LARS P. SYLL

Economists for sale

It is remarkable that the public has been convinced that the earth revolves around the sun. This is remarkable because we can all look up in the sky and see the sun revolving around the earth.

Most of us are willing to believe the direct opposite of what we can see with our own eyes because we accept the analysis of the solar system developed by astronomers through many centuries of careful observation. The overwhelming majority of people will never go through the measurements and reproduce the calculations. Rather, our belief that the earth revolves around the sun depends on our confidence in the competence and integrity of astronomers. If they all tell us that the earth in fact orbits the sun, we are prepared to accept this view.

Unfortunately the economics profession cannot claim to have a similar stature. This is both good and bad. It is good because it doesn’t deserve that stature. Economists too often work as hired guns for those with money and power. It is bad because the public needs expertise in economics, just as it needs expertise in medicine and other areas.

Dean Baker

Self-righteous drivel from the chairman of the Nobel prize committee

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, usually — incorrectly — referred to as the Nobel Prize in Economics, is an award for outstanding contributions to the field of economics. The Prize in Economics was established and endowed by Sweden’s central bank Sveriges Riksbank in 1968 on the occasion of the bank’s 300th anniversary.The first award was given in 1969. The award is presented in Stockholm at an annual ceremony on December 10.

As of 2012 the prize has been given to 71 individuals.
Of all laureates, 56 have been (by birth or by naturalisation) US citizens — that is: 79 %
The University of Chicago has had 26 affiliated laureates — that is 37 %
Only 5 laureates have come from outside North America or Western Europe — that is: 7 %
Only 1 woman has got the prize — that is: 1.4 %

The world is really a small place when it comes to economics …

But that kind of facts doesn’t seem to bother Per Krusell — the chairman of The Economic Sciences Prize Committee at the Royal Swedish Academy of Sciences (responsible for the selection of candidates for  The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) — who today, in the leading Swedish newspaper Dagens Nyheter, vehemently tries to defend the prize, saying that critiques — coming from people like yours truly and others —  are “politicized and trivial,” “naive” and “without respect” for the “important steps forward” in answering “important questions” that the prized economists have contributed.

This is indeed one of the most viciously misleading articles — even coming from a leading Swedish neoclassical übereconomist — I’ve read in years!

In a  post last year yours truly wrote about the decision of The Royal Swedish Academy of Sciences  to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2012 to Alvin Roth and Lloyd Shapley. I complained that the prize committee once again confirmed that neoclassical economic theory today basically is in the story-telling business whereby economic theorists create make-believe analogue mathematical models of the real economic system.

This year — making an extraordinarily successful forecast — I told Swedish media the prize committee would show how in tune with the times it was and award the prize to Eugene Fama. Why? Well — I argued — he’s a Chicago economist and a champion of rational expectations and efficient markets. And nowadays freshwater economists seem to be the next to the only ones eligible for the prize. And, of course, an economist who has described the notion that finance theory was at fault as “a fantasy” and argued that “financial markets and financial institutions were casualties rather than causes of the recession” had to appeal to a prize committee with a history of awarding theories and economists totally lacking any real world relevance.

Well, my forecast turned out to be right — the Swedish Academy of Sciences awarded The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2013 to (besides Lars Peter Hansen and Robert Shiller) Eugene Fame. The prize committee really did show how in tune with the times it was …

I love to be right of course, but otherwise this is only saddening and shows what a joke this prize is, when someone like Fama can get it. Maybe I’m not showing proper “respect” for Fama’s “important steps forward”, but, really, how could one after reading the following interview with Nobel laureate Fama?

Many people would argue that, in this case, the inefficiency was primarily in the credit markets, not the stock market—that there was a credit bubble that inflated and ultimately burst.

Eugene Fama: I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.

I guess most people would define a bubble as an extended period during which asset prices depart quite significantly from economic fundamentals.

Eugene Fama: That’s what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it. It’s easy to say prices went down, it must have been a bubble, after the fact. I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. People are always saying that prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them. They are typically right and wrong about half the time.

Are you saying that bubbles can’t exist?

Eugene Fama: They have to be predictable phenomena. I don’t think any of this was particularly predictable.

John Cassidy

So, without any respect whatsoever, I say once again — Dump the prize!

DSGE macroeconomics — a costly waste of time

Commenting on the state of standard modern macroeconomics, Willem Buiter argues that neither New Classical nor New Keynesian microfounded DSGE macro models has helped us foresee, understand or craft solutions to the problems of today’s economies:

The Monetary Policy Committee of the Bank of England I was privileged to be a ‘founder’ external member of during the years 1997-2000 contained, like its successor vintages of external and executive members, quite a strong representation of academic economists and other professional economists with serious technical training and backgrounds. This turned out to be a severe handicap when the central bank had to switch gears and change from being an inflation-targeting central bank under conditions of orderly financial markets to a financial stability-oriented central bank under conditions of widespread market illiquidity and funding illiquidity. Indeed, the typical graduate macroeconomics and monetary economics training received at Anglo-American universities during the past 30 years or so, may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding. It was a privately and socially costly waste of time and other resources.

Most mainstream macroeconomic theoretical innovations since the 1970s … have turned out to be self-referential, inward-looking distractions at best. Research tended to be motivated by the internal logic, intellectual sunk capital and aesthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works …

Both the New Classical and New Keynesian complete markets macroeconomic theories not only did not allow questions about insolvency and illiquidity to be answered. They did not allow such questions to be asked …

Charles Goodhart, who was fortunate enough not to encounter complete markets macroeconomics and monetary economics during his impressionable, formative years, but only after he had acquired some intellectual immunity, once said of the Dynamic Stochastic General Equilibrium approach which for a while was the staple of central banks’ internal modelling: “It excludes everything I am interested in”. He was right. It excludes everything relevant to the pursuit of financial stability.

The Bank of England in 2007 faced the onset of the credit crunch with too much Robert Lucas, Michael Woodford and Robert Merton in its intellectual cupboard. A drastic but chaotic re-education took place and is continuing.

I believe that the Bank has by now shed the conventional wisdom of the typical macroeconomics training of the past few decades. In its place is an intellectual potpourri of factoids, partial theories, empirical regularities without firm theoretical foundations, hunches, intuitions and half-developed insights. It is not much, but knowing that you know nothing is the beginning of wisdom.

And today Simon Wren-Lewis tells us that “Nearly all the young academic macroeconomists I know want to work with DSGE models, because that is what gets published.”

After reading Buiter’s article, that certainly should be a very worrying confirmation of economics becoming more and more a total waste of time. Why do these young bright guys waste their time and efforts? Besides aspirations of being published, I think maybe Frank Hahn gave the truest answer back in 2005, when interviewed on the occasion of his 80th birthday, he confessed that some economic assumptions didn’t really say anything about “what happens in the world,” but still had to be considered very good “because it allows us to get on this job.”