Post-Keynesian Observations

Understanding the Macroeconomy

Dynamite Prize in Economics

with 2 comments

The results are finally in. Real-World Economics organized a vote to select the three economists most responsible for the current financial crisis. The “winners” were:

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.

You can find the discussion here:

Real-World Economics: Dynamite Prize in Economics

The basic idea behind the vote was that bad economic theory caused the collapse. Certain economists–unfortunately, those in positions of power in the government and academia–were pushing the idea that markets were rational and efficient to the extreme and should be left entirely to their own devices. We did, and then we had to bail them out because markets apparently thought that loaning lots of money to poor people was a good idea. I will leave you with some terrifying words from Keynes (last paragraph of the General Theory):

…the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas. Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

Economists as the Trilateral Commission???

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Written by rommeldak

February 22, 2010 at 2:13 pm

2 Responses

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  1. Dr. Harvey,
    In Dr. Quinn’s senior seminar class we discussed Glass-Steagall land the repeal that was passed only repealed two parts which dealt with how commercial banks could be affiliated with firms who underwrote securities. It never repealed the rules between investment and commercial Banks which restricted commercial banks from underwriting securities. I am not saying Larry Summers is a good economist I just think this distinction is important. Second, Alan Greenspan engaged in extremely loose monetary policy throughout the early 2000’s which Keynes himself would’ve advocated. In the General Theory Keynes clearly advocated a zero bound interest rate and doesn’t think raising interest rates is a good idea. The loose monetary policy is partly to blame for the increase in home prices during the early 2000’s, a classic Austrian buisness cycle explanation of a credit boom. Do you disagree?

    Chris Mufarrige

    March 2, 2010 at 11:17 pm

    • Howdy, Chris! I finally made a minute to sit down and read your comments properly. With respect to your discussion, I get the impression that you are assuming that I agree with the inclusion of Summers and Greenspan on the list and are therefore raising questions about their actual impact. I would be happy to go into them, but I don’t even remember if I voted for either. All I clearly recall is my #1, which was Milton Friedman. I blame his positivism for creating an atmosphere in which economic research can be conducted without any connection to real-world institutions or structures. So while we suffer through the worst economic disaster since the Great Depression, the American Economic Review publishes articles with groundbreaking conclusions like we actually care what our peers earn–no kidding! It’s insane. By the way, I strongly agree with your statement that all Greenspan did was follow a policy that Keynes would have endorsed (and, therefore, I probably would, too). Quite right. I had no problem with it and do not see it as having contributed to the problem. That’s precisely what they should have done. As far as what I think caused it, that’s largely covered in my posts numbered 11 through 13.

      rommeldak

      March 11, 2010 at 8:02 pm


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