Category Archives: William K. Black

Kenneth Arrow’s (Ignored) Impossibility Theorem

By William K. Black
February 22, 2017     Bloomington, MN

Kenneth Arrow, one of the giants of economics, has died at the age of 95.  He became a Nobel Laureate in 1972.  As a young lawyer in 1977, I saw him in action as an expert witness on the subject of risk.  The context was setting the rates for shipping oil through the Trans-Alaska Pipeline System (TAPs).  Arrow testified about the risks of oil prices falling.  The FERC administrative law judge thought such a scenario was ridiculous.  Within four years, oil prices fell sharply.  Arrow’s experience was a common one for economists dealing with lawyers – the ALJ ignored him.

The New York Times obituary for Arrow is revealing about how the conventional wisdom distorts economic theory in a predictably skewed fashion.  It begins by discussing Arrow’s “impossibility theorem,” which states that where there are more than two choices it is impossible to construct perfect majority choice systems.

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Quis custodiet ipsos custodies? Jean Tirole’s Proposal to Appoint Felons to Monitor CEOs

By William K. Black
February 18, 2017     Roma, Italia (5th in my series on Jean Tirole)

When in Rome, trot out a venerable Latin quotation from Juvenal: “Who will guard the guards?”  I have “buried the lead” in this series of article about Jean Tirole by relegating my discussion of his proposal for fixing the problem of the criminal CEO – appoint a criminal “monitor” – to the fifth article in this series.  His proposal is in his 2001 article titled “Corporate Governance.”

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Steve Mnuchin, Who Played Key Role in Foreclosure Crisis, Confirmed As Treasury Secretary

NEP’s William Black appears on The Real News Network discussing that a Mnuchin-owned bank made hundreds of billions of dollars of fraudulent mortgage loans that caused a financial catastrophe. You can view with transcript here.

Jean Tirole’s Core Contradiction of Corporate Governance

By William K. Black
February 14, 2017     Bloomington, MN (4th in a series on Jean Tirole)

In my second article in this series I began to discuss Tirole’s 2001 article (“Corporate Governance”), which contains this remarkable admission about orthodox economists’ ‘group faith’ (no thinking involved) that results in the “implicit assumption” that some unexplained force “perfectly” protects employees, creditors, and the public from predation by firms.

The economists’ implicit assumption is that employees, suppliers, customers, and other natural stakeholders are protected by very powerful contracts or laws that force controlling investors to perfectly internalize their welfare whereas the contractual protection of investors when the natural stakeholders have control is rather ineffective, and so investors must receive the control rights. The details of the argument have not yet been worked out [p. 4].

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Jean Tirole Proves Why Heterodox Economists are Essential to Save the Field

By William K. Black
February 12, 2017     Bloomington, MN (Part 3 in my Tirole series)

I discussed Jean Tirole’s 2001 article (“Corporate Governance”) and this remarkable admission about orthodox economists in my second article in this series.

The economists’ implicit assumption is that employees, suppliers, customers, and other natural stakeholders are protected by very powerful contracts or laws that force controlling investors to perfectly internalize their welfare…. [The] details of the argument have not yet been worked out.”  [p. 4]

I explained that this was a particularly pernicious example of “group think” that furthered the dominant ideology of orthodox economists (laissez faire) and served their self-interest in getting hired, published, honored, and advanced.  I explained that it was anti-scientific and failed Tirole’s test of what it took to be a scientist.  I noted that Tirole’s admissions also demonstrate the dishonest nature of his and his disciples’ attacks on heterodox economists and promised to discuss that point in this subsequent article.

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Jean Tirole Fails the Tirole Test of What Makes an Economist a Scientist

By William K. Black
February 11, 2017     Bloomington, MN (Part 2 in my Tirole series)

In his letter to the French education minister denouncing French heterodox economists as a “motley crew” of academic failures, Jean Tirole, the 2014 Nobel Laureate in Economics, stated his test for the standard for an economist to be a scientist.

Secondly, like the other great scientific disciplines, modern economic science relies on the continuous questioning of its hypotheses, testing its models against the facts, and abandoning theories that fail the test of reality.

Tirole and his Toulouse school of orthodox economists fail the Tirole test.  Their models, policies, and theories, typically “fail the test of reality” – yet they do not abandon the falsified theories.  Further, they ignore reality-based scholarly work.  Worse, as Tirole admits, the Toulouse school’s failures are typical of orthodox economists.  Tirole shows that the foundational errors fall into three categories, and the nature of those errors supports three other underlying errors.  Tirole’s admissions also demonstrate the dishonest nature of his and his disciples’ attacks on heterodox economists, as I will explain later in this series of articles.

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The “Motley Crew” of Heterodox Economists Freaking Out France’s Theoclassical Economists

William K. Black
Dublin, Ireland     April 4, 2017

I presented a talk today at the Trinity Economic Forum in Dublin.  The Forum is a wonderful annual event run by the students that brings together thoughtful and forceful economic speakers from diverse viewpoints.  Steve Keen also gave a talk at the Forum and I thank him for bringing the subject of this column to my attention.  France is the home of some of the most theoclassical economists in the world.

Orthodox French economists, a bastion of laissez faire, are enraged that theoclassical economics is in increasing disrepute and heterodox economists are leading powerful challenges to the doyen of French economic orthodoxy, Jean Tirole.  Tirole received the Nobel Prize in economics in 2014 for his work on “regulating” oligopolies.  Tirole denounced all heterodox economists as a “motley crew” and claimed that they had failed to meet “internationally recognized norms of evaluation” for science.  Triole stated that it would be a “catastrophe” if heterodox economists taught French students.

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Private Sector Will Make a Killing Off of Infrastructure Bank

NEP’s Bill Black appears on The Real News Network discussing that Democrats and Republicans appear willing to offer public-private partnerships and tax credits to the benefit of Wall Street. You can view with transcript here.

Terror, Trolls, and Trump

By William K. Black
January 30, 2017     Bloomington, MN

How far have Fox “News” and the self-described “Deplorables” fallen?  They rushed after a lethal terror attack on Muslims in Quebec City to declare that Muslims must have committed the attack.

“So, I retweeted the wrong pics, but I was right about the #QuebecShooters being freaking Muslims!!

Close, if the Deplorable meant by his phrase “I was right” “I was wrong.”

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CalPERS Seek to Destroy its Most Effective Director

By William K. Black
January 26, 2017     Bloomington, MN

CalPERS was once the crown jewel of institutional investors, known for combining competence, integrity, and care.  It invests funds and pays the pensions of California State workers.  Over a decade ago, however, CalPERS’ senior managers and board became a cesspool that stood for the opposite.  CalPERS’ corrupt culture is deeply rooted. Various California’s Treasurers have tried to clean up the mess, but the reforms have failed because few senior officers and board members have been willing to take on the rot with the forcefulness required.

I worked closely with board members in my role as the general counsel of Federal Home Loan Bank of San Francisco.  It takes enormous courage to confront senior corporate officers or fellow-directors when they are maintaining a solid front.  We had a good board, officers, and institution.  In an institution with a deeply rooted, sick culture like CalPERS, everything works against forceful directors trying to cure the rot.  They have to confront a phalanx of directors and officers who are genuinely horrified that someone would disturb the highly prized decorum of the boardroom.  The officials maintaining that the sick culture is not sick become enraged at anyone that blows the whistle on their unwillingness to act aggressively to cure the sick culture.

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