true reasons why the current system is unstable.
What does this have to do with free trade? Nothing.