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God Invented Economists to Make Astrologers Look Good -- So Why Do Economists Get All the Nobel Prizes?
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Monday morning update: The Bank of Sweden has now announced the 2013 prize and I have posted a separate commentary here. EF

Any day now the Bank of Sweden will announce a new Nobel economics laureate. Judging by the bank’s record, he is likely to be an aging Anglophone, Caucasian male. He is also likely to be a dangerous crank.

For many years, the great majority of recipients of the Swedish bauble have been advocates of extreme laissez-faire. As such, they have been precisely the people we have to thank for the radical financial deregulation that has blighted the lives of so many home buyers and small investors in the United States (not to mention Ireland, Spain, and elsewhere).

There have been a few exceptions, most notably Paul Krugman and Joseph Stiglitz, both of whom have an honorable record of questioning financial deregulation before the crash. For the rest, most were part of the problem – and a big part. Their influence calls to mind the old joke that God invented economists to make astrologers look good.

It is not as if no one offered an unequivocal warning of trouble ahead. But remarkably few of the most prescient critics of financial “innovation” were card-carrying economists. The regulator and lawyer Brooksley Born proved particularly inspired when in 1999 she resigned in protest at Congress’s overruling of her efforts to rein in abuses in financial derivatives. (Congress was acting on Wall Street’s orders.) Meanwhile Raghuram Rajan, an Indian whose first degree was in engineering, spoke out against financial innovation in 2005 and was promptly denounced as a “Luddite” by former U.S. Treasury Secretary Larry Summers. Then there was Robert Kuttner, co-founder of The American Prospect, who got it spectacularly right in his 2007 book The Squandering of America. But even he is unlikely ever to get a congratulatory early morning phone call from Stockholm. Apart from the disability that he actually knows what he is talking about, his problem is that he has a mere master’s in economics, not a doctorate, which is the union card of the economics profession. (Lest I be accused of Monday morning quarterbacking, I should say that my own warnings about financial liberalization were issued as far back as 1999 in, among other things, my book In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity. Under the chapter heading “Finance: A Cuckoo in the Economy’s Nest,” I described the already hectic deregulation-fueled explosion in financial engineering as “positively destructive” and “the economics of the cancer cell.”)

Any thinking Martian might be forgiven for imagining that Sweden’s Nobel prize nominations have been deliberately rigged to favor wingnuts. But why such a perverse bias? The mystery deepens when you realize that Swedish policymakers, in common with counterparts right across the most prosperous parts of central and northern Europe, secretly laugh at laissez-faire. The Swedes have excellent empirical reasons to sneer. After all their own economy is one of the world’s most successful, with hourly wages at market exchange rates more than 20 percent higher than America’s. Yet Sweden flouts virtually every principle of laissez-faire. The government owns much of the economy. Finance is tightly regulated. So is employment, and companies are heavily constrained from making layoffs. Workers enjoy some of the world’s most congenial conditions and benefits, including generous parenting breaks, long vacations, and excellent healthcare – all mandated by the government in flat defiance of free market orthodoxy. Labor union enjoy enormous legally mandated privileges. (There are reasons why an economy organized on these principles — socialist principles, frankly — can work and work very well. But anyone who reads only in English has first to unlearn a vast amount of Anglophone conventional wisdom before he or she can make sense of a successful socialist economy.)

As for the Nobel economics prize, I am hardly alone in alleging extraordinary bias. Even the descendants of Alfred Nobel have noticed it and have threatened to deny the economics prize the use of the Nobel moniker. In their view Alfred Nobel would have disowned many of the kooks who have been honored in his name.

As Paul Craig Roberts points out, the sort of economics championed by the laureates has been paving the way for the American economy’s ultimate demise. “It is worse than useless, it is dangerous,” says Roberts, who in the 1980s was the principal architect of Reaganomics. “Despite being contradicted by all the empirical evidence, these economists stick by theory. Sooner or later the dollar will collapse and inflation will soar.”

Roberts cites the laureates Robert Merton and Myron Scholes as classic examples of what is wrong with the Bank of Sweden’s selections (or rather the selections of a committee of “experts” convened by the bank). Merton and Scholes shared the prize in 1997 for supposedly brilliant work on how to value financial derivatives. The following year a huge hedge fund they advised was brought to the brink of bankruptcy and, after being rescued by the Federal Reserve, had to be wound up in 2000. Undeterred Scholes went to run another fund into the ground in 2008. Meanwhile a fund advised by Merton went bankrupt in 2009.

Of course, by no means all economists are quacks. But the best economists are modest souls – with a lot to be modest about. They recognize that useful economics tends to be simple stuff, quite bereft of higher algebra. A notable proponent of this view is the Korean economist Ha-Joon Chang, who recently commented: “95 percent of economics is commonsense made complicated. And even for the remaining the 5 percent, the essential reasoning, if not all the technical details, can be explained in plain terms.”

Chang was merely echoing the great mid-twentieth century economist John Kenneth Galbraith, who noted that there was virtually nothing useful in economics that cannot be stated in plain English.

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In the words of Pat Choate, a prominent critic of the economics profession’s pretensions to mathematical rigor, economics is not a science at all but an art. His point is that economists’ models depend crucially on assumptions and their predictive value is wiped out if the assumptions are off.

“How do you model what John Boehner is going to do about the federal shutdown?,” he asks.

(Republished from Forbes by permission of author or representative)
 
• Category: Economics • Tags: Nobel Prize 
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