Honest Mom, I only bought the new Playboy to read the article on UMKC Economics

By William K. Black

The UMKC economics department is featured in an article in the current Playboy that discusses the failure of theoclassical economics and economists to admit their theoretical and policy errors.  The devotion of theoclassical economists to those errors has proven so dogmatic that their disastrous policies have created the ever more criminogenic environments that drive our recurrent, intensifying financial crises.

The title of the article is:  These Rogues Of The Dismal Science Have Been Vindicated By The Economic Crash. How Much Longer Can Mainstream Economists Ignore The Heterodox?  You now have a valid excuse to purchase Playboy, care of the UMKC economics department.

Tim Schultz, the author of his article sets out his purpose in attending the 2011 annual meeting of economists in Denver.

“Black is not alone. He is a leading voice among a small group of economists who believe modern economic science simply doesn’t understand the real world. Members of this loosely organized group call themselves, a bit dramatically, the heterodox. Many of them had predicted the financial crisis before it occurred and are now calling for real reforms in order to avoid an even bigger one. Like Black, they are ignored or belittled by most in their profession. Yet reality has issued a wake-up call. The financial crisis and ongoing recession have largely validated many of the heterodox positions on fraud, deregulation and debt. Could the mainstream still refuse to publish, cite or listen to them?  I went to Denver last year to find out if the rogues of the dismal science were finally going to have their day.”

Schultz asked one of America’s leading quants, John Cochrane, to critique heterodox economics.

“I mean, every· now and then there’s an excluded subgroup that turns out to be right,” said John Cochrane of the University of Chicago. Cochrane speaks proudly for mainstream, also known as neoclassical, economics.  Talking with me over the phone before the conference, he made clear that his condemnation was general: “I haven’t read their specific work. I’m busy, and I try to read what is considered interesting and valid.”  His position on heterodox economists was unambiguous: They’re kooks.  “They are about two percent of academe and about zero percent of finance.” He was dismissive of their prediction of the credit-bubble collapse. ‘Beware those who predict nine of the last two crashes, okay? They’re just not rigorous and don’t use modern mathematical tools.  This business is a wide-open meritocracy.  You have to distinguish between closed minds and a lack of quality. The perception is that this is 1969 stuff. Give me new data and new ideas.’”

To review the bidding, Cochrane hasn’t read any of our work.  Like all of us “he’s busy.”  He reads “what is considered interesting and valid.”  The key word in that phrase is “considered.”  It means by him and like-minded colleagues.  In plainer English, Cochrane doesn’t read anything we write because the people he hangs with don’t read anything we write.  They know without reading anything we write that our work is not “interesting and valid.”

A prominent economist at an even more prominent university recently denounced ad hominem criticisms made by Paul Krugman because he alleged that Krugman criticized without taking the time to read the works of the economists he was criticizing.  The economist wrote that “many colleagues” at one of the most prestigious universities in the world helped him draft his denunciation of Krugman, but that he needed to keep their names secret “for obvious reasons” so that they would not also be criticized.

“I like it when people disagree with me, and take time to read my work and criticize it. At worst I learn how to position it better. At best, I discover I was wrong and learn something. I send a polite thank you note.

Krugman wants people to swallow his arguments whole from his authority, without demanding logic, or evidence.  Those who disagree with him, alas, are pretty smart and have pretty good arguments if you bother to read them. So, he tries to discredit them with personal attacks.

This is the political sphere, not the intellectual one. Don’t argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let’s just not pretend this has anything to do with economics, or actual truth about how the world works or could be made a better place.

It gets worse Krugman hints at dark conspiracies, claiming “dissenters are marginalized.”

Any astute reader knows that personal attacks and innuendo mean the author has run out of ideas.

That’s the biggest and saddest news of this piece: Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do (emphasis in original).”

That extended quotation comes from Cochrane’s response to Paul Krugman’s column September 6, 2009 article entitled “How Did Economists Get It So Wrong?”

Cochrane exemplifies our family’s rule that one cannot compete with unintentional self-parody.  I am proposing to my colleagues that we create a new economic medal for hypocrisy:  The Cochrane.  Cochrane is so logically inconsistent (violating what he terms in his article “the first siren of beauty”) that in his statements to the author of the Playboy article he proves the point he had so recently mocked Krugman for advancing:  economic “dissenters are marginalized” by Cochrane and his colleagues.  Dissenters are dismissed without ever being read – automatically “considered” beyond the pale.  Again, here is what Cochrane told Schultz:

“He was dismissive of their prediction of the credit-bubble collapse. ‘Beware those who predict nine of the last two crashes, okay? They’re just not rigorous and don’t use modern mathematical tools.  This business is a wide-open meritocracy.  You have to distinguish between closed minds and a lack of quality. The perception is that this is 1969 stuff. Give me new data and new ideas.’”

This is what passes for “rigorous” “crystal-clear” “logic” in Cochrane’s world.  He denounced Krugman for failing to understand that Cochrane’s views are driven by ineluctable logic, for Cochrane claims that economics as practiced by Cochrane is a “discipline that requires crystal-clear logical connections.”  Does Cochrane know how many crashes we predicted?  No, because he has never read any of our work.  He, a leading neo-classical quant, made up his numbers to support his conclusion – an all too revealing demonstration of how purportedly “modern mathematical tools” are abused.  Cochrane is to logic as “truthiness” is to truth.

UMKC economists, white-collar criminologists, financial regulators, public administration scholars, and law enforcement officials have given the world “new data and new ideas” for decades, but since Cochrane refuses to read the “new data and new issues” he gets to display his “crystal-clear logic” by claiming in an exasperated tone that he has not read any “new data and new ideas” from us.  Heterodox views will always fail Cochrane’s test – because he will not read their “new data and new ideas” he will not receive “new data and new ideas” from those with heterodox views.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Follow him on Twitter:   @WilliamKBlack

57 responses to “Honest Mom, I only bought the new Playboy to read the article on UMKC Economics

  1. Ha! Look forward to the day when “quants” like Cochrane and his ilk are relegated to the irrelevance they so richly deserve.

  2. I think, though, that the article highlights a critical weakness of heterodox econ that should be addressed – math. There’s no reason math cannot work with heterodox economics, and I think it is self-defeating for heterodox economists to reject it as a viable method.

    • Paul Krueger

      It would be incorrect to assume that heterodox economic theories like MMT avoid the use of mathematics. You might make that conclusion based on what is in blogs, but there is much more in various papers you can find. Scott Fullwiler and Bill Mitchell (among others I’m sure) have published papers containing mathematical models and analysis.

      More mathematical sophistication is not necessarily a good thing either. For example, I’ve waded into a few of the papers that use “Dynamic Stochastic General Equilibrium” (DSGE) models (which have become common in mainstream economics) and find them to be extremely opaque. I don’t want to generalize too much from the small sample that I’ve read, but those few made many complex assumptions with little or no explanation. Their assumptions primarily seem to be justified simply by the fact that they were also used by some previous research. Then they proceed to derive results that are consistent with the assumptions that were built in. At best, it seems to me that they demonstrate that their stated conclusions are consistent with their assumptions.

      From the name itself, you can see that DSGE models are focused on finding equilibrium states. The assumption that economies move towards stable equilibrium states is critical, because without it you can’t easily talk about “what happens” because it is constantly changing over time. And it also seems to me that they have yet to discover what weather forecasters learned decades ago, namely that complex non-linear dynamic systems can be enormously sensitive to initial conditions and can have many sorts of “attractors” that are anything but static. That is the foundation of chaos theory. These observations are not new to economics. A quick google search found “Nonlinear Dynamics and Chaos Theory in Economics: a Historical Perspective” by Artem B. Prokhorov: http://www.msu.edu/~prohorov/paper.pdf. But objections like those in this paper seem to be generally ignored by those who use DSGE models.

      And then throw in the human factor. Economics is fundamentally about human decision-making and people adapt to new information in extremely rapid and flexible ways. They learn over time and modify their behavior when it proves to be sub-optimal. It might be possible to predict some of that using the right sort of model, but it would be enormously complex and not likely to be very accurate. The model would somehow have to reflect changes in the belief states of the players being modeled.

      It seems to me that eventually economic modeling must start to look more like weather (not climate) modeling in the sense that you can only do it over near-future time periods using very detailed data about initial conditions. Just as for weather models, it would likely require super-computer scale computational power. To make these models more transparent it would be necessary to use an appropriate modeling language. I’ve been thinking about the use of fuzzy logic for this sort of thing because of its ability to relatively easily model human decision-making rules. That’s the same sort of mathematics that is used (for example) to control how cameras react. Implemented in the context of the sort of constraints adopted by MMT (e.g. stock-flow consistency and sector balance equations) I think that could be interesting.

      • The “mainstream” leaps into mathematical models without understanding the basic truths about the economy, i.e. the fundamental differences between Monetary Sovereignty and monetary non-sovereignty. And if one doesn’t understand those basic differences, there is no hope of understanding the future.

        Much ignorance is hidden in equations.

        Rodger Malcolm Mitchell

      • Prefer Bayesian Probability Theory to Fuzzy Logic … although I don’t get to do that sort of thing these days.

      • Thanks for coalescing that point so nicely. I agree… it’s one thing to say, use math to figure out linear things like Pi or the acceleration due to gravity. It’s another thing entirely to apply mathematics to complex non-linear, “chaotic” data sets. “At best, it seems to me that they demonstrate that their stated conclusions are consistent with their assumptions” – exactly… if you’ve ever drawn a line (or curve) through a set of data that was decidedly non-deterministic, you’d know that you could do precisely as aforementioned: make it confirm to a myriad set of assumptions.

      • Main thing missing from mainstream models seems to be wealth. For example, public debt is wealth to the private sector. Raising house prices create more wealth also. Collapsing house prices creates “wealth shock”, which induces more saving within a private sector. And so on.

        It also seems to be the case that purpose of the mainstream models is not to further undestanding of the economy, but to serve political purpose to mislead our policy makers to some preferable policy. Let’s not forget that Milton Friedman taugh to his students that in order to win a political argument, on has to:

        1. Choose the policy outcome one wants to arrive
        2. Choose underlying assumptions that logically lead to desired outcome
        3. Construct a theory between them

        That way you get your political opponents to argue over minor details where they can be easily defeated, implicitly accepting underlying asumptions. But in reality it is nothing but lying with elaborate theories.

    • And what about Steve Keen, who criticizes the neo classicals for being weak in math?

      • Steve Keen does, in fact, have every right to criticize the neo-classicals for their weak math — and he does so rather eloquently.

        I was reminded of neo-classical justifiers’ comments on a relatively recent blog where Keen was ridiculed for not understanding their depth of math skills. It was in regard to Keen’s recent INET paper. In the reality world, Dr Keen gives his papers to real mathematicians for analysis. See this recent paper by mathematicians on Keen’s 1995 economic model (with some more recent modifications) if you want to have an idea of Keen’s facility with dynamic non-linear complexity systems:


        Eat your heart out John Cochrane ! 1969 indeed !

  3. “Heterodox” is the same as “unorthodox,” meaning not conforming to the official position. It often refers to religion. Protestantism was heterodox. So was Galileo. So was the realization that birds descended from dinosaurs, and germs cause disease. Ignaz Semmelweis was heterodox.

    In every case, the mainstream fights tooth and nail, to deny the new ideas. While in theory, every scientist should actively search for fact that disagree with current beliefs — that is how science progresses — the reality is quite different.

    Mainstream scientists have so much ego invested in the standard wisdom — often from many years of writing and speaking — that to learn now everything they have said was utter bullsh*t is too devastating to consider.

    Because, Professor Cochrane, you are busy, I offer you this five-minute explanation of Monetary Sovereignty, which you can deny to your heart’s content.

    1. Today’s money — dollars, yen, euros et al do not exist in any physical form. They all are mere accounting notations. No one ever has seen or touched a dollar. A dollar cannot be “printed.” A dollar bill merely is a receipt, showing the holder owns a dollar, but the dollar itself is just a number on a balance sheet.

    2. A Monetarily Sovereign entity has the unlimited ability to create its sovereign currency — for the U.S., it’s the dollar. The U.S. has the unlimited ability to mark up numbers in dollar-denominated bank accounts, including its own bank accounts. It never can run short of dollars, and any debts denominated in dollars, no matter how large, easily are serviced. Dollar-denominated debt never is a for the Monetarily Sovereign U.S. government.

    3. The U.S. government became Monetarily Sovereign on August 15, 1971. By contrast, the U.S. states, counties, cities and villages, businesses and people are, and always have been, monetarily non-sovereign. They have no sovereign currency; they can run short of dollars, and dollar-denominated debt is a burden.

    4. The euro nations are monetarily non-sovereign, which is why their debt is so burdensome to them, and is the fundamental cause of the euro crisis. (I predicted this crisis in a speech on June 5, 2005 at the UMKC)

    5. Having the unlimited ability to create dollars, the U.S. government does not need income. It does not need to borrow dollars or to receive tax dollars. Both borrowing and taxing are relics of the pre-August 15,1971 era. States, counties, cities and villages, business and people, being monetarily non-sovereign do need income, usually in the form of taxes and borrowing (for monetarily non-sovereign governments) or salary and investment income (for businesses and people).

    5. The U.S. federal government creates dollars by spending. It pays bills merely by instructing creditors’ banks to increase the numbers in creditors dollar-denominated bank accounts, which increases the total world dollar supply. The U.S. government destroys dollars by taxing. It instructs taxpayers’ banks to reduce the numbers in taxpayers’ accounts.

    6. The U.S. federal government “borrows” (no longer necessary) by marking up the numbers in T-security accounts and marking down the numbers in checking accounts. “Lenders” to the U.S. have both a bank checking account and a bank T-security account. The “loan” is accomplished when the checking account is debited and the T-security account is credited. The “loan” is paid when the T-security account is debited and the checking account is credited. Paying federal loans has no inflation implications, because no new dollars are created.

    7. The federal deficit is the accounting differences between taxes received (dollars destroyed) and federal spending (dollars created). Deficit spending is the federal government’s method for adding dollars to the economy. Deficit spending does not create T-securities. Federal debt and deficits are not functionally related. It is possible to have federal deficits without debt, and it is possible to have federal debt without deficits.

    So there it is, Professor Cochrane. Everything in heterodox Monetary Sovereignty economics flows from those seven simple points — five minutes worth of reading for a busy guy like you.

    Then if you would like to learn a bit more, you can spend 15 minutes at Summary

    Try it some time.

    Rodger Malcolm Mitchell

    • Roger, excellent summary.

      Of course, Mr. Cochrane and Co. will never see/read it but…

      They will be rewarded in Heaven. Or not.

  4. Should say, “Dollar-denominated debt never is a burdenfor the Monetarily Sovereign U.S. government.

    • “1. Today’s money — dollars, yen, euros et al do not exist in any physical form. They all are mere accounting notations. No one ever has seen or touched a dollar. A dollar cannot be “printed.” A dollar bill merely is a receipt, showing the holder owns a dollar, but the dollar itself is just a number on a balance sheet.”

      Graeber 101.

      Credit Theorists insisted that money is not a commodity but an accounting tool. In other words, it is not a “thing” at all. You can no more touch a dollar or a deutschmark than you can touch an hour or a cubic centimeter. Units of currency are merely abstract units of measurement, and as the credit theorists correctly noted, historically, such abstract systems of accounting emerged long before the use of any particular token of exchange.

      The obvious next question is: If money is a just a yardstick, what then does it measure? The answer was simple: debt. A coin is, effectively, an IOU. Whereas conventional wisdom holds that a banknote is, or should be, a promise to pay a certain amount of “real money” (gold, silver, whatever that might be taken to mean), Credit Theorists argued that a banknote is simply the promise to pay something of the same value as an ounce of gold. But that’s all that money ever is. There’s no fundamental difference in this respect between a silver dollar, a Susan B. Anthony dollar coin made of a copper-nickel alloy designed to look vaguely like gold, a green piece of paper with a picture of George Washington on it, or a digital blip on some bank’s computer. Conceptually, the idea that a piece of gold is really just an IOU is always rather difficult to wrap one’s head around, but something like this must be true, because even when gold and silver coins were in use, they almost never circulated at their bullion value.

      Graeber, David (2011-07-12). Debt: The First 5,000 Years. Random House Inc

      • BobbyG

        Absolutely, 100% correct.

      • Exactly, BobbyG, exactly, Good Citizen!

        I always say, the top three economists in the Western Hemisphere (I don’t claim knowledge of the entire planet) are Prof. Michael Hudson, Prof. Joseph Tainter and Prof. David Graeber.

        Of course, the second and third named individuals are anthropologists. Might that not be the problem?

  5. Posted comments presume mathematics to be synthetic a priori. It is not. Mathematical operators are reducible to inclusive disjunction (“plus” or “+”) and exclusive disjunction (“minus” or “–“). Intervening any two things are an infinity of things exhibiting characteristics of the two limiting things. Unobservable, they are imaginable. As imaginable, they are ascriptive. Being ascriptive, they are normative, each constituting an “ought,” not an “is.” Exhibiting characteristics of the two limiting things, they are ambiguous, neither one limit nor the other limit. Resolution of their ambiguity constitutes assignment to one or the other limit (exclusive disjunction), or both limits (inclusive disjunction). Such assignment being unnecessary, it too constitutes an “ought.” No where is there any entity, observable or imaginable, constituting an autonomous object identifying a mathematical operator. Since a normative resolution of ambiguity, mathematics is simply a means by which an a priori conceptualization can be represented. Thus, mathematics is as good as the conceptualization it is employed to represent. There is nothing special in mathematics itself, or one’s agility in employing it. If what is mathematically modeled is crap, the mathematical model is crap.

  6. FDO15:

    You pig. You vile, rancid, and miserable worm. In fact, you even embarrass pond scum. And people don’t despise you because you’re repulsive. Don’t get me wrong — you are still repulsive — it’s just not why people are repulsed. It’s because you have no meaning. To anyone or anything. Including stop signs. Drooling baboons abandoned you because of your inability to scratch yourself with either hand, even with the big bouncing arrow placed over your bright-red ass. Darwin is considered a hack because of your existence. You should be proud, or at least highlight this achievement on your resume. Mostly though, it’s because tapeworms would rather host on something, ANYTHING, with less fecal contamination. It just is what it is. This isn’t personal.

    But you don’t understand, we are all more than amused. Including the communists. And we all unite in hoping you will cry. In the giant petri dish in which you inhabit.

    • Trixie,

      Why go there? You’re just stooping down to FDO15’s level (actually, your comment his below his level). Are we children? Why call people names?

      Nearly everyone on these Modern Money blogs would do themselves and everyone else a favor by mimicking the tone and argument style of Tom Hickey. One may or may not agree with his views, but one thing is for certain… in disagreements, he sticks to the issues and is always cordial.

      • “Why go there? You’re just stooping down to FDO15′s level (actually, your comment his below his level). Are we children? Why call people names?”

        Because we’ll never here from FDO15 here again. He can’t take it and will move on. That’s the point. Never fails.

      • Why not? You can’t have a rational discussion with with FDO 15, so why not call him names?

  7. A general suggestion for readers of FD015 posts:

    People liken FD015 and his minion “Peter” should not be thought of as representative of the MMR (Cullen himself said this). They are hearthless, stateless trolls, bandying about the same useless talking points.

    • Yeah, but on the other hand I haven’t laughed this hard in a long time.

      Rodger, bravo. Every word was magnificent.

      Trixie, a job well done. Probably similar to what FD015 heard on his first date (and 2nd, and 3rd…).

      • Trixie’s wit is formidable. Saddens me that she no longer shares it as much with Cullen and beo…

  8. Intolerantcentrist

    Cochrane’s Chicago School ideology of deregulation is the ‘Captain’ of our economic ship; a ship which most of us recognize is sinking after striking the predictable and avoidable financial iceberg. In his purposeful and constructive ignorance of reality, Cochrane purvey the deregulatory belief system by arguing that the ship is in fact sinking but not because of striking an iceberg. Rather, he argues, the ship is sinking because we have laws against hitting icebergs with ships.

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