The Corruption Of Economic Science

The Nobel Prize in Economic Science has finally got my goat - and a "tipping point" has been reached. This year's prize takes the entire cake shop and represents what I believe to be something extremely dangerous - the deliberate corruption of a vital science. I have been watching this prize for many years now, and seeing it go to complete clowns and dangerous demagogues - Paul Krugman being the best example. But this year...

Let's begin with the opening statement of the "information for the public" issued by the Academy. It begins:

According to a classical view of the market, buyers and sellers find one another immediately, without cost, and have perfect information about the prices of all goods and services. Prices are determined so that supply equals demand; there are no supply or demand surpluses and all resources are fully utilized.

The document then goes on to say that the awardees have shown that this so-called "classical" view is false, that there are "search costs and frictions," and that their research has important practical applications in the labour and housing markets.

Anyone who has looked for a job or tried to rent a house knows that there is a long search process, and it has costs. This happens precisely because market participants do NOT possess "perfect information." They never can. There are therefore market solutions - like real estate agents for housing and newspapers that advertise job vacancies.

This is something everyone knows - and it is most evident in the area of advertising, which is such a huge industry simply because "perfect information" is a great big fiction. Advertisements tell the consumer "what he did not know that he did not know" - and this is a market solution to imperfect knowledge and information.

But what does the research of our awardees suggest? The Academy states:

In the classical model of competition, the unregulated market outcome is both unique and efficient. But in a world with search costs, there can sometimes be several possible market outcomes. This was shown by Peter Diamond, who also pointed out that only one of these outcomes can be the best. This, in turn, implies that there is reason for governments to try and find ways of inducing the economy to move towards the best outcome.

Thus, at a time when all the real economists on this planet are trying to roll back the State, these three blokes have discovered yet another reason to expand State interference in the market economy; another wretched form of interventionism. What is their research based on?

The answer: MATHEMATICS!

These blokes have developed a mathematical "model" to explain unemployment: the Diamond-Mortensen-Pissarides (DMP) model. The Nobel Academy tells the public that "today, the DMP model is the most frequently used tool for analyzing unemployment, wage formation and job vacancies." I find this portion of the text most significant:

It has been known for a long time that the labor market fluctuates between situations of either high unemployment and few vacancies or low unemployment and many vacancies. This empirical pattern, known as the Beveridge curve due to the British economist William Beveridge, is illustrated in figure 1, based on data on the U.S. economy in the 2000s. The DMP model provides a theoretical explanation for the Beveridge curve.

The DMP model can be used to explain the position of the Beveridge curve and the location of the economy on the curve. If unemployment and vacancies move in opposite directions, then changes can be regarded as reflecting variations in the demand for labor which occur over a business cycle.

Lord William Beveridge once headed the London School of Economics, the birthplace of "Fabian Socialism," and it is he who pushed that nation onto the disastrous path of the "welfare state."

But what of the business cycle itself? What causes all these booms and busts? No answer. No logical economics. Just loads of maths, and a frightful diagram. Is this "economic science"?

I found an independent assessment of this year's prize thanks to LewRockwell.com here. It is by Robertt Wenzel of EconomicPolicyJournal.com, and it is bitterly critical and extremely sarcastic - deservedly. On Peter Diamond, this report says:

Diamond, 70, is an economist at the Massachusetts Institute of Technology, and a specialist in Social Security. Bernie Madoff would have loved to have Diamond on his team, since Diamond completely ignores the Ponzi like aspects of Social Security and tinkers with "fixing" the scam. Going beyond Madoff, Diamond then ignores the coercion involved in Social Security. He focuses with tunnel-like narrow vision beyond the coercive aspects, and Ponzi like aspects, to pontificate in numerous journal articles and books about how to "save" Social Security, including recommendations to cut "benefits" and aggressively increase Social Security taxes.

He adds that Diamond was "elected a fellow and has served as President of the Econometric Society." In my opinion, econometrics is a proven failure. The Nobel prize also went to the founders of Long Term Capital Management, which crashed. Forgotten already? Econometrics has nothing to do with the true science of Economics. It is a corruption of science.

The author of this report adds, on the other awardees:

Mortensen, 71, is an economics professor at Northwestern University in Evanston, Illinois. He studies frictional unemployment. This is like studying half time in a basketball game. Yeah, it exists, but it is a pretty simple concept that doesn't tell you much about the game. Frictional unemployment simply means that if someone loses a job, it takes them time to find another job.

Mortensen along with Pissarides (who is 62, and a professor at the London School of Economics) and, to some degree, Diamond have taken the simple concept of frictional unemployment and put it in mathematical form to create search and matching theory. There appear to be no successful practical applications for the Alice in Wonderland equations created. Their only valuable input is one we have been pointing out here regularly: "that more generous unemployment benefits give rise to higher unemployment and longer search times."

Read the full report.

Let us now turn to the true interests of the working classes, especially those who are unemployed. Booms and busts - the "business cycle" - are caused by central banks, that is, by governments, and the only way to ensure steady economic growth is sound money, the gold standard, and free banking under Law.

Further, ALL State interventions in the labour market - beginning with "minimum wage legislation" - cause unemployment. Labour unionism causes unemployment. And it is in the completely unhampered market that all workers can find work and survive.

What I have written above is according to the established science of Economics of the Austrian School. You can find these views scientifically explained and established logically in the works of Ludwig von Mises and Friedrich Hayek. There are innumerable scholars belonging to this school whose work needs public recognition - simply because the public must be made aware of where their true interests lie. The Nobel prize has gone, once again, to peddlers of nonsense, and propagandists for misgovernment. This is against the general public interest. It is also a corruption of science. This should be widely condemned.

[This post is continued in Part 2, available here.]