"Don’t let the Nobel prize fool you. Economics is not a science" The Guardian

Business as usual. That will be the implicit message when the Sveriges Riksbank announces this year’s winner of the “Prize in Economic Sciences in Memory of Alfred Nobel”, to give it its full title. Seven years ago this autumn, practically the entire mainstream economics profession was caught off guard by the global financial crash and the “worst panic since the 1930s” that followed. And yet on Monday the glorification of economics as a scientific field on a par with physics, chemistry and medicine will continue. 

The problem is not so much that there is a Nobel prize in economics, but that there are no equivalent prizes in psychology, sociology, anthropology. Economics, this seems to say, is not a social science but an exact one, like physics or chemistry – a distinction that not only encourages hubris among economists but also changes the way we think about the economy. 

A Nobel prize in economics implies that the human world operates much like the physical world: that it can be described and understood in neutral terms, and that it lends itself to modelling, like chemical reactions or the movement of the stars. It creates the impression that economists are not in the business of constructing inherently imperfect theories, but of discovering timeless truths... 

...Many economists seem to have come to think of their field in scientific terms: a body of incrementally growing objective knowledge. Over the past decades mainstream economics in universities has become increasingly mathematical, focusing on complex statistical analyses and modelling to the detriment of the observation of reality. 

Consider this throwaway line from the former top regulator and London School ofEconomics director Howard Davies in his 2010 book The Financial Crisis: Who Is to Blame?: “There is a lack of real-life research on trading floors themselves.” To which one might say: well, yes, so how about doing something about that? After all, Davies was at the time heading what is probably the most prestigious institution for economics research in Europe, located a stone’s throw away from the banks that blew up... 

...All those banks have “structured products approval committees”, where a team of banking staff sits down to decide whether their bank should adopt a particular new complex financial product. If economics were a social science like sociology or anthropology, practitioners would set about interviewing those committee members, scrutinising the meetings’ minutes and trying to observe as many meetings as possible. That is how the kind of fieldwork-based, “qualitative” social sciences, which economists like to discard as “soft” and unscientific, operate. It is true that this approach, too, comes with serious methodological caveats, such as verifiability, selection bias or observer bias. The difference is that other social sciences are open about these limitations, arguing that, while human knowledge about humans is fundamentally different from human knowledge about the natural world, those imperfect observations are extremely important to make..."

From the Guardian

"Socialism sounds great!" -- Thomas Sowell, a blatant conservative

From Thomas Sowell

Socialism sounds great. It has always sounded great. And it will probably always continue to sound great. It is only when you go beyond rhetoric, and start looking at hard facts, that socialism turns out to be a big disappointment, if not a disaster.  

While throngs of young people are cheering loudly for avowed socialist Bernie Sanders, socialism has turned oil-rich Venezuela into a place where there are shortages of everything from toilet paper to beer, where electricity keeps shutting down, and where there are long lines of people hoping to get food, people complaining that they cannot feed their families. 

With national income going down, and prices going up under triple-digit inflation in Venezuela, these complaints are by no means frivolous. But it is doubtful if the young people cheering for Bernie Sanders have even heard of such things, whether in Venezuela or in other countries around the world that have turned their economies over to politicians and bureaucrats to run. 

The anti-capitalist policies in Venezuela have worked so well that the number of companies in Venezuela is now a fraction of what it once was. That should certainly reduce capitalist "exploitation," shouldn't it? 

But people who attribute income inequality to capitalists exploiting workers, as Karl Marx claimed, never seem to get around to testing that belief against facts -- such as the fact that none of the Marxist regimes around the world has ever had as high a standard of living for working people as there is in many capitalist countries. 

Facts are seldom allowed to contaminate the beautiful vision of the left. What matters to the true believers are the ringing slogans, endlessly repeated. When Senator Sanders cries, "The system is rigged!" no one asks, "Just what specifically does that mean?" or "What facts do you have to back that up?" 

In 2015, the 400 richest people in the world had net losses of $19 billion. If they had rigged the system, surely they could have rigged it better than that. But the very idea of subjecting their pet notions to the test of hard facts will probably not even occur to those who are cheering for socialism and for other bright ideas of the political left. 

How many of the people who are demanding an increase in the minimum wage have ever bothered to check what actually happens when higher minimum wages are imposed? More often they just assume what is assumed by like-minded peers -- sometimes known as "everybody," with their assumptions being what "everybody knows."... 

...The great promise of socialism is something for nothing. It is one of the signs of today's dumbed-down education that so many college students seem to think that the cost of their education should -- and will -- be paid by raising taxes on "the rich." Here again, just a little check of the facts would reveal that higher tax rates on upper-income earners do not automatically translate into more tax revenue coming in to the government. 

Often high tax rates have led to less revenue than lower tax rates. In a globalized economy, high tax rates may just lead investors to invest in other countries with lower tax rates. That means that jobs created by those investments will be overseas. None of this is rocket science. But you do have to stop and think -- and that is what too many of our schools and colleges are failing to teach their students to do.

Seven Dangers to Human Virtue

Thomas Sowell on Greed

From economist Thomas Sowell's "The Vision of the Anointed" (1995):

Among the many other questions raised by the nebulous concept of "greed" is why it is a term applied almost exclusively to those who want to earn more money or to keep what they have already earned—never to those wanting to take other people's money in taxes or to those wishing to live on the largess dispensed from such taxation. No amount of taxation is ever described by the anointed as "greed" on the part of government or the clientele of government. . . . 

Families who wish to be independent financially and to make their own decisions about their lives are of little interest or use to those who are seeking to impose their superior wisdom and virtue on other people. Earning their own money makes these families unlikely candidates for third-party direction and wishing to retain what they have earned threatens to deprive the anointed of the money needed to distribute as largess to others who would thus become subject to their direction. In these circumstances, it is understandable why the desire to increase and retain one's own earnings should be characterized negatively as "greed," while wishing to live at the expense of others is not.

Honest Job Interviews

From the SMBC

The Mansion: A Subprime Parable by Michael Lewis

In all the public finger-pointing about the American real estate bust, surprisingly little attention has been paid to its origin. There’s obviously a long list of people and ideas that can share in the blame: ratings agencies, mortgage brokers, big Wall Street firms, small Wall Street firms, Angelo Mozilo, Alan Greenspan. Every few weeks, the New York Times runs a piece exposing some new way in which a big Wall Street firm has exploited some poor or middle-class family. The rich people on Wall Street blame their bosses. The brokers at Merrill Lynch blame Stan O’Neal; the traders at Bear Stearns blame Jimmy Cayne. Everyone blames Countrywide. But all of this misses the point: However terrible the sins of the financial markets, they’re merely a reflection of a cultural predisposition. To blame the people who lent the money for the real estate boom is like blaming the crack dealers for creating addicts. 

Americans feel a deep urge to live in houses that are bigger than they can afford. This desire cuts so cleanly through the population that it touches just about everyone. It’s the acceptable lust.

Rest at "The Mansion: A Subprime Parable by Michael Lewis"

What a Fake Tweet can do to Wall Street

"Any news of an attack on the White House is a sign of imminent apocalypse, and the market reacted accordingly: From 1:08 p.m. to 1:10 p.m., the Dow Jones Industrial average plunged more than 100 points, from 14697.15 to 14548.58. Just as quickly though, it rebounded. By 1:13 p.m., it was back above 14690"

Everything Is Rigged: The Biggest Price-Fixing Scandal Ever from the Rolling Stones

"The idea that prices in a $379 trillion market could be dependent on a desk of about 20 guys in New Jersey should tell you a lot about the absurdity of our financial infrastructure. The whole thing, in fact, has a darkly comic element to it. "It's almost hilarious in the irony," says David Frenk, director of research for Better Markets, a financial-reform advocacy group, "that they called it ISDAfix."

"Famously, one Barclays trader monkeyed with Libor submissions in exchange for a bottle of Bollinger champagne, but in some cases, it was even lamer than that. This is from an exchange between a trader and a Libor submitter at the Royal Bank of Scotland:

SWISS FRANC TRADER: can u put 6m swiss libor in low pls?...
PRIMARY SUBMITTER: Whats it worth
SWSISS FRANC TRADER: ive got some sushi rolls from yesterday?...
PRIMARY SUBMITTER: ok low 6m, just for u
SWISS FRANC TRADER: wooooooohooooooo. . . thatd be awesome

Screwing around with world interest rates that affect billions of people in exchange for day-old sushi – it's hard to imagine an image that better captures the moral insanity of the modern financial-services sector."

More at the Rolling Stones Article

The relationship between markets and morality- Os Guinness

What, then, is the relationship between markets and morality?

Unless capitalism has an ethical boundary, it will always create two problems. One is the problem of insatiability, never knowing when to stop, always wanting just a little more. The other problem—you can see this very clearly in America today—is commodification. The good society draws a line between what is and what is not for sale, but, in modern America, almost everything is up for sale, including much that should not be. We need powerful faith with strong ethics and knowledge of what is legitimate to buy and sell—that’s the market at its best—but certain things are not for buying and not for selling, and we should know why.

- Os Guinness, the great-great-great grandson of Arthur Guinness (founder of the Guinness brewery)

Brave New World (is Here!)

"...Huxley also foresaw a disturbing partnership between the state and capitalism but didn’t anticipate how little need for government collusion sophisticated marketers would need to reorder society. In “Brave New World,” the state has suppressed all simple sports because they don’t require lots of expensive equipment to keep the economy humming. Instead, it relentlessly hypes complicated tech-y activities such as “electromagnetic golf.” A couple of generations ago, kids might have bought one baseball glove and one bat that would last for years. Today they instead spend hundreds of dollars on Xbox 360s and games that quickly become boring and demand to be replaced with upgraded versions.

Thanks to subliminal messages repeated thousands of times in nurseries while kids sleep, the “Brave New World” characters grow up conditioned to accept a disposable society in which everyone is always hungry for the latest thing and simply discards the old. Huxley would be surprised to see that no such indoctrination is necessary to make people throw away an iPhone that was state of the art three years ago and line up overnight to get a slightly improved version...."

- Kyle Smith, writing in the New York Post

Greed is the Beginning of Everything - Tomas Sedlacek

 In a SPIEGEL interview, Czech economist Tomas Sedlacek discusses morality in the current crisis and why he believes an economic policy that only pursues growth will always lead to debt. Those who don't know how to handle it, he argues, end up in a medieval debtor's prison, as the Greeks are experiencing today.

SPIEGEL: It's easy to increase consumption, but decreasing it is much more difficult to do. Doesn't the uneven distribution of wealth also propel the wheel of desire, based on the motto that I want what others have?

Sedláček: Yes, the social ladder becomes sticky on the way down. The view of economists is that each individual seeks to maximize his benefit. The only problem with this is that we cannot precisely define what the optimal benefit is for us. We don't know what we want. That's why we need comparisons, examples and suggestion. Try imagining an object of your desire, a beautiful woman, for example. It doesn't work as an abstract idea, because the imagined image in your head is volatile. You need a photo, a description, a model. Someone has to tell you what you think is so great that you find it irresistible -- society, neighbors and colleagues, but also the advertising and entertainment industry, ads, films and books. All desires that exceed our basic biological needs are determined by culture. We want to live as if we were actors portraying ourselves.

Thanks to Kai for the article