I wait with bated breath for economists to discover the wheel and fire. They might even one day even advance so far as to discover time and distance but for that I will not be holding my breath.
Economists have this strange idea that mathematical rigor is the signature of science but I have some bad news for them: It ain't. Economics suffers from a bad case of physics envy.
> Friedrich von Hayek, who won the award in 1974, used his Nobel Banquet speech to critique the prize. “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."
Nobody cares about what the descendants of Nobel think. The prize is awarded with exactly the same procedure as the other Nobels and has the same prestige in the field.
I know about Hayek. I was talking about the points made in the article. Also, Hayek is not the sole arbiter of what is and what is not an imposter prize
isn't "science" the cataloguing of statements that can be specifically disproved, but have not been able to be disproven? I don't think that applies to econ at all!
Even physics has branches with theories that are out there. (String theory comes to mind)
The natural sciences have also had a maturity path and so will economics. It will never be an ‘equal’ in broad terms, considering that economies are complex and lab experiments are not possible.
The reason why models exist in economics is for exactly the point you raise, falsifiability.
A couple of key elements driving the borrowers’ move to marketable securities from bank loans are not mentioned: loan covenants and bank regulation. Bank loans have traditionally had more covenants and a loan officer butting in on the borrower’s business. Borrowers hate that. And bank regulation almost by definition means that in many cases the borrower can’t use a bank.
Finally, without wanting to be nasty, marketable securities brought investment banks onto the playing field and their almost risk free ability to profit from placing securities left commercial banks, literally, holding the bag…empty.
Thank you for this wonderfully clarifying piece. I’m a lawyer, not an economist, but have tried to stay relatively informed on these issues, perhaps because my early career in the Midwest coincided with the Volcker shocks, and I was deeply impressed--or depressed--by the industrial wreckage that surrounded me in the aftermath.
Upon reading the Nobel citation the other day, I asked myself, “Why did anybody need to demonstrate in the ‘80s that bank runs could happen, when they’ve been happening in broad daylight for centuries?”
Thank you for the link. I am familiar with the counter-arguments of the economists but it still does not persuade me that economics rises to the level of a science.
How can economics be science? It's based on understanding human psychology, macro environments (way beyond our conscious to model out), and money (something we invented, inflate/deflate at our will). There is no objective, universal science to it. It's trends, patterns and frameworks to give some meaning to the chaos - as is life :-).
do not forget, you could have a half hour argument on whether the "y" axis and "x" axis presented in nearly every econ graph (starting from the very first lessons in econ 101 itself!) should be interchanged, or not! How can economics be science indeed!
Scientists at the LHC in CERN have been searching for the elusive valuminium particle for years now. The Higgs boson gives mass while valuminium provides other atoms with value. The speculation is that gold and silver atoms both have lots of valuminum particles in them.
Yep, money is a social technology invented by humans.
this piece is so important it makes me want to apply to Columbia after 45 years of being a very active participant in global markets.Tooze again gives great support to the work of Benjamin Cohen and his 2008 book on International Political Economy--thank you Adam for bringing Kindleberger to the fore yet again.The strong dollar is putting a great deal of pressure on the global financial system and the US modelers will again find out they are not an Island.The FED used its exorbitant privilege to inflate the global system and now wants to negate its exorbitant burden of preventing a massive global deflation---Minsky indeed
Thank you for this column. I first heard of Minsky in early 2009 just when the Great Recession was spiraling. I did read his book and it made good sense to this non-economist. There are lots of weak spots in the US financial system and just like houses of cards, some come tumbling down every ten years or so.
Nice analysis. Perhaps the problem was that the other nominees were more dismal? Or perhaps the committee simply wanted a reason to celebrate Bernanke for his applied economics efforts keeping the financial system running back in 2007-2009.
This article is great as per, and it made me realise that the whole debate around 'endogenous versus exogenous money' has been too narrow, focused on the issue of whether banks create deposits in the process of lending. The BIS section in particular shows that understanding endogenous money entails understanding how the financial system endogenously evolves over time to create new lending facilities, financial instruments, and even institutions. It seems to me that a half-decent Nobel prize would have been to whichever work was at the forefront of discovering these evolutions and that those who subscribed to endogenous money (even if not by name, Gilian Tett springs to mind) were more likely to be studying such evolutions.
The dump on Bernanke is justified. I'm not sure about the dump on Diamond-Dybvig. Nobody really cares about their toy model--but they emphasized precisely the right issue, at almost precisely the right time. Maturity mismatch+leverage=scary.
Thank you for this wonderful post. I am a (US) pediatrician, but/and my undergraduate degree is Economics (early 1990s Princeton), and I am the daughter of an economist. There are so many things I love about the discipline, so many ways I find even its basic principles applicable in the real world. And. As much as I appreciate Bernanke’s stewardship of US monetary policy, when I heard that received a Nobel for (after my mother sent me the headline in happy excitement), my immediate thought was, “Someone got a Nobel for proving that Bank runs are a thing? In the 1980s? Wasn’t “Its a Wonderful Life” in black and white?” I then immediately felt guilty for being churlish and snarky, and generally not my best self. I am so pleased to have someone so brilliant and articulate and gracious explain why I might not be totally off base. Thanks for all you do and share.
- Bernanke got a Nobel for basically proving and measuring the impact/effect of bank runs and advantages of maintaining functioning banks, no matter the crises. It was the first time someone had actually measured and put together a cohesive framework and measurement to explain - WHICH IS GREAT, IMO
- However, this was NOT a novel idea. Many economists before him including Minsky and others had atleast talked about it though not had detailed data to prove what made 'common sense'. Personally, this didnt warrant such a breakthrough that it deserved the highest award ever created. I might be wrong.
- Not just Minsky, other famed economists from the days of the great depression had theorized same thesis and had actually commented. I hope we learn from this mistake.
- Bernanke, once invited over dinner, once claimed to Milton Friedman that I hope we have learnt our lessons and we never have to go back to the days of the depression --> implying the learnings of keeping banks functioning that were well accepted in the circles atleast
- When presented with the GFC in 2008, Bernanke failed to act to nip the evil in the bud, was late to the party and ended up bailing our the criminal cartel - the big banks, the sins of which we are still suffering from as we go into another slowdown.
- To claim that banks should be kept fully functional in any crises situation seems noble (pun intended). But, it pre-supposes that banks are acting in the nation and the economy's interest. 2008 was the year that JP Morgan invented Credit Default Swaps. They thought they were geniuses and had found a way to de-risk loans. All they had done was transfer risk to another party. How on earth can you claim that risk is gone when all you have done is transfer it to someone else and if that risk does surface its going to implode the entire system - it's beyond me. All major banks actively participated in CDS, moved into MBS causing massive wreckage and did that using HIGHLY LEVERED products. CLOs, MBS was packaged with CDS and sold as AAA rated products after bribing the ratings agencies. Look up interviews where Fed was aware of these ratings and did nothing. 2 days before it was collapsing 3 out of 5 fed board members resigned conveniently
- Margin trades, complex derivatives (which arent so complex if you look underneath), allowing the country's Shadow banks to operate without ANY regulation who can offer such ridiculous products to bring the entire global economy down and make money at the cost of it - Wow!
- Most banks were bailed out, perhaps no more than 1 executive was imprisoned for THE BIGGEST CRIMES committed on the wall street. Yes main street lost their lives, savings and hope forever. A big chunk never ever made it back to the stock markets till date
- Most Fed folks are a revolving door with Goldman Sachs, JPM and other banks. How is that in the best interest of the economy all the time?
Postulating academic theories to keep banks functionals in crises ASSUMES good behavior. This was NOT the case. When The Fed and banks are in cohoots against the best interest of the economy, it encourages risky products, doesnt regulate, doesnt punish, doesnt restore faith, keep pumping fake dollars to prop up asset prices -- which shall continue, ----> To say that Banks should be kept functional in crises IS A COVER UP in the truest sense
They did in with LCTM, 200s, 2008, 2020 and many more time and will do it again. Keep bailing and covering up past frauds and put it on the tax payers
Is this why you get a Nobel Prize? The timing couldnt be more a 'Slap on the face' of the common woman and man! WELL DONE FED! WELL DONE PRIZE COMMITTEE. It's tone deaf and misses the underlying sentiment of the root issues at hand.
Sorry for the long message but someone had to say it.
I can only discuss a few of the points you raised. I'm not well-informed on some of the things you mentioned about happening in the US during GFC.
About the burden being put on the mess finance created during the GFC, I'd like to point out that the public exchequer made a profit on the bailouts. So the 'taxpayers' did not end up losing money per se.
The Fed may have been late to act on some of the misrepresentation of risk that was going on in American Finance. From an Indian Perspective, the RBI (basically the Indian version of Fed), was far more proactive in regulation, so I'll give you that. But Bernanke did not get this prize for his role in policy in 2006-08, but for his academic contributions that happened pre-2000s.
If the Fed didn't act to stop the financial system from failing in 2008, the US economy as well as the world at large would've suffered worse and for longer than it did. The Fed's response to GFC was not about morality and ideology, but practical considerations.
On Minsky, I'm not familiar how robust his model (if he even had one, or it was just commentary) was. Maybe if he was alive, he'd received a share of the prize for his contributions, but remember that the Nobel prize is not awarded posthumously. This is the same reason Alan Krueger didn't get it with David Card last year.
I wait with bated breath for economists to discover the wheel and fire. They might even one day even advance so far as to discover time and distance but for that I will not be holding my breath.
Economists have this strange idea that mathematical rigor is the signature of science but I have some bad news for them: It ain't. Economics suffers from a bad case of physics envy.
Physics envy, to the point of establishing a fake Nobel Prize... https://fivethirtyeight.com/features/the-economics-nobel-isnt-really-a-nobel/
> Friedrich von Hayek, who won the award in 1974, used his Nobel Banquet speech to critique the prize. “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."
Nobody cares about what the descendants of Nobel think. The prize is awarded with exactly the same procedure as the other Nobels and has the same prestige in the field.
Von Hayek is not a descendant of Nobel. It is, and always will be an, impostor prize.
I know about Hayek. I was talking about the points made in the article. Also, Hayek is not the sole arbiter of what is and what is not an imposter prize
I suggest you to give this a try
https://www.reddit.com/r/Economics/wiki/faq_methods/
isn't "science" the cataloguing of statements that can be specifically disproved, but have not been able to be disproven? I don't think that applies to econ at all!
Even physics has branches with theories that are out there. (String theory comes to mind)
The natural sciences have also had a maturity path and so will economics. It will never be an ‘equal’ in broad terms, considering that economies are complex and lab experiments are not possible.
The reason why models exist in economics is for exactly the point you raise, falsifiability.
A couple of key elements driving the borrowers’ move to marketable securities from bank loans are not mentioned: loan covenants and bank regulation. Bank loans have traditionally had more covenants and a loan officer butting in on the borrower’s business. Borrowers hate that. And bank regulation almost by definition means that in many cases the borrower can’t use a bank.
Finally, without wanting to be nasty, marketable securities brought investment banks onto the playing field and their almost risk free ability to profit from placing securities left commercial banks, literally, holding the bag…empty.
Thank you for this wonderfully clarifying piece. I’m a lawyer, not an economist, but have tried to stay relatively informed on these issues, perhaps because my early career in the Midwest coincided with the Volcker shocks, and I was deeply impressed--or depressed--by the industrial wreckage that surrounded me in the aftermath.
Upon reading the Nobel citation the other day, I asked myself, “Why did anybody need to demonstrate in the ‘80s that bank runs could happen, when they’ve been happening in broad daylight for centuries?”
Now, I get it.
Thank you for the link. I am familiar with the counter-arguments of the economists but it still does not persuade me that economics rises to the level of a science.
How can economics be science? It's based on understanding human psychology, macro environments (way beyond our conscious to model out), and money (something we invented, inflate/deflate at our will). There is no objective, universal science to it. It's trends, patterns and frameworks to give some meaning to the chaos - as is life :-).
do not forget, you could have a half hour argument on whether the "y" axis and "x" axis presented in nearly every econ graph (starting from the very first lessons in econ 101 itself!) should be interchanged, or not! How can economics be science indeed!
Is this just a strawman you came up with or an actual controversy, that you can perhaps point me to?
Scientists at the LHC in CERN have been searching for the elusive valuminium particle for years now. The Higgs boson gives mass while valuminium provides other atoms with value. The speculation is that gold and silver atoms both have lots of valuminum particles in them.
Yep, money is a social technology invented by humans.
this piece is so important it makes me want to apply to Columbia after 45 years of being a very active participant in global markets.Tooze again gives great support to the work of Benjamin Cohen and his 2008 book on International Political Economy--thank you Adam for bringing Kindleberger to the fore yet again.The strong dollar is putting a great deal of pressure on the global financial system and the US modelers will again find out they are not an Island.The FED used its exorbitant privilege to inflate the global system and now wants to negate its exorbitant burden of preventing a massive global deflation---Minsky indeed
Thank you for this column. I first heard of Minsky in early 2009 just when the Great Recession was spiraling. I did read his book and it made good sense to this non-economist. There are lots of weak spots in the US financial system and just like houses of cards, some come tumbling down every ten years or so.
Nice analysis. Perhaps the problem was that the other nominees were more dismal? Or perhaps the committee simply wanted a reason to celebrate Bernanke for his applied economics efforts keeping the financial system running back in 2007-2009.
This article is great as per, and it made me realise that the whole debate around 'endogenous versus exogenous money' has been too narrow, focused on the issue of whether banks create deposits in the process of lending. The BIS section in particular shows that understanding endogenous money entails understanding how the financial system endogenously evolves over time to create new lending facilities, financial instruments, and even institutions. It seems to me that a half-decent Nobel prize would have been to whichever work was at the forefront of discovering these evolutions and that those who subscribed to endogenous money (even if not by name, Gilian Tett springs to mind) were more likely to be studying such evolutions.
The dump on Bernanke is justified. I'm not sure about the dump on Diamond-Dybvig. Nobody really cares about their toy model--but they emphasized precisely the right issue, at almost precisely the right time. Maturity mismatch+leverage=scary.
Thank you for this wonderful post. I am a (US) pediatrician, but/and my undergraduate degree is Economics (early 1990s Princeton), and I am the daughter of an economist. There are so many things I love about the discipline, so many ways I find even its basic principles applicable in the real world. And. As much as I appreciate Bernanke’s stewardship of US monetary policy, when I heard that received a Nobel for (after my mother sent me the headline in happy excitement), my immediate thought was, “Someone got a Nobel for proving that Bank runs are a thing? In the 1980s? Wasn’t “Its a Wonderful Life” in black and white?” I then immediately felt guilty for being churlish and snarky, and generally not my best self. I am so pleased to have someone so brilliant and articulate and gracious explain why I might not be totally off base. Thanks for all you do and share.
No, they did not get a Nobel for proving that bank runs are a thing. That’s an incorrect overgeneralisation
So, why was Big Ben awarded? What was the big deal?
Did you read the Nobel committee’s explanation? It’s a pretty detailed answer for your ‘Why’ and ‘What’
https://www.nobelprize.org/uploads/2022/10/popular-economicsciencesprize2022.pdf
Thanks you. Actually, I did. A few comments:
- Bernanke got a Nobel for basically proving and measuring the impact/effect of bank runs and advantages of maintaining functioning banks, no matter the crises. It was the first time someone had actually measured and put together a cohesive framework and measurement to explain - WHICH IS GREAT, IMO
- However, this was NOT a novel idea. Many economists before him including Minsky and others had atleast talked about it though not had detailed data to prove what made 'common sense'. Personally, this didnt warrant such a breakthrough that it deserved the highest award ever created. I might be wrong.
- Not just Minsky, other famed economists from the days of the great depression had theorized same thesis and had actually commented. I hope we learn from this mistake.
- Bernanke, once invited over dinner, once claimed to Milton Friedman that I hope we have learnt our lessons and we never have to go back to the days of the depression --> implying the learnings of keeping banks functioning that were well accepted in the circles atleast
- When presented with the GFC in 2008, Bernanke failed to act to nip the evil in the bud, was late to the party and ended up bailing our the criminal cartel - the big banks, the sins of which we are still suffering from as we go into another slowdown.
- To claim that banks should be kept fully functional in any crises situation seems noble (pun intended). But, it pre-supposes that banks are acting in the nation and the economy's interest. 2008 was the year that JP Morgan invented Credit Default Swaps. They thought they were geniuses and had found a way to de-risk loans. All they had done was transfer risk to another party. How on earth can you claim that risk is gone when all you have done is transfer it to someone else and if that risk does surface its going to implode the entire system - it's beyond me. All major banks actively participated in CDS, moved into MBS causing massive wreckage and did that using HIGHLY LEVERED products. CLOs, MBS was packaged with CDS and sold as AAA rated products after bribing the ratings agencies. Look up interviews where Fed was aware of these ratings and did nothing. 2 days before it was collapsing 3 out of 5 fed board members resigned conveniently
- Margin trades, complex derivatives (which arent so complex if you look underneath), allowing the country's Shadow banks to operate without ANY regulation who can offer such ridiculous products to bring the entire global economy down and make money at the cost of it - Wow!
- Most banks were bailed out, perhaps no more than 1 executive was imprisoned for THE BIGGEST CRIMES committed on the wall street. Yes main street lost their lives, savings and hope forever. A big chunk never ever made it back to the stock markets till date
- Most Fed folks are a revolving door with Goldman Sachs, JPM and other banks. How is that in the best interest of the economy all the time?
Postulating academic theories to keep banks functionals in crises ASSUMES good behavior. This was NOT the case. When The Fed and banks are in cohoots against the best interest of the economy, it encourages risky products, doesnt regulate, doesnt punish, doesnt restore faith, keep pumping fake dollars to prop up asset prices -- which shall continue, ----> To say that Banks should be kept functional in crises IS A COVER UP in the truest sense
They did in with LCTM, 200s, 2008, 2020 and many more time and will do it again. Keep bailing and covering up past frauds and put it on the tax payers
Is this why you get a Nobel Prize? The timing couldnt be more a 'Slap on the face' of the common woman and man! WELL DONE FED! WELL DONE PRIZE COMMITTEE. It's tone deaf and misses the underlying sentiment of the root issues at hand.
Sorry for the long message but someone had to say it.
I can only discuss a few of the points you raised. I'm not well-informed on some of the things you mentioned about happening in the US during GFC.
About the burden being put on the mess finance created during the GFC, I'd like to point out that the public exchequer made a profit on the bailouts. So the 'taxpayers' did not end up losing money per se.
The Fed may have been late to act on some of the misrepresentation of risk that was going on in American Finance. From an Indian Perspective, the RBI (basically the Indian version of Fed), was far more proactive in regulation, so I'll give you that. But Bernanke did not get this prize for his role in policy in 2006-08, but for his academic contributions that happened pre-2000s.
If the Fed didn't act to stop the financial system from failing in 2008, the US economy as well as the world at large would've suffered worse and for longer than it did. The Fed's response to GFC was not about morality and ideology, but practical considerations.
On Minsky, I'm not familiar how robust his model (if he even had one, or it was just commentary) was. Maybe if he was alive, he'd received a share of the prize for his contributions, but remember that the Nobel prize is not awarded posthumously. This is the same reason Alan Krueger didn't get it with David Card last year.
That’s helpful, thanks
Vastly informative. So much so my brain hurts.