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In my diary on the latest awarding of the Nobel Prize for Economics, a few commenters argue that I am attacking all economists or the entire economics profession.

I am not.

I was at pains to copy and paste "neo-liberal" before each time I used the words "economist" or "economics." My focus was on - and was intended to be on - Eugene Fama, not the other two economists who were given the Riksbank (Nobel) prize along with Fama.

A few commenters (pretty much the same bunch, it appears) - also condemn my derision toward neo-liberal economists' pretensions to be engaged in "science." A standard retort to these commenters is: "Did you or your guys foresee the financial collapse?"

Now, that is a good enough retort, but I think there is an even better test, which I will present shortly. Right now, I want to call attention to Fama's absurd reply to this question in his reply to Cassidy's question:

O.K., right. Here’s a question to turn it around. Can you have a bubble in all asset markets at the same time? Does that make any sense at all? Maybe it does in somebody’s view of the world, but I have a real problem with that. Maybe you can convince me there can be bubbles in individual securities. It’s a tougher story to tell me there’s a bubble in a whole sector of the market, if there isn’t something artificial going on. When you start telling me there’s a bubble in all markets, I don’t even know what that means. Now we are talking about saving equals investment. You are basically telling me people are saving too much, and I don’t know what to make of that.
Now, this is a very interesting answer by Fama, because it leads directly to the (what I consider) devastating critique of neo-liberal economics as being an apologia for a status quo dominated by plutocrats and oligarchs. There is a simple reason why there can be, have been, and are "bubble[s] in a whole sector[s] of the market." And it is not the reason of the Federal Reserve pouring trillions of dollars into financial markets to prevent another collapse in prices of financial assets. That is certainly happening, but this, as a specific reason, could be categorized by Fama and neo-liberals as an "artificial" interference with the market.

The simple reason is people in fact "are saving too much" - but you have to preface "people" with "rich" to get at what's going on. As I explained in my February 2013 post, Why the rich act the way they do, America's plutocratic leaders and elites are NOT investing in the development of new productive capabilities. The data clearly show that the United States economy is being de-industrialized and de-capitalized, and has been for decades. That's because plutocrats / oligarchs actually don't have the stomach to engage in management of advanced industrial enterprises (see Veblen's 1921The Engineers and the Price System for a detailed discussion of this point - warning: PDF file). Plutocrats / oligarchs more typically engage in usury, speculation, and economic-rent seeking behavior. And it is these practices of usury, speculation, and economic-rent seeking behavior that cause gross mis-allocations of credit and money in the economy that result in speculative bubbles.

And since the speculative bubbles are caused by the behavior of plutocrats / oligarchs, it is obviously not in the interests of neo-liberal economists to admit that there are speculative bubbles, let alone attempt to explore their causes.

Now, to what I consider a better question than: "Did you or your guys foresee the financial collapse?" How about we begin asking economists "Did you foresee and warn that NAFTA and GATT would cause a race to the bottom and help cause the destruction of America's working and middle classes?" There were economists who warned about that; Thomas Palley comes immediately to mind. How an economist answers this question about free trade will go a long way in separating the real economists from the neo-liberals.

Originally posted to NBBooks on Thu Oct 17, 2013 at 12:50 PM PDT.

Also republished by Money and Public Purpose.

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Comment Preferences

  •  Economists as a disgraced profession - Galbraith (3+ / 0-)
    Recommended by:
    Cassiodorus, Jim P, rbird

    Thanks for the diary.

    No less than John Kenneth Galbraith's son has criticized the economics profession. Here is James Galbraith in testamony to the senate

    I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including "rational expectations," "market discipline," and the "efficient markets hypothesis" led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this – but most did.

    Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the bubble. They continue to do so now. At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word "naughtiness." This was on the day that the SEC charged Goldman Sachs with fraud.

    I added the bold.

    Why the 'Experts' Failed to See How Financial Fraud Collapsed the Economy

    •  One recalls Chapter 4 of Volume 1 of CAPITAL (3+ / 0-)
      Recommended by:
      claude, Don midwest, psyched

      in which Marx describes the capitalist as a "rational miser."  The capitalist would rather just see her/ his money grow, as a miser would, but their "rational" superiority to misers consist in the fact that they feel obliged to invest in businesses (what Marx calls M-C-M', the formula for capital) because money won't grow by itself.

      The neoliberals of today, like the alchemists of the Middle Ages, are going to improve on the formula for capital, and find the philosopher's stone -- but this time they're looking in the pseudo-science of economics, so they can discover a way to make money grow by itself, without the necessary bother of investment.  Of course, this is the way bank loans work -- but with bank loans there is the problem of default, so that's not perfect.  

      With the crisis of '08-'09, there is the other neoliberal solution -- just have the government print some money and give it to us.  Of course, the optics are a little more complex -- the government printed money and lent it to the banks at zero percent interest, whereby the banks promptly invested the loaned money in Treasury bills.  So yeah.  

      Such a strategy involves the risk of inflation, which is of course why we see the big austerity push today -- they're afraid of inflation.  But so far they've controlled inflation through a strategy known as "dollar hegemony" -- the dollars are absorbed and not put into circulation because if there was to be a great dumping of dollars their "value" would implode.  We'll see how long this scheme lasts.

      And they call this a science!  It takes a special kind of wizardry to be born into wealth so you can grow up to be the CEO of a bank receiving zero-percent loans from the Federal government.

      "Where the wealth's displayed/ Thieves and sycophants parade" -- Joni Mitchell

      by Cassiodorus on Thu Oct 17, 2013 at 01:56:21 PM PDT

      [ Parent ]

  •  anyone have references on TPP and economists? (1+ / 0-)
    Recommended by:
    Jim P

    this is something big on the table

    is the economics profession sleeping at the wheel again?

  •  Don't need to be an economist to know that... (2+ / 0-)
    Recommended by:
    Nada Lemming, blueoasis

    tariffs protect wealthy nations manufacturing from cheap foreign labor, its what they were created for.

    Remove tariffs > Increased price difference between foreign and domestic products > sell less domestic > lower domestic manufacturing > less good jobs > less middle class

    Any Economist who didn't see that coming should return their degree...

    The greatest shortcoming of the human race is our inability to understand the exponential function [Albert A. Bartlett]

    by fToRrEeEsSt on Thu Oct 17, 2013 at 01:06:05 PM PDT

  •  Note ... (3+ / 0-)
    Recommended by:
    DKBurton, Nada Lemming, NBBooks

    ... as far as the challenge, see the Association for Evolutionary Economics Got It Right project page.

    Of course a number of non-neoliberal economists called it.

    Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

    by BruceMcF on Thu Oct 17, 2013 at 01:17:52 PM PDT

  •  Fama got his prize for the paper he published (1+ / 0-)
    Recommended by:
    Sky Net

    many years ago. His political views many years after he published that paper or whether he predicted some events several decades later are irrelevant.

    •  The rational market hypothesis is simply (1+ / 0-)
      Recommended by:


      MMT = Reality

      "The Earth is my country and Science my religion" Christiaan Huygens. Please join our Kos group "Money and Public Purpose". The gold standard ended on August 15, 1971, its time we start acting like it.

      by Auburn Parks on Thu Oct 17, 2013 at 03:42:49 PM PDT

      [ Parent ]

      •  MMT is not reality. It's a theory supported by (0+ / 0-)

        virtually no one. Rational market hypothesis doesn't fully explain the markets but it was proposed long time ago and was a significant advance at the time.

        •  Lol, shall we talk about some of the main tenets (1+ / 0-)
          Recommended by:

          of MMT?

          1)  The Govt is the issuer of the US dollar.  It can never run out of money


          2)  The US Govt spends by simply crediting bank accounts at the Fed:


          3)  The Fed controls the interest rates
          100 years of Fed operations and monetary policy should make that clear to anyone

          4) Govt deficits = Non-Govt surpluses
          5) National sectoral balances

          Former Fed Chair Marriner Eccles
          Former Deputy Treasury Secretary Frank Newman
           Countless articles in Economics journals
          Countless articles in the mass media

          And on and on and on.  I can provide dozens of links if you'd like.  MMT simply describes our modern fiat monetary operations.  If your pride and ignorance force you to deny these simple claims about our reality, then you probably belong at Red state and not on Daily Kos.

          MMT = Reality

          "The Earth is my country and Science my religion" Christiaan Huygens. Please join our Kos group "Money and Public Purpose". The gold standard ended on August 15, 1971, its time we start acting like it.

          by Auburn Parks on Thu Oct 17, 2013 at 04:00:50 PM PDT

          [ Parent ]

          •  So you can offer in defense of your point of (0+ / 0-)

            view are insults.

            •  Thats awesome. I provide concrete proof that we (0+ / 0-)

              are right and that you are wrong.  And what do you do?  You ignore all the facts that prove you are wrong and instead claim that I was mean to you.  That is awesome, it shows just how hollow your POV is.  I'm still waiting for you to show where we are wrong.  Thanks for playing though and making our point.

              MMT = Reality

              "The Earth is my country and Science my religion" Christiaan Huygens. Please join our Kos group "Money and Public Purpose". The gold standard ended on August 15, 1971, its time we start acting like it.

              by Auburn Parks on Fri Oct 18, 2013 at 02:05:11 PM PDT

              [ Parent ]

  •  The thing that is necessary to understand (0+ / 0-)

    is that economics is not a science, it is a social science. It is not independent from politics and political concerns. It never has been.

    The problem is not only neoliberal economics which suffers from a shortage of being in touch with reality, it is the whole of the economics profession.

    One obvious thing that I noticed after the Reinhart-Rogoff scandal was even though they had fudged the data deliberately to uphold a political policy agenda, the agenda was never abandoned by politicians. Economists serve the system and when an ideological argument was caught out, the profession may have been embarassed, but it did not change the perspective of politicians. This shows the limits of economics and economists. Even when their theories are inconsistant and do not work, even when they are demonstrated to have manipulated data, even when their arguments are demonstrated to have no relation with reality, the theories are not abandoned. This is never the case with science.

    "Hegel noticed somewhere that all great world history facts and people so to speak twice occur. He forgot to add: the one time as tragedy, the other time as farce" Karl Marx, The Eighteenth Brumaire of Louis Bonaparte .

    by NY brit expat on Fri Oct 18, 2013 at 05:58:59 AM PDT

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