VOTE for nominees for the *Ignoble* Prize in Economics

[Political Heretic]

The Ignoble Prize for Economics, to be awarded to the three economists who contributed most to enabling the Global Financial Collapse (GFC).

Vote for three. The candidates’ dossiers are below the ballot.

VOTE HERE: http://rwer.wordpress.com/poll-procedures-for-the-ignoble-prize-for-economics/vote-for-the-ignoble-prize-for-economics/

Short List 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.


Procedures
The voting is being conducted using PollDaddy. Its system uses cookies to prevent repeat voting. A voting box showing the short-listed candidates and a link to their dossiers will remain till voting closes near the top of the right-hand column on the home page of the Real-World Economics Review Blog. Voting is open to all interested parties. Each voter can vote for up to three of the listed candidates. The ballots are secret. Voting will remain open for several weeks. No results will be announced before closing the poll.

[Political Heretic]

1. I voted: Milton Friedman, Robert Lucas, Eugene Fama

[Warpy]

2. Friedman and Fama for their theoretical horseshit

that provided the original infection, Summers for the specific deregulation in the US that caused the whole ridiculous edifice to start collapsing in the summer of 2007.

Greenspan did an incredible amount of damage but is barely off the hook because he's just smart enough to realize it was all hogwash and he was a complete fool to buy into it.

The others never recanted.

[Political Heretic]

4. I agree that some of those contemporaries really screwed us, but my hate for Lucas is strong

The "rational expectations" horse shit is the keystone on which all of "classical" economics rests.

It is horse shit on so many different levels I sometimes don't even know where to begin. What's most insulting is that it wasn't trying to be accurate, it was trying to provide an excuse to substantiate bullshit economic theories - make them "sound" scientific. Manipulative, disingenuous horse shit.

[Warpy]

8. Oh, it was very difficult to narrow it down to just three

since I loathe the lot of them.

Summers barely edged out the rest because his damage was so specific and led to the catastrophe so quickly. Without him, we might have had a smaller casino and a smaller crash.

[wryter2000]

3. That felt good

I was going to vote for Summers, anyway, just for getting rid of Glass-Steagle, but the fact that he's a misogynistic pr*ck was a lagniappe.

On edit, my other two were Friedman and Fama. :hi:

[Political Heretic]

5. Yeah, voting like this is like stress-therapy :)

AAaahhhhhhhhh.... :)

[wryter2000]

6. The only hard part is choosing

So many greedheaded peabrains, so little time. :)

[jmowreader]

7. I went with Black and Scholes, Friedman and Summers

I would have added a few more names to the list, though.

William Edward Simon: Richard Nixon's treasury secretary, William Simon made it cool to be a vulture capitalist. In 1984, Simon's company Wesray borrowed $80 million and purchased an $81 million company, Gibson Greetings. Eighteen months after buying the company, Simon did an IPO that netted him, personally, $66 million. Gibson Greetings has been described as the Wall Street version of Sutter's Mill.

Jude Wanniski and Arthur Laffer. I think you're all familiar with this Far Side comic...



If Mr. Larson were to do the same type of cartoon for conservatives, the "treatment" would be "tax cuts." Two of the biggest players in bringing America to the verge of fiscal ruin were Wanniski and Laffer.

Blythe Masters: She invented the Credit Default Swap. Nuff said.

So...if I could pick who I wanted, it would be Black & Scholes, Wanniski & Laffer, and Masters.

[Warpy]

9. Had a meeting with a financial muckety muck today

and it's the first time I've ever heard an investment banker say "clusterfuck."

[jmowreader]

22. The cartoon?

This is the old Far Side cartoon about equine medicine, the one with the woman reading the list of horse problems all of which are treated by shooting.

[Hippo_Tron]

10. I think that's a poor description of Milton Friedman's contribution

Milton Friedman, like him or not, made very serious contributions to the study of economics. Rational choice theory is an incredibly powerful tool that can be used to create models that can enhance our understanding of how real world events happen. Friedman didn't invent rational choice theory per se, but he did popularize it.

Any serious academic economist (or other social scientist) who uses rational choice theory will tell you that social sciences aren't exact sciences, though. Sometimes a real world situation has some factor exogenous of the model and predictions turn out wrong because the model didn't take into account that factor.

The problem is that politicians and other non-academics take these conclusions and treat them as though they were scientific fact because they are trying to persuade people who don't know any better. Furthermore, they take the conclusions of these economic theories and extend them to support policies that go well beyond what the theories actually support.

Milton Friedman's contribution to the situation we are in now is that later on in his career he became more of a politician than an economist and he started advocating for policies that even his own research didn't actually support. But because he had made such major contributions academically, people believed what he said to be gospel and above scrutiny.

Paul Krugman wrote a good piece about this shortly after his death.

http://www.nybooks.com/articles/19857

[Political Heretic]

12. I don't fully agree with your characterization of Friedman's contributions.

Milton Friedman economic contributions were inexorably linked with politics all through his career. It is not the case that only later in his life did he become more of a politician.

Core economic theories and principles suggested by Friedman were based on a host of false premises. The most important of which was the notion that economics is a hard science. It is not, and it cannot be, because it does not have an objective dataset.

To claim that its only other people that pervert or distort Friedman by trying to take theories as scientific fact requires one to ignore Friedman himself, who made not bones about seeing is economics as scientific fact. This was a major part of his agenda - to codify his particular dogmas about economic as a "hard science."

Also I don't believe it is the case that any serious scientist will tell you that rational choice theory is not exact. In fact over and over again in economic journals, business publications and published books by neoclassical economists build their entire arguments and theories from rational choice theory, without any serious accounting for its limitation or flaws.

Any serious accounting of those limitations or flaws would render it effectively useless, and the entire house of cards that that brand of economics would collapse.

Studying the life and history of Milton Friedman as well as his most famous economic works paints an entirely different picture than the one you (and Krugman) suggest (though I'm not surprised he said nice things about the guy when he died, as that is pretty common.)

Friedman and the Chicago school had their economic theories rebuffed by concrete reality almost anywhere they attempted to put them into play, as Naomi Klein exhaustively documented in The Shock Doctrine. It's a bit of a generalization, but I think still pretty fair to say that Friedman's entire work was basically just someone ideologically opposed to Keynesianism and trying to make facts fit an ideology.

The point isn't that Friedman contributed utterly nothing to the field. The point is that the man himself was his own best interpreter if his work and his goals. And he tells you in his own words exactly that I'm telling you know. And it seems really important that people acknowledge that his entire work rests on a failed premise that couldn't be proven then and is easy to disprove now.

And yet, his ideas remain the driving force behind the global economy...

[Hippo_Tron]

18. None of my economics professors call the discipline a "hard science"

The discipline is more "scientific" than it was before Friedman in that economists try to use scientific methods to make better predictions and support their own predictions. But it's not a hard science due to the simple fact that you can't perform a repeatable laboratory experiment in order to test an economic theory like you can a hard scientific theory. Again I haven't met a serious social scientist who will dispute that. Just because they don't write a disclaimer in their journal article saying "hey by the way, it's possible my theory won't turn out to be true in the real world" doesn't mean they think it's a hard science.

Perhaps in the early 1980's there were more academics that treated it as a hard science. I wasn't around then so I don't know. But I do know that rational choice theory, along with other economic theories, can be used to make predictions that are often right. Since there is no method of making economic predictions that are always right, rational choice theory is extremely useful even if the models can at times be wrong.

Economists like Krugman and Stiglitz who agree with Keynes on matters of policy far more than they agree with Friedman on policy use rational choice theory extensively in their work. I haven't read Naomi Klein's book and I don't know what (if anything) she has to say about Milton Friedman's academic work versus his policy advocacy. I do know that Stiglitz wrote a (mostly) positive review of Naomi Klein's book and yet like most modern economists, Milton Friedman's contributions are a part of his work.

I still maintain that there is a difference between Friedman the scholar and Friedman the politician and that they are incorrectly conflated ex post due to the fact that the man was such a free market ideologue.

[Political Heretic]

21. "Perhaps in the early 1980's there were more academics that treated it as a hard science"

There were then, and there are now.

Rational choice theory, makes predictions that are wrong as often as they are right. This is what not enough people say when they say that it "makes predictions that are often right." Rational choice theory is extremely useful for primarily one thing: justifying the economics of exploitation.

I don't know why everyone always references Krugman to me. I don't even like the guy. He is part of the problem, not part of what I want to see as a solution.

I'm not some how "unaware" that rational choice theory is the basis for virtually any economic thought you can read in any mainstream publication, as well as nearly any peer review economic journal. It powers classical economics.

Rational choice theory and neoclassical economics have never been merely about trying to "understand" things. Ever. It has always been about trying to interpret reality to fit a ruling class paradigm.

[Hippo_Tron]

25. To whose economic theories do you subscribe then?

I cited Krugman because he's a well known economist. Elinor Ostrom just won a Nobel prize for her work on common resources which takes rational choice theory and builds on it to explain how people naturally cooperate with each other. I don't see how that is about justifying the economics of exploitation.

I could name numerous other applications of rational choice theory that have nothing to do with free market economics or even economics at all for that matter. It is a tool to understand behavior, not an ideology in itself.

[On the Road]

11. I Think It Should be David Li

who came up with "The Formula That Killed Wall Street."

A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.

For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

OK, so he didn't mean for it to be applied to mortgage derivatives. But still, it's got to be one of the most famous examples ever of academic economics leading to catastrophe.

[Political Heretic]

13. Good addition! Thanks for that. :)

[Alias Dictus Tyrant]

15. This is a misapplication of the tools

Basically, people using mathematics they do not fully understand. Kind of like using a screwdriver as a chisel for something important and then being surprised when problems arise.

The more subtle problem is separating the competent from the incompetent when dealing with esoteric theoretical mathematics. At the high-end of any theoretical mathematics field, there are literally only a few thoroughly competent experts in the world but it would be hard for an outsider to identify them. I am frequently tapped to evaluate the competency of people working in a couple different areas of high-end theoretical mathematics but there is a chicken-and-egg problem. How do the people that use me as the measure of competency know that I am competent? They can't.

[Political Heretic]

16. First of all, its not mathematics. The notion that somehow it is, is what got us here.

The attempt to turn economic speculation into mathematical formal and pretend that it is quantitative is the problem itself.

The notion that only a tiny "elite" cabal of specialists can understand or talk about economics is ludicrous on its face.

The problem isn't people too stupid to "do the math right." The problem is the belief that economics is a science where quantifiable math can be done, rather than the collections of qualitative social theories that economics really is.

[Alias Dictus Tyrant]

26. Excellent, innumeracy reigns supreme!

"The problem isn't people too stupid to "do the math right." The problem is the belief that economics is a science where quantifiable math can be done, rather than the collections of qualitative social theories that economics really is."

Let me translate: "I am completely ignorant of mathematics and anything vaguely resembling theoretical economics".

I am no fan of what happened on Wall Street by any means, but as someone who does theoretical mathematic research for a living your characterization of topics I am intimately familiar with is so grossly inaccurate as too be a laughable joke if it wasn't so serious. People wonder why the US can't compete while simultaneously spewing their innumerate ranting as though it had value. Puh-lease.

Leave the handwaving anti-science and ignorance to the Creationists. I've never associated myself with the Republicans because of their anti-science and innumerate ignorance. It the Democrats think mathematics no longer applies to them, I am an American without a party. I hold the Democrats to a higher standard.

If you want to challenge my mathematical competence, please have at it. I can hold my own against the very best.

[Political Heretic]

33. Economics isn't a hard science, and theoretical mathematics is worth very little.

Your ability to compute artificial calculations based on faulty premises is unimpressive. In order for me to "challenge" your mathematical ability to make calculations based on artificial rules detached from reality, I'd have to first care about the theoretical speculations.

As gifted as you believe yourself to be at something as irrelevant and abstracted as made-up math based on nothing of empirical substance and without concretely testable hypothesis, I am trained in public policy and political economy seen through a particular lens of social theory. It's obvious that we're likely to disagree and pretty much not like each other. I think what you do is a total waste and part of the problem, you think what I do is inferior and idiotic.

:shrug:

It's fairly ironic that you talk about the ignorance of creationists. Because economic fundamentalism looks a lot like it. Economics isn't about science. Math and science are not identical, and economics is a product of human engineering, with mathematical formulate based on theoretical assumptions that are untestable and unprovable. The entire enterprise is self-referential nonsense, with people such as yourself so threatened by accepting that truth that they wave their dicks around furiously screaming, "I'm elite and special! You ignorant serf cannot possibly understand! I dare you to challenge my greatness."

With it its little self-referential circle, self-important idiots can go on and on in a largely artificial exercise as an outlet for their mathematical skill. But you just don't get it. I don't want to challenge your mathematical competence. I challenge the very relevance and value of your math in any context other than the self-serving and self congratulatory.

As Doug Rushkoff writes,

It is up to our most rigorous thinkers and writers not to base their work on widely accepted but largely artificial constructs. It is their job to differentiate between the map and the territory — to recognize when a series of false assumptions is corrupting their observations and conclusions. As the great interest in the arguments of Richard Dawkins, Daniel Dennett, Sam Harris, and Christopher Hitchens shows us, there is a growing acceptance and hunger for thinkers who dare to challenge the widespread belief in creation mythologies. That it has become easier to challenge the supremacy of God than to question the supremacy of the market testifies to the way any group can fall victim to a creation myth — especially when they are rewarded to do so.

That is what you represent, sir. Fundamentalist religion when it comes to theoretical economic calculations. That they have no testability and little generalizable consistent accuracy doesn't matter to you. The math is fun.

What's even less impressive is your sense of self-importance. Only you and other special elites can possibly understand such infinitely complicated issues. I hate to break it to you, but on an anonymous internet board, no one particularly cares who you think you are, or how great you think you are. Worst still for you, no one needs to be experts in theoretical mathematics to understand how clearly economic theorizing is political philosophy and social theory, not natural science.

So do invented math based on invented premises not derived from the natural work, artificially constructed, and without testable hypothesis - and feel free to continue to look down your nose and everyone else why you do it.

The rest of us will continue to laugh out loud at your own sense of self-superiority and remind yourselves how much like a religious fundamentalist you actually sound.

[Zynx]

24. The math might not be wrong, but it has no place having trillions of dollars attached to it.

The models simply don't hold up under stress.

[Alias Dictus Tyrant]

28. You are correct

The mathematics was applied far beyond its competency. I do *not* in any way contest this. The people who applied it were not qualified to do so, and the mathematics had limits the people who applied it did not understand.

What I do object to is people who insist that the mathematics was wrong in some way. That is ignorance, something I associate with Republicans. Let's leave the fancy mathematics to the mathematicians that specialize in it. Wall Street did not, and they got rightly burned. Let's not burn the competent theoretical mathematicians with them in a spasm of Luddite worship.

I don't know what a liberal is "supposed" to feel about such things, but I view mathematics as one of the greatest developments of the human species. It is foundational to the dismissal of the medieval bigotry that envelopes much of human history.

[On the Road]

31. I Agree That it Wasn't David Li's Fault

hence the qualifier. But the role of that equation in the mortgage derivative debacle is so prominent that it cries out for some kind of notoriety.

[Alias Dictus Tyrant]

14. Black & Scholes? Seriously?

Only someone ignorant of mathematics would accuse them of "enabling" the financial collapse. That would be like accusing Navier & Stokes (go ahead, Google it) of enabling global climate change. Just because innumerate blowhards don't understand the mathematics and misapply it is not the fault Black & Scholes. We can always count on the "math is hard" Barbies of the world to offer an opinion on the theoretical mathematics surrounding economics -- full-blown ignorance knows no restraint when it comes to having an opinion.


The relevant theoretical mathematics is extremely difficult. The real issue is that far more people try to apply it than actually understand it, so it is no wonder that mistakes are made. Most economists like Paul Krugman are narrow specialists and are as competent as an informed layman regarding most economic matters they opine about. There are a few brilliant theoretical polymath economists out there, but they don't write columns for the New York Times.


If I had to pick a "smartest living economist" it would probably be Kenneth Arrow. However, using the "reasoning" of this poll we would blame him for voting irregularities.

[Political Heretic]

17. Black & Scholes - not "misapplied" but rather wrong direction entirely.

Sorry, but its way past time to reject the claims of a small cabal of elitists that everyone but a tiny sub-set of super-specialists is just too stupid to understand "the math" (a joke in and of itself) of economics, and thus should simply be quiet and let the big boys work.

That's such a laugh. The notion of "the math" itself is the problem. Understanding these instruments of rationalization is complicated sure. But it is not beyond the reach of most anyone with interest. In fact, what anyone can learn is how the "the math" itself and the

Don't get me wrong, there is no question that theoretical economics approached in the classical style of pseudo-scientific analytic hypothesis (so popular in the early 20th century and coming right out of the logical positivist push (happening in many academic fronts at that time) is complicated. But is suspect is the very notion that classical economics is relevant, useful at all in understanding how macro or micro economic systems work. Rather, it serves mostly as an ideological tool -- using bogus scientific claims to "rational proof" as props to keep a certain kind of economy afloat.

One that doesn't support itself in the long run, does not move towards increasing stability, but does make a few people extraordinary wealthy in the short run.

[Alias Dictus Tyrant]

27. The mathematics is correct...

...under a certain set of well-specified assumptions. If you understand those assumptions, you understand the scope of application. Many people misapply it because they do not understand the theoretical context.

Anyone who thinks the strict mathematics is incorrect is, in no uncertain terms, an imbecile. Claiming that calculus that is used ubiquitously in every day life is magically invalid for a very narrow domain is the mark of a fool. All that is becoming apparent here is that your understanding of the mathematics is on par with the morons on Wall Street.

Anyone who thinks mathematics is just a quaint idea is no better than the loathesome Creationists who assert the very same thing.

[Political Heretic]

34. The theoretical mathematics can't be objectively proven "correct"

It can only be demonstrated to be "internally consistent" with a given set of artificially constructed assumptions - "correct" within that narrow, pointless artificial construction.

Worth very little in the real world.

I don't think mathematics, as applied in hard sciences, physics and elsewhere is a quaint idea. I think that "theoretical" math is useless. Sorry.

[Ardent15]

19. Samuelson, Friedman, and Greenspan. nt

[anonymous171]

20. Friedman. nt

[Zynx]

23. Considering that Samuelson and Friedman were opposed to each other I think it is odd to have them

on the same list. Samuelson advanced Keynesian analysis of macroeconomics as much as he did advance a more classical view of microeconomics. I have a hard time faulting him for what happened.

[Political Heretic]

32. Why should that be odd?

You can still do some terrible economic work and not agree with Friedman. :shrug:

[Alias Dictus Tyrant]

29. Samuelson was kinda wrong

Seriously, Samuelson is almost famous for being mind-bogglingly wrong in strange ways in economic circles. It is almost weird to the extent he is still respected among economists. Friedman, love him or hate him, was at least sort of sane even if you disagree with him.

[Zynx]

30. Care to elaborate about Samuelson?

Other than some comments about Eastern European countries being more prosperous than they were, I'm not exactly sure what you are referring to.