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Permalink Like Dislike The author of "The Black Swan" says the Nobel Prize for Economics rewarded the wrong theories and brought on the world crisis, but if it was given to him, he'd accept it if "it would help society..."
http://www.reuters.com/article/idUSTRE68R2SK20100928?pageNumber=1
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47 male
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I don't think there should be a Nobel prize at all for economics. Economics isn't a science, it's a game just as Monopoly is a game. The rules constantly change so what might work from 1980 to 2000 can simply fall apart from 2001 onward. It's like creating rules for how lab rats find cheese in a maze, then watching those rules fall apart after all the rats learn where the cheese is hidden.
Managing risk is the worst possible application of economic "science" because risk is unlimited. That's the whole premise behind the "Black Swan" book. An individual might buy $1 million in automobile insurance and sleep soundly at night thinking he's covered, but the next day he might run a school bus off a cliff and face $20 million in lawsuits. There's simply no way to make investing 100% safe and at some point EVERY economic model will fail when enough people accept it and make bets conforming to it.
So back to the article, I don't think you can blame the Nobel prize committee. Their job is to reward original thinking. Once that original thinking is incorporated into the market, it doesn't work anymore. The right theories of the 1990s are the wrong theories of the 2000s and so on. For example keynesian remedies were rejected for decades and now they are hot stuff again.
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Bellingham, WA
I think the thesis has merit. I can't be arsed to read the article but as people here should know by now why and how I think the economics field has been corrupted to the core.
The NYT thought they were getting another center-right ideologically made man when they hired Krugman. Oops.
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Davis, CA
The Science Oscars are to blame?
This is a product of Nassim being on too many talking-head shows. Enough words and sooner or later we all saying something loopy.
The financial markets rewards economists who say the things they want to hear, and that is the crux of the problem. You look down the list of "top economists" quoted in media and used as intellectual backing for public and business policy, and you quickly see that they are nearly all bought and paid for. And there's a lot of them.
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Mountain View, CA
You think he's losing it?
"I'm using the money now to finance the destruction of the economic establishment."
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This should fall under the SFW(So ephin' what) category, but these same people are treated like Policy Oracles, which then you have to wonder. Is the economy really changing, or are these guys changing it?
Bah, the jig is up, the problem will be the cure, if these are the smartest we've got, and they created this mess, then we've got no body to look to lead us out. We got Papa Buffet the Hut, but he just sits by the Oyster bed eating up all of the good ones for him self.
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robertoaribas's website
Bonus points for anybody who knows why there isn't a Nobel prize in mathematics...and NO his wife wasn't cheating with a mathematician...
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47 male
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shrekgrinch says
They worked in 1933, they'll work now.
shrekgrinch says
The way you use it, political correctness is very accurately defined as "Standards the entire first world has embraced except for right wing nuts in the United States." You and people like you are very much alone.
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San Francisco, CA
iwog says
Quote from wikipedia:
"... In recent years, many American politicians from the Democratic Party have been awarded the prize, including Jimmy Carter, Al Gore, and Barack Obama. Barack Obama's prize was particularly controversial, as a sitting president who had been in office less than one year and who had been nominated no more than 12 days after being inaugurated as president..."
http://en.wikipedia.org/wiki/List_of_Nobel_Peace_Prize_laureates
What did Obama do to deserve the prize?
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nosf41 says
This was actually an award to the American people for finally fully booting the neocon warmongers from power.
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iwog says
Well, the one Taleb hates the most is Myron Scholes. And his ideas were never the right theories. His theories bankrupted Long Term Capital Management back in 1998. It's amazing to me that we reward someone with a Nobel Prize who thinks it is perfectly safe to run a Hedge Fund leveraged 400 to 1 because your price model was signaling no risk. This is the sad state of economics that has existed for the better part of this century.
Beyond that, the economics prize is not a Nobel prize. It's a totally unrelated prize created by the Central bank of Sweden. It's not the Nobel committee. Most winners of the prize have proven that their policy recommendations lead to disaster. The ones that try to go into the market themselves bankrupt their firms. And the ones that don't have the balls to enter policy making or the market sit back and do an awful job of forecasting events. Yet, somehow, they come up with the most detailed explanations for why things happen after wards. Even then, they still get it totally wrong. The "Nobel" prize in economics is one of the most meaningless and worthless prizes that exists. It was a disaster from the get go when they gave the prize to Paul Samuelson. Back then, he was predicting the Soviet Union to overtake the US economy and continued to do so for decades until the Soviet Union finally collapsed. It's a complete joke. Hell, they gave it to Krugman for things he wrote 30 years ago.
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robertoaribas says
Because Novel didn't give a damn about mathmatics. Now, where's the bonus point? ;)
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iwog says
There isn't. There is a "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel", which was invented by bankers in the 60s. Alfred Nobel was a scientist, and I think he would have been appalled at the idea that economics gets treated like one.
Economics is definitely not a science. If you can't apply the scientific method, it isn't science. When was the last time any economic theory was tested with a control group? Where are the peer-reviewed results?
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shrekgrinch says
Every time I post this graph, you give up and run away. Therefore I'll simply do it again. Someday maybe you'll have the guts to talk about it.
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@ Oakman,
Always like to read your comments about economics stuff.
Troy says
I believe you're probably correct. I got a question for you. What does it mean if the Republicans take back the house this year?
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iwog says
BRILLINT !
Hey I can do the same ... max out my credit card buying all kinds of stuff.
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E-man says
LOL! What do you mean by "IF" ?
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E-man says
Excessive self-loathing.
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thomas.wong1986 says
Just have to be politically correct since they haven't won yet. The odds are about 75% that Republicans would take back the House, and 40% chance for the Senate at this time.
IMHO, this would be similar to 1994 so I'm cautiously optimistic about the economy going forward despite what Iwog said and how pessimistic you think of the economy :o)
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E-man says
In 1995 we had a technology revolution ahead of us, the ink on NAFTA was still drying, and China's trade imbalance was still well under Japan's.
Since 1994 we have run up a $2T trade imbalance with China (on top of the $1T accumulated deficits with Japan). This has had some benefits and some drawbacks. I don't know anything but I suspect we'll be seeing more of the latter as time goes on.
The House GOP's main trick was letting the system the Democrats established 1989-1993 function as intended, reducing growth on the national debt while intrinsic productivity growth of the internet and Windows 95, big-box retail, etc etc produced a nice secular increase in the nation's fisc.
But 2011 is a different story. We've fucked ourselves with overconsumption of housing and military adventures, all done on borrowed money thanks to the Bush tax cuts and the industry's suicide lending innovations. Here's a graph comparing GDP, household debt, and the federal deficit.
(the green zone indicates the deficit turning into surplus)
It's clear from this that we hit the wall in 2008. The consumer is tapped out and the Feds have thrown trillion-dollar deficits at the economy to keep it together.
I don't see any more recovery cards left in the shoe.
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What does that blue line labeled "deficit" measure? The deficit certainly hasn't gone down in the last two years. Is it some for of gross tax receipts (being high enough to generate a surplus in '98-'02)?
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OK, since the scales are different I ghetto-added the Deficit scale on the left, moving GDP and debt to the right legend. This is a confusing chart because deficits are annual while household debt is cumulative. My purpose with this is to just show that the "recovery" we've had has been solely due to the System pushing immense gov't debt to replace the loss of household debt increases starting when the "recession" hit 4Q07.
This is all just hack analysis but from this chart I get a sense that the true GDP of what our economy can do is really around $12T. Circa 2002-2003 debt growth started supporting GDP growth, which is what drives bubble economies. What we're doing now is just blowing another bubble in government bonds to continue to paper over the fundamental failures of this economy.
Much like Japan is doing, I guess.
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iwog says
Maybe you care to explain how the depression still existed when real gdp was supposedly higher in 1937 than the height of the bubble in 1929.
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Davis, CA
The Great Depression ended in 1936. This notion that it continued to the late 40's or was "fixed" by warfare, is simply incorrect. Of course we live in a world where kids think Buzz Lightyear was the first man on the Moon, so our grasp of history is often tenuous.
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John Bailo's website
Patrick says
Actually, the book "The Ruling Class" says essentially the same thing.
The economists who were the helmsmen and apologists of the past 40 years of economic policies -- and whose models were subsequently found flawed and wrong -- continued to receive awards and get positions of power even after their ideas were refudiated!
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Kent, WA
John Bailo's website
theoakman says
I have called this the Rich Guys Recession. Although a lot of normal people are struggling, dollar for dollar the biggest losers...those with large asset holdings...and whose large salaries depended on an ever increasing spiral of debt and stock inflation....have basically crashed.
Even if we peons all get jobs, those guys will never likely see their stratospheric lifestyle return for another 4 decades.
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There was 20% DEFLATION between 1929 and 1937.
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theoakman says
A depression (and a recession for that matter) is officially measured in GDP. Strictly speaking, Vicente is correct that the depression ended as soon as United States GDP recovered to pre-depression levels.
The problem is that while the GDP is a good measure of production, it's not a very good measure of how much of that production is actually being spread around to citizens. We had a severe wealth disparity problem in the 1930s which ensured that whatever gains were made in commerce and industry, most of those gains would go into the pocket of the aristocracy.
Therefore unemployment remained high by historical standards and there were still unemployed lining up at soup kitchens and bread lines. This is not to say unemployment wasn't dropping, it certainly WAS dropping, it just didn't drop as fast as the GDP was recovering.
Therefore the Great Depression is popularly considered to have ended with the beginning of World War II. At that point, rich people were extremely scared and were willing to (finally) give up some of their wealth for the popular good. Wealth disparity plunged and the economy after World War II was a robust one.
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Troy says
Yes but almost none of it was during the New Deal. Deflation was caused by Republican mismanagement prior to FDR taking over. The policies implemented were almost exactly the same fiscally "responsible" policies that Tea Party nuts want now.
http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=6
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Deflation of $100 from 1929:
1929 $100
1930 $97.50
1931 $88.92
1932 $79.76
1933 $75.69
1934 $78.27
yup, your clarification is important, but the deflation also explains how real GDP could increase without helping anyone who was trying to pay the debts they had run up in the 1920s.
That deflation killed a lot of people, and all the monetarists here simply elide the knowledge that the US was on the gold standard at the time from their reasoning processes.
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iwog says
We always had deflation in the US, more so than inflation over the last 200+ years.
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Vicente says
I'm a bit surprised by this statement. I think Krugman is taking the other side of this particular argument. Would you care to elaborate on what is different in his interpretation than yours?
One point that comes to mind is the 1937 balance-the-budget-induced downturn. Another is that there may have been quite a bit of pre-Pearl-Harbor war buildup spending.
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thomas.wong1986 says
Sorry, Thomas, but you really lost me there, which is an unusual occurrence. There are several things in this thread that I cannot make sense of, and this is one of them.
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Troy says
I find the terminology here a bit confusing. It looks like this is some sort of price INDEX, but it is denominated in DOLLARS. This has the unfortunate effect of making it look like something else than what I presume it is supposed to say.
An easy but presumably wrong interpretation would be "Oh, my $100 bill from 1929 is only worth $78.27 in 1934 (measured against its purchasing power in 1929). That would indicate INFLATION, not deflation.See what I mean?
Maybe all I'm saying is that it denominating an index in dollars is not a good idea. No slight of Troy intended at all, generally I find his posts and comments very informative.
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justme says
Just like today you have to stop borrowing money at some point and let the economy stand on it's own. The Keynesian concept that you can manage stimulation timing to perfection creating a perfectly smooth transition is just garbage. There will always be a transition period where things are going to be rocky.
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bob2356 says
It doesn't have to be rocky as long as the stimulus is large enough.
World War II was just one giant Keynesian dream with millions of men being paid billions to build disposable weapons and fight enemies overseas. It made New Deal spending seem insignificant.
Instead of a rocky transition, soldiers came home to a booming economy with full employment.
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iwog says
I'm not entirely sure about that. One of the great advantages was the austerity the war period enforced. This created a lot of built-up demand while repairing everyone's "balance sheets". Combined with these savings and greatly improved productive capacity the system was essentially reset and Labor held the whip hand for the next three decades.
The purchasing power of $100 in 1940 lost 20% by 1945 and a further 20% by 1950, whereas the 1950s only saw a further 10% decline. There was an increase in the access of credit, and housing was a key sector of the economy as the WW2 generation settled into family life.
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justme says
That's why I added the Deflation in an edit : ) My numbers were coming from http://www.westegg.com/inflation/
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iwog says
Yeah, but a few million didn't come home. I'd be willing to wager that unemployment would have been higher had so many soldiers not died overseas.
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theoakman says
Total U. S. military deaths in battle and from other causes were 416,837 (official numbers from the various branches of the military). There were another half a million wounded, though the vast majority not so badly that they couldn't work.
Of those, how many were husbands who's wives were working while they were gone and would have gone back home if their husbands came back?
We lost 0.32 percent of the population. By comparison, the USSR lost 14% of its population, by far the heaviest loss.
Even if you count all the wounded, you'd still be talking about less than 1% of the population being unable to return to work, and ignoring all the women who went to work who previously did not.
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Kevin says
My mistake. But would be about 1% because kids wouldn't be counted in the workforce.
On a side note, their is a huge pile of Keynesian based literature from the 1940s in my university library that predicts that unemployment will return to double digit levels due to the fall in aggregate demand as a result of post war spending cuts.