Archive | November, 2010

Issue XLIV: Confederacy of Dunces: The Economics “Profession”

11 Nov

 Much of what is said to be sound economics is what is sound economically for the reasonably affluent – John Kenneth Galbraith

     On a visit to the London School of Economics two years ago, Queen Elizabeth II asked the a group of economists, “Why did no one see this financial crisis coming?”  The answer to this very man-on-the-street question stumped the economists.  A year later, they came up with an answer for Her Majesty.  “A failure of collective imagination” and a “psychology of denial” prevented the smartest guys in the room from forseeing that housing bubbles can pop, and pop hard.

      That’s all well and good, but the question elides and evades the question of systemic blindspots that self-appointed bigwigs have.  Economics is now a highly consequential field of inquiry, and its failures can have world-altering consequences that make medicine’s oversights look comically small.  Today’s report will dig under the unexamined hood of the economics “profession.”  
 Ignoring political economy
Economics was originally called political economy in the days of Marx and Smith.  That’s because economics does not occur in a political or social vacuum, and usually the economy of a country is more determined by the society, geography, and government it is superimposed over than the “natural laws” professors theorize about.  Supposedly brilliant economist Jeffrey Sachs never considered the importance of geography in developing a country until after he got his PhD and he visited Bolivia, a poor landlocked country, in the 1980s.  Apparently, economists aren’t trained to consider little things like mountain ranges and oceans.
       In the developing world, that means the World Bank and International Monetary Fund handing out “one size fits all” economic advice to countries with vastly different countries.  When Jeffrey Sachs gave shock therapy to Eastern Europe and Russia after the end of communism, he promptly destroyed and impoverished millions of lives with his puritanical free market alchemy.  When Russia sold off its crown jewels of communist industries (oil, mining, and steel), an oligarchy connected to Boris Yeltsin swindled their way into the Forbes 500 while people without food or paychecks for months in the 1990s.  It was probably the biggest financial fraud in the history of the world until the 2008 financial crisis, and it paid for a lot of mansions in London’s West End. 
      Closer to home, the economists are mostly ignoring the American financial oligarchy focusing on how particular models or theories failed to predict “systemic risk.”  They focus on their theorems and formulas and express suprise.  Meanwhile the slow and steady development of a rapacious and disconnected elite has been ocurring since the 1980s, and the political, social, and economic consequences of having such an elite are just beginning to play out.  Venezuela had such an elite and a sham “two party” democracy in the pre-Chavez era that never touched the real concentrations of power in society.  Ignoring the Latin Americanization of American politics demonstrates that the field ignores grittier realities of the world we live in.  But why do they fail to address this very political failure of political economy?
Academic Economics = Corruption
     Why do economists ignore what J.K. Galbraith’s son calls “The Predator State?”  Economists don’t understand the unseemly symbiosis between corporation and state because they themselves sit at the middle of that intersection and charge a hefty toll.  Nontheless, no one has really called out the economists in front of Congress and tarred and feathered them.
     Until now.  A new documentary called Inside Job focuses on the numerous conflicts of interest in the economics profession.  Unlike medicine or science, economists are not required to disclose their conflicts of interests.  Some professors expressed great faith in the Icelandic banking system after being paid by Iceland’s banks.  Another academic consulted for AIG got $6 million and promoted deregulation.  And, of course, Lawrence Summers (the ultimate conflict of interest machine) made millions on Wall Street after promoting deregulation and ending limits and bank sizes as Treasury Secretary.  Next time you read an op-ed by a famous economics professor, be skeptical!    
      Pointing out that Marx and Keynes have said that capitalism is inherently unstable doesn’t win may friends at the Chamber of Commerce.
New York Post – “Fire Geithner