Are academic economists a waste of space?

Certainly a significant proportion are.

Scott Sumner is one, I suspect. I’ve often read his blog posts, but don’t remember anything he’s written that’s the slightest bit interesting, informative or original.

This Naked Capitalism post on Sumner sums up academia at it’s worst very nicely. The post is entitled “Scott Sumner puts foot in mouth and chews”. The Naked Capitalism post says in relation to professional economists:

“Too much verisimilitude is a cardinal sin in economics, since it becomes hard to write things up in formulas hard enough to scare laypeople but not so hard that you’d need to be a real mathematician to devise them. So they posit hyper-rational consumers with perfect information and amazing computational powers in pretty simple situations, when in reality people have crappy information and aren’t all that smart and reality is really really complicated and kinda scary too. Which is also enough to make anyone plenty emotional.”

Or as Bill Mitchell put it, Ricardian equivalence is an idea from la-la land. But as anyone acquainted with economics knows, that has not stopped hundreds of academic economists expending thousands of hours erecting impressive mathematical models based on Ricardian equivalence. Got to keep themselves employed, haven’t they?

On much the same theme, Matias Vernengo in a post entitled “Why the crisis didn’t discredit mainstream economics” said:

"I suggested before that the best way to look at it is from a sociological standpoint. The same people hold the same positions at the key 'respectable' universities, go to the same 'relevant' meetings, and award the same 'important' prizes. And research does build on previous research. Let alone that the economics profession, like the others, is there to protect and reproduce the status quo.”

________

P.S.(7th Sept 2013).  Daniel Hamermesh's views on useless economists.

Government sponsored insurance of bank deposits is nonsense.

When deciding where to place or invest one’s money, there are a variety of options ranging from the near 100% safe to the risky. Investing in short term government debt is a near 100% safe option (which can be done in the UK by depositing money in an account at National Savings and Investments).

In contrast, depositing money in a commercial bank is slightly more risky, and to reflect that risk, depositors demand more interest. But the additional interest they demand simply reflects the additional risk: no more and no less.

Now what should government charge if it wants to insure those commercial bank deposits? Well assuming government gauges the risk correctly, it will have to charge an amount that reflects the risk – no more and no less.

So, lo and behold, and assuming everyone gauges the risks correctly, the premium that government charges will cancel out the extra interest!!!  It’s all nonsense. It’s senseless paper shuffling exercise.

And in fact there are numerous individuals and organisations round the world who advocate a banking system under which those who want to try benefiting from extra risk carry that risk themselves. They’re right. Those advocating such a system include most advocates of full reserve banking and the following (some of whom advocate full reserve and some of whom don’t).

Laurence Kotlikoff, Matthew Klein, John Cochrane and this lot. 

___________

P.S. (23rd Aug. 2013): More on the above subject by yours truely here.

The OECD and TBTF.

Bill Mitchell has pointed to some of the nonsense emanating from the OECD, e.g. here and here. As Bill rightly points out, the levels of incompetence in the OECD and IMF are such that they ought to be closed down.

Another bit OECD incompetence which I’ve just stumbled across is their claim that New Zealand should provide bank depositors with a guarantee.

That bank depositors are entitled to a taxpayer backed guarantee is of course very much the conventional wisdom. It’s something nearly every country provides. If the conventional wisdom in the West in 2013 dictated that we should build muli million ton pyramids to bury dead kings and queens in a la ancient Egypt, do doubt the OECD would back that as well.

But there’s a big problem with that guarantee: it amounts to a subsidy of banking. And if there’s one thing we’re all agreed on (OECD included), it’s that bank subsidies (the TBTF subsidy included) should be disposed of.

So what ideas do we get from the OECD on the subject of disposing of bank subsidies? Well, as you might expect, we get a series of long and sleep inducing papers on the subject. Got to keep themselves employed and justify their salaries, haven’t they? As to IDEAS, the silence is deafening.

So my advice to New Zealand is: “stick to your guns and give the OECD a two fingered salute”.

Anyway, how do we reconcile the apparently irreconcilable: the undesirability of on the one hand taxpayer backed guarantees for depositors and bank subsidies and on the other the desire to provide depositors with a safe way of storing their money?

Well it’s all been worked out, probably unbeknown to the OECD, here, here and here.

__________

P.S. (25^th Aug 2013). Some unflattering remarks about some IMF authors by Paul Krugman here.

Paying interest to lenders who don’t risk losing their principal misallocates resources.

Inflation apart, your money is virtually risk free if you lend to a responsible government: e.g. most North European governments. Plus if government stands behind bank deposits, so your “loan” to a bank when you deposit money there is virtually risk free.

But there’s a problem with all that, as follows. In the case of banks, the investments and loans that banks make are not 100% safe: a point that has become glaringly obvious in the recent crises. Though given the never ending stream of bank failures over the last few centuries, it was obvious all along.

In short, the only way of attaining complete safety is to do NOTHING with your stock of money. I.e. lending is INHERENTLY risky, even if the risk is small.

As for loans to government, the fact that such loans combine interest and zero risk is a mirage. As to loans to government which government uses to make investments, if those investments are incompetent and the investments don’t pay for themselves the risk or loss does not vanish into thin air: all that happens is that taxpayers foot the bill for the incompetence, while those lending to government don’t pay a penalty.

And as to loans to government which government spends on current consumption, there is no justification for that. Such lending is simply a ruse that enables incumbent politicians to ingratiate themselves with the electorate, while future politicians have to sort out the mess, as I explain in more detail here.

Indeed both Warren Mosler and Milton Friedman advocated a “zero government borrowing” regime.

Bank leverage.

Another form of risk free lending might seem to be involved where a bank has such a conservative leverage ratio that there is no realistic prospect of it failing. Let’s say a ratio of 50%.

Isn't that better than insisting on full reserve or 100% leverage? The 50% ratio on the face of it induces people who don’t want any risk to lend their money, doesn’t it?

Well the answer to that is that if 50% leverage really does bring 100% safety, then there’s no need for government backing for deposits – in which case depositors become quasi shareholders. Alternatively, if government backing for deposits IS OFFERED, then that is quite clearly a subsidy of banking!!!

In short, the argument for anything less than 100% leverage is plain illogical. It’s self- contradictory. It’s in check mate. Or in the words of Money Python, it’s a dead parrot.

Conclusion.

Loans which are apparently risk free are a mirage. They are a confidence trick. All lending involves risk. That risk can be artificially transferred to parties other than the lender, but that’s simply a cheat. It’s fraud. It’s a misallocation of resources.