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A cor­re­spon­dent just sent me the fol­low­ing set of Depres­sion jokes. I’ve seen it before, but there are a cou­ple of new twists that are worth shar­ing.


The reces­sion has hit every­body real­ly hard…

  • My neigh­bour got a pre-declined cred­it card in the mail.
  • Wives are hav­ing sex with their hus­bands because they can’t afford bat­ter­ies.
  • CEO’s are now play­ing minia­ture golf.
  • Exxon-Mobil laid off 25 Con­gress­men.
  • A strip­per was killed when her audi­ence show­ered her with rolls of pen­nies while she danced.
  • I saw a Mor­mon with only one wife.
  • If the bank returns your check marked “Insuf­fi­cient Funds,” you call them and ask if they meant you or them.
  • McDon­ald’s is sell­ing the 1/4 ounc­er.
  • Angeli­na Jolie adopt­ed a child from Amer­i­ca.
  • Par­ents in Bev­er­ly Hills fired their nan­nies and learned their chil­dren’s names.
  • My cousin had an exor­cism but could­n’t afford to pay for it, and they re-pos­sessed her!
  • A truck­load of Amer­i­cans was caught sneak­ing into Mex­i­co.
  • A pic­ture is now only worth 200 words.
  • When Bill and Hillary trav­el togeth­er, they now have to share a room.
  • The Trea­sure Island casi­no in Las Vegas is now man­aged by Soma­li pirates.
  • And, final­ly.…
  • I was so depressed last night think­ing about the econ­o­my, wars, jobs, my sav­ings, Social Secu­ri­ty, retire­ment funds, etc., I called the Sui­cide Hot­line. I got a call cen­tre in Pak­istan, and when I told them I was sui­ci­dal, they got all excit­ed, and asked if I could dri­ve a truck.

This is also a good place to repro­duce Yves Smith’s won­der­ful April Fools Joke about econ­o­mists. Her site Naked Cap­i­tal­ism is one of the best on the web, for those of you who haven’t seen it.

Blacklisted Economics Professor Found Dead: NC Publishes His Last Letter

Pro­fes­sor Out­is Phi­lalithopou­los was found dead in his home three days ago; the coroner’s report cit­ed nat­ur­al caus­es that were left unspec­i­fied. Unfor­tu­nate­ly, all of the professor’s aca­d­e­m­ic work has dis­ap­peared; the only trace left appears to be the fol­low­ing let­ter, which he sent to an admir­er short­ly before his death. The under­stand­ably con­cerned recip­i­ent of the let­ter has shared its con­tents with Naked Cap­i­tal­ism, and has insist­ed that her iden­ti­ty be pro­tect­ed.

Dear * * *,

Read­ing your gen­er­ous let­ter was an unex­pect­ed­ly encour­ag­ing expe­ri­ence. I rarely feel that oth­ers tru­ly under­stand the pur­port of my the­o­ries, but when I see a high school stu­dent such as your­self nav­i­gate her way through the vil­i­fi­ca­tions that sur­rounds my work, it makes me want to redou­ble my efforts to explain my ideas to a larg­er audi­ence.

How did you become the most coura­geous eco­nom­ics pro­fes­sor of our time? Real­ly, you are far too kind. I nev­er thought of myself as any­one out of the ordi­nary while work­ing as a young PhD on tech­ni­cal ques­tions in Pub­lic Choice the­o­ry. As you prob­a­bly know, Pub­lic Choice is the path­break­ing the­o­ry that demys­ti­fied the deci­sions of politi­cians, show­ing that they act ratio­nal­ly in order to max­i­mize their own eco­nom­ic ben­e­fits.

Soon after receiv­ing tenure, it occurred to me that we were being pro­found­ly incon­sis­tent. While we had cor­rect­ly crit­i­cized the pre­vi­ous main­stream view that pol­i­tics involved benev­o­lent efforts to serve the com­mon good, we had failed to apply the same rig­or to the com­mu­ni­ty of aca­d­e­m­ic econ­o­mists. As a result, we were mod­el­ing both eco­nom­ic and polit­i­cal actors as self-inter­est­ed util­i­ty-max­i­miz­ing agents, while con­tin­u­ing to see eco­nom­ics pro­fes­sors as ide­al­is­tic pur­suers of truth. I decid­ed to cor­rect this over­sight by devel­op­ing my the­o­ry of Aca­d­e­m­ic Choice, in which econ­o­mists are the­o­rized as ratio­nal agents who con­tin­u­al­ly seek to max­i­mize their future earn­ings poten­tial.

The way I would describe Aca­d­e­m­ic Choice the­o­ry is that it is “the soci­ol­o­gy of econ­o­mists, with­out romance.” Is this right? What an insight­ful com­ment. As you say, Aca­d­e­m­ic Choice the­o­ry is a descrip­tive project, with no nor­ma­tive ori­en­ta­tion. We apply a crit­i­cal approach in order to coun­ter­bal­ance per­va­sive ear­li­er notions of econ­o­mists as sci­en­tif­ic heroes strug­gling against pop­u­lar igno­rance in order to serve the com­mon good.

What would you iden­ti­fy as the cen­tral insights of Aca­d­e­m­ic Choice the­o­ry? The the­o­ry begins by iden­ti­fy­ing three prin­ci­pal ways in which econ­o­mists try to max­i­mize their util­i­ty. First, they receive salaries from uni­ver­si­ties, which can be increased if their course enroll­ment increas­es. Course enroll­ment is pri­mar­i­ly dri­ven by stu­dents with future careers in busi­ness and the finan­cial sec­tor, so an econ­o­mist has an incen­tive to pro­pound the­o­ries that CEOs and finan­cial insti­tu­tions find attrac­tive. Even if adop­tion of these the­o­ries leads to sub­stan­tial pub­lic costs, these costs will not be shoul­dered by the econ­o­mist per­son­al­ly. Sec­ond, by devel­op­ing such the­o­ries an econ­o­mist can open the door to future wealth as a lob­by­ist or con­sul­tant. Third, the sup­port of econ­o­mists is crit­i­cal to cre­at­ing and main­tain­ing spe­cial priv­i­leges for thefinan­cial ser­vices indus­try and for top cor­po­rate offi­cers. By threat­en­ing to with­draw this sup­port, econ­o­mists can engage in rent-seek­ing. I call this last prac­tice aca­d­e­m­ic entre­pre­neur­ship.

Is it real­ly plau­si­ble that econ­o­mists threat­en top banks that in the absence of some kind of pay­off, they will change the the­o­ries they teach in a direc­tion that is less favor­able to the banks? There are cer­tain­ly cas­es in his­to­ry of the fol­low­ing sequence:

a. Econ­o­mist E espous­es views that are less favor­able to cer­tain spe­cial inter­est groups S. Doing so threat­ens the abil­i­ty of S to extract rent from the pub­lic.
b. Lat­er, E changes his view, there­by with­draw­ing the pri­or threat.
c. Still lat­er, E is paid large amounts of mon­ey by rep­re­sen­ta­tives of S in exchange for ser­vices that do not appear par­tic­u­lar­ly oner­ous.

For exam­ple, let E = Lar­ry Sum­mers and let S = the finan­cial ser­vices indus­try. In 1989 E was (a) a sup­port­er of the Tobin tax, which threat­ened to reduce the rent extract­ed by S. This threat was appar­ent­ly lat­er with­drawn (b), and in 2008 E was paid $5.2 mil­lion © in exchange for work­ing at the hedge fund D. E. Shaw (an ele­ment of S) for one day a week.

How­ev­er, it is nat­u­ral­ly more dif­fi­cult to wit­ness the nego­ti­a­tions in which spe­cif­ic threats were appeased with spe­cif­ic future pay­outs. This is a prob­lem that also bedev­ils Pub­lic Choice the­o­ry, in which it is like­wise dif­fi­cult to show exact­ly how a par­tic­u­lar politi­cian is remu­ner­at­ed in exchange for threat­en­ing busi­ness­es with anti-busi­ness leg­is­la­tion. The the­o­ry assures us that such nego­ti­a­tions occur, although they are dif­fi­cult to observe direct­ly. Per­haps fur­ther the­o­ret­i­cal advances will help us to close this gap.

Isn’t it offen­sive to assume that econ­o­mists, for motives of per­son­al gain, shade their the­o­ret­i­cal alle­giances in the direc­tions pre­ferred by pow­er­ful inter­est groups? How could it ever be offen­sive to assume that a per­son acts ratio­nal­ly in pur­suit of max­i­miz­ing his or her own util­i­ty? I’m afraid I don’t under­stand this ques­tion.

Is there a “behav­ioral” ver­sion of Aca­d­e­m­ic Choice the­o­ry, in which the basic premis­es are enriched by the pos­si­bil­i­ty that econ­o­mists some­times act irra­tional­ly? Great ques­tion. One of my stu­dents devel­oped just such a the­o­ry – he pos­tu­lat­ed that econ­o­mists some­times do act benev­o­lent­ly, but they have access to lim­it­ed infor­ma­tion and are sub­ject to cog­ni­tive bias­es. Under these assump­tions, he proved that econ­o­mists would pro­duce the­o­ries that are flawed in sim­i­lar ways to what is inde­pen­dent­ly pre­dict­ed by Aca­d­e­m­ic Choice.

How­ev­er, while his dis­ser­ta­tion was unques­tion­ably a valu­able con­tri­bu­tion to the lit­er­a­ture, I am per­son­al­ly con­vinced that the orig­i­nal Aca­d­e­m­ic Choice the­o­ry is more empir­i­cal­ly real­is­tic. Stud­ies have shown that many peo­ple do act irra­tional­ly, but not econ­o­mists – to the extent pos­si­ble, their deci­sion-mak­ing con­forms to the mod­el of Homo eco­nom­i­cus.

If the the­o­ries of econ­o­mists are harm­ful to the gen­er­al wel­fare, why doesn’t some­one try to per­suade the pub­lic that these the­o­ries are mis­tak­en? Col­lec­tive action in this sense is infea­si­ble. If we instead con­sid­er the efforts of a sin­gle indi­vid­ual, the cost in terms of time and effort of dis­cred­it­ing an eco­nom­ic the­o­ry is sub­stan­tial, while the ben­e­fits are dis­persed over many peo­ple and so are com­par­a­tive­ly small. In any case, the efforts of one per­son are unlike­ly to be deci­sive in swing­ing the con­sen­sus of econ­o­mists away from a giv­en erro­neous the­o­ry. It fol­lows log­i­cal­ly that the ratio­nal deci­sion for an intel­lec­tu­al con­sumer is to be inac­tive on this front, and even to be igno­rant of the flaws in eco­nom­ic the­o­ry.

It might be thought that when eco­nom­ic the­o­ries are marred by par­tic­u­lar­ly glar­ing prob­lems, the pub­lic would notice. How­ev­er, the con­se­quence may sim­ply be to select for eco­nom­ic the­o­ries that are par­tic­u­lar­ly dif­fi­cult for the pub­lic to eval­u­ate, with­out imply­ing any increase in the aggre­gate accu­ra­cy of such the­o­ries.

Do you sim­ply assume based on the the­o­ry that peo­ple are gen­er­al­ly igno­rant about mis­takes in eco­nom­ic the­o­ries, or are there oth­er rea­sons why you would think this?Pub­lic Choice schol­ar Bryan Caplan was able to prove empir­i­cal­ly that democ­ra­cy sub­si­dizes irra­tional beliefs. He looked at one polit­i­cal issue after anoth­er and found that the views of vot­ers are very dif­fer­ent from the main­stream views of econ­o­mists and are there­fore obvi­ous­ly irra­tional. I would love to be able to prove that intel­lec­tu­al con­sumers are igno­rant of bias­es in eco­nom­ic the­o­ries with an equal degree of rig­or, but so far have not thought of a way. See, how­ev­er, the response to your next ques­tion.

The core claim of Aca­d­e­m­ic Choice is that valid eco­nom­ic the­o­ries are an under­pro­vid­ed pub­lic good, due to a com­bi­na­tion of aca­d­e­m­ic entre­pre­neur­ship and ratio­nal pub­lic igno­rance. Is this mere­ly a pre­dic­tion of the math­e­mat­i­cal mod­els, or is there real world evi­dence of this claim? Orig­i­nal­ly I did arrive at this result as a log­i­cal con­se­quence of the the­o­ret­i­cal mod­el; how­ev­er, the pre­dic­tion has since been cor­rob­o­rat­ed through empir­i­cal inves­ti­ga­tions.

Con­sid­er the fol­low­ing sev­en propo­si­tions. All of them have been effec­tive­ly pro­mot­ed and pub­li­cized by aca­d­e­m­ic econ­o­mists:

P1. (e.g. Greenspan) It is unnec­es­sary to wor­ry about decep­tion in finan­cial mar­kets since mar­ket dis­ci­pline will make sure that dis­hon­est agents are per­ma­nent­ly ostra­cized.
P2. (Clarke) A per­son whose income is 100 times as large as that of anoth­er per­son has con­tributed exact­ly 100 times as much to the gen­er­al wel­fare.
P3. (First Wel­fare The­o­rem) Cor­po­ra­tions, if left to them­selves, will always pro­vide employ­ment to every­one and pro­duce an econ­o­my fea­tur­ing con­stant reces­sion-free growth.
P4. (Arrow-Debreu) A nec­es­sary con­di­tion for this ide­al econ­o­my is the avail­abil­i­ty of arbi­trar­i­ly com­pli­cat­ed secu­ri­ties that ref­er­ence cash flows in all times, in all places, and in all ways imag­in­able.
P5. (Bor­row­ing at the Risk-Free Rate) Eco­nom­ic insti­tu­tions should be designed under the assump­tion that when­ev­er a firm or bank tries to obtain a low inter­est loan, it suc­ceeds.
P6. (1997/2008) If a Third World coun­try has a bank­ing cri­sis, bedrock prin­ci­ples of eco­nom­ics dic­tate that its largest banks should be allowed to fail and be acquired by U.S. and Euro­pean banks. How­ev­er, if the U.S. has a bank­ing cri­sis, bedrock prin­ci­ples of eco­nom­ics dic­tate that its largest banks should be saved through mas­sive sub­si­dies from the pub­lic.
P7. (EMH, etc.) It is impos­si­ble for invest­ment funds to beat the mar­ket. How­ev­er, the cur­rent cap­i­tal mar­ket sys­tem cen­tered around funds try­ing to beat the mar­ket is this most per­fect sys­tem con­ceiv­able by human beings.

As a bright high school stu­dent like your­self can clear­ly see, the list con­sists entire­ly of state­ments that are obvi­ous­ly wrong, and sev­er­al of them are inter­nal­ly incon­sis­tent. If econ­o­mists were sim­ply con­fused, we would expect to find no pat­tern in these state­ments. Instead, as pre­dict­ed by Aca­d­e­m­ic Choice, state­ments P1-P7 all direct­ly enable rent-seek­ing by cer­tain influ­en­tial minori­ties (finan­cial sec­tor employ­ees and cor­po­rate exec­u­tives). More­over, P1-P7 have also helped to gen­er­ate mar­ket dis­con­ti­nu­ities with sig­nif­i­cant pub­lic costs, among which the recent glob­al finan­cial cri­sis.

Some of your crit­ics have insin­u­at­ed that the true aim of your research is to restore faith in the pos­si­bil­i­ties of democ­ra­cy. How do you respond? I con­fess feel­ing rather hurt by this accu­sa­tion. Let me explain to you, though, the rea­sons for this mis­un­der­stand­ing. A gen­er­a­tion of Pub­lic Choice econ­o­mists had pro­posed guid­ance by eco­nom­ic the­o­ries as an effi­cient alter­na­tive to the mis­takes inher­ent in demo­c­ra­t­ic process­es, or in oth­er words, to polit­i­cal mar­ket imper­fec­tions. Aca­d­e­m­ic Choice sug­gests, how­ev­er, that once one intro­duces “aca­d­e­m­ic” mar­ket imper­fec­tions, we may need to con­front the pos­si­bil­i­ty that far from cor­rect­ing polit­i­cal fail­ures, the author­i­ty of econ­o­mists may actu­al­ly prove to be a source of fur­ther dis­tor­tions in the econ­o­my, lead­ing to what I call the “aca­d­e­m­ic dis­si­pa­tion of val­ue.”

This much is cor­rect. How­ev­er, to make the leap to assum­ing that I inten­tion­al­ly cre­at­ed Aca­d­e­m­ic Choice the­o­ry in order to favor democ­ra­cy is mali­cious and unfair – it is just like claim­ing that the main goal of the founders of Pub­lic Choice was to dis­cred­it pol­i­tics.

What kinds of pro­pos­als could help to min­i­mize val­ue destruc­tion by aca­d­e­m­ic econ­o­mists? You are quite right that from the point of view of the pub­lic this issue looms large. Even in most West­ern democ­ra­cies, more than half of the total GDP is allo­cat­ed accord­ing to prin­ci­ples pro­mot­ed by agents sub­ject to Aca­d­e­m­ic Choice dynam­ics, i.e. econ­o­mists. One sim­ple rem­e­dy to the large neg­a­tive exter­nal­i­ties gen­er­at­ed through their aca­d­e­m­ic entre­pre­neur­ship could be to shrink the size of the sec­tor of aca­d­e­m­ic econ­o­mists.

Anoth­er approach is indi­cat­ed by the game the­o­ret­ic insight that win­ning strate­gies in com­pet­i­tive games usu­al­ly involve a ran­dom ele­ment. Fol­low­ing this prin­ci­ple, ever since antiq­ui­ty tri­als have been decid­ed by juries who are cho­sen by lot. We should there­fore strong­ly con­sid­er peri­od­i­cal­ly repop­u­lat­ing eco­nom­ics depart­ments with peo­ple select­ed at ran­dom.

How are your per­son­al rela­tions with your econ­o­mist col­leagues? When I began to devel­op Aca­d­e­m­ic Choice the­o­ry, I ful­ly expect­ed resis­tance from his­to­ri­ans of sci­ence, since I knew they would see me as tres­pass­ing on their ter­rain. But I was heart­bro­ken when I real­ized that col­leagues in my own depart­ments now regard­ed me with some­thing akin to hatred. I tried to help them to see the ele­gance of my math­e­mat­i­cal mod­els and proofs, but their hos­til­i­ty con­tin­ued unabat­ed: no one would pub­lish my arti­cles, and even my most promis­ing grad­u­ate stu­dents were refused jobs every­where. I could not under­stand how my attempt to extend the reach of eco­nom­ic the­o­ry had led to this ran­cor, and my only solace was to remind myself that Howard Roark in The Foun­tain­head had also been mis­un­der­stood by col­leagues who did not under­stand his indi­vid­u­al­is­tic dream of cre­at­ing beau­ty.

But nonethe­less, I per­se­vered, and one day it dawned on me that the reac­tions of my col­leagues were actu­al­ly a star­tling con­fir­ma­tion of Aca­d­e­m­ic Choice the­o­ry. After all, econ­o­mists are very famil­iar with the free rid­er prob­lem, where­by indi­vid­u­als take advan­tage of group ben­e­fits with­out con­tribut­ing any­thing. In order to guard against free rid­ers, econ­o­mists had insti­tut­ed the tenure process and the jour­nal review process. And since my the­o­ries could con­ceiv­ably weak­en the abil­i­ty of econ­o­mists to extract rent in the future, they had classed me as a free rid­er and were attempt­ing to impose costs on me!

Now that I have real­ized this, even the most malev­o­lent stares of my col­leagues are unable to dis­turb my sense of inner peace – for I real­ize that every attempt to dis­in­cen­tivize me from my cho­sen career path is yet anoth­er vin­di­ca­tion of the explana­to­ry poten­tial of eco­nom­ic mod­els.

If econ­o­mists are gen­er­al­ly self-inter­est­ed util­i­ty max­i­miz­ers, how can one explain your own pas­sion to pur­sue the truth at all costs? I con­fess that your ques­tion has forced me to recon­sid­er many things. Indeed, after think­ing about the finan­cial out­comes asso­ci­at­ed with my career, it seems hard for me to avoid the con­clu­sion that I myself con­sti­tute a refu­ta­tion to Aca­d­e­m­ic Choice!

Try­ing to address this para­dox has led to the hum­bling real­iza­tion that I am a flawed exam­ple of Homo eco­nom­i­cus. In fact, I suf­fer from a cog­ni­tive bias known as har­mo­niza­tion bias – i.e., my per­son­al util­i­ty func­tion is dis­tort­ed by virtue of ascrib­ing pos­i­tive val­ue to har­mo­ny between the real world and my eco­nom­ic the­o­ries.

My ini­tial reac­tion to this dis­turb­ing dis­cov­ery was fear that the valid­i­ty of Aca­d­e­m­ic Choice could be com­pro­mised – what if oth­er econ­o­mists also suf­fer from har­mo­niza­tion bias? Thank­ful­ly, the dis­or­der appears to be rare in the com­mu­ni­ty, and so Aca­d­e­m­ic Choice the­o­ry remains applic­a­ble to the real world.

Would you rec­om­mend a research career in Aca­d­e­m­ic Choice the­o­ry? There are cer­tain­ly a few obsta­cles. You would have to res­olute­ly con­ceal your inter­est in Aca­d­e­m­ic Choice dur­ing your entire edu­ca­tion­al career, at least until you receive tenure. Once you reveal your true pas­sion, you would have to accept both rel­a­tive pover­ty and cease­less acri­mo­ny on the part of your col­leagues.

Aca­d­e­m­ic Choice is cer­tain­ly not for every­one –at the very least, it is nec­es­sary to suf­fer from har­mo­niza­tion bias. In light of these con­sid­er­a­tions, I had begun to accept that the chances of ever find­ing anoth­er stu­dent will­ing to study Aca­d­e­m­ic Choice were slim. Still, your bril­liant and live­ly let­ter has led me to ques­tion my pes­simism.

Wouldn’t it be mar­velous to see new faces in Aca­d­e­m­ic Choice! The the­o­ry is full of beau­ti­ful unsolved prob­lems that doubt­less stand only in need of a fresh exam­i­na­tion. Maybe har­mo­niza­tion bias is not as rare among peo­ple in gen­er­al as it is among econ­o­mists. Maybe I should try to offer a schol­ar­ship for younger stu­dents. What do you think?

Good luck with your senior research report and all the best,


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    About Steve Keen

    I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.