Monday, October 18, 2010

Corrupted Economists

One of the best books on economics to be published in the past decade is the 2006 book Financialization and the World Economy, edited by Gerald A. Epstein of the Political Economy Research Institute of the University of Massachusetts at Amherst, one of the few institutions dominated by the kind of heterodox economics thinking that has consistently opposed the ever tightening stranglehold of Wall Street and the financial markets on the real economy. Recently, Epstein fired back at orthodox economists by openly discussing how economists who defend the overweening role of Wall Street and the financial markets often have a sizable personal financial stake in companies involved in the orgy of speculation and usury those markets have become. (To put it in context: back in the 1960s, there was roughly $1.50 of financial trading for every $1.00 of GDP in the U.S.; by 2000, there was over $50.00 of financial trading for every $1.00 of GDP.)

Conflicts of Interest and the Financial Crisis: It’s Also the Economics Profession, Stupid!

by Gerald Epstein

Even the Queen of England could see that the economics profession messed up big time in the lead up to the financial meltdown. On a visit to the London School of Economics in 2009 she asked why economists’ failed to foresee the crisis. After a “serious” study, a group of eminent economists’ said economists had a “failure of imagination”, suggesting, perhaps, the need for more envisioning courses in Economics PhD programs. Paul Krugman pinned it mostly on economic theorists’ obsession with mathematical beauty and elegance at the expense of true understanding, what he called “mistaking beauty for truth”.
A more sensible answer begins with the observation that most of the economics profession was utilizing the wrong theories — theories based on efficient markets and rational expectations – rather than the much more informative ideas based on Keynes, Minsky, and those of my colleague James Crotty, among others (see the discussion at the Institute for New Economic Thinking) who see financial markets as inherently unstable and bankers in need of serious constraints.

But, until now, there has been way too little focus on the answer actually given by the Professor to whom the Queen originally directed her question. He reports: “…she asked me: ‘How come nobody could foresee it?’ I think the main answer is that people were doing what they were paid to do, and behaved according to their incentives, but in many cases they were being paid to do the wrong things from society’s perspective.” (Guardian, 26 July, 2009 )

And as we like to remind our students, economists are people too.

Charles Ferguson’s new movie, Inside Job brings to the fore this crucial point: Financial economists who missed the build-up to the crisis and who are now urging mild reform are not simply blinded by their love of beauty, but also, it seems, by their love of money. Ferguson reminds us of Larry Summers’ long-standing advocacy of financial de-regulation, while pulling down more than $20 million from the financial-services sector between 2001 and 2008. Glenn Hubbard, Chairman of George Bush’s Council of Economic Advisers and an advocate of financial de-regulation, was paid $100,000 by the defense to testify in the case of the two Bear Stearns executives charged with fraud by the U.S. government. And, according to Inside Job, economists routinely get paid to provide testimony and write papers favorable to the financial industry.

Read more.

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