Tuesday, October 26, 2010

“Our God Is Money”: Economics Isn’t a Dismal Science—It’s an Ersatz Religion

Are you an Austrian?” I was asked recently, in the polite tones reserved for asking if I were, say, Jewish or Muslim or Christian. 
  
An object of veneration.
I’d been asked the question while discussing macro-economic policy in the United States— 
  
—actually, “discussing” doesn’t quite capture what I’d been doing:
  
I’d been lambasting the Neo-Keynesian drivel of spend!-spend!-spend!, which I deplore—“They’re like drunk sailors with the national credit-card—trawling for good blow and cheap whores in a Tijuana back alley!”—
  
—while at the same time ridiculing the Monetarists’ obsession with money supply—“Money-supply fetishists are just like foot fetishists—only twice as creepy, and only half as reasonable!”—
  
—all the while insisting that in this Global Depression, savings had to be the priority—austerity the only policy prescription that made any kind of sense. 
  
Are you an Austrian?” came the question. 
  
“I'm an agnostic,” I answered flippantly—but then instantly realized that my answer went to the heart of the problem with economics. 
  
It’s no great insight to say that economics—the so-called “dismal science”—has had a dismal track-record in terms of predicting macro-economic events over the last forty-odd years. 
  
And as for the last couple of years? Sheesh—a monkey throwing darts would have done a better job of predicting how the macro-economic picture would play out. 

Very few people have been asking why this is so. Very few people have been asking why economics has failed so spectacularly at predicting the Global Financial Crisis, and very few people have asked why economics cannot seem to solve the Global Depression we are currently experiencing. 
  
This is an important question—especially if we are collectively putting so much of our faith in economists and their dismal science, as the sherpas who will lead us out of this current mess that we’re in, and back up to the mountain top. 
  
An object of veneration?
Yes, according to Lloyd Blankfein.
First of all, what is economics? 
  
The dictionary definition is, economics concerns itself with the study of the production, consumption and transfer of wealth—everything from accounting to finance to macro-economics. 
  
Now, I have no truck with micro-economics, generally speaking; accounting and finance. All good to me, within certain limitations. When I speak here of economics, I’m referring to macro-economics. 
  
What does economics do, as a discipline?
  
The answer is obvious: Economics tries to predict the future. 
  
Lots of sciences try to predict the future—and they succeed, too, without much controversy. 
  
For instance, physics and chemistry claim that, if gasoline is mixed with air inside an enclosed cylinder, and then ignited, the force will drive a piston which will drive a crankshaft which will drive a car. 
  
Lo and behold, several hundred million cars drive around the planet, amply fulfilling physics’ and chemistry’s predictions. Score for them. 
  
But what about economics? 
  
Well, economics claims it is a science—yet for all its “scientific” models, economics found itself in 2007 with its hands up against the wall and its collective pants down around its ankles, when it utterly failed to predict the Global Financial Crisis, and the subsequent Global Depression. 
  
Actually, there were a number of non-economists whose predictions were far more accurate than any paid economists’. But all those eccy Ph.D.’s with all the academic trimmings? They got the big ol’ raspberry, when the Global Financial Crisis hit. 
  
In fact, economics definitively showed itself to be a failed science much earlier: Back in 1998, the spectacular failure of Long Term Capital Management showed them up to be fools. 
  
LTCM—run by legendary trader John Meriwether—was a hedge-fund that used “scientific” trading methods developed by Myron Scholes, Robert Merton and Fischer Black, who invented options pricing. In fact, Scholes and Merton won the Nobel Prize in economics for their work—in fact, Scholes and Merton worked at LTCM, applying their “scientific” methods to LTCM’s trading strategies. 
  
Talk about the best and the brightest! Meriwether opened his shop in 1994 with these two Big Brains running the engine room, along with a host of other Big-Brains-in-Training—and what happened? 
  
In less than four years, Long Term Capital Management blew up. A “once in a billion years event” happened in less than four years—which means that either LTCM was the unluckiest outfit in the world . . . or maybe economics and finance isn’t a science. 
  
Why be coy: Economics isn’t a science—it never has been. It can’t be—because its subject matter is people: And people aren’t predictable. 
  
Circumstances being equal, water will freeze at 0°C, and will boil at 100°C—every time, time after time, no matter what. 
  
But people? You can never predict when they’ll freeze you out, or boil over in rage. 
  
That hasn’t stopped economics from pretending to be a science. That’s why the discipline has spent the last 60 years importing math and physics wholesale: So as to create a veneer of scientific certainty and respectability. 
  
So if economics isn’t a science, then what is it?
  
Well: What human activity pretends to higher knowledge of a super-human power that controls human lives and destinies? What human enterprise tries to convince other human beings that they—and only they—know what will happen next? What group of human beings claim that their secret knowledge uniquely allows them to know what will happen—and so therefore, you must listen to all that they say, and never ever question their commands, decrees or pronouncements, no matter how foolish?
  
Easy: Priests. Priests in the service of a religion. 
  
Ancient Mayan priests used their knowledge of the stars and the planets to not merely predict the future—they used that knowledge to control the populace, and therefore get their own way. 
  
That is exactly what economics has been doing, as of late: Claiming knowledge of the future, and claiming unique access to a higher truth—unavailable to the ordinary man and woman—so as to get the populace to do their bidding. 
  
Just like religions, economics uses esoteric knowledge and language to discriminate between its acolytes and the unlearnĂ©d, the elect and the unwashed. 
  
Just like religions, economics builds sophisticated-seeming theoretical structures, that seem to explain reality. 


  
An object of veneration?
Yes, according to Tea Partiers.
They don’t, of course: The mathematical models economist spend all their time building are simply not up to the task of faithfully reproducing the macro-economic reality, and thereby predicting it. 
  
Why? Because there are so many variables that human invention simply cannot cover them all. Human invention cannot predict all the moves in a game of chess—and chess only has six classes of pieces moving on a mere 64 squares. 
  
Imagine something like a world’s economy: How many classes of pieces? How many squares? How many moves? How many variables?
  
Heavens! 
  
Yet economics—ridiculously—claims it has models which can predict the future—but what’s even more ridiculous, there are many who believe them. 
  
Just like all successful religions, economics is very good at convincing people that it is the One True Path to Wisdom—and not just unsophisticated or uneducated people: Actually, as all good con-men know, the easiest people to fool are sophisticated, intelligent, educated people. It’s precisely their sophistication, intelligence and education which makes them arrogant, makes them think they can’t be fooled: They think they’re too smart to be fooled. 
  
So of course, they’re fooled most of all. 
  
Just like all religions, economics is used to explain away the actions of its more powerful adherents, and to protect the interests of its most powerful patrons. 
  
What did economists and the other clergy of economics claim, in the Fall of 2008? “If we don’t save the banks, we are all doomed!!!” 
  
That was of course not true: If the banks had not been bailed out, they would have gone into bankruptcy, the stock holders would have been wiped out, the bond holders would have gotten a haircut (or a buzzcut, rather)—but life would have gone on. 
  
In fact, the financial sector today would be healthier, if the Too Big To Fail banks had been allowed to fail, and then restructured along Sweden ‘92 lines. 
  
But not one economist in any position of influence advocated the bankruptcy and restructuring of the Too Big To Fail banks. Some actually advocated a “hold your nose and get it over with” approach to the TBTF banks—
  
—which is unsurprising: Establishment religions are not in place to change a society, but to maintain a society. Establishment religions benefit those in power by maintaining the status quo—their job is to make sure the populace never questions the status quo, no matter how wide the gap between the stated principles on the one hand, and what is actually done on the other.
  
The fact that the TBTF banks were not allowed to fail—and instead were bailed out to the detriment of the economy as a whole, but to the benefit of a small, well-positioned minority—goes to show what the establishment religion of economics is used for: To shore up the interests of those in power, to the detriment of the society as a whole. 
  
Not only that, the Religion of Economics is used to explain away blatantly hypocritical measures as part of The Grand Design. 
  
“It’s a bad solution, but what are we gonna do? Let the banks fail? That will bring about a market collapse! The end of the free market! So we gotta hold our noses and get it over with.”: How many, many times did we all hear economists say this, about saving the TBTF banks? That it was systemically necessary to save the banks. 
  
Are those the words of someone who truly believes in the “creative destruction” that is supposed to be such an integral part of the free markets?
  
No: They’re the words of a priest of the establishment religion, protecting the interests of his masters. 
  
Just like all powerful religions, economics has different sects and denominations. 
  
Marxism used to be a creditable example: It was one more cult in the menagerie of economics. But this particular sect was discredited by the collapse of the Soviet Union and the Warsaw Pact nations. The gross and blatant failure of Marxism made it impossible to argue that it was a viable macro-economic policy option—so its fiercest followers were driven underground. (But they’re still out there, by the way: Like Gnostic Christians, waiting for their chance to come back out.)
  
Marxism is an obvious example of economics-as-religion—but I would argue that all schools of macro-economic thinking are no different from Marxism. The reason is because, like Marxism, all the schools of macro-economic thinking come at their subject from an a priori perspective. 
  
Thus, Austrians are no different from Keynesians, or Neo-Keynesians, or Monetarists, or Modern Monetary Theorists, and these all have absolutely no difference from Marxism: They all come from theoretically arrived at principles, which are then applied to the empirical data. If the data does not fit the theory, then the data is dismissed, and discounted as not germane to the problem at hand. 
  
This dismissal is where the various schools of economic thought get in trouble: That which they dismiss is usually the brick wall they find themselves crashing into. 
  
Neo-Keynesians are arguing spend!-spend!-spend! on stimulus and whatnot, up to and including war as a possible solution to the fall in GDP. The more insane among this crowd, like Paul Krugman, argue that the Obama stimulus package was not enough—it had to be bigger
  
Neo-Keynesians don’t realize that no stimulus will ever be big enough—but if they have their druthers, they’ll bankrupt a nation. 
  
Monetarists, like Ben Bernanke and his Lollipop Gang at the Federal Reserve, argue that increasing the money supply will create inflation—which will mean the economy is getting back on track. 
  
Monetarists don’t realize that they’re committing several logical flaws, principal among them being the post hoc ergo propter hoc logical fallacy, with regards to inflation. If they have their druthers, they’ll drive the nation into hyperinflation. 
  
Austrians argue that the government should cut spending and raise taxes, so as to balance the budget—and magically, the economy will improve, with no loss of GDP. 
  
Austrians are smoking something—and whatever it is, it’s powerful. So I want some. 
  
Just like all religions, the various sects and denominations confer membership to its believers. They invite you to belong
  
Notice how economists of a particular school rarely question the fundamental orthodoxies of their sect. Sure, little spats here and there over minor, peripheral issues within their denomination. But about the big pillars of their order? Nary a quibble, nary a peep, nary a doubt. 
  
In fact, debate within the various churches is so small-bore and trivial, that you quickly realize that the quibbles aren’t about economics: The quibbles are jockeying for position within the school of economic thought. Like peacocks, showing off their useless plummage? Like that. 
  
The one thing all the sects of the Religion of Economics all agree upon is growth: All agree that an economy must grow every year—year after year—no excuses—no matter what. 
  
This is where economics fails most of all. 
  
Of course, perpetual growth is ridiculous: Nothing can grow every year without fail. Nothing should be forced to grow year after year. Trees need to be pruned, growth consolidated. 
  
Nevertheless, the current leadership of the American, European and Asian economies are all under the delusion of the same orthodoxy—growth!-growth!-growth!
  
The American economic leadership in particular is a slave to this economic orthodoxy. But as I argued in The Short-Sightedness You Get From Staring At A Single Number, deliberately and systematically turning all your macro-economic efforts towards inflating the Gross Domestic Product inevitably leads to distortions in the overall economy. 
  
Growth, in and of itself, is not a metric of anything—and it can easily be perverted. Much of the debt accrued by the U.S. Federal government over the last 30 years—and the last ten in particular—was used to goose the economy to levels of growth that were unsustainable, and which have led to the situation we currently find ourselves in. 
  
And what is the situation we currently find ourselves in?
  
The United States government and the American people spend more money than they bring in. They have been doing this for going on 40 years—and now the bill has finally come due. 
  
That’s America’s problem—it’s really not more complicated than that. 
  
My solution to this problem? “Cut spending and raise taxes, so as to balance the budget. With a balanced budget, begin building a solid economy on a solid economic foundation.”
  
This apparently makes me an Austrian—Monetarists and Neo-Keynesians dismiss me, of course. They assume that, like all Austrians, I believe that cutting spending, raising taxes and closing the budget deficit will magically spur growth in GDP. 
  
Actually, I don’t. 
  
See, I’m not an Austrian. Not only that, I do not commune at the church of economics. Call me a son-of-a-bitch if you must, but don’t ever call me an economist. 
  
Rather, I’m a pragmatist: At this time, the best thing to do in order to maintain long-term social stability is to cut spending, raise taxes, close the budget deficit, and have negative growth for three or four years
  
In other words, stop trying to avoid the Global Depression, and fully dive into it. Avoid Japan’s fate of Lost Decades. Let the markets really do their creative destruction. Let the debt overhang be wiped out via bankruptcies. Let the chips fall where they may—let the whole unstable house of cards crash to the ground—just get it over with, once and for all. 
  
Of course, this will never happen. The orthodoxies of economics won’t allow it. 
  
So instead, we’re going to get a combination of Neo-Keynesian and Monetarist solutions, to the problem the United States has. 
  
This will bring hyperinflation by December 2011; severe social disruption starting in Q3 of 2011 and accelerating through Q4, before really exploding in Q2 of 2012; the dissolution of the European Union by December of 2012; and very likely—insane as it might now sound—a de facto dictatorship in the United States. 
  
But hey, I’m probably wrong. After all, I’m a heretic, in the eyes of this particular religion. In fact, I hear Brad DeLong wants to burn me at the stake.
  

52 comments:

  1. Wonderful article! Religion is a far better descriptor than science.

    The one point I would disagree with is your take on Marxism. I am merely an “arm-chair economist”, but in my modest study of the Soviet Union and its bloc I hardly think it could be described as Marxist. Call it Stalinism or what have you, but I don’t recall Marx or any genuine Marxist call for a substantial bureaucracy to extract the production of the populace. Furthermore, to your point on economic growth, I would say that Marxism is the only “sect” you mention whose objective is not perpetual growth.

    I have only been reading your blog for the last couple of weeks, but thanks again for your exceptional posts.

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  2. Are you an Austerian?

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  3. re: "And people aren’t predictable."

    I would think advertisers disagree. The MSM is another fine example of perception management. So while people may not be perfectly predictable, one could make a reasonable guess as to what people will do in certain circumstances. Of course, control of a nation full of different people is much more complex than selling shoes.

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  4. Awesome amigo. I've been trying to tell people this for years. Economics as science is useless in the same way that sociology as a science or linguistics as a science are useless.

    The professors make them purposely convoluted and arcane so that lesser minds can't construct the argument that its all bullshit, since they aren't capable of understanding the complex math. LOL

    If young people would study logic and history and literature and ethics we would be a lot better off as a society than we are by brainwashing young minds into becoming cult-members

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  5. I disagree with the substance of this article. It's like saying: a batter who does not get at hit every at-bat is a failure and techniques that improve hitting are worthless because they don't produce a perfect batting average.

    Just like in hitting, some techniques are better than others, even if they don't work for every batter.

    Your solution - At this time, the best thing to do in order to maintain long-term social stability is to cut spending, raise taxes, close the budget deficit, and have negative growth for three or four years - makes little sense.

    Try this - 1) inflate the money supply until >95% of the real estate that is currently under water floats - yes, screw the mortgage holders. 2) Require every country with a balance of payments credit to allow the US to borrow the extent of that credit at 0% interest for 30 years. Make our problem their problem. 3) Spend what ever it takes to develop a replacment for oil, with a domestic source.

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  6. @SPEEDY
    numero tres - NATURAL GAS - we have quite an impressive amount of it

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  7. Not an expert on Austrian economics but I know a fair bit.

    Don't most Austrian school economists advocate long-term cuts government in spending AND tax so that the (relatively) free market drives growth?

    With the cut in overall reduction in tax rates and the increase in market growth, the Laffer curve kicks in and increases tax revenue allowing the government to balance it's books.

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  8. speedy...how ridiculous. Is your real name Krugman?

    Trees grow to the sky? Did you forget about global wage arbitrage, declining wages, rising commodity prices?

    The people with pitchforks(better shotguns) will stop at your house first.

    Douchebag.

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  9. Hello GL:

    Try reading Hayek, Mises, Rothbard, Hoppe, Hulsmann, Menger, and and so on then shot some real bullets at austrians. Sounds like you are not familiar with some aspects of western civ.

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  10. @speedy

    I disagree with the substance of your argument. What Gonzalo is referring to is the case of the US economy: a batter who does not get a single at hit at-bat is a failure and techniques that never improve hitting are worthless because they don't produce more hits.

    I don't approve of these silly little analogies. They overwhelm the books I read for class. I have had enough of them. (i.e., replace "batter" with "economist" and "hitting" with "accuracy")

    The religion analogy though - incredible.

    What I would question though is your reference to GDP. Every Austrian I know thinks the GDP is BS. As far as I know, the only way to achieve continuous GDP growth is with inflation. On the other hand, you do have continuous growth in WEALTH. That is, our world is always becoming more efficient and producing increasingly more goods which, in addition, require increasingly more capital.

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  11. YES! A brilliant and testy evaluation. Since a religion, such as economics, is a body of knowledge supported by faith rather than facts, the question arises: why would such a system persist when it is a conspicuous failure. The only reason I can detect is that it makes money for some one who has a vested interest in propagating it.

    F'rinstance: to preach as revealed wisdom that the economy is inherently stable when it in fact it is the opposite can have benefits for those who know better. The dogma lines up the suckers for wealth extraction during a downturn while the illuminati are short selling. "You have to keep the faith," they intone with a hand in front of their mouths to cover the smirk. I have been watching quite a bit of this over the last few years.

    Some of your readers may want to examine the work of Steve Keene, a highly qualified economist from Australia. As a heretic, he takes his share of flack, but he is working to develop a better grade of religion, and I admire him for it.

    TCG

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  12. Quote: Budget: a mathematical confirmation of your suspicions.

    My suspicion is that the USA has no budget plan.

    Your blog is fantastic. More Please Sir...

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  13. I think you need to read some more austrian economics.

    they do not advocate higher taxes.

    Smaller .gov yes higher taxes no.

    besides that these guys have been right in their predictions

    just because your gods fail do not denigrate other gods.

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  14. If you are prescribing that we balance the budget and have the recession, that does put you closest to the Austrian macroeconomic view as currently understood (that recessions clean out the mess that the unsustainable growth gets you to, therefore are necessary). Whether or not you self-identify as that is up to you.

    As for the rest of your post, which is truly insightful regarding the failure of economics as a mathematically precise predictive science (and I'm an economics major [yes, I know...]), one thing I would recommend is Hayek's 1974 Nobel Prize acceptance speech. Treating people like hydrogen atoms, while making some of these problems mathematically solvable, does not actually work in reality. If nothing else, people aren't rational economic beings to make that sort of thing work.

    Economics does have some useful insights, especially the more you get away from mathematics and the closer you get into the logical and even moral paradigms. I just wouldn't bet the house on any useful predictions coming out of it except 'if you screw with things, the unintended and unknown consequences are going to make you very sad'.

    Do keep up the good work.

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  15. Not to be nit-picky... but the entire mention of Marxism is completely inaccurate. The management style of economics developed by the Soviets can only be called Leninist-Stalinism, wherein a ruling elite controls all economic planning. Marx never ever advocated a centrally planned economy, so Marxism itself never failed.

    Further, as a complete skeptic of modern history, I would have to argue that the whole course of Soviet history, from its inception to its strange demise, only served the purpose of discrediting Marxist ideas. How did a relatively unknown intellectual collect enough funds to raise an army that eventually defeated the army of the Tsar, ruler of the largest land mass in the world? How did one of the top two nations suddenly fall in the matter of three or four years? While many books try to to point to all sorts of different variables, while I have no proof, my intuition tells me that, just like the housing crisis, it was engineered.

    Other than this blip, I thought, myself as a student of economics, that the comparison of economics to a religion is entirely valid. The entire concept of economic mathematics is based on impossible assumptions and mathematical techniques for which a mathematics ref would pull the red card. You cannot turn a derivative into a differential ratio and then split up the differentials. It just doesn't work that way. But, for some unknown reason, the entire body of economic mathematics depends on this illegal operation and no one ever questions it.

    Well done and keep up the excellent work!

    OM

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  16. Pal, you don't know shit about Austrians.
    First, they did predict the mess of 1997
    They did predict the housing mess too.
    Finally, that statement is wrong:
    <<
    Austrians argue that the government should cut spending and raise taxes, so as to balance the budget—and magically, the economy will improve, with no loss of GDP.
    >>

    They say cut spending AND CUT TAXES
    Nothing about raising taxes.
    It does soudns like you are lost and don't know what to adhere to with your agnosticity in this.
    You seem to despise gold as well. Commodity money is the only way to prevent politicians from spending. Also, its a sound money. You can't have a free market without a free market money.
    Just go study a little bit. Must of your stuff is good except way off on those.
    Check on youtube Thomas Woods' speach on why you never heard of the depression of 1921.

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  17. I so glad to have discovered your blog. I find your posts on the current financial situation fascinating.
    It totally amazes me that "the best and the brightest", Scholes and Merton were both integral at LTCM. It just goes to show how little a Nobel Prize in economics means.
    I haven't read all of your blog, but if you haven't commented on the book "The Quants", I would love to know what you think about them.

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  18. I'm not an expert, but I know you are wrong about the Austrian school, which derides macro-economics as you do. It does not advocate for higher taxes. The Austrian school does not utilize pseudo-scientific math or try to predict the future using mathematical formulas. So, you really ARE an Austrian in many ways. You eschew the scientific veneer that Keynesians and Monetarists attempt to layer on unpredictable human action. You should read Lew Rockwell's latest article on the history of economic thought (http://www.lewrockwell.com/rockwell/world-of-salamanca158.html). It's fascinating.

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  19. What a riot you are! Making sense and funny as all get out - keep up the great work, and think seriously about cloning yourself - we need a lot more laughs in this country...

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  20. (continued)

    The theories of Keynesianism/Monetarism/The Chicago School were not promoted because they explain our economic system. They were promoted because they support policies that benefit the Masters the Universe under the system they have created.

    Growing knowledge that these theories are failures has created the need for new theories to distract both the masses and the experts. To lend legitimacy to the faulty new theories the Masters of the Universe roll these theories out in the domain of the experts - university departments of economics.

    A new international entity has been created - the Institute for New Economic Thinking. It is populated by the cream of the economic crop. It will award millions in grant money and it will support the creation of lots of new theories, which will not explain what is happening. The new theories will distract us, and support policies that benefit the Masters of the Universe. They will be rolled out by different universities all over the world. It is happening right now. http://ineteconomics.org/

    A new theory has already been rolled out in the US. It is called Chartalism, and was promoted on HuffPost in the spring. http://www.huffingtonpost.com/lynn-parramore/the-deficit-nine-myths-we_b_553527.html

    A site has been created to promote it. http://www.newdeal20.org/. Weekend seminars have been and are being staged to promote it.

    Here are some of its tenets -

    * There is really no limit to how high government debt can go.

    * Treasury securities are savings accounts.

    * Selling government bonds is mistakenly called borrowing.

    * Deficits add to savings, so deficits are a good thing.

    * Hyperinflation cannot happen in the US.

    The system we operate under - fiat currency, the Fed, and fractional reserve banking - operates in the way it was designed to operate. It moves wealth from the pockets of those who create wealth thru work into the pockets of The Masters of the Universe, those who have early access to the money created by debt bubbles.

    As long as we have this system we will all be subjected to successive rollouts of new economic theories to replace those that are exposed as fallacies. The new ones will not explain the system. They will support the maintenance of policies that perpetuate the system.

    K Smith

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  21. What we have is not the equivalent of different religions. It is really much, much simpler - and sneakier.

    We all have been convinced that economic systems behave differently depending on the way we think about them. Saying that the way a system operates is subject to interpretation is like saying that if you put a dollar in an empty Coke machine that depending on the way you you hit the buttons, or the way you hold your mouth, or if you stand one leg, it is possible to get a Coke.

    You will never get a Coke from an empty Coke machine. You will always get nothing. You will just keep putting your money into it and continue to get nothing

    This is what is happening. The Masters of the Universe have us thinking that it is possible to get a Coke from an empty Coke machine. As long as we believe it, we will just keep feeding it dollars. We will argue about the fact that we are not hitting the buttons the right way. We will spend lots of time verifying that the optics in the dollar reader are functioning correctly. We will try using new and crispier dollars. But we will never, ever get a Coke.
    Here is another way to look at it.

    What we have is the equivalent of 5 people in a car, all interested in going to the same destination. Each one thinks he or she has the best tool to use to get to the destination.

    One has GoogleMaps. One has TomTom. One has Garmin. One has MapQuest. One has a Rand McNalley paper map.

    Each service provider has included detailed instructions on how to use the media, and included all kinds of seemingly logical explanations as to why their system is the best media to use to get to any destination. Each person has become an expert on the technical aspects of his or her chosen media. Each person is a True Believer in his or her media.

    But the fact is that the destination is not on any of the media.

    The designation exists. There is a way to get there.

    Getting there is not an ethereal thing, or an inexplicable thing, or a complicated thing.

    It is just not on any of the media.

    No matter how hard they try, no matter what functionality they use, no matter how strongly they believe, none of the media will get them to their destination. They will just continue to drive in circles.

    (continued)

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  22. ...and I believe that all the things you predict are very likely happen, along with one other thing.

    War.

    There will be a false flag event that propels us into a really big war.

    It remains to be seen if America will have the stomach for it.

    K Smith

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  23. Correct me if I'm wrong (do I even have to ask?), but Austrian Economics is basically free market economics, right? A free market does not require economists that make predictions and calculations - that's sort of the whole point. You cannot predict the market or manipulate it to some ideal place - if you try to do that, you cause problems.

    Keynesianism and all other non-free market schools of thought use their methodology / predictions and the resulting intervention as a way of achieving some political or financial goal; stimulate the economy and get your buddies re-elected, print money and make your buddies rich, etc.

    Austrian economists are not the kind of economists you are talking about - the ones that argue about the best way to intervene in the marketplace and the best way to control the money supply.

    If anything, what Austrian economics studies is how other economists screw things up with their predictions / methodology and intervention. What Austrian economics teaches is that interventionist schools of economic thought are rubbish.

    It's a funny thing really, because Austrian economists are basically saying we don't need economists. Just let the market be a free and let private citizens and private businesses make their own "predictions" and their own decisions. No need to study / predict monetary policy cause there should be no Fed. No need to study / predict government stimulus cause there should be no government intervention into the marketplace (beyond, of course, protecting your rights, e.g. protecting against fraud, theft, etc).

    No one needs to study the economy and develop a methodology for economic predictions in order to make economic interventions. No one needs this knowledge because no one should have this power - and no one should have this power because no one could possibly have this knowledge. And if people think they have this knowledge and somehow get this power then you're going to have some problems. (see: The World, circa Now).

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  24. I note that you only mention MMT once, and then do not allocate any specific criticism to it. So you know OF it but not ABOUT it? K Smith above refers to it by its old name, Chartalism, but provides a list of its "tenets" that leaves a lot to be desired. It's essentially double-entry bookkeeping applied at the macro level, and like regular double-entry, it goes out of balance if you get anything wrong. In essence, it's double-entry feature IS its empirical checking mechanism. Mistakes simply don't fit. (Also, I've never seen a single piece of empirical evidence that did not agree with MMT predictions of what it would be.)

    As to K Smith's "tenets":

    (1) * There is really no limit to how high government debt can go. - This is a feature of fiat money. MMT simply recognizes it. Essentially, a country with a sovereign currency cannot be in debt IN ITS OWN CURRENCY because it has an infinite supply of it. (The Euro is not a sovereign currency. Neither is any currency pegged to anything else. Yes, Greece can become insolvent. No, the US cannot.)

    (2) * Treasury securities are savings accounts. AND (3) * Selling government bonds is mistakenly called borrowing. - Both say the same thing. #2 says it better.

    (4) * Deficits add to savings, so deficits are a good thing. - Deficits do add to private sector savings. (In fact, total private sector savings is identical to total government debt. They are merely the opposite sides of that double-entry transaction.) MMT DOES NOT say that deficits are a good thing. It merely says that deficits (or surpluses, for that matter) should satisfy the private sector demand for savings to avoid recessions. They can also be used for other things, but those would be political choices.

    (5) * Hyperinflation cannot happen in the US. - This is (sort of) a restatement of #1. This claim is however limited to the fact that holders of US debt instruments cannot force the US into hyperinflation by dumping those instruments or by refusing to purchase more of them. This is because US government spending is NOT funded by either taxes OR borrowing, and the view that it is, is exactly backwards to the way it actually happens. (Yes, it sounds strange, but double-entry clearly demonstrates (rather simply, in fact) that spending actually PRECEDES both taxation and borrowing, and is therefore dependent upon neither. Yes, there are reasons a country should tax and might want to borrow, but none of them are to fund its own spending.)

    It is important to understand that all of this applies ONLY to sovereign fiat currencies and the countries that uses them.

    Obviously this is not the sum total of MMT, but I wanted to correct any misimpressions that might have been caused by K Smith's presentation of it.

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  25. I do think Mises' methodological apriorism is problematic and worthy of a more in depth look (for which I don't really have the time right now). What the Austrians say seems to make most sense though ... intuitively.

    Not sure about Austrian economists but I can't imagine austro-libertarians recommending the increase of taxes - more likely their abolition - and probably the repudiation of public debt too.

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  26. very good. Also refer to http://dieoff.org/page240.htm

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  27. Austrian economist predicted most of what happenned between 2000 and 2010. Here is another Austrian prediction, from an Austrian economist (me):what we are doing now is going to bring about a depression that will make the 1930's look like a spring day at the fair! we are all walking zombies....

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  28. "Whither is God?" he cried; "I will tell you. We have killed him-you and I. All of us are his murderers. But how did we do this? How could we drink up the sea? Who gave us the sponge to wipe away the entire horizon? What were we doing when we unchained this earth from its sun? Whither is it moving now? Whither are we moving? Away from all suns? Are we not plunging continually? Backward, sideward, forward, in all directions? Is there still any up or down? Are we not straying as through an infinite nothing? Do we not feel the breath of empty space? Has it not become colder? Is not night continually closing in on us? Do we not need to light lanterns in the morning? Do we hear nothing as yet of the noise of the gravediggers who are burying God? Do we smell nothing as yet of the divine decomposition? Gods, too, decom-pose. God is dead. God remains dead. And we have killed him."How shall we comfort ourselves, the murderers of all murderers? What was holiest and mightiest of all that the world has yet owned has bled to death under our knives: who will wipe this blood off us? What water is there for us to clean ourselves? What festivals of atonement, what sacred games shall we have to invent? Is not the greatness of this deed too great for us? Must we ourselves not become gods simply to appear worthy of it? There has never been a greater deed; and whoever is born after us-for the sake of this deed he will belong to a higher history than all history hitherto."

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  29. "The meaning of our cheerfulness.— The greatest recent event, that "God is dead," that the belief in the Christian god has become unbelievable3—is already beginning to cast its first shadows over Europe. For the few at least, whose eyes—the suspicion in whose eyes is strong and subtle enough for this spectacle, some sun seems to have set and some ancient and profound trust has been turned into doubt; to them our old world must appear daily more like evening, more mistrustful, stranger, "older." But in the main one may say: The event itself is far too great, too distant, too remote from the multitude's capacity for comprehension even for the tidings of it to be thought of as having arrived as yet. Much less may one suppose that many people know as yet what this event really means —and how much must collapse now that this faith has been undermined because it was built upon this faith, propped up by it, grown into it; for example, the whole of our European morality. This long plenitude and sequence of breakdown, destruction, ruin, and cataclysm5 that is now impending—who could guess enough of it today to be compelled to play the teacher and advance proclaimer of this monstrous logic of terror, the prophet of a gloom and an eclipse of the sun whose like has probably never yet occurred on earth?

    Even we born guessers of riddles who are, as it were, waiting on the mountains,6 posted between today and tomorrow, stretched in the contradiction between today and tomorrow, we firstlings and premature births of the coming century, to whom the shadows that must soon envelop Europe really should have appeared by now—why is it that even we look forward to the approaching gloom without any real sense of involvement and above all without any worry and fear for ourselvesV Are we perhaps still too much under the impression of the initial consequences of this event—and these initial consequences, the consequences for ourselves, are quite the opposite of what one might perhaps expect: They are not at all sad and gloomy but rather like a new and scarcely describable kind of light, happiness, relief, exhilaration, encouragement, dawn.

    Indeed, we philosophers and "free spirits" feel, when we hear the news that "the old god is dead," as if a new dawn shone on us; our heart overflows with gratitude, amazement, premonitions, expectation. At long last the horizon appears free to us again, even if it should not be bright; at long last our ships may venture out again, venture out to face any danger; all the daring of the lover of knowledge is permitted again; the sea, our sea, lies open again; perhaps there has never yet been such an open sea."

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  30. On perpetual growth, our debt-based economy demands it. As long as the system keeps growing exponentially, the Ponzi can continue as new debtors fund old liabilities. Bankers and their endless interest payments have demanded exponential growth from our economy which has led us to become mere cogs in their Orwellian machine.

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  31. GL,

    Love your articles, but I agree with those who say you do not get the Austrian School of Economics. Most Austrians I have read say we need much smaller government - and govt. should stay out of the economy, and lower taxes.

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  32. My question: how did we get into this mess and form the ersatz religions, and how can we get out? I don't think it was a hidden conspiracy, but rather a collective misdirection.

    Our nation has historically been riddled with divine value-add break-through "seeds": The inventions of the airplane, the assembly line, and ensuing transportation industries. The invention of the transistor which led to digital systems, the microprocessor, and nearly every hi-tech advancement today. The list goes on. Bottom line is that these seeds have provided value-multipliers which have taken our hard work and multiplied it a thousand fold to create wealth and productivity much greater than our work-hours alone could have produced.

    That is all great. The problem is that somewhere along the line, we collectively forgot about the divine hand in these inventions, in the formation of the country, and the prosperity of our land, and we only remembered the hard work that we put into it. We came to believe that it was 100% our hard work that produced all this. This arrogant error of not giving credit where credit is due is what fuels economic ersatz religions- since we now believe we were 100% responsible for past prosperity, then it means we are 100% responsible to continue it and fix our problems. This means we must have formulas to explain everything so that we can control it. Without the formulas, we can't predict and control. So we delude ourselves into thinking we have viable economic formulas when really, we don't. We have made our economic system our god, and we worship it by looking to it for all the answers.

    There is nothing new here. It was described 2700+ years ago:

    "When you have eaten and are satisfied, praise the LORD your God for the good land he has given you. Be careful that you do not forget the LORD your God... Otherwise, when you eat and are satisfied, when you build fine houses and settle down, and when your herds and flocks grow large and your silver and gold increase and all you have is multiplied, then your heart will become proud and you will forget the LORD your God... You may say to yourself, "My power and the strength of my hands have produced this wealth for me." But remember the LORD your God, for it is he who gives you the ability to produce wealth... If you ever forget the LORD your God and follow other gods and worship and bow down to them, I testify against you today that you will surely be destroyed." -Deuteronomy 8:10-19

    JS

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  33. My question: how did we get into this mess and form the ersatz religions, and how can we get out? I don't think it was a hidden conspiracy, but rather a collective misdirection.

    Our nation has historically been riddled with divine value-add break-through "seeds": The inventions of the airplane, the assembly line, and ensuing transportation industries. The invention of the transistor which led to digital systems, the microprocessor, and nearly every hi-tech advancement today. The list goes on. Bottom line is that these seeds have provided value-multipliers which have taken our hard work and multiplied it a thousand fold to create wealth and productivity much greater than our work-hours alone could have produced.

    That is all great. The problem is that somewhere along the line, we collectively forgot about the divine hand in these inventions, in the formation of the country, and the prosperity of our land, and we only remembered the hard work that we put into it. We came to believe that it was 100% our hard work that produced all this. This arrogant error of not giving credit where credit is due is what fuels economic ersatz religions- since we now believe we were 100% responsible for past prosperity, then it means we are 100% responsible to continue it and fix our problems. This means we must have formulas to explain everything so that we can control it. Without the formulas, we can't predict and control. So we delude ourselves into thinking we have viable economic formulas when really, we don't. We have made our economic system our god, and we worship it by looking to it for all the answers.

    Nothing new here. It was described 2700+ years ago:

    "When you have eaten and are satisfied, praise the LORD your God for the good land he has given you. Be careful that you do not forget the LORD your God... Otherwise, when you eat and are satisfied, when you build fine houses and settle down, and when your herds and flocks grow large and your silver and gold increase and all you have is multiplied, then your heart will become proud and you will forget the LORD your God... You may say to yourself, "My power and the strength of my hands have produced this wealth for me." But remember the LORD your God, for it is he who gives you the ability to produce wealth... If you ever forget the LORD your God and follow other gods and worship and bow down to them, I testify against you today that you will surely be destroyed." -Deuteronomy 8:10-19
    JS

    ReplyDelete
  34. My question: how did we get into this mess and form the ersatz religions, and how can we get out? I don't think it was a hidden conspiracy, but rather a collective misdirection.

    Our nation has historically been riddled with divine value-add break-through "seeds": The inventions of the airplane, the assembly line, and ensuing transportation industries. The invention of the transistor which led to digital systems, the microprocessor, and nearly every hi-tech advancement today. The list goes on. Bottom line is that these seeds have provided value-multipliers which have taken our hard work and multiplied it a thousand fold to create wealth and productivity much greater than our work-hours alone could have produced.

    That is all great. The problem is that somewhere along the line, we collectively forgot about the divine hand in the prosperity of our land, and we only remembered our hard work. We came to believe that it was 100% our work that produced all this. This arrogant error of not giving credit where credit is due is what fuels economic ersatz religions- since we now believe we were 100% responsible for past prosperity, then it means we are 100% responsible to continue it and fix our problems. This means we must have formulas to explain everything so that we can control it. Without the formulas, we can't predict and control. So we delude ourselves into thinking we have viable economic formulas when really, we don't. We have made our economic system our god, and we worship it by looking to it for all the answers.

    Nothing new here. It was described 2700+ years ago:

    "When you have eaten and are satisfied, praise the LORD your God for the good land he has given you. Be careful that you do not forget the LORD your God... Otherwise, when you eat and are satisfied, when you build fine houses and settle down, and when your herds and flocks grow large and your silver and gold increase and all you have is multiplied, then your heart will become proud and you will forget the LORD your God... You may say to yourself, "My power and the strength of my hands have produced this wealth for me." But remember the LORD your God, for it is he who gives you the ability to produce wealth... If you ever forget the LORD your God and follow other gods and worship and bow down to them, I testify against you today that you will surely be destroyed." -Deuteronomy 8:10-19
    JS

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  35. Benedict@Large - what I said about chartalism/MMT is not my presentation.

    It is the presentation of the "experts" who heavily promote it. It is how they presented it on HuffPost in the spring. They are members of a think tank that pushes this theory from the University of Missouri, and are the ones who conduct seminars to promote it in academia.

    MMT/chartalism is just one more theory whose principals support policies that enrich the Masters of the Universe. That is why it is being heavily promoted in academia. It is also promoted by financial advisors who will benefit financially if its ideas are widely adopted. It supports sky high currency debasement and its policies rest on the existence of a totalitarian government.

    MMT/chartalism is just another economic Epic Fail.

    K Smith

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  36. This comment has been removed by the author.

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  37. I agree with Phil in NC!
    as to "austrians" you should read some of the books by Ludwig von Mises. The theme:less government, free markets, "free market money", like gold + silver. your remark about austrians and "raising taxes" really is BS.
    Otherwise, I normally enjoy your writings.
    Nikolaus (Germany)

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  38. Economists are equivalent to the ancient augers who examined entrails for portents. They've just substituted models and charts for entrails. It can also be argued however, that the augers were much more accurate at foretelling the future if we are to believe the writings of Xenophon.

    There are economists who know what they are talking about. James K. Galbraith, Dean Baker, and William K. Black come to mind. Like all heretics, they are voices in the wilderness, and the orthodoxy ignores them rather than burns them at the stake.

    You can say that economics is a religion, but religions have a core of truth to them. The great religions, or really philosophies, sprang from spiritual masters who have pointed the way to new perceptions of the world that are likely emergent properties of human biology and psychology. There is some convergence for instance between some Buddhist and Taoist sayings with physics and modern cosmology. Form is emptiness and emptiness is form versus Rutherford's finding that matter is mostly space and Einstein's that matter is a form of energy. The one becomes ten thousand things smacks of the Big Bang.

    On the other hand, economics is to religion what snake oil is to medicine. Both economics and quack medicine prey on the gullible and the desperate, and garb themselves in respectability to make the deception easier. Money is a convenient fiction. Any discipline based on a fiction will be another step removed from the original fiction which is one step removed from reality.

    It should be possible to study and analyze human economics, however. It's just a form of applied mathematics. Psychology does this with human behavior which stems from the human brain and medicine does this with human biology and physiology. Your body is much, much more complicated than a financial system or economy. It is even more mysterious because it took 4.5 billion years of evolution to form, and yet, your chances of being healed by a doctor are quite good.

    So, it's not that economics can't be studied, it's just that 99% or more of economists have failed to be good observers, empirical modelers, and mathematicians. What's worse is that there's no attempt by the discipline to police or fix itself. There's no ethical standards whatsoever, especially for the private sector economists. There are generally moral and ethical standards priests and doctors have to follow. What standards do economists follow?

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  39. You're a great writer and philosopher and all that, and I'll keep reading your blog. But I'd like to know what you were smoking when you read that Austrians want to raise taxes. I am astonished. My view of you as an "expert" is totally shattered.

    http://www.xaviercromartie.com/

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  40. Possibly, you have mistakenly identified the people at CATO as Austrians? CATO says they are Austrians, but they're Not. No way, no how.

    I agree with what Xavier Cromartie said, and another thing, Austrians Do Not think an economy must grow every year.

    Please read the suggestions others have given above, such as Hoppe, Hayek and Lew Rockwell. If you do, you may find yourself saying, Yes, I am an Austrian.

    This statement of yours, without a doubt, is false:

    "The one thing all the sects of the Religion of Economics all agree upon is growth: All agree that an economy must grow every year—year after year—no excuses—no matter what."

    - Clark

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  41. Economics, all schools, is crap. It's the old trick of the Gypsy palm reader taking the mark's cash to have the evil spirits removed with math and lots of long words and circular arguments.

    The same result always applies. The value of your work is diminished and the charlatan walks away with the difference between what you produced and what you get.

    A huge effort is made to prevent people from accessing the knowledge and resources available in a fairly distributed fashion. It's done so that wealthy people can have servants and demand that others do their bidding.

    For this we are destroying the biosphere. Well, all things will be taken from those who wait long enough.

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  42. I've enjoyed the article, thoug it was a perverse pleasure of sorts. It shows how using a lot of true things allows trowing in quite a lot of bullshit and still keep semblance of plausibility.

    So correct in the attack on mainstream economics, keynesian and monetarist positions, and in what needs to be done; so ignorant of austrian ideas and predictions; so weak on science methodology; so rudely overgeneralising - and yet readable, and for most people strongly attractive piece. Perfectly written. Demagogic as hell.

    To fix the last thing (if desired), I suggest searching mises.org when writing about any economics-related topic. Starting with "Brad DeLong" may be a nice exercise.

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  43. I hope you get your shit straight, I really do, as I thought your articles were pretty good up until this point.

    And in case anyone is wondering what the CATO Institute is if it's Not Austrian, I'll tell you, they are Coordination Problem Socialist in denial. Perhaps they don't wish to be socialist, but they are. Perhaps it all has something to do with the big money backing them up from a family with the last name of Knoch?

    Maybe this will help you:

    http://www.lewrockwell.com/blog/lewrw/archives/67955.html

    - Clark

    Let Freedom Ring!

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  44. I think the core issue is that America has become a corporatocracy. Either Austrian or Keynesian would probably work just fine if you put limits on spending and outlawed lobbying. Treasury debt has pulled forward decades of future spending and handed it to corporations. Someone should have been asking questions 30-40 years ago, but it doesn't matter now. It's like asking someone what they are drinking after they have been on a 5 day coke and drinking binge ...it's gonna be ugly no matter what.

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  45. You are right though that all these economic religions were useless, since they did not even predict a recession ...after we had already been thru one bubble.

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  46. Your latest post reminded me of a movie called Pi.

    http://en.wikipedia.org/wiki/Pi_(film)

    This film was pretty ahead of its time especially since, it focused on how human irrationality, or entropy in general, makes modern mainstream economics impractical. I’d also recommend reading this blog post if you haven’t already.

    http://thearchdruidreport.blogspot.com/2009/10/why-markets-fail.html

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  47. Enjoy your work, but not your misunderstanding of Austrians. Austrians don't view economics as anything remotely like as science, but rather more as a humanity --rooted in the unpredictability of Human Action. Most certainly they / we (it best describes me...) don't advocate raising taxes either directly or surreptitiously via ginning $$ supply and forking the proceeds to the Govt. or its fascist allies by monetizing debt. Of all major and minor views of economics, Austrians complain about everything you've articulated in this article. Hell, Murray Rothbard used to refer to the most famous economists held high by the govt / banking nexus as transparent "court economists".

    I'd be interested seeing how you'll correct the record on Austrians. (BTW, Hayek became very much a non-Austrian in his later years... so don't quote him from that era.

    Finally, to those who have problems with the Nobel Prize in Economics, consider the source: It is a prize sponsored by the Central Bank of Sweeden. What would you expect them to celebrate? They're legalized counterfeiters, and the Nobel goes to whomever justifies the ongoing fleecing of currency holders absent their consent.

    BTW, that's not Austrian, either!

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  48. Economics isn't a science. This is a core teaching with in the Austrian school.

    So it sounds like you are an Austrian.

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  49. Now mises.org strikes back: Gonzalo Lira on the False Religion of Economics. Free challenge to GL included!

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  50. "In fact, the financial sector today would be healthier, if the Too Big To Fail banks had been allowed to fail, and then restructured along Sweden ‘92 lines.

    But not one economist in any position of influence advocated the bankruptcy and restructuring of the Too Big To Fail banks."

    Not true. Both Krugman and DeLong called for this:

    http://krugman.blogs.nytimes.com/2008/09/28/the-good-the-bad-and-the-ugly/

    http://delong.typepad.com/sdj/2008/09/time-not-for-a.html

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GL