Krugman: Most Economists, Including Nobel-Prize Winners, Are Idiots or Fools

Paul Krugman, in attempting to defend Keynesian doctrine, calls most modern economists idiots or fools, including a slew of recent Nobel prize winners:

It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession…in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making…

Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts…

The renewed romance with the idealized market [which bears little resemblance to reality] was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation…

By 1970 or so, [d]iscussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse.

In other words, modern economics ignores just about all aspects of the real economy and the government’s effect on it.

Numerous Nobel prizes were received based on ridiculous theories:

The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims. The elegance and apparent usefulness of the new theory led to a string of Nobel prizes for its creators, and many of the theory’s adepts also received more mundane rewards: Armed with their new models and formidable math skills — the more arcane uses of CAPM require physicist-level computations — mild-mannered business-school professors could and did become Wall Street rocket scientists, earning Wall Street paychecks.

Indeed, as I have previously pointed out, many economists now admit that their assumptions and theories were wrong. And studies show that the what the economics profession has adopted as gospel – that the economy is inherently stable – is utterly false.

Krugman lambasts Bernanke and Summers as being key members of the club of foolish economists, who denied any problem with bubbles or leverage. For example, Krugman quotes Bernanke as follows:

Home-price increases, Ben Bernanke said in 2005, “largely reflect strong economic fundamentals.”

And he points out that Summers completely missed the boat on risk:

There was a telling moment in 2005, at a conference held to honor Greenspan’s tenure at the Fed. One brave attendee, Raghuram Rajan (of the University of Chicago, surprisingly), presented a paper warning that the financial system was taking on potentially dangerous levels of risk. He was mocked by almost all present — including, by the way, Larry Summers, who dismissed his warnings as “misguided.”

(As I have repeatedly pointed out, Bernanke and Summers – as well as Geithner – have been wrong about just about everything)

While Krugman is a dyed-in-the-wool Keynsian, he shows that both modern Keynesians and Friedmanites ignored reality and accepted 2-dimensional theories which failed to reflect reality. Indeed, I believe that both camps are wrong, and that both camps have been promoted largely because they serve the interests of the powers-that-be.


Austrian economist Ludwig von Mises said:

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

Economist Hyman Minsky described a “Ponzi finance” system during prolonged expansions and economic booms. Misky said that speculative excesses create bubbles, triggering structural instability, then asset valuation collapse that turns euphoria to revulsion and market crashes.

But modern economists ignore von Mises and Minsky’s wisdom, and pretend that we can blow bubble after bubble, and cook up bigger and better Ponzi schemes, to ensure an economic recovery.

Krugman does a reasonably good job of criticizing other economists, but does not admit that his brand of Keynesianism is worthless as well.

Print this post
This entry was posted in General. Bookmark the permalink.
  • http://www.examiner.com/x-18425-LA-County-Nonpartisan-Examiner Carl Herman

    Imagine an oligarchy/plutocracy. Their optimal outcome is power and wealth while remaining undetected. Their wealth and power would have to keep key players in accord with propaganda so the masses do not discover the oligarchy. The key players include media, government, the highest levels of money creation, and the academic fields ever-informing the next generations of these important areas.The academic field of economics would have to be attacked and subverted to the oligarchy. Otherwise, leaders with the creation and management of money, goods and services would point out to parasitic oligarchy. This is especially challenging when the parasitic effects become widely noticable. One way to do this is to feed money into controlled areas of academics that are obscure and non-threatening, while withholding money from substantive study.Welcome to the world of government funding for universities,who gets tapped for academic attention in economics, and what works get published.

  • http://Anonymousnoreply@blogger.com Anonymous

    No one should have any doubt concerning Paul Krugman's sinewy dedication to his long-held economic beliefs, -delusional constructs only Paul Krugman can fully fathom (because they are only in Paul Krugman's head), -delusional constructs that have won him both admiration and animosity among his peers and temporal superiors alike in the pusillanimous field of economics -as it must exist at the turn of 20th into the 21st Century.We all have lost faith in these many robed Zoroasters of economics. They can all stop waving their arms about and go home.Everything every human can think is -just a mental fabrication. Everything any human can know is but a mental fabrication because -it is ALL just in one's head, -it is not all that much like what anyone else has in their head, -and it is certainly very little like what is the singular reality outside all of our heads.That's just the nature of what everyone yaps about so incessantly, especially guys -like Paul Krugman.All these many swell geniuses, like Paul, have it in their minds to assess the world's circumstances scientifically.The inescapable epistemological problem in trying to describe reality scientifically is, -like mathematics, science -in any and every flavor- and in -the science of economics- can be expressed and can be invented in an infinite variety, not one of which will approximate the one true reality that exists -unknowable- outside all our heads.In this sense, no science -and that includes economics- can approach describing reality with any efficacy.The epistemological problems that crop up are problems involving -extremely exact contradictions- in both observation and analysis.The epistemological problem is like that of relativity theory and quantum mechanics. Their contradictions cannot be accorded with each other, because they are both only in the heads of physicists. And neither quantum mechanics or relativity theory can define our infinitely complex -and yet singular- reality.There's no contest. Reality is infinitely-infinitely complex. Reality gets the Gold Medal.This is the failure of every science that has everyone so exasperated, -whether they recognize the problem or not. And most do not recognize this problem. They just howl about the resultant human problems -science gives them.Those problems crop up because human beings live in reality, and not in any of the scientific constructs -in the heads of people like Paul Krugman.Those theorists however, just keep chirping the same semantic devices, like songbirds in a forest, playing out their part in a humanity made of so many automatons, empirical barbarians, every one -from Aristotle to Krugman.If we drop the pretense of any possible scientific understanding, all these problems right themselves.When someone proposes a scientific solution, tell them, "That won't work. It's just a scientific guess, fool."Stop doing. Let entropy settle the score.Paul did have something of an economic-epiphany that is worth noting in this article.This is that now that the fed has driven rates down to near zero, there is no profit left in lending, when that profit-potential is measured against the returns possible at higher rates. This is a massive and catastrophic failure of policy.His conclusion -that banks will not lend precisely because of fed policy- is a tad short of cogent, however.Anticipating deflation, banks necessarily are requiring higher and higher equity to loan ratios. This is also adding to the deflationary force working to create a deflationary economy.And, it is exactly what fed policy is so recklessly trying to avoid. -And these are the sort of unavoidable contradictions that arise in any scientific approach.

  • http://www.blogger.com/profile/12445876932247713605 Rusty Mason

    The Nobel Prize, along with a Rhodes Scholarship, has over the last few decades provided conservatives a warning flag that the recipient is a possible Marxist/liberal moron. That the above article might be news to liberals is fascinating; it is astonishing that they are still so intellectually stunted.

  • http://Anonymousnoreply@blogger.com Anonymous

    Rusty – If you think there is any difference economically between liberals and conservatives you are misguided. Both are for big government and give breaks to one type of super corporation or another. The corporations, banks and a select few rich individuals run the show. We are simply riding in their wake while trying to stay afloat.Bailouts = BUSH = Obama. Both appointed the same guy to the FED despite the fall out. If this were a corporation these people would have been fired!!!But we still focus on morals. Liberal vs Conservative. Dem vs Rep. WHY? Morals have no place in politics. Most moral legislation should be a state issue. Lets focus on Federal issues when talking about macroeconomics.The separation of power from rich to poor is too great to ignore anymore. Its a giant ponzi for sure. We just gave the banks money right? To be able to give us loans??? Where did the money go??? We will see tax increases, inflation, less jobs, lower wages and limited credit while they take the bail out dollars and invest in real assets like real estate, commodities and futures, and resources. What can we buy with our $600 stimulus? What can we do… get used to bs terms like "jobless recovery." These concepts are crazy!They get the lower class to fight each other too. Outsourcing is not a problem… Poor people are poor people… Technology has taken 80% of the manufacturing jobs in the past 20 years. It has take 75% of the front end bank jobs too. The list goes on… but they got us made at people in china, India, etc. and why? They hate us too. Our corporations give them jobs that pollute and destroy their homelands, our military protects them and then they get paid just enough not to starve… and you think anyone at the top of our pyramid gives a crap about your morals… there is nothing conservative or liberal about any of this. Its all rich vs poor. They have the fractional reserve system and credit to take you down… and all you got are those around you, liberal or conservative yet we as a people are completely divided. Houses sit empty owned by the bailed out banks and children wait in soup lines around the world in hopes mom can get a job to feed them. And we wonder why the population gets out of control? People sell themselves to eat and as a result children get born into poverty. In this country every child is just another consumer, where they focus the marketing attention at young ages… brain washing starts young here.The average wage since 1967 has gone up in the USA 3.5x while the average home cost went up over 10x… much like the cost of anything… wages 3.5x… everything else 10x? Credit bubble… those facts are right on the labor department, housing department, and other government websites. But the focus of every election has been gay marriage, abortion, stem cells, etc. Meanwhile your children are getting robbed.All these economists are either idiots or liars. The system has to fail. End of story. Whats next is up to us so we better get an idea of what we'd like to have vs what we're going to be given if we don't collectively decide.

  • http://www.blogger.com/profile/12445876932247713605 Rusty Mason

    Anon Sep 8-2:08, I agree there's not a dime's worth of difference today between libs/cons or Reps/Dems, but there was. Almost all of our leaders today in every leadership position are Marxists/globo-capitalists. I'm ready for some real change. "Off with their heads," ut dicant. We'll start with the banksters and their bought politicians and work our way down.

  • http://Anonymousnoreply@blogger.com Anonymous

    Rusty's a little too facile with the labeling/name calling; comes off as very simpleminded…

  • http://Anonymousnoreply@blogger.com Anonymous

    Let's stop the nonsense about Bush being a conservative. Bush was NOT a conservative. Just because Bush ran around saying he was a conservative does not make it so. If he lied about anything, it was about being a conservative.

 

 

Twitter