The Swedish tv program World of Science had a broadcast on ‘Economic Science and the Debt Crisis’ (YouTube, English subtitles ‘Vetenskapens Värld’ 19-11-2012). It shows us the desolate half-built houses and home evictions in Spain and wonders why economists went astray before 2007, and why in 2012 and four years after the Lehman collapse in 2008 this crisis still isn’t resolved. A main worry is whether economists still might go astray right today. The Swedish video ominously ends with the risk of a collapse of the housing market in Sweden.
In 2008/9 officials claimed ‘No one saw this coming’ (paraphrased). The highest officials excused themselves in this manner, like Alan Greenspan (well-known) and Nout Wellink (not well-known but president of the Dutch Central Bank and chairperson of the Bank of International Settlements in Basel, i.e. the central bank of central banks).
Queen Elizabeth famously asked ‘if these things are so large, how come everyone missed it ?’ (paraphrased). To answer this same question, the Swedish video has interviews with Nobel Prize winners Joseph Stiglitz (Columbia University) and Robert Lucas (University of Chicago), officials Michael Kumhof (IMF), Jörg Asmussen (ECB) and Stefan Ingves (Swedish Central Bank), and scientists professor Steve Keen (University of Western Syndey) and dr Dirk Bezemer (University of Groningen).
The video is very instructive, by itself but also since it shows that Dirk Bezemer disinforms Sweden. The flow of information of economic science to the general public still isn’t optimal.
The video focusses on the phenomenon that economic models at the official institutes tended to exclude the financial sector. Even at the central banks. These models assumed that money was only greasing the wheels and not a factor of itself. The Great Depression in the 1930s occurred because money can be a factor in itself, notably when people have debts that they cannot pay back. But most economists apparently thought that this was long in the past. At the Central Planning Bureau in Holland around 1990 some models included a monetary / financial sector, following the criticism of Milton Friedman, but in practice that sector seemed superfluous. The financial sector in 1981-2007 was booming but it did not play a role in the main models. See also my earlier text here on the Keynesian years.
In the video, Robert Lucas is in a state of denial. Joe Stiglitz doesn’t have much of an answer though everyone at George Soros’s Institute of New Economic Thinking (INET) listens attentively to what he has to say, perhaps trying to find out whether there is something New in it. The officials explain that they are doing their best and that we have to muddle through. Keen and Bezemer explain the mechanism of debt. If you borrow and invest, the economy will grow because of that investment. If you invest wisely then you can pay back what you borrowed. If you invest unwisely you cannot pay back, but still have to. Banks are supposed to have buffers for failing clients. Things can go wrong when many clients fail at the same time. It doesn’t help when there has been fraud in the system and you don’t do anything about that, even when the proof is so obvious after the system collapses. (And it doesn’t help when the environment is not accounted for in your measure of growth.)
Bezemer did not warn about the crisis before it happened. He was an economist on agriculture and development with a 2001 thesis in that area. He however wrote a paper ‘No one saw this coming’ that shows that plenty economists warned about the crisis. What was obvious for everyone who had seen the crisis coming has now been documented for a larger public.
Our high officials deliberately chose to neglect contrary evidence, not only before the onset in 2007 but still continue to do so. Much of the economic history of the last five years is about how the world deals with embarrassment in high places. For example, in the recent European Summit Bundeskanzler Angela Merkel succeeded in blocking further discussions, with the effect that the German trade surplus doesn’t get the criticism that it requires. The attitude is as if the debtors are the problem but economically the creditors are important too.
I did warn about the crisis, see DRGTPE 2005 on the financial system, though I was amazed that George W. Bush allowed Lehman to collapse. Who also warned is professor Alfred Kleinknecht of the University of Delft. He and I do not occur in Dirk’s paper because neither of us used explicit financial models. He and I just followed economic developments and used common economic sense and statements of those with the alternative models. Dirk’s criterion of quantitative finance is also rather strict since I employ economic theory and propose a new neoclassical synthesis, which allows us to understand that crises will happen when countries do not have Economic Supreme Courts. (Not only financial crises but also ecological crises for example.)
Thus, when I read Dirk’s paper in 2009, I complimented him on his fine work, but also informed him about the censorship of economic science at the Dutch Central Planning Bureau. Also, Dirk’s paper emphasises the role of accounting for economic modelling. Indeed, debt can only play a role when you properly account for it. Dirk’s paper has a bit of a flavour as if this would be a new discovery and original contribution of himself. However John Hicks 1904-1989 and Nobel Prize winner in 1972 already famously pointed to the importance of accounting. And my analysis in DRGTPE also achieves an important result by accounting. I asked Dirk whether he could check that also since a corroboration would be useful in general.
There evolved an exchange of emails. Indeed, I write ‘Dirk’ instead of ‘Bezemer’, which reflects this exchange. To my regret Dirk concluded that I would not ‘communicate effectively’. I disagree and find that he doesn’t listen well. I still have the impression that he hasn’t read DRGTPE. See here my overview of our differences of opinion, and it amazes me that he doesn’t formulate a reply.
There is also the case of professor Alfred Kleinknecht of Delft. Like me he criticises for twenty years the Dutch export surplus. The surplus of the North is the deficit of Southern Europe. Dirk can check as an academic outsider that Dutch official institutes and bureaucrats abuse economic science. But he doesn’t. Dirk isn’t interested in who saw it coming, but of course has to write a paper that will be accepted by journals.
Dirk’s paper ‘No one saw this coming’ is more useful than that of Nobel Prize winners Lucas and Stiglitz and the officials at IMF, ECB and the Central Bank of Sweden, but it still is incomplete, biased and inadequate if you want to understand the current crisis. Apparently Dirk has also a page at INET. It is not clear what is New about ‘No one saw this coming’ since it only states what was known, so there must be other New ideas. Clearly Dirk didn’t use his contacts there to inform INET and Joe Stiglitz about the new ideas in DRGTPE and the censorship of science in Holland. Dirk doesn’t tell the Swedish camera that there is censorship of science in Holland and that everyone is advised to boycott Holland till that censorship is resolved.
Dirk seemed part of the solution but turns out to be part of the problem. He seems critical but he actually isn’t. You are warned now. Though Dirk’s paper might seem critical, do not conclude that he has an open mind. On camera he is nice and helpful and knowledgeable, but apparently this is not the whole picture of the situation.
When John Maynard Keynes wrote his ‘General Theory’ he of course couldn’t require the world to read it, but he could do so for his students, and apparently World War II was a sufficient nutcracker to open up more minds. Currently I don’t teach economics and I am hoping that we can prevent World War III in say 2050 or even a local war here in Europe that doesn’t get the rest of the world involved again. Perhaps Dirk is waiting for a new crisis like that so that he can write ‘No one saw this coming’ again. But okay, this may be unkind of me to say. But it is frustrating when you hope for an open mind and a scientific attitude, and you find evidence to the contrary again.