Yet another Nobel Prize in Economics: An affront to humanity and truth
- Kamran Mofid
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“A Nobel prize in economics implies that the human world operates much like the physical world: that it can be described and understood in neutral terms, and that it lends itself to modelling, like chemical reactions or the movement of the stars. It creates the impression that economists are not in the business of constructing inherently imperfect theories, but of discovering timeless truths.”-Photo: Jasper Rietman
In May 2015 at the Annual General Meeting of the World Congress of Faiths, which was held at London School of Economics, I delivered a keynote speech on “The Value of Values to Build a World for the Common Good” I discussed different issues and when in particular I tried as a “Recovered” economist, who has seen the light and hopefully is now wiser than before, shed some light on what economics was and what it has become: Economics, Globalisation and the Common Good: A Lecture at London School of Economics
That was then. And now : The Big, Exciting News of the week- just in case you are not aware is that the winner of the Sveriges Riksbank prize in economic science in memory of Alfred Nobel, as it is officially called, is going to be announced on Monday 12 October 2015.
After eight years in which many of the pillars of economic theory have been swept away by a financial tsunami that went largely unpredicted by the majority of practitioners and teachers of the “dismal science”, it may be hard to believe anyone deserves to be awarded a Nobel prize in the subject.
Those of us who have been fighting for a revolution in the way economics is taught in schools and universities would have liked to see an end to this annual charade, pretence and utmost arrogance. The Nobel Committee instead should admit defeat, show humility and search for a more meaningful way to honour achievement that reflects the seismic changes of the past eight years and more, perhaps by considering awarding an annual multi-disciplinary prize in economics, psychology, sociology and anthropology, for example.
To reflect more on these issues I wish to share with you two excellent articlec by Christopher Sawnn and Joris Luyendijk respectively.
Dynamite the Nobel prize in economics
“Did you know that worms cause cancer? They don’t, of course, yet in 1926 Johannes Fibiger won a Nobel Prize in medicine for this “discovery.”
The Nobel committees for science prizes rarely make such amusing blunders, but those awarding the medal for economics have a long history of endorsing ideas that are useless, incorrect and even dangerous.
With the latest winner of the $1.4 million windfall due to be named on Monday, the case is stronger than ever for scrapping the prize altogether. The economics award — created in 1968 by Sweden’s central bank — has always been the odd man out.
Far from celebrating those who have “conferred the greatest benefit on mankind” as Alfred Nobel intended, the economics prize has done more harm than good.
The prize has fostered a faith in economists that is often misplaced. Friedrich Hayek, who won in 1974, said he would have advised against creating the award. The title, he said, “confers on an individual an authority which in economics no man ought to possess.”
Laureates, he suggested, should be required to take “an oath of humility … never to exceed in public pronouncements the limits of their competence.”
Sadly, economists, as a caste, have showed no such humility. The Nobel imprimatur has encouraged us to exaggerate the scientific quality of the dismal science.
Unlike their counterparts in physics, chemistry and medicine, economists have precious little predictive power. Lately, there has been much soul searching about the failure of economists to anticipate the 2008 meltdown. But given the profession’s history it would have been surprising if they had.
Over the past 20 years economists have failed to forecast any of the major twists and turns of the U.S. economy. Economists, as labor leader George Meany once grumbled, is “the only profession where a person could be considered an expert without having once been right.”
Worse still, the Nobel committee has set its seal on ideas that have been extremely toxic. Nobel Prize-winning theories were behind the biggest market meltdowns since the Great Depression.
In 1987, wide acceptance of the Black-Scholes-Merton option pricing model helped turn a market stumble into the worst one-day fall in Wall Street history, threatening the entire system. The model was rejected by traders, yet a decade later Robert Merton and Myron Scholes picked up their check from the Riksbank.
Or take Value at Risk models — backed by the Nobel Prize-winning portfolio theories of Harry Markowitz — which was culpable in both the panics of 1998 and 2008. These models helped justify skimpy capital ratios in the run-up to 2008.
“These theories have managed to transform tranquillity into turbulence, creating crises out of nowhere,” says Pablo Triana, author of “Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets?” He adds: “The Nobel Prize helped give them respectability.”
And Nobel-endorsed economic theories helped justify the aversion to regulation showed by policy makers like Alan Greenspan. A long list of laureates from the Chicago school from Gary Becker to Edward Prescott helped promote the idea that governments should stand aside.
If the Swedish central bank wants to give away 10 million kronor a year, that is their business. But the prize should not be allowed to coast on the prestigious Nobel brand. Surviving relatives of Nobel are right to ask that their name be taken off the prize.
Aside from a new name, the prize should also come with a label:
WARNING: These theories should not be used by everyone. Side effects can include: financial crises, turbulent stock markets and banking collapse.”
Read the original article:
Don’t let the Nobel prize fool you. Economics is not a science
“Business as usual. That will be the implicit message when the Sveriges Riksbank announces this year’s winner of the “Prize in Economic Sciences in Memory of Alfred Nobel”, to give it its full title. Seven years ago this autumn, practically the entire mainstream economics profession was caught off guard by the global financial crash and the “worst panic since the 1930s” that followed. And yet on Monday the glorification of economics as a scientific field on a par with physics, chemistry and medicine will continue.
The problem is not so much that there is a Nobel prize in economics, but that there are no equivalent prizes in psychology, sociology, anthropology. Economics, this seems to say, is not a social science but an exact one, like physics or chemistry – a distinction that not only encourages hubris among economists but also changes the way we think about the economy.
A Nobel prize in economics implies that the human world operates much like the physical world: that it can be described and understood in neutral terms, and that it lends itself to modelling, like chemical reactions or the movement of the stars. It creates the impression that economists are not in the business of constructing inherently imperfect theories, but of discovering timeless truths.
To illustrate just how dangerous that kind of belief can be, one only need to consider the fate of Long-Term Capital Management, a hedge fund set up by, among others, the economists Myron Scholes and Robert Merton in 1994. With their work on derivatives, Scholes and Merton seemed to have hit on a formula that yielded a safe but lucrative trading strategy. In 1997 they were awarded the Nobel prize. A year later, Long-Term Capital Management lost $4.6bn (£3bn)in less than four months; a bailout was required to avert the threat to the global financial system. Markets, it seemed, didn’t always behave like scientific models.
In the decade that followed, the same over-confidence in the power and wisdom of financial models bred a disastrous culture of complacency, ending in the 2008 crash. Why should bankers ask themselves if a lucrative new complex financial product is safe when the models tell them it is? Why give regulators real power when models can do their work for them?
Many economists seem to have come to think of their field in scientific terms: a body of incrementally growing objective knowledge. Over the past decades mainstream economics in universities has become increasingly mathematical, focusing on complex statistical analyses and modelling to the detriment of the observation of reality.
Consider this throwaway line from the former top regulator and London School of Economics director Howard Davies in his 2010 book The Financial Crisis: Who Is to Blame?: “There is a lack of real-life research on trading floors themselves.” To which one might say: well, yes, so how about doing something about that? After all, Davies was at the time heading what is probably the most prestigious institution for economics research in Europe, located a stone’s throw away from the banks that blew up.
All those banks have “structured products approval committees”, where a team of banking staff sits down to decide whether their bank should adopt a particular new complex financial product. If economics were a social science like sociology or anthropology, practitioners would set about interviewing those committee members, scrutinising the meetings’ minutes and trying to observe as many meetings as possible. That is how the kind of fieldwork-based, “qualitative” social sciences, which economists like to discard as “soft” and unscientific, operate. It is true that this approach, too, comes with serious methodological caveats, such as verifiability, selection bias or observer bias. The difference is that other social sciences are open about these limitations, arguing that, while human knowledge about humans is fundamentally different from human knowledge about the natural world, those imperfect observations are extremely important to make.
Compare that humility to that of former central banker Alan Greenspan, one of the architects of the deregulation of finance, and a great believer in models. After the crash hit, Greenspan appeared before a congressional committee in the US to explain himself. “I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms,” said the man whom fellow economists used to celebrate as “the maestro”.
In other words, Greenspan had been unable to imagine that bankers would run their own bank into the ground. Had the maestro read the tiny pile of books by financial anthropologists he may have found it easier to imagine such behaviour. Then he would have known that over past decades banks had adopted a “zero job security” hire-and-fire culture, breeding a “zero-loyalty” mentality that can be summarised as: “If you can be out of the door in five minutes, your horizon becomes five minutes.”
While this was apparently new to Greenspan it was not to anthropologist Karen Ho, who did years of fieldwork at a Wall Street bank. Her book Liquidated emphasises the pivotal role of zero job security at Wall Street (the same system governs the City of London). The financial sociologist Vincent Lépinay’s Codes of Finance, a book about the division in a French bank for complex financial products, describes in convincing detail how institutional memory suffers when people switch jobs frequently and at short notice.
Perhaps the most pernicious effect of the status of economics in public life has been the hegemony of technocratic thinking. Political questions about how to run society have come to be framed as technical issues, fatally diminishing politics as the arena where society debates means and ends. Take a crucial concept such as gross domestic product. As Ha-Joon Chang makes clear in 23 Things They Don’t Tell You About Capitalism, the choices about what not to include in GDP (household work, to name one) are highly ideological. The same applies to inflation, since there is nothing neutral about the decision not to give greater weight to the explosion in housing and stock market prices when calculating inflation.
GDP, inflation and even growth figures are not objective temperature measurements of the economy, no matter how many economists, commentators and politicians like to pretend they are. Much of economics is politics disguised as technocracy – acknowledging this might help open up the space for political debate and change that has been so lacking in the past seven years.
Would it not be extremely useful to take economics down one peg by overhauling the prize to include all social sciences? The Nobel prize for economics is not even a “real” Nobel prize anyway, having only been set up by the Swedish central bank in 1969. In recent years, it may have been awarded to more non-conventional practitioners such as the psychologist Daniel Kahneman. However, Kahneman was still rewarded for his contribution to the science of economics, still putting that field centre stage.
Think of how frequently the Nobel prize for literature elevates little-known writers or poets to the global stage, or how the peace prize stirs up a vital global conversation: Naguib Mahfouz’s Nobel introduced Arab literature to a mass audience, while last year’s prize for Kailash Satyarthi and Malala Yousafzai put the right of all children to an education on the agenda. Nobel prizes in economics, meanwhile, go to “contributions to methods of analysing economic time series with time-varying volatility” (2003) or the “analysis of trade patterns and location of economic activity” (2008).
A revamped social science Nobel prize could play a similar role, feeding the global conversation with new discoveries and insights from across the social sciences, while always emphasising the need for humility in treating knowledge by humans about humans. One good candidate would be the sociologist Zygmunt Bauman, whose writing on the “liquid modernity” of post-utopian capitalism deserves the largest audience possible. Richard Sennett and his work on the “corrosion of character” among workers in today’s economies would be another. Will economists volunteer to share their prestigious prize out of their own acccord? Their own mainstream economic assumptions about human selfishness suggest they will not.”
See the original article:
Do you wish to learn more about the issues raised in this Blog posting? If so, then, I wish to recommend an excellent book to you:
From power and greed to compassion and the common good
By Manfred Max-Neef and Philip B. Smith
Paperback, 200 pages, published: 10th February 2011
A Review by Herman Daly
“…As clear from the title, the book argues that modern neoclassical economics is a mask for power and greed, a construct designed to justify the status quo. Its claim to serve the common good is specious, and its claim to scientific status is fraudulent. The latter is sought mainly by excessive mathematical formalism to the neglect of concrete facts and real values. The mathematical formalism is in imitation of nineteenth century physics (economics viewed as the mechanics of utility and self-interest), but without any empirical basis remotely comparable to physics. Pareto is identified a villain here, and to a lesser extent Jevons.
The hallmark of a real science is a basic consensus about fundamentals. There is no real consensus in economics, so how can it claim to be a mature science? Easy, by forcing a false “consensus” through the simple expedient of declaring heterodox views to be “not really economics,” eliminating history of economic thought from the curriculum, instigating a pseudo-Nobel Prize in Economics, and attaining a monopoly on faculty positions in economics departments at elite universities. Such a top-down, imposed consensus is the opposite of the true bottom-up consensus that results when independent minds all bow before the power of the same truth. “Mathematics was simply built into the laws that describe the behavior of the atomic nucleus. You didn’t have to impose it on the nucleus.” (p.67). The same cannot be said of people, even atomistic homo economicus…”
Read the whole review: