“If I had been consulted whether to establish a Nobel Prize in economics, I should have decidedly advised against it. One reason was that I feared that such a prize […] would tend to accentuate the swings of scientific fashion. […] My second cause of apprehension […] is that the Nobel Prize confers on an individual an authority which in economics no man ought to possess.”
— Friedrich Hayek, upon receiving a Nobel Prize in economics
YOUGHAL, IRELAND — Last week, the Nobel Committee announced its winners for the prize in economics.
It gave the prize to three professors, including a pair of numbskulls. One from France … one from India … now both at MIT in the U.S., married, and alas, reproducing.
But let us turn to the world of finance first. Then we will return to benighted academia …
Investors are generally optimistic. The trade deal with China is “coming along very well,” their president told them. Larry Kudlow, his advisor, also gave out word that the December tariffs might be delayed if the talks are still on track.
But the real reason for investor optimism is that they know the fix is in. FX Empire reports:
More than 30 central banks around the world have cut interest rates this year amid trade wars and slowing economic growth and subdued inflation. The Fed cut the federal funds rate twice this year, each time by 25 basis point[s].
We caution our Dear Readers, however. You don’t get to Heaven without dying. Markets go up and down.
After 10 years of up … Mr. Market is probably getting bored. He’s more likely to turn around than to continue his upward hike much longer.
And the great and glorious Valhalla in which stock prices rise from here to kingdom come is never going to come at all.
So let us return to the dark heart of academia … the economics department.
There, the professors are bound and determined to stop the natural ebb and flow of markets and economies.
For them, a market sell-off is a problem to be avoided by adroit government policies.
As for a recession … they have a solution. And when that one causes further, graver problems … they’ll come up with another solution.
Quantitative easing? Negative rates? Fake money? Repo liquidity? Fiscal policy … monetary policy? Hey, there’s a lot more where that came from …
Call in Roto-Rooter
Paris Match reported that one of the recent Nobel Prize winners, Esther Duflo, urged economists to think of themselves as “plumbers.” To her, the world’s economy is merely a system of pipes.
“The poor will always be with us,” said Jesus. But not if Professors Duflo and her husband, Abhijit Banerjee, can help it. They’ll call in Roto-Rooter!
Like Paul Samuelson, who won his Nobel for bringing pseudoscientific rigor to the profession, the two most recent winners aim not just to opine on the causes of poverty, but to study them — as if they were a sewer system — and help governments put in bigger drains.
Our son Henry, based in Paris, was on the case:
One of the studies most frequently cited in connection with Ms. Duflo only showed what we already knew, that people — even professors — respond to cash incentives.
She convinced a school district in a rural area of India to run a test. The idea was to pay an extra bonus to teachers for every day they taught in excess of 20 days per month. And if they didn’t show up, they would be penalized a like amount.
Teachers proved that they had come to work by taking a photo of themselves with their students daily, with a special camera that stamped the date and hour.
Surprise! Once the system was put in place, the rate of absenteeism on the part of teachers fell and the performance of students improved.
Henry goes on to remark that financial incentives are not exactly a revolutionary new idea.
“You get what you pay for,” as Milton Friedman used to say.
But the duo didn’t stop there. They also did a study that showed that villagers would be more receptive to a taped speech by a woman if the village had previously had a woman leader.
They’ve conducted 80 of these “experiments.”
Another of them discovered that special tutoring could help schoolchildren who were falling behind. And another discovery was that the poor didn’t necessarily spend extra money on more or better food; they had other desires too — such as TVs and radios.
Solutions for Everything
In addition to these staggering insights, Mr. Banerjee also has a solution for the slowdown in the world economy: Raise taxes!
Yes, by letting the rich hold on to their dough, “you are giving incentives to the rich who are already sitting on tons of cash.”
What is he thinking? The rich are not chickens, sitting on their cash like setting hens.
Instead, the money is put in banks and T-bills … and lent out to governments to do the very good things that governments allegedly do. Or, it is invested in the corporate world, where businesses hire people, build factories, increase productivity, and create more wealth.
At least, that is the idea. What really happens is far too complex for economists to comprehend … and far too nuanced to imagine for their pipe dreams.
But it must be a delight to be so simpleminded. And so vain.
You think the troubles of the human species — real and imagined — can be solved with a wrench. And you just happen to have one in your hand.
P.S. Fortunately for Europe and America, modern economists didn’t come along until the great growth spurt that took us from scarcity to obesity was largely over. Paul Samuelson didn’t win the Nobel Prize until 1970. Paul Krugman won it in 2008. And now Duflo and Banerjee have it on their wall.
We’ve seen that the plumber economists didn’t create prosperity. What we will see next is how much of it they can destroy.
• This article was originally published by Bonner & Partners. You can learn more about Bill and Bill Bonner’s Diary right here.