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Source link: http://archive.mises.org/15351/priceless-how-the-federal-reserve-bought-the-economics-profession/

Priceless: How The Federal Reserve Bought The Economics Profession

January 18, 2011 by

Ryan Grim reports on an issue becoming evermore widely known:

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.

‘The Fed has a lock on the economics world,’ says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. ‘There is no room for other views, which I guess is why economists got it so wrong.’

One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past.

The Fed failed to see the housing bubble as it happened, insisting that the rise in housing prices was normal. In 2004, after ‘flipping’ had become a term cops and janitors were using to describe the way to get rich in real estate, then-Federal Reserve Chairman Alan Greenspan said that ‘a national severe price distortion [is] most unlikely.’ A year later, current Chairman Ben Bernanke said that the boom ‘largely reflect strong economic fundamentals…’”

Update
: Jeremy H. provides a link to this insightful article by Dr. Larry White on the subject: The Federal Reserve System’s Influence on Research in Monetary Economics

{ 13 comments }

fundamentalist January 18, 2011 at 9:13 am

This shows why a strategy to change mainstream econ from within will fail. The Fed and all governments demand economists who will praise the state. Academia, which is also in love with state power, supplies those economists. Austrians should aim for a different market – private enterprise. Austrians should quit trying to influence academia and set up schools that cater to private businesses. Very few private companies employ economists because they are worthless for private enterprise. Austrians should jettison the entire mainstream program and recreate economics from scratch. The undergrad program should be applied economics aimed at being useful to private enterprise. Graduate programs could then focus on research. And they should make it clear to prospective students up front that traditional econ programs will not accept their credits.

Ohhh Henry January 18, 2011 at 10:26 am

The HuffPo article contains a mini-rebuttal received from Stephen Williamson, who says he has “a long relationship with the Fed”:

… Indeed, some very revolutionary ideas in macroeconomics came out of the intellectual environment at the Federal Reserve Bank of Minneapolis in the 1970s and 1980s … Those economists were often sharply critical of accepted Fed policy, and they certainly never seemed to suffer for it; indeed they were rewarded …

Would I be correct in guessing that the ideas emanating from Minnesota were mostly about how the Fed should print a lot more money than ever before? Or were they mere quibbles over mathematical formulae and statistical analyses which were only considered revolutionary by the academics who were wedded to some other methods for justifying inflation.

At any rate, Prof. Williamson seems to be unaware that inflation is what the debate about influence over the economics profession is all about. The HuffPo are also oblivious to the real issue, apparently, because the words “inflation”, “money supply”, “printing money”, etc. do not occur anywhere in the article (but are abundantly found in the comments added by the public).

RWW January 18, 2011 at 10:43 am

From one of the article comments:

“[Austrian economists] are critics of the Fed, but there aren’t any reputable economist that adhere to the Austrian school. Particular­ly none alive today. What the Austrian school has are rabid crypto-ana­rchists who want to use an ontologica­l ideology to further their political agenda of religious market non-interv­ention. The economists who were mentioned in the article who criticized the Fed had logical reasons, founded on facts and evidence. The Austrians reject monetarist­s due to a religious belief that all market interventi­on is immoral, even if that interventi­on was to them entirely minimal. That’s not an argument, that’s a premise.

“That the school acknowledg­es such with the use of terms such as ontology and axiomatic reasoning is even more alarming. It’s as if they’ve not yet caught up to Kant and later critiques of the synthetic a priori and Cartesian rationalis­t philosophy­, and take von Mises’ On Human Action as an unquestion­able doctrine.”

HL January 18, 2011 at 12:03 pm

That’s not an argument, that’s a premise.

Good thing the author expended so much effort to master Austrian Economics. Not.

RWW January 18, 2011 at 12:21 pm

I particularly enjoy how he paints the Austrian school as a religion while worshiping at the altar of Kant. I always wonder about people like this: do they reject the theorems of mathematics on the same grounds?

Sean January 18, 2011 at 1:38 pm

When I read the comment in the article referring to Kant I laughed. Mises was a Kantian after all. His perspective on human action is analogous to Kant’s method of dealing with space and time and the process by which synthetic a priori truths can be developed out of our intuition of space and time. Perhaps I am wrong on this (calling David Gordon!). Anyway, the commentator in the article has obviously less of a clue than amateurish little me.

Phinn January 18, 2011 at 12:22 pm

>>> What the Austrian school has are rabid crypto-ana­rchists who want to use an ontologica­l ideology to further their political agenda of religious market non-interv­ention.

Are there enough scare-words crammed into this sentence? Crikey.

Even if you don’t see the connection between corporate statism and chattel slavery, it’s easy enough to spot this kind of propaganda by substituting the word “slavery” for “free market” and its variants.

Were 19th century abolitionists decried as rabid, crypto-somethings with ontological ideologies, hidden agendas and an excess of religious zeal who would recklessly destroy civilization itself?

Yes. Yes, they were. But today, they are near-universally recognized as the epitome of cool-headed reason who valiantly struggled with a mountain of historical prejudice and craven exploitation.

Jeremy H. January 18, 2011 at 12:12 pm
fundamentalist January 18, 2011 at 1:10 pm

Hayek had this to say:

“There is a glamour about the natural sciences which express itself in the spirit and the atmosphere in which it is pursued and received, in the prizes that wait for the successful as in the satisfaction it can offer to most. What I want to say to you tonight is a warning that, if you want any of this, if to sustain you in the toil which the prolonged pursuit of any subject requires, you want these clear signs of success, you had better leave economics now and turn to one of the more fortunate other sciences.

“…The reason why I think that too deliberate striving for immediate usefulness is so likely to corrupt the intellectual integrity of the economist is that immediate usefulness depends almost entirely on influence, and influence is gained most easily by concessions to popular prejudice and adherence to existing political grounds. I seriously believe that any such striving for popularity–at least till you have very definitely settled your own convictions, is fatal to the economist and that above anything he must have the courage to be unpopular.
…I think as economists we should at least always suspect ourselves if we find that we are on the popular side. It is so much easier to believe pleasant conclusions, or to trace doctrines which others like to believe, to concur in the views which are held by most people of good will, and not to disillusion enthusiasts, that the temptation to accept which would not stand cold examination is sometimes almost irresistible.

“It is the desire to gain influence in order to be able to do good which is one of the main sources of intellectual concessions by the economist. …

“…There are now, and probably always will be, any number of attractive jobs, such as various sorts of research or adult education, in which you will be welcome if you hold the right kind f ‘progressive’ views, and will have a better chance of getting on various committees or commissions if you represent any known political programme than if you are known to go your own way. … I don’t think that the work of the politician and the true student of society or compatible. Indeed it seems to me that in order to be successful as a politician, to become a political leader, it is almost essential that you have no original ideas on social matters but just express what the majority feel.”

http://blog.mises.org/9969/hayek-on-courage-and-corruption/

Tony Fernandez January 18, 2011 at 1:48 pm

“This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.”

Obviously. When you spend your whole life studying something that you later discover to be a fraud, do you really want to publicize it to the world or defend it in order to spare yourself the embarrassment? It really seems like pride is THE issue that is holding us back from a freer economy.

Lynn Atherton-Bloxham January 19, 2011 at 8:35 am

Fundamentalist, I agree. Not only is the time right, but certainly this emphasis would have true market value. Having worked with several larger businesses, and many mid size and small, my experience was that business mangers and owners are confused. They sense what they were taught, even in doctoral business and economics classes, is fraught with contradictory elements, rendering it useless in actual business planning and management. Economists who have an in depth grasp of markets and the voluntary exchange process, and a keen awareness of the dislocations that interferences cause to the process, would support and encourage the beleaguered business people. I hope more Austrian economists take note of your suggestion.

Neil January 19, 2011 at 8:57 am

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Vanmind January 24, 2011 at 11:01 am

There is only one must-publish venue for any person, and it’s called the wide-open internet. That is now the only legitimate peer review process.

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