I was delighted to hear that today after months of contentious public debate Larry Summers has finally withdrawn his name from consideration to become the next chairman of the Federal Reserve.
Why am I happy for this? Because he is a very guilty economist! Let me explain:
On 12 February 2010 I wrote an article under the title of “Global Financial Collapse: The Guilty Economists who destroyed the world and the Economics itself”. Let me quote a passage or two from that article:
It is accepted fact that the economics profession through its teachings, pronouncements and policy recommendations facilitated the GFC (Global Financial Collapse). We also know that danger signs became visible long before the event and that some economists (those with their eyes on the real-world) gave public warnings which if acted upon would have averted the human disaster.
With other learned professions entrusted with public confidence, such as medicine and engineering, it is inconceivable that their professional bodies would not at the very least censure members who had successfully persuaded governments and public opinion to ignore elementary safety measures, so causing epidemics and widespread building collapses.
To date, however, the world’s major economics associations have declined to censure the major facilitators of the GFC or even to publicly identify them. This silence, this indifference to causing human suffering, constitutes grave moral failure. It also gives license to economists to continue to indulge in axiom-happy behaviour. Nor has the economics establishment offered recognition to those economists who were not taken in by fads and fashion and whose competence, if listened to, would have prevented the collapse.
These two silences reveal a continuing moral crisis within the economics profession.”
Anyhow, I was pleased to note that the “Real-World Economics Review” had nominated 10 most guilty economists for the Ignoble Prize for Economics, to be awarded to the three economists who contributed most to enabling the Global Financial Collapse (GFC). Amongst those nominated was, yes, Larry Summers:
“As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), Larry Summers worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also worked with Greenspan and Wall Street interests to torpedo efforts to regulate derivatives.” (See the entire list of nominees below).
After much deliberation, dialogue and comments there was a vote. More than 7,500 people voted—most of whom were economists themselves from the 11,000 subscribers to the “Real-World Economics Review” With a maximum of three votes per voter, a total of 18,531 votes were cast. The poll was conducted by PollDaddy. Cookies were used to prevent repeat voting. And then the winners were annonunced:
Alan Greenspan (5,061 votes): As Chairman of the Federal Reserve System from 1987 to 2006, Alan Greenspan both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation.
Milton Friedman (3,349 votes): Friedman propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of fantasy-based theories of economics and finance that facilitated the Global Financial Collapse.
Larry Summers (3,023 votes): As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), Summers worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also helped Greenspan and Wall Street torpedo efforts to regulate derivatives.
Given the above, Yes, today is a good day. Larry Summers is not to lead the Fed. However, the Big Question is: Given the American ways of rewarding the Guilty Economists, again and again, will there ever be a chance for a good economist for the common good to lead the Fed? Let us hope for a miracle!
See below the list of the 10 nominees for the Ignoble Prize for Economics (The Prize name was latter on changed to Dynamite Prize in Economics):
Dossiers of short-listed of nominees for the Ignoble Prize for Economics
Fischer Black and Myron Scholes
They jointly developed the Black-Scholes model which led to the explosive growth of financial derivatives. The importance given to their hypothetical calculation of derivative prices was baneful not just because it was bogus, but also because it meant that relevant and often urgent real-world economic research was widely neglected by the profession. Eugene Fama His “efficient market theory” provided the moral umbrella for all sorts of greed, predatory behaviour and incompetent corporate management. It also provided the rationale for deregulation. And his theory’s widespread acceptance meant that “discussion of investor irrationality, of bubbles, of destructive speculation had virtually disappeared from academic discourse.” In these three ways Fama’s work created the environment which made possible the GFC.
Milton Friedman
He propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of the financial theories with unrealistic assumptions that facilitated the GFC. In short, he opened the door for everyone subsequently to theorize without fear of having to be attached to reality.
Alan Greenspan
As Chairman of the Federal Reserve System from 1987 to 2006, he both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation. Before a Congressional committee on 28 October 2008 Greenspan confessed that his theoretical beliefs of 40 years were now proven to be without foundation, hence his total confusion and failure at his job.
Assar Lindbeck
By working to make the Riksbank Prize in Economic Sciences (“Nobel Prize in Economics”) almost exclusively a prize for neoclassical economists, this Swedish economist has contributed significantly to the conversion of the economics profession and of world public opinion to market fundamentalism.
Robert Lucas
His development of the rational expectations hypothesis, which defined rationality as the capacity to accurately predict the future, both served to maintain Friedman's proposition that monetary factors do not affect the real economy and, in the name of “rigor”, distanced economics even further from reality than Friedman had thought possible.
Richard Portes
As Secretary-General of the Royal Economic Society from 1992-2008, he helped suppress worries expressed by non-mainstream economists about developments in the financial sector. In 2007 he wrote a Report for the Icelandic Chamber of Commerce giving a clean bill of health to Icelandic banks only a few months before they collapsed. When investigators called attention to the real state of Icelandic banking, he wrote a series of letters to the Financial Times defending the soundness of Icelandic banks and imputing professional incompetence to those who doubted it.
Edward Prescott and Finn Kydland
For jointly developing and popularizing “Real Business Cycle” theory, which by omitting the role of credit greatly diminished the economics profession’s understanding of dynamic macroeconomic processes.
Paul Samuelson
Through his textbook Economics: An Introductory Analysis (19 English language editions and translated into 40 languages), he popularized neoclassical economics, contributing more than any other economist to its diffusion and thereby to the deregulation of financial markets which made possible the GFC.
Larry Summers
As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), he worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also worked with Greenspan and Wall Street interests to torpedo efforts to regulate derivatives.
Global Financial Collapse: The Guilty Economists who destroyed the world and the Economics itself
Greenspan, Friedman and Summers win Dynamite Prize in Economics
http://rwer.wordpress.com/2010/02/22/greenspan-friedman-and-summers-win-dynamite-prize-in-economics/
Read more on the “Economics” of Larry Summers and others like him:
Put your trust in Socrates, not economists
Editorial, The Observer, 16 August 2009
http://www.guardian.co.uk/business/2009/aug/16/socrates-credit-crunch-global-economy/print
Economists are the forgotten guilty men
Academics - and their mad theories - are to blame for the financial crisis. They too deserve to be hauled into the dock
Anatole Kaletsky
From The Times
February 5, 2009
http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article5663091.ece
Who taught them greed is good?
To what extent are business schools' MBA courses responsible for the global financial crash?
Peter Walker, The Observer, Sunday 8 March 2009
http://www.guardian.co.uk/business/2009/mar/08/credit-crunch-mbas/print
I blame the Queen for this crisis
The man hired to lead the Royal Economic Society rejected any challenge to a blind orthodoxy that helped to cause catastrophe
“I found these economists guilty of providing not only the Queen, prime ministers and chancellors, but also the citizenry – including millions of investors – with dangerously misleading guidance.”- Ann Pettifor
http://www.theguardian.com/commentisfree/2009/feb/26/recession-economy-capitalism
In Praise of the Economic Students at the Sorbonne: The Class of 2000
http://www.gcgi.info/blog/392-in-praise-of-the-economic-students-at-the-sorbonne-the-class-of-2000
The Times, 8 March 2011
Ethics boys
Sir, Around 1991 I offered the London School of Economics a grant of £1 million to set up a Chair in Business Ethics. John Ashworth, at that time the Director of the LSE, encouraged the idea but had to write to me to say, regretfully, that the faculty had rejected the offer as it saw no correlation between ethics and economics. Quite.
Lord Kalms, House of Lords
The Roots of Economics -- And Why it has Gone So Wrong
by Kamran Mofid
This article is Chapter 4 of Promoting the Common Good: Bringing Economics & Theology Together Again by Marcus Braybrooke & Kamran Mofid, a dialogue between a theologian and an economist. Published by Shepherad-Walwyn (Publishers), 2005. Used by Permission.
http://lass.purduecal.edu/cca/jgcg/downloads/PromotingTheCommonGood.pdf