Since September 2008, a significant number of economists have abandoned scientific scholarship to embrace the technically flawed doctrine of hydraulic Keynesianism. They include Lawrence Summers, Joe Stiglitz, Paul Krugman, Christina Romer and Bradford De Long, all of whom were exposed to adaptive and rational expectations theories, all of whom embraced to some degree, the New Keynesian version of those theories before returning to the economic Stone Age.
Once President Obama entered into office, in January 2009, all these scholars threw away their accumulated learning to join in the progressive bandwagon that would be fired on the long- broken anvil of John Maynard Keynes. For a while, it seemed as though the Swedish academy had also jettisoned hard-learned knowledge and was bent on rebuilding the Keynesian vision.
Well, new evidence has now piled up demonstrating that Maynard Keynes and his disciples have no clothes. With all the political oxygen rushing out of a beleaguered White House, Obama’s Keynesian cronies have deserted his ship and are looking for richer pickings well outside the domain of the Democratic Party.
Thankfully, the Swedish academy has shaken itself loose from the Keynesian corset by awarding the Nobel Prize in Economic Science jointly to Thomas Sargent and Christopher Sims, both of whom have made significant contributions to rational expectations.
According to rational expectations theories, individuals do not respond passively to changes in economic policy or economic conditions. They anticipate future conditions and adjust their own behavior in their best interests. This implies that it is hard for politicians to manipulate individuals into behavior that does not make economic sense. President Obama has learned this lesson the hard way during the first three years of what looks increasingly likely to be a single term in office.
Chistopher Sims yesterday demonstrated that he takes his own models seriously:
“Asked yesterday what he would do with his half of the $1.5 million prize money, Mr. Sims said: ‘First thing I’m going to do is keep it in cash for a while and think.” Editorial, ’The Return of Rational Expectations’, The Wall Street Journal, October 11, 2011
President Obama must really wish that he had appointed Christopher Sims, instead of Larry Summers, to be his chief economic adviser in January 2009. As must a large majority of educated American voters! If only all those trillions of wasted dollars were still in the money market!
Tags: 2012 elections, Christopher sims, hydraulic Keynesianism, Nobel Prize, Obama error, rational expectations, Swedish academy regains its common-sense, Thomas Sargent
October 12, 2011 at 3:51 pm |
The Nobel Prize in economics should be stopped. All economics professors are after this prize. When you are after this goal you will not be able to tell the truth. Most of the recent books on macroeconomics do not even tell that the Fed is a private bank. Roger [1] writes – “Of all the losses suffered during the current recession [of 2008], one of the most notable (and well deserved) is the loss in reputation suffered by today’s macroeconomics textbooks”.
The best way to understand the problems in economics is to link it with physics. Nobel Laureate Wassily Leontief said – “How long will researchers working in adjoining field abstain from expressing serious concern about the splendid isolation in which economics now finds itself?”[2]. Here is one such link:
Assume that the total material wealth of a nation is equivalent to a pot of gold. That is, this gold represents all the automobiles, airplanes, missiles, roads, bridges etc., or in other words this is the GDP, the gross domestic product. Similarly assume that the total money available is a bag of dollar bills. This is the equivalent of the largest monetary aggregate (M3) or the total money in the economy. This bag of money has an one to one relationship with this pot of gold. This bag of money can buy that pot of gold.
By the law of conservation (LOC) this pot of gold cannot grow. This law says that the mass and energy cannot be created or destroyed; it can only be transformed or transferred. This bag of money cannot grow either, because this is equivalent to that pot of gold and is attached to it by the LOC.
We all know that the Fed can print another bag of money, out of thin air. It is a private bank and only it can print money without any restrictions, transparency, and accountability to anyone. Money is free for the Fed and it can give it to anyone it chooses.
This extra bag doubles the price of the pot of gold causing inflation. If this money is allocated only to the top fifth of the population then their share of the pot of gold will increase, changing the wealth distribution. According to the LOC, since the gold cannot increase, the share of the bottom fifth will then naturally decrease causing transfer of wealth. This transfer of wealth happens not only because the money share decreases for the bottom fifth, the price of gold also increases, and thus reducing their purchasing power.
According to the LOC there cannot exist a win-win situation. When someone wins, someone else must lose. In every win-win situation, a detailed analysis will always show that there is a third party who will be the loser. Thus the LOC says that the transfer of wealth must happen when someone becomes richer.
Printing money is not the only way to transfer wealth, profiting and interest charging, are also ways of transferring wealth. The capitalism, headed by the central bank, is precisely designed to make that transfer happen. Wealth transfer happens only when you make money without contributing to the pot of gold or to the GDP. Thus stock market gain is a way to transfer wealth. In fact the entire financial system is a means to transfer wealth. That is because the financial system can redistribute the quantity money.
[1] Garrison, R., (2009), Mainstream macro in an Austrian nutshell, Auburn University
[2] Halls, C. et al.(2001)The need to reintegrate the natural science into economics, see internet site:
http://dieoff.org/page228.pdf