The "Nobel Prize" for Economics is Fake

Created in 1968 by the Swedish Central Bank over the objections of the Nobel family, the "Nobel Prize for Economics" has created a veneer of respectability to ideas crafted to undermine democracy.

Today, it is clear that democracy and our democratic institutions are literally under assault – that there are people who are storming buildings, and blockading parliaments in an effort to destabilize or overthrow democratically elected governments. One of the reasons being blamed is “disinformation” - and it doesn’t help when the policies and ideas that run governments and markets may be based on a fake Nobel Prize.

The Jan 6 attack on the U.S. capitol, was an organized attempt to overturn the results of an election, based on conspiracy theories and the lie that the U.S. election was not legitimate (it was legitimate, as courts have found over and over). Documents have shown that media outlets like Fox, and politicians all knew that Trump had lost the election “fair and square” but they told the lie anyway. In Canada, we had a convoy that sought to overthrow the elected government of Canada, based on conspiracy theories and lies around vaccine safety, and especially whether public health orders were constitutional - which courts routinely found them to be.

The reason these conspiracies find fertile ground, even when they are outlandish and disprovable, is because people are desperate, and one reason so many people are desperate is that they are in financial distress, or outright crisis.

The reason for this crisis is a failure of economic ideology - because the financial structure of society is the structure of society.

In a world now awash with disinformation, we need to recognize that the fake Nobel Prize for economics has been part of the problem for more than 50 years, by endorsing far-right economic ideologies, like “public choice” theory, which are contradicted by empirical evidence, and whose ideas when applied in the real world have proven to be catastrophic.

One is James Buchanan, who developed “public choice” theory and won in 1985. The subject of an outstanding book by Nancy Maclean, Democracy in Chains, Buchanan’s work is not empirical - and he advised Chile on how to create a constitution of “locks and chains”. Robert Merton and Myron Scholes won in 1997, for the “Black-Scholes theory,” which used math from rocket science to predict future prices of options.

The formula has become a cornerstone of modern finance, but when applied in the real world, by Merton and Scholes own company, Long-Term Capital Management, it resulted in a crash so massive that it required intervention from the U.S. Federal Reserve, as documented in this amazing Frontline documentary. LTC had “Four billion dollars supporting $1.25 trillion in derivatives” which meant that if it paid out all its bad bets, it was going to be $1.246-trillion short, in markets that were unregulated.

The fake “Nobel Prize for economics” has often been about rewarding particular ideologies that provide a veneer of academic credibility to a certain type of right-wing politics, and certainly - libertarian, conservative and anti-social democratic. Not centrist and democratic: rather, a society where all the important decisions will be made by private players.

Many economists are effectively modern-day court astrologers - who could bend the earth, the sun, the moon and the stars to the will and service of the local King or Queen. And like today’s orthodox economists, those astrologers collected extensive real-world data and engaged in extremely complex mathematical equations to come to their conclusions. Their function was to show that the King’s decisions had the blessing of the universe and the heavens, just as Priests would confirm the decisions were righteous, and now economists affirm that government budgets have the blessing of “the market”.

Perhaps the words “the market” suggests bustling crowds of people, and so “the market” has somehow come to stand in for democracy - of people endorsing ideas with their money. The reality is that the concentration of wealth today is so great, that ownership of “the market” is so concentrated, that it realistically may be a few dozen or few hundred people in any given country.

That puts democracy at risk for the reason President Franklin Delano Roosevelt identified in his 1936 speech to Congress on Curbing Monopolies:

Unhappy events abroad have retaught us two simple truths about the liberty of a democratic people.

The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself. That, in its essence, is Fascism—ownership of Government by an individual, by a group, or by any other controlling private power.

The second truth is that the liberty of a democracy is not safe if its business system does not provide employment and produce and distribute goods in such a way as to sustain an acceptable standard of living.

Both lessons hit home.

Roosevelt was elected, democratically, several times over. He was not a socialist or a communist, though he described himself as “centre-left”.

FDR redefined what the centre, and being liberal, meant. It meant a mix of government and private investment to the benefit of both, with enough regulation, but not too much.

Most governments today - even the ones deemed “left-wing” are all to the right of FDR, on economic issues. Democrats in the U.S., Labour in the UK, or Liberals, New Democrats and Greens in Canada are all to the right of FDR in the 1930s. That was at a time when the Soviet Union was fully communist, Germany and Italy were fascist.

That is why, when these parties are accused of being “extreme”, “radical” far-left, or socialist, it’s not remotely true.

It takes an extremist to call a centrist a communist

Imagine, for a moment an actual “centrist” government. It may take some imagining, because there aren’t many real-world examples, and most of the governments that are

Imagine a democratically elected government that they have independent legal system and judiciary. The party in power is bringing in a new social program, which was part of their platform, and helped them earn support to win the election.

Now, consider someone who depicts a “centrist’ government like that as being “far left,” “communist,” or “tyrannical”.

To believe that a centrist democracy that enforces the rule of law and abides by the constitution is radical or extreme left, you have to be a right-wing extremist, a paranoid right-wing extremist, or both. The same is true for people on the far left who equate all law enforcement with “fascism”. There’s a reason why people say the political spectrum is a circle, not a line.

For decades “centrist” social democratic and liberal ideas have been portrayed by as far left by conservatives, who have to stake ground far to the right in order to do so.

We have had at least four decades of right-wing ideas that have been steadily dismantling and undermining democracy and all that it stands for, including the right to vote, basic dignity and hope for justice under the law. Their goal is to dismantle all of the progress achieved through the New Deal, while being completely blind to the ways in which the New Deal and its policies created the middle class and prosperity in the US, Canada, the UK and around the world.

That last economic revolution happened in the 1970s, when governments aggressively threw out the lessons and policies and frameworks of the “New Deal” and replaced them with neoclassical economics, a souped-up reboot of the economics that were in place before the Depression, the New Deal, the Second World War, and the post-war boom.

After Revolution, 30 years of Intellectual Decline

The economic revolution was, in itself, an intellectual coup against democracy. After the turmoil of the 1960s and 1970s with riots and war and various liberation movements underway – black, women, LGBT – inflation was blamed on government spending, or on Richard Nixon’s desire to keep jobs going.

A New Zealand economist, William Phillips, had developed a theory that seemed to show a connection between employment and inflation. For a number of years, it fit predictions very well, and it came to be associated with John Maynard Keynes, though it was not, actually, anything to do with Keynesian economics.

When the 1970s hit, and inflation was going up, but jobs and wages weren’t, it was called “stagflation” – which hadn’t been predicted. This became a reason to throw Keynes out, but it was much more than that. In response to inflation from the oil crisis of the 1970s, governments — especially the UK, US, and Canada — switched to a new economic model, Milton Friedman’s monetarism. It emphasized the power of the free market, labour mobility, deregulation, limited government intervention, and lower taxes, while private enterprise was switching to “maximizing shareholder value.”

Deregulated financial markets have resulted in far greater market volatility. Between 1940 and 1980 there were virtually no market crashes. Since then, there have been dozens, which have wiped out millions of small investors while enriching small numbers of very wealthy investors.

Democratically elected governments have abdicated the role of managing the economy to unelected central bankers (sometimes at the urging of central bankers). In downturns, governments have been discouraged from running deficits to stimulate the economy through direct spending on infrastructure projects, or government hiring. Instead, central banks stimulate or cool off the economy by lowering or raising interest rates. The result is that individuals and businesses are expected to drive economic recoveries through debt instead of work. This has benefited owners over workers while driving up the price of assets: real estate and stock markets go up with wages stagnate and job growth stalls.

When it comes to taxation, income from work — from “labor” — is taxed at a higher rate than income from owning — capital gains and dividends, and corporate tax cuts and loopholes mean that individuals are bearing a far greater share of the burden of the cost of government than they have in the past, while corporations are distributing the benefits of tax cuts to CEOs, executives, and shareholders rather than employees.

This has been a deliberate strategy, on the part of conservatives, to strip democratically elected governments of the capacity to act, regulate, pass, and enforce laws, while simultaneously insisting that all governments adopt a far-right conservative economic ideology.

All of these policies have a common thread: they devalue income from work, while rewarding income from ownership. The result is stagnation — or lower wages and longer hours for the many — higher profits and lower taxes for the few. No wonder inequality is growing – and no wonder nothing can change, no matter who gets elected.

There is no “Nobel Prize” for Economics

This push to legitimize far-right junk economics – most of it unsupported and disconnected or disproven by real-world research – has been happening for decades, at the very highest levels of politics and intellectual endeavor.

The most blatant example of this intellectual fraud is the creation of a phony Nobel Prize for Economics by the Swedish Central Bank in 1969. 

Alfred Nobel was long dead, and it is not one of the five prizes designated in his will –Physics, Chemistry, Medicine, Literature and Peace. In 2007, Alfred Nobel’s great-great nephew Peter Nobel, described it as “a PR coup by economists to improve their reputation”.

“Nobel despised people who cared more about profits than society's well-being, Peter says, reiterating his vehement criticism of the Nobel Economics Prize which he says Alfred Nobel would never have created.
Unlike the Nobel Prizes for Medicine, Chemistry, Physics, Literature and Peace, which were created by Nobel in his 1896 will and first awarded in 1901, the Economics Prize was conceived by Sweden's central bank in 1968 to mark its tricentenary and first awarded a year later.
“There is nothing to indicate that he would have wanted such a prize.”“^[1]

Notre Dame historian Philip Mirowski has found evidence that the economics award grew out of Swedish domestic politics. According to Mirowski, in the 1960s, the Bank of Sweden was trying to free itself from government oversight and become independent. One way to do that was to frame economics as purely scientific, rather than political — in which case, government interference could only hurt the bank. Having a Nobel Prize boosted economics’ scientific street cred. And Mirowski isn’t the only academic who is skeptical of whether there should be a Nobel-associated economics prize. Friedrich von Hayek, who won the award in 1974, used his Nobel Banquet speech to critique the prize.³ “The Nobel Prize confers on an individual an authority which in economics no man ought to possess,” Hayek said. He worried that the prize would influence journalists, the public and politicians to accept certain theories as gospel — and enshrine them in law — without understanding that those ideas have a different level of uncertainty than, say, gravity or the mechanics of a human knee.

From: https://fivethirtyeight.com/features/the-economics-nobel-isnt-really-a-nobel/

Economics is not a science

There’s a joke that anything that has to call itself a “science” isn’t one. Unlike “social sciences” like sociology, economics and political science, chemistry, physics and mathematics don’t have to call themselves sciences.

Economics is not a science – it is really a branch of politics, but it is one of a long train of disciplines that have sought to elevate themselves by claiming to be “sciences” and wrapping themselves in the trappings of physics and calculus while spouting pseudoscience.

Between 1940 and 1980, there were virtually no financial crises around the world. Since 1980 there have been dozens, yet we still keep using the same fundamental economic theories. It’s like having a car where the brakes fail, the wheels fall off, the seatbelts come loose, the steering is loose, and it keeps crashing. But we refuse to even get it fixed, much less consider replacing it.

The reason it’s different is that capitalism and democracy were different between 1940 and 1980. It was an industrial capitalist democracy where finance served the economy, and the government ensured that market “innovations” didn’t include fraud, insider trading and theft. Of course, there were terrible inequities and discrimination, but it was still fundamentally a different kind of economy.

After 1980, we’ve been living under financial capitalism, where the rest of the economy works to serve the finance industry, which has been the one part of the economy that has really exploded in size since then.

The left/right split between liberals/progressives and conservatives is perceived as all business vs all workers, and it’s only workers who incomes have stagnated - it’s not.

Worker’s incomes have stagnated, but so have revenues for many industries in the so-called “real economy”. Whether it’s heavy industry or manufacturing, there has been a loss of “good jobs” - with pay, benefits and security - that sustain middle-class jobs, and local communities. Some industries struggle, while others have disappeared, either going out of business or being swallowed up in merger after merger.

That’s because we should see the economy as three sectors - industry, workers and the FIRE sector. FIRE stands for Finance, Insurance and Real Estate. Finance includes retail banking as well as the rest of the finance sector - stocks and bonds.

Since 1980, the growth has been in the FIRE sector, while Industry and labour slowed. Part of this is for the simple reason that the FIRE sector is more volatile and unstable than the “real economy”. It is higher risk, which means great gains for a few and losses for many.

That is because there were multiple ideological changes that took place in the late 1970s, leading into the 1980s, that reduced regulation around the FIRE sector - which created huge riches “on paper” and equally huge crashes - with devastating consequences around the world.

Economics and laws aren’t just created by societies – they shape the societies that use them.

The neoclassical economics and neoliberal policies that have been in place since the 1970s are designed to recreate the kind of society that classical economics described and help reinforce - not a prosperous 20th century democracy, but 19th century feudalism, where a handful of aristocratic families and oligarchs run the economy and the country, and the government and the law have been weakened to the point they can’t do anything about it.

A lot has changed in the last 160 years.

It’s also been acknowledged neoclassical economics are terrible economics. Not only does it not describe anything properly, but it also doesn’t do what it says it will. Its predictions were wrong. Don’t take my word for it – In 2016, Paul Romer, who is one of the world’s leading economists, said that macroeconomics had been in “intellectual decline” for 30 years. He pointed out that it totally failed to predict the 2008 financial crisis, the single largest crisis of its kind since 1929. Other policies – including the Keynesian New Deal Policies – were thrown out for much less.

So why are these economic theories still being used to guide policy for much of the global economy?

Because the message suits those who have been actively working to dismantle democracy for decades – not because they want to avoid “big government” – but because they don’t want the law to apply to them.

This is what Lord Acton meant when he wrote “absolute power corrupts absolutely”, because being above the law means no accountability.

The extremism inherent in ideologies that reject the law

Ideologies that reject accountability or responsibility are extreme ideologies, because they are inherently corrupt. I emphasize being accountable and taking responsibility as degrees of justice being done, because too often we equate justice with punishment.

The other very obvious display of how extreme these ideologies are, is that the politicians who hold these beliefs have outlawed Keynesian policies. Politicians may be punished for passing budgets that borrow to cover expenses and investments. It may be forbidden entirely.

This legal “safeguard” should be recognized for the extremism it is: it’s a law that bans any ideology but neoclassical conservative economics, no matter who gets elected. That’s what balanced budget laws and amendments seek to do: make it illegal, and punishable, for elected officials in governments to be committed to Keynesian principles, for people as well as the economy. Spending to stabilize and invest in the economy, when necessary, is a perfectly sensible thing to do, and most governments do it.

This is a key and defining aspect of totalitarian ideas and leadership, shared by the totalitarian left and the totalitarian right.

They oppose democracy and the rule of law because they have to be a law unto themselves. When they become the law, they can punish their enemies while sparing themselves and their allies.

That is corruption. It is corruption that is inherent in any state where the justice system lacks independence or is subservient to the needs of the government or a governing family.

There are many forces actively working to dismantle and end liberal democracy. Some are doing so for reasons of geopolitical power. Some are Zealots. Some are zealots and oligarchs with grandiose fantasies built on the crackpot theories of Ayn Rand.

For all its flaws, a functioning liberal democracy with social supports provides citizens with the freedom and power to see their will expressed through elections and policy, and a functioning legal system helps establish order and maintain peace.

Sometimes folks complain about how we talk about rights, but not responsibilities,

Rights are about what the government is not allowed to keep you from doing. Responsibility is that we all agree to abide by, and obey, the same law.

The ideas of liberal democracy are key and must be repeated. The “liberal” part of liberal democracy is liberal as in “liberty” – freedom, based on the principle of the rule of law. In a liberal democracy, it’s not the rule of force, or the rule of a monarch, or the rule of any one person, or group of people. It’s the rule of law, and it is supposed to apply to everyone.

The economic models we use, likewise, are embarrassingly primitive. They are totally inadequate to the task, especially of prediction. We have vast reams of data and incredible models for modelling reality, but the neoclassical economics and theories we use are primitive and aren’t replaced even when they utterly fail.

The fact that the “Nobel Prize for Economics” is a fraud should tell you everything you need to know about the desperate need for reform - but not by extremists who can’t see that their own political and economic views are the ones that have been undermining liberal democracy for 40 years, and it’s been a disaster.

That economic reform must be shaped by people of good will with a commitment to the balance, freedom, rights and responsibility to the rule of law, not by extremists.

•DFL

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^[1] https://web.archive.org/web/20071014012248/http://www.thelocal.se/2173/20050928/