This is a hard hitting post on the economics profession by Bill Bronner. He has written a book recently called Hormegeddon: How Too Much of a Good Thing Leads to Disaster.
The post is based on his book.
Friedrich Hayek made the point on numerous occasions that the more a person has been educated, the greater the likelihood he is an idiot. That insight may or may not be true of those who spent their school years in engineering and science; it is certainly true for those who have studied economics. The more they have learned, the dumber they get. Like a cloud rising against a mountain, when a young person enters the economics department, the higher up the academic slope he goes, the more the common sense rains out of him.
The trouble with The Economist, The Financial Times, the US government and most mainstream economists is not that they don’t know what is going on, but that they don’t want to know. It would be counterproductive. Nobody gets elected by promising to do nothing. Nobody gets a Nobel Prize for letting the chips fall where they may. Nobody attracts readers or speaking fees by telling the world there is nothing that can be done. Instead, they meddle. They plan. They tinker. Usually, the economy is robust enough to thrive despite their efforts. But not always.
From 2007-2012, Nobel Prize winning economists Paul Krugman and Joseph Stiglitz, along with celebrity economist, Jeffrey Sachs, and practically all their colleagues, failed to notice the most important happening in their field. This in itself was not news. Not noticing things came easily to them, like second nature. In fact, you might say they built their careers on not noticing things.
Blindness was part of their professional training. It was what allowed them to win coveted prizes and key posts in a very competitive occupation. Had they been more reflective, or more observant, they would probably be teaching at a community college.
Their obstinate dedication to being unaware marks the culmination of a long trend in economics. By the late 20th century, leading economists preferred not to look. They closed their eyes to what an economy actually is (to how it works) and focused on their own world—a make-believe playground of numbers, theories and public information, with little connection to the world that most people lived in.
Irving Fisher, one of the greatest economists of the 20th century, on September 5, 1929: “There may be a recession in stock prices, but not anything in the nature of a crash.”
Julius Barnes, head of Hoover’s National Business Survey Conference, announced in 1930: “The spring of 1930 marks the end of a period of grave concern. American business is steadily coming back to a normal level of prosperity.”
It is such a pity. Teaching has been sidelined and research is given so much importance. From the research factory, we see more and more crap being thrown out which is of course packaged as the idea which will change the world economy.
In 21st century, nothing has changed:
And now, in the 21st century, more than 75 years later, economists are up to more mischief. And part of the mischief involves not noticing things that are under their noses, including the fact that their discipline is 90% claptrap.
Minutes of the Federal Reserve’s Open Market Committee meetings, released in 2013, showed that neither Ben Bernanke, the Fed chairman, nor other key decisions makers had any idea what was coming their way in 2007.
“My forecast for the most likely outcome over the next few years,” opined Fed governor, Donald Kohn, “is…growth a little below potential for a few quarters, held down by the housing correction, and the unemployment rate rising a little further.”
Ben Bernanke set the pace for his fellow Fed officials back in 2005, with a stunning display of arrogance and ignorance about the threat derivatives posed to the global financial system:
“they are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk…”
Then, two years later, he was at it again: “At this juncture…the impact on the broader economy and the financial markets of the problems in the subprime markets seems likely to be contained…”
Again, in 2008: Fannie Mae and Freddie Mac were “adequately capitalized,” he said. They were “in no danger of failing.”
In the financial pile-up of ‘08-’09, derivatives did, in fact, create so much risk that the system couldn’t handle it. Subprime crashed. Almost every financial school bus was dented. And practically all of Wall Street—Fannie and Freddie too—had to be towed away. And then, in 2013, Ben Bernanke, as blind to the approaching financial disaster as a pick-up truck to a brick wall, was driving the whole world economy.
So are they incompetent? No, not at all..They are top class swindlers!:
That economists are incompetent hardly needs additional evidence or argument. But they are far from being idiots. On the contrary, they are too clever by half. They are such able swindlers and accomplished charlatans that they convince themselves of things that couldn’t possibly be true. They do so for reasons of professional vanity…and for money.
This blog has written umpteen posts on not taking the profession too seriously. It is just one of the subjects:
If you agree with that, guess what…you’re going against an entire century of economic theory and practice. The modern economist believes he can improve the way people invest, save, spend and do business. In the United States he has been hard at it—manipulating, interfering, controlling—for a century, at least since the Federal Reserve system was founded in 1913. Is there any evidence that all this sweat and heavy breathing has actually worked? That it has actually improved the way economies function? None that we have seen. But now after 100 years of meddling, economics itself is sinking below the zero barrier, down into dark under world of hormegeddon, where the return on further effort will be starkly, catastrophically negative.
As India obsesses and spins the profiles of its economic advisers and experts, these are some lessons. They too come from a world which has created so much mess. Yet we continue to think that is where economics education lies…