The Ignoble Prize for Economics

by Dollars and Sense

The Real-World Economics Review (formerly the Post-Autistic Economics Review), has opened voting for what they are calling the Ignoble Prize for Economics, for "the three economists who contributed most to enabling the Global Financial Collapse." Here are the details:

Twenty-two economists were nominated for the prize. Through consultation with contributors to the Real-World Economics Review Blog, the following short list of ten, including two pairs of economists, has been selected for the ballot.

Dossiers of short-listed of nominees for the Ignoble Prize for Economics:

Fischer Black and Myron Scholes
They jointly developed the Black-Scholes model which led to the explosive growth of financial derivatives. The importance given to their hypothetical calculation of derivative prices was baneful not just because it was bogus, but also because it meant that relevant and often urgent real-world economic research was widely neglected by the profession.

Eugene Fama
His "efficient market theory" provided the moral umbrella for all sorts of greed, predatory behaviour and incompetent corporate management. It also provided the rationale for deregulation. And his theory’s widespread acceptance meant that "discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse." In these three ways Fama’s work created the environment which made possible the GFC.

Milton Friedman
He 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 the financial theories with unrealistic assumptions that facilitated the GFC. In short, he opened the door for everyone subsequently to theorize without fear of having to be attached to reality.

Alan Greenspan
As Chairman of the Federal Reserve System from 1987 to 2006, he 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. Before a Congressional committee on 28 October 2008 Greenspan confessed that his theoretical beliefs of 40 years were now proven to be without foundation, hence his total confusion and failure at his job.

Assar Lindbeck
By working to make the Riksbank Prize in Economic Sciences ("Nobel Prize in Economics") almost exclusively a prize for neoclassical economists, this Swedish economist has contributed significantly to the conversion of the economics profession and of world public opinion to market fundamentalism.

Robert Lucas
His development of the rational expectations hypothesis, which defined rationality as the capacity to accurately predict the future, both served to maintain Friedman's proposition that monetary factors do not affect the real economy and, in the name of "rigor", distanced economics even further from reality than Friedman had thought possible.

Richard Portes
As Secretary-General of the Royal Economic Society from 1992-2008, he helped suppress worries expressed by non-mainstream economists about developments in the financial sector. In 2007 he wrote a Report for the Icelandic Chamber of Commerce giving a clean bill of health to Icelandic banks only a few months before they collapsed. When investigators called attention to the real state of Icelandic banking, he wrote a series of letters to the Financial Times defending the soundness of Icelandic banks and imputing professional incompetence to those who doubted it.

Edward Prescott and Finn Kydland
For jointly developing and popularizing "Real Business Cycle" theory, which by omitting the role of credit greatly diminished the economics profession’s understanding of dynamic macroeconomic processes.

Paul Samuelson
Through his textbook Economics: An Introductory Analysis (19 English language editions and translated into 40 languages), he popularized neoclassical economics, contributing more than any other economist to its diffusion and thereby to the deregulation of financial markets which made possible the GFC.

Larry Summers
As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), he 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 worked with Greenspan and Wall Street interests to torpedo efforts to regulate derivatives.

Procedures
The voting is being conducted using PollDaddy. Its system uses cookies to prevent repeat voting. A voting box showing the short-listed candidates and a link to their dossiers will remain till voting closes near the top of the right-hand column on the home page of the Real-World Economics Review Blog. Voting is open to all interested parties. Each voter can vote for up to three of the listed candidates. The ballots are secret. Voting will remain open for several weeks. No results will be announced before closing the poll.

Labels: Alan Greenspan, Edward Presscott, Eugene Fama, larry Summers, Milton Friedman, Paul Samuelson, Real-World Economics Review, Robert Lucas

 

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2/02/2010 11:20:00 AM 0 comments

 

Krugman vs. Hudson on Samuelson

by Dollars and Sense

I was alerted by this post on Naked Capitalism to a back-and-forth between Paul Krugman and Michael Hudson on Paul Samuelson.

It started when, on Dec. 14th, the day after Samuelson died, Counterpunch re-published a paper by Michael Hudson from back in 1970, shortly after Samuelson was awarded the recently-established Nobel Prize in Economics. Here's a tidbit:

This is only the second year in which the Economics prize has been awarded, and the first time it has been granted to a single individual—Paul Samuelson—described in the words of a jubilant New York Times editorial as "the world's greatest pure economic theorist." And yet the body of doctrine that Samuelson espouses is one of the major reasons why economics students enrolled in the nation's colleges have been declining in number. For they are, I am glad to say, appalled at the irrelevant nature of the discipline as it is now taught, impatient with its inability to describe the problems which plague the world in which they live, and increasingly resentful of its explaining away the most apparent problems which first attracted them to the subject.

The trouble with the Nobel Award is not so much its choice of man (although I shall have more to say later as to the implications of the choice of Samuelson), but its designation of economics as a scientific field worthy of receiving a Nobel prize at all. In the prize committee's words, Mr. Samuelson received the award for the "scientific work through which he has developed static and dynamic economic theory and actively contributed to raising the level of analysis in economic science. . . ."

What is the nature of this science? Can it be "scientific" to promulgate theories that do not describe economic reality as it unfolds in its historical context, and which lead to economic imbalance when applied? Is economics really an applied science at all? Of course it is implemented in practice, but with a noteworthy lack of success in recent years on the part of all the major economic schools, from the post-Keynesians to the monetarists.

In Mr. Samuelson's case, for example, the trade policy that follows from his theoretical doctrines is laissez faire. That this doctrine has been adopted by most of the western world is obvious. That it has benefited the developed nations is also apparent. However, its usefulness to less developed countries is doubtful, for underlying it is a permanent justification of the status quo: let things alone and everything will (tend to) come to "equilibrium." Unfortunately, this concept of equilibrium is probably the most perverse idea plaguing economics today, and it is just this concept that Mr. Samuelson has done so much to popularize. For it is all too often overlooked that when someone falls fiat on his face he is "in equilibrium" just as much as when he is standing upright. Poverty as well as wealth represents an equilibrium position. Everything that exists represents, however fleetingly, some equilibrium—that is, some balance or product—of forces.

Krugman responded to Hudson on his NYT blog. (As one commenter ("attempter") on Naked Capitalism pointed out, Krugman doesn't even mention Hudson by name: "Krugman couldn't even bring himself to write Hudson's name, but just linked to the anonymous post. (Of course K is always very respectful of anyone properly ensconsed in the Establishment, even where he disagrees with them.) Quite the contrast with his protests over how he and others who were correct on Iraq remain marginalized on that subject.") Here is all of Krugman's post:

A number of people are linking to this reprinted critique of the work of the late Paul Samuelson. I could point out that the critique thoroughly misunderstands what Samuelson was saying about international trade, factor prices, and all that. But there is, I think, an interesting point to be made if we start from this complaint:

Can it be "scientific" to promulgate theories that do not describe economic reality as it unfolds in its historical context, and which lead to economic imbalance when applied?

Actually, there was a time when many people thought that institutional economics, which was very much focused on historical context, the complexity of human behavior, and all that, would be the wave of the future. So why didn't that happen? Why did the model-builders, led by Samuelson, take over instead?

The answer, in a word, was the Great Depression.

Faced with the Depression, institutional economics turned out to have very little to offer, except to say that it was a complex phenomenon with deep historical roots, and surely there was no easy answer. Meanwhile, model-oriented economists turned quickly to Keynes—who was very much a builder of little models. And what they said was, "This is a failure of effective demand. You can cure it by pushing this button." The fiscal expansion of World War II, although not intended as a Keynesian policy, proved them right.

So Samuelson-type economics didn't win because of its power to cloud men's minds. It won because in the greatest economic crisis in history, it had something useful to say.

In the decades that followed, economists themselves forgot this history; today's equation-mongers, for the most part, have no idea how much they owe to the Keynesian revolution. But in terms of shaping economics, it was the Depression that did it.

L. Randall Wray of the University of Missouri at Kansas City (where Hudson teaches, along with lots of other great heterodox economists, responded on behalf of Hudson at the UMKC econ blog. Wray says that Krugman's claim that "Samuelson-type economics" won the day because it had something useful to say in response to the Depression is "bizarre, to say the least," and he gives six reasons for thinking so. Here are the first four:

First, Roosevelt's New Deal was in place before Keynes published his General Theory, and it was mostly formulated by the American institutional economists that Krugman claims to have been clueless. (There certainly were clueless economists—those following the neoclassical approach, traced to English "political economy".)

Second, it was Alvin Hansen, not Paul Samuelson, who brought Keynesian ideas to America. And Hansen retained the more radical ideas (such as the tendency to stagnation) that Samuelson dropped. Further, Hansen was—surprise, surprise—working within the institutionalist tradition (as documented by in a book by Perry Mehrling).

Third, many other institutionalists also adopted Keynesian ideas in their work—before Samuelson's simplistic mathematization swamped the discipline. For example, Dudley Dillard—a well-known institutionalist—wrote the first accessible interpretation of Keynes in 1948; Kenneth Boulding's 1950 Reconstruction of Economics served as the basis for four editions of his Principles book—on which a generation of American economists was trained (again, before Samuelson's text took over). It is in almost every respect superior to Samuelson's text. I encourage Professor Krugman to take a look.

Fourth, Hyman Minsky (who first trained with institutionalists at the University of Chicago—before it became a bastion of monetarist thought) took Samuelson's overly simplistic multiplier-accelerator approach and extended it with institutional ceilings and floors. He quickly grew tired of the constraints placed on theory by Samuelsonian mathematics and moved on to develop his Financial Instability Hypothesis (which Krugman has admitted he finds interesting, even if he does not fully comprehend it). I ask you, how many analysts have turned to Samuelson's work to try to understand the current crisis—versus the number of times Minsky's work has been invoked?

Read the rest of the post.

And last but not least, here's Michael Hudson's response to Krugman, also at the UMKC econ blog.

Labels: Counterpunch, Great Depression, institutional economics, Keynesianism, L. Randall Wray, Michael Hudson, Paul Krugman, Paul Samuelson, UMKC

 

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12/22/2009 01:49:00 PM 0 comments