How Did Economists Get It So Wrong?
|September 18, 2009||Posted by Jeffery J. Smith under Progress Report, The Progress Report|
How Did Economists Get It So Wrong?
How the Federal Reserve Bought the Economics Profession
Bankers had to pay the Nobel committee to create the prize in economics. Why? Because the discipline is more superstition than science. We trim, blend, and append three 2009 articles from: (1) the blog Debtwatch, Aug 28, by Steve Keen, University of Western Sydney and author of the bestseller, Debunking Economics; (2) The New York Times Sunday Magazine, Sept 2 by Nobel laureate Paul Krugman; and (3) the Huffington Post, Sept 10, by Ryan Grim.
by Steve Keen, by Paul Krugman, and by Ryan Grim
- Its Hard Being a Bear (Part II)
There are so many bits of nonsense in economic theory that it would take a book to detail them all, but common to many of them is the following dilemma:
Almost everything economists believe is possibly true at the level of an isolated individual, but almost certainly false at the level of an economy.
The education of economists at most universities is therefore the farce that turns fallacy into tragedy. Fatal flaws in the theory that are evident in the original research papers of the discipline are glossed over in economic textbooks and the standard subjects based on them.
Therefore most practicing economists, who read the textbooks but not the original literature, are completely unaware of the pitiful foundations on which their carefully crafted models are built. Their assurances about the future are therefore utterly unreliable.
- How Did Economists Get It So Wrong?
Not long ago economists were congratulating themselves. They thought that they had resolved their internal disputes. At the International Monetary Fund, economists believed the central problem of depression-prevention has been solved. At the Federal Reserve Board, they celebrated economic performance over the previous two decades. Few economists saw our current crisis coming.
As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.
JJS: Mainstream economists reached consensus by excluding those who thought outside the box, who declared the emperor wore no clothes. Indeed, geonomists — those who track our spending for land and resources (among other rent related tasks) — did predict the crash, to the year, and had been doing so for years in advance. Yet conventional economists would not listen and without that seal of approval from officialdom, nobody would listen.
- How The Federal Reserve Bought The Economics Profession
The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni, and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession.
In 2004, then-Federal Reserve Chairman Alan Greenspan said that “a national severe price distortion [is] most unlikely.” A year later, current Chairman Ben Bernanke said that the boom “largely reflect strong economic fundamentals.” Even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists — who missed it, too.
For its studies for 2009, the Federal Reserve has budgeted $433 million. That’s a lot of money for a few hundred economists.
The Fed employs or contracts with easily 500 economists at any given time, says Robert Auerbach, a former investigator with the House banking committee. Add in those who have previously worked for the Fed — or who hope to one day soon — and you’ve accounted for a very significant majority of the field. “These economists testify as witnesses at legislative hearings or as experts at judicial proceedings.”
The late Milton Friedman, in a 1993 letter to Auerbach: ” having something like 500 economists in the Federal Reserve has had a significant influence on the kind of research they do, biasing that research toward non-controversial technical papers on method as opposed to substantive papers on policy and results.
At seven top journals, 84 of the 190 editorial board members were affiliated with the Federal Reserve in one way or another. It is common for a journal editor to review submissions dealing with Fed policy while also taking the bank’s money.
James K. Galbraith and co-authors Olivier Giovannoni and Ann Russo found that in the year before a presidential election, there is a significantly tighter monetary policy coming from the Fed if a Democrat is in office and a significantly looser policy if a Republican is in office. The effects are both statistically significant, allowing for controls, and economically important.
They submitted their findings to the Review of Economics and Statistics, but the paper was rejected. “The editor assigned to it turned out to be a fellow at the Fed,” Galbraith says.
The journals determine which economists get tenure and what ideas are considered respectable. Pursuing tenure ironically requires fealty to the dominant economic ideology; that is the precise opposite of the purpose of tenure, which is to protect academics who present oppositional perspectives.
A relationship with the Fed signals a rising star or an economist who has arrived. Rob Johnson was a top economist on the Senate banking committee under both a Democratic and Republican chairman. He says that the consulting gigs are like “being one of a club, being respected, having all the prestige dimensions, as much as a paycheck.”
The other hypothesis, he says, “is that they’re essentially using taxpayer money to wrap their arms around everybody that’s a critic and therefore muffle or silence the debate.”
JJS: Its the prevailing assumptions about property that our institutions are at pains to protect. To become a science, economists would have to incorporate how property shapes economies, and that economies themselves are subsets of the overall ecosystem. Then policy would look much different. Wed de-tax labor and capital, and recover and share the values of land and resources. Then none of this could happen again.
Jeffery J. Smith runs the Forum on Geonomics.
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