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Home Topics in Depth Economics The 2016 Nobel Prizes in Economics Go to those Who Pushed Criminogenic Policies

  • Jefferson23 (7274 posts)
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    The 2016 Nobel Prizes in Economics Go to those Who Pushed Criminogenic Policies

    By William K. Black
    February 27, 2017     Bloomington, MN

    How has the Swedish Central Bank’s committee that awards prizes in Economics in honor of Nobel responded to the field’s abject failures regarding the recent financial crisis and the Great Recession?  A lesser group would display humility, acknowledge its failures, and promise a fundamental rethink of the field.  Neoclassical economists, however, are made of sterner stuff.  The committee’s response is to praise the discipline for its theoretical advances and proposed policies related to finance, regulation, and corporate governance.  Eugene Fama, Jean Tirole, Oliver Hart, and Bengt Holmström exemplify this pattern.  This series of articles discusses the joint award in 2016 to Hart and Holmström.  In this introduction to the series, I outline the major errors that I will address in this series.

    The major errors fall into several categories.  The awards, and the committee’s explanation for the awards, give us the ability to look at how the committee thinks of economics.  The committee’s message is one of complacency.  Economics is progressing brilliantly and now understands the key things that can go wrong in the economy and has developed optimal solutions to those problems.  Given economists’ catastrophic policy proposals and predictive failures that were central to the financial crisis that is an extraordinary claim.  At least one of two things must be true.  Either CEOs are churlishly refusing to implement these wondrous policies, or those policies are disastrous rather than wondrous.  This question never occurs to the committee.  The committee is not aware of the paradox that at the same time (according to the committee’s fairy tales) economists were “taming the large corporation” and creating “optimal” CEO compensation contracts and governance that supposedly tame the CEO, the real world was going in the opposite direction.  The policies pushed by the 2016 Laureates helped create the criminogenic environment that produced unprecedented levels of elite CEO frauds that hyper-inflated multiple bubbles, drove the global financial crisis, and produced the Great Recession.

    Complacency is an important ingredient to our worst failures.  The great truth is the saying:  “it is not the things that you do not know that produce disaster – it is the things that you do know, but are not true, that produce disaster.”

    If CEOs refused to adopt the optimal policies, that begs the question whether Hart and Holmström spent from 1980-2008 trying to warn the public that a disaster was going to occur because of the churlish CEOs. As I will show, they did the opposite. They were fierce opponents of financial regulatory reforms. Holmström, even at the time of receiving his award, was sure that CEO compensation was not excessive. What we are seeing is the ideological blinders inflicted by training as a neoclassical economist common to the Laureates and the committee that selects them.


    Mom Cat, mother earth, DJ13 and 4 othersKoko, bbgrunt, GZeusH, leveymg like this

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  • leveymg (3835 posts)
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    1. Neoclassical economics is like neoclassical Catholicism: a religion

    Spoken in a language with terms that only the already anointed understand.  It’s chief purpose – beyond enforcing orthodoxy and discipline within the faith – seems to be to forgive sins and frauds, no matter how massive, after they are committed.

  • GZeusH (2495 posts)
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    2. Unfortunate title

    Black corrects it in the first line, ALFRED NOBEL NEVER BEQUEATHED A PRIZE FOR ECONOMICS, it was the Swedish Central Bank looking to hitch their wagon to some pre-existing prestige.

    When your chief purpose is to enforce orthodoxy and forgive frauds (thanks, leveymag), what a little fraud in naming the award?

    Policy:  The mistaken notion that bossy people have that they can influence other people's behavior through majority rule.
    • pinduck (1109 posts)
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      3. Classical economics, to use their term, is capitalist apologetics plain and

      simple. There is no rescuing this hopelessly wrong-headed discipline so the Riksbank merely gave this years prize to those who somehow convinced themselves that paying CEO’s 300X the pay of the ordinary worker(up from 40X two generations ago) is goodly, and maybe godly, in its self serving venality. No wonder Krugman placed his bets on getting  a job in the Clinton administration because I think he was smart enough to realize his little economic house of cards was an increasingly fragile reed upon which to base his career.

      "Sometimes I feel like Fletcher Christian..."
    • Fasttense (1608 posts)
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      4. Glad to see the scam dissected here

      Very few know that Nobel did NOT fund the scam. They even gave the prize to the biggest economic scammer in history — Milton Friedman. Next up, they are going to award it to Trump.


      • pinduck (1109 posts)
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        5. The goon Hayak also got the Swedish Riksberg bank prize two years

        apart from Friedman.

        "Sometimes I feel like Fletcher Christian..."