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Source link: http://archive.mises.org/9896/should-people-just-ignore-economists/

Should People Just Ignore Economists?

May 5, 2009 by

BusinessWeek has done us a favor by pointing out that most economists continue to accept the very theories that prevented them from anticipating the financial collapse. However, the magazine errs in concluding that we should now listen to those same economists. It would make more sense to ignore those economists that not only failed to predict but also had a hand in creating the crisis. FULL ARTICLE


greg May 5, 2009 at 8:19 am

A bigger crime is an economist that can’t predict a boom!

No matter what side of the trade you are on, anyone that stays with one side, is NOT AN ECONOMIST!

Peter Schiff is a prime example, he is a perma bear and will be right only when the market turns down which is about 25% of the time. Basically a blind rabbit can find a carrot over time.

Barry Loberfeld May 5, 2009 at 8:23 am

From “Economics: A Trialogue”:

Adam: All right, so now that we’re settled, let’s start. You’re both here because you’re my two birds and this get-together is my one stone. Now John here had invited me to a PeaceSmiths meeting — a kind of left-of-center political group — and I picked up some stuff there about “religious socialism” and “Christian economics.” And Emma had invited me to a meeting of Long Island Secular Humanists, where I picked up a copy of their newsletter and an issue of The Humanist magazine, which has a column called “Humanist Economics.” What struck me was how the believers and the nonbelievers — the saints and the sinners, if you will — came to the same conclusions. And by the same means: ideological economics.

Emma: I don’t see where you’re going with this.

Adam: All right. The newsletter defined secular humanism as “the philosophy of life guided by reason and science, freed from religious and secular dogmas.” My main point here is, economics is a science. If secular humanism is committed to science per se, then “humanist economics” — that is, humanist science — is a redundancy. It stands in opposition to what — nonhumanist economics, that is, nonhumanist science? That should be a contradiction, according to the given definition. And John — “Christian economics”? One is religion and the other is science. God’s revelation and man’s reason — two very different things, wouldn’t you agree?

John: It just means a Christian perspective on the subject of economics.

Adam: Exactly! You raced right to the issue. Both groups are focusing on the subject of economics but aren’t looking at the science of economics.

John: Which means that we should abandon all our morals and ideals to be “scientific”?

Adam: No, no, not at all. Both of you, keep your convictions. What I’m suggesting is that the science of economics might show you that what you’ve adopted as means might not lead to your convictions’ goal. You no doubt want to help the sick, but the science of medicine shows you that leeches aren’t the way to do it. It’s the same with economics.

Emma: Let me guess — now we get the demonstration?


Arend May 5, 2009 at 8:38 am

@ greg: afaik Schiff already predicted the next boom, which most sensible economists would like to call bubbles by the way, which extends the bear rally the Dow Jones is now experiencing. Describing Schiff as a blind rabbit who once in four whiles will find carrot does not explain the almost flawless descriptions and explanations of the how and why of the busts by Schiff before the actual busts came into being. That doesn’t make him a blind rabbit, a very lucky gambler or an omnipotent God. It just makes him a sound economist, which relative to the rest of the discipline indeed makes him one of the alpha males.

@ Ontopic: most graduated and/or practicing economists are nothing of the kind for the simple reason that the bulk of them are ‘specialists’, specialized in themes and subjects that are in thin air floating wraiths. Most of them are not educated and/or interested in seeing the big picture and able to link phenomena which are out of their ‘specialty’. As Austrians theory doesn’t have superficial distinctions such as micro and macro and supply and demand economics, on that ground they are most likely to come up with an integrated general analysis of the economy. Mainstream economics isn’t interested in putting their pieces together.

fundamentalist May 5, 2009 at 8:49 am

Everyone should read the Barro article on the WSJ web site. The link is on Robert Murphy’s page. Barro estimated the Keynesian multiplier from spending on wars at 0.8. It’s great analysis! Of course, even Barro’s analysis attributes all GDP growth to state spending and ignores the effect of the private market on maintaining GDP growth.

anon May 5, 2009 at 9:28 am

re: mark brandly

Hope you forwarded a copy of this article to Peter Coy :)

Gil May 5, 2009 at 9:51 am

This probably belongs in the joke section but:

How many people listen to economists anyway?

(Sorry, couldn’t help it.)

Sonic Ninja Kitty May 5, 2009 at 11:49 am

Great article! I can picture Krugman in the lettuce patch now. I’m sure he will be able to work his way up to arugula fairly quickly.

Roy C Schroeder May 5, 2009 at 12:30 pm

The eternal varaties:

Schroeder’s Law

The amount of liberty and freedom you have available is inversely proportional to the size of GOVERNMENT YOU CREATE.

IN all ages,and in all civilations, where republican forms of government have been lost, it has been through the pretense of a “share the wealth program, and a blind faith in public officials,”.

Rep. Otto E. Passman (D. La.)

joebhed May 5, 2009 at 1:47 pm

central government planner here.

I think we could all agree that there is a serious problem with both economics and economists, when it comes to the actual working of the debt-money system – which is part and parcel of the essential cause of this great financial catastrophe.
The debt-money system that the private Federal Reserve bankers cooked up by JP Morgan, etc. at Jekyll island is essentially flawed.

Where in the economics textbooks is the creation of money as debt covered – the fact that ALL money is created as a debt?
And all that debt-money is created via loans that secure assets that require a repayment of principal and interest that is greater in sum than the value of the asset.
And we NEVER create the money for the interest that MUST be repaid.

Rather, we are forced to create even greater quantities of debt-money in the future to secure more assets, and then we keep taking some of THAT money to pay the interest on the previous debts.
And you know what happens, eventually?

Read How Debt Money Goes Broke at Financial Sense University.
I don’t agree with all of it, but it does explain that when we can not create enough new debt-money fast enough to pay the interest on the monies already out there, the entire money system is insolvent.

In other words: *You are Here*.

Where is that covered in the economics textbooks?
Of Keynes or Rothbard or Krugman or von Mises?

I am aware of the Austrian call for full-reserve banking, which I support. But unfortunately, Austrians ignore this essential aspect of the debate.
They would rather blame the government, as if this has anything to do with government.

The debt-money system is the problem.
It is not fiat money.
It’s debt-money, gold-backed or not.


matskralc May 5, 2009 at 2:58 pm

I am aware of the Austrian call for full-reserve banking, which I support. But unfortunately, Austrians ignore this essential aspect of the debate.
They would rather blame the government, as if this has anything to do with government.

Well, the government’s the one that makes it illegal for us to refuse their debt-money, so I’d say they still have quite a bit to do with it.

matt May 5, 2009 at 3:02 pm

mises discusses fractional reserve banking in some detail:
as for this assertion:
“They would rather blame the government, as if this has anything to do with government.”
Whether the Fed is a pseudo government agency or the government is a pseudo Fed agency is a matter of semantics. They are a central planner of essentially the price of money. their pricing has virtual control over the flow of money into and out of member banks.

David Spellman May 5, 2009 at 4:17 pm

Good economists expose the fraud and theft of the fiat money system. To prevent that, the profession of economics has been packed full of lackeys and sycophants who manufacture bizarre lies to defend looting the honest people. It is not a case of economics being unable to cope with the real work, it is a case of flooding economics with shills who undermine true economics.

JOSEPH KECKEISSEN May 5, 2009 at 6:16 pm

For heaven´s sake, invite Peter Coy to one of the Mises seminars. Pay his way, and make him feel aglow at hearing the real answers to his queries.
Best. Joe Keckeissen in Guatemala

Jim Stewart May 5, 2009 at 6:41 pm

Rather than invite Peter Coy to one of the Mises seminars we should demand that BusinessWeek correct his errors and report the facts of ‘Austrian’ economic forecasting and solutions.

Below is my comment and the one before it on the BusinessWeek online aritcle. Let’s add more for it’s readers and editors to deal with.

Jim Stewart
May 5, 2009 11:06 PM GMT
Joshua Park is right. Will BusinessWeek finally start to prominently publish the predictions of Ron Paul, Peter Schiff and others whose solutions include free markets and ending the Fed! If not, why not?
Joshua Park
May 5, 2009 10:50 PM GMT
It would serve the readers of BusinessWeek better if Peter Coy would have evaluated why the majority of economists were wrong. How about evaluating whether investment is temporal with stages of production or if economists should take all savings and investment in the aggregate? The article fails to point out that Keyenesians would (as a matter of philisophical course) favor the Federal Reserve System and other central banks, all because they ignore the importance of the market-chosen loaned-funds interest rate. You mess with the money, you mess with the economy. The author of this article would have saved us all a lot of time if he became familiar with Friedrich A. Hayek. Then, he might realize that there is one school of economic thought (not even mentioned in the article) that actually explains what has happened.

Arend May 5, 2009 at 7:02 pm

@ joebhed: If I understand you correctly you’re asking where in economic science is the problem covered that money as debt to secure assets are less worth/valued than the repayments of the loan plus interests.

Well there are some problems with this way of looking at it:

1. A more or less naturally limited commodity money supply will increase in value when an economy grows. Prices of goods in the commodity currency will in general fall; fiat currency and fractional reserve banking, with their own systemic tendencies to inflate the money supply will prevent such a thing from happening;

2. In the system (most mainstream) Austro-libertarians would endorse, debt (in commodity money) can only happen as a result from past savings (in commodity money). The interest to be paid will be covered by the expectation that the invested debt will increase economic growth/production in line with consumer wants in such a way that the debtor will make a profit that covers interests to be paid and maybe even an extra bonus when he/she supplied the consumer in a pwned elite way; if not that’s to bad, the entrepreneur/debtor fails and society as a whole is worse of, but no biggy, no monetary system is to collapse from such an accident because savers and/or their intermediaries (banks) will look out for the winners, not the losers who will waste their savings; in your example/ the status quo, government/Fed will probably want to prop up the lost asset values when the suckers will systematically rule the economy which will surely result in (re)inflation; Either way, the claim that more and more money has to be created (as debt or not) to cover the interest payments is misguided and not even true in a fiat currency system, such a line of reasoning would result in paying debt with debt, which is what some people seem to be doing but which isn’t a sound way of doing things; the very fact that this is possible is because the fiat currency system is in place, this is not a logical truth but an empirical truth: when a fiat currency system is in place, the people controlling it (which by definition will not be the people/the market/ the savers) will inflate it for their own (political) gain;
3. Why (re)inflation? B/c an economy that is systematically ‘ruled’ by suckers can only occur when there has been serious inflation in the past, through fiat inflation converted into debt causing the risk-premium savers can and will ask to be superficially low. This can only be done in a fractional reserve banking system; and by the way, one cannot sell any remotely non-pessimistic human being the idea that the economy/human race consists systematically of suckers in a cyclical way. “We” are fallible but also winners of Darwin awards, we can do something right. The creation of weird investment products are proximate explanations of the extravagances in the financial sector. Take a look at the money supply figures from the last say 10 years on this site and find out the ultimate explanation. If you want it to be government or evil corporate central bank with monopoly power and de facto being the world bank, be my guest, it doesn’t change the facts and the sound analysis of the facts;
4. In other words, what you call the problem “money as debt” is logically antecedent and implicated in both fiat currency and fractional reserve banking.

Respectfully back at ya

Eric May 5, 2009 at 7:09 pm


How would you define government. Since you complain that Mises followers blame things on the government, perhaps it’s time to make certain we all know what we mean by government.

I like Harry Brownes definition:

Uninitiated force!

That’s all there is to it. If you see someone using force, then either they’re the government or they’re acting like a government e.g. the Mafia is a government in the sense of using force.

Now definitions are anything you want, but what’s important is that we agree, so, joebhed, what do you see as the difference between government and private institutions?

HM May 6, 2009 at 12:33 am

The Mises org taught me a lot about economists (and economics).
I took the usual few intro courses in college, but learned just enough to be dangerous.
What I’ve learned here, and also reading Dr. Krugman in the NY Times, etc, is that economics, and hence economists, is exactly like religion.
It all depends what you BELIEVE.
It seems like the people here really, truly believe that government is inherently bad, if not downright evil.
On the other hand, the folks from Dr. Krugman’s camp believe that business, if left unchecked, will bring about doom for all.
All involved quotes from dusty old books written by Keynes, or Mises, etc.
This is exactly like religion (or politics).
George Carlin summed up religion well – he prayed to the Sun. You are successful about the same percentage, but at least the Sun gives you light and heat.
Perhaps we just need a similar saying for ecomomics.

joebhed May 6, 2009 at 9:22 am

I appreciate the comments back at me.
And i haven’t read all of those links provided, but I will.

To be clear, I should say that I also blame the government for its transfer of our sovereign right over to a private monopoly and thus, any outcome is on their hands.

My point about the failures of the debt-money system and the results we are seeing today (How Debt Money Goes Broke) is that this entire system is the design of the private Fed bankers. At the time of its adoption, I would be with the populists who opposed passing the right of money-creation to the banks. As I said, the system operates to the benefit of the private Fed membership, and not the people.

I do believe it is the proper function of government to create the nation’s money and determine its value in commerce. Much of the country operated on local government scrip when the private Fed failed to maintain a proper level of money supply. And, can you explain where the government makes it illegal to refuse the private banks’ debt-money (not the government).
Can’t you still receive Greenbacks in payment? That is non-debt money.

matt : “Whether the Fed is a pseudo government agency or the government is a pseudo Fed agency is a matter of semantics. They are a central planner of essentially the price of money. their pricing has virtual control over the flow of money into and out of member banks.”

First, I totally disagree about the semantics part. Second, I already said that I support full-reserve banking. All of that FOMC bull would evaporate. The rate of interest would be set by the deposit banks that are lending out real money.

From Friedman’s Framework:
“The adoption of 100 per cent reserves would also reduce the discretionary powers of the reserve system by eliminating rediscounting and existing powers over reserve requirements. To complete the elimination of the major weapons of discretionary authority, the existing powers to engage in open market operations and the existing direct controls over stock market and consumer credit should be abolished.”

ummmm, on the difference between the government and private institutions? hmmmmm.
I’m not sure why we need to have that level of discussion, unless it has some relevance to the money issue here. I have stated what I see as the proper role of the government in the creation of the nation’s money supply.
A free people can choose to establish any form of government. They are also free to select the rights and obligations of that government.
The American Colonists threw off the forces of imperialism in the Revolution, and in so doing decided to create their own government – whatever the definition.

A private banking corporation is a legal entity that by definition is NOT the government, and owes the people nothing. The Fed is a private banking corporation that has been granted monopoly powers over the nation’s money system by what I consider the corrupted government of the people, corrupted by the money power.
Because it’s the government, we have the right and the means to change it. I know its an uphill slog, but it is doable.

arend: backatcha soon, I hope.

joebhed May 6, 2009 at 10:26 am

I have to admit I don’t understand everything that you explained, which was a lot.

But the main gist I got out of it was that in a free-banking, commodity-only money system, we wouldn’t need to worry about the problem that debt-money fails to create the interest payments, because markets are sufficiently perfect to provide for the ‘growth” needed to make those payments. You may believe that, but I do not.

Given full-reserve banking, we can agree that banks can only lend money that is already created into existence as a deposit, and if a deposit equals savings, then, yes, savings are the only basis for loans, and therefore debt. I believe in full-reserve banking, so there is a limited congruity there.

Whereas to me price stability is a valued goal of monetary policy, you state that in your perfect commodity-money market prices will generally fall. To what end? For what purpose?

The debt-money system is inherently inflationary not because of its pursuit of price stability, which it pretty much ignores, nor because it is a fiat system, but because each generation of loans that is repaid leaves behind a need for additional funds that must be created in the next generation of loans to make up for that stolen to pay the interest today.

First you dismiss this shortcoming as not true,
“the claim that more and more money has to be created (as debt or not) to cover the interest payments is misguided and not even true in a fiat currency system”.

Then you state that it is in fact what is happening, but you blame it on the fiat nature of the money(currency) system,
” …..such a line of reasoning would result in paying debt with debt, which is what some people seem to be doing but which isn’t a sound way of doing things; the very fact that this is possible is because the fiat currency system is in place”.

The fiat money system has nothing to do with it. It’s the debt-money system that is the problem, and again, I thought all Mises-ists agreed with that point, and thus called for abolishing the fractional-reserve banking system.

You can make the case that a commodity-only money system would, by definition, eliminate this problem, and I can make the case that a full-reserve banking system, by definition, would eliminate this problem.
And, we have.
However, I can say that the elimination of this problem takes place by the elimination of fractional reserve banking, the essence of debt-money, which it does. Fiat currency obviously has nothing to do with it. It would still exist.


Stephen Grossman May 6, 2009 at 4:15 pm

>[Arend]Mainstream economics isn’t interested in putting their pieces together.

And yet, curiously enough, putting the pieces together, literally, is science. Arbitrary descriptions of an allegedly random, non-causal flow of events without identity is the pre-scientific “mind.”

Ireland May 6, 2009 at 4:45 pm

@ HM : “Economics is exactly like religion.
It all depends what you BELIEVE.”

It’s indeed true one can observe one very special quality in religious people and in many subscribers to austrian economics. In both cases there is this confidence of posessing the truth, which underlies the presented claims.

However to conclude from this, that religion and belief is thus the same as economics is a bit of a jump, isn’t it? BTW, that strong confidence is seldom found with mainstream econ, simply because mainstream arguments just don’t hold up.

So back to confidence and truth. In the presented cases there are in fact two completelty different sources of this: religious belief on one hand and critical examination on the other.

While the confidence of a believer comes from the belief, confidence of a scholar comes from exposing the object to the honest critical examination. It’s not about what I believe, but what I have done with it, what checked and re-checked about it, and criticaly considered, to the best of my abilities.

In the end comes the confidence, that this theory explains things better than all the others, and it holds until someone can point out either a problem with it, or an even better theory. And we’ll thank for that, because if correct, it will advance the knowledge. (To appreciate the difference, just try doing these things to a true BELIEVER.)

Vanmind May 6, 2009 at 9:55 pm

I would wager that failing to mention the Austrian School was deliberate.

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