Monday, October 11, 2010

The Nobel Economics Winning Trio Deconstructed

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2010 was awarded jointly to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides.

Diamond, 70, is an economist at the Massachusetts Institute of Technology, and a specialist in Social Security. Bernie Madoff would have loved to have Diamond on his team, since Diamond completely ignores the Ponzi like aspects of Social Security and tinkers with "fixing" the scam. Going beyond Madoff, Diamond then ignores the coercion involved in SS. He focuses with tunnel-like narrow vision beyond the coercive aspects, and Ponzi like aspects, to pontificate in numerous journal articles and books about how to "save" SS, including recommendations to cut "benefits" and aggressively increase SS taxes.

With this absurd background, President Obama has nominated Diamond to become a member of the Federal Reserve. The Senate failed to approve his nomination because of Republican foot dragging, before members adjourned to campaign for the midterm congressional elections.

In an apparent effort to prove his cluelessness goes beyond SS and that he doesn't understand the proper methodology of economics, Diamond was elected a fellow and has served as President of the Econometric Society. Econometrics is a faulty method of economics whose followers blew up the hedge fund, Long Term Capital Management and the sub-prime mortgage industry.

Mortensen, 71, is an economics professor at Northwestern University in Evanston, Illinois. He studies frictional unemployment. This is like studying half time in a basketball game. Yeah, it exists, but it is a pretty simple concept that doesn't tell you much about the game. Frictional unemployment simply means that if someone loses a job, it takes them time to find another job.

Mortensen along with Pissarides (who is 62, and a professor at the London School of Economics) and, to some degree, Diamond have taken the simple concept of frictional unemployment and put it in mathematical form to create search and matching theory. There appear to be no successful practical applications for the Alice in Wonderland equations created. Their only valuable input is one we have been pointing out here regularly: "that more generous unemployment benefits give rise to higher unemployment and longer search times."

Outside of this obvious point, these guys have no real insights that can help anyone understand the economy and one of them. Diamond, is near the controls of  the greatest Ponzi scheme the earth has ever experienced. I would be objecting less if the award was given directly to Madoff.

 In summary, the Nobel Committee could have only done a worse job by giving the award jointly to Alan Greenspan and Ben Bernanke.


  1. Yep, the award of the Nobel prize to two LTCM directors was a big contrarian sell signal. Also, I'm surprised no one has suggested a rather elegant solution to the SS problem: hand the "trust fund" over to BlackRock to trade. They can mark it higher each month like Maiden Lane until it's "solvent".

  2. Wenzel,

    The Nobel Committee only did a "bad" job if, in fact, receiving the award is an actual honor and it deserves to go to purveyors of truth, rightfully speaking.

    I deny both are true, and so, they have in fact made an excellent choice! Again! As always, minus that fluke with Hayek.

  3. "Mortensen, 71, is an economics professor at Northwestern University in Evanston, Illinois. He studies frictional unemployment. This is like studying half "

    I love insight like commented above! These academic clowns is the reason we have so many problems in the economy. They are the 'so-called' experts...

  4. I was just visiting the site Marginal Revolution, and I am sad to report that no less of an authority than Tyler Cowen disagrees with your assessment of the quality of this year's Nobel winners.

    Nonetheless, I agree with you completely and consider Cowen a polymathic blowhard. ("Look at me! I read five books this weekend!") The Swedes wanted to award uncontroversial establishmentarian macro thinkers after going to the far left in 2008 and then veering slightly right in 2009. They need to abolish this award before it becomes too much of a joke. Or else, they could rename it the Nobel Prize in Effective Interventionism and be more accurate regarding the goal of the award and its organizers at Sweden's central bank.

  5. You are definitely a fool.

  6. Being pro-antiestablishmentarian, I agree with Ameri, though the awards for the hard sciences still mean something.

  7. Great article as usual! But I am quite a bit obfuscated by the fact that none others than the great ROBERT MUGABE has been forgotten by the Nobel prize committee! How scandalous!!!!!!!!!!

  8. HAHAHAHAHA. You do not even know what econometrics is. Let me give you a hint, it's applied statistics. You are too ignorant to even know you are ignorant about economics.

  9. I saw the announcement on BBC news yesterday...their "economics commentator" said "they've been given a prize for stating the blindingly obvious".

  10. What can you expect from an award by a central bank. Would you expect an award for mafioso of the year to not go to a retired godfather?

  11. Bravo, great article. We live in a world of circuses and clowns. How do we get out?

  12. The Nobel committee rewards those perpetuate the system that enriches the TBTFW (too big to f*&% with) banks. These prize winners are no surprise.

  13. This blog turns out to be an echo chamber of opinions by leading libertarian thinkers. The only witty sentence is the one on half-time.

    I prefer to read the originals, they argue and make their point in a serious argument, instead of an attempt to engage in a shouting match.

  14. Is is a troll site with potential.

    I will check back sometimes...

  15. the poster of this article obviously has not the slightest idea of economics as a science (as opposed to economics as it is presented by politicians).

    the part where you blame the crisis on econometrics also shows that you are too lazy to at least look up the wikipedia article on the subject you are posting on. as some poster before me mentioned, econometrics is nothing more than applied statistics. it is a useful tool, nothing else. if you see econometrics as the cause of anything, you are beyond stupid.

  16. Maybe the author should read this

    before posting nonsense...

  17. Dear Latest Anon (and all other badmouthers):

    Anyone who links to the NYT to "explain" anything, especially anything related to economics, is a moron. The NYT are pushers of "Free Lunch Economic Theory".

    Free Lunch Economic Theory is not an economic theory but rather a euphemistic way to discuss theft and redistribution of wealth.

    You are confused, violent and angry people with malice in your hearts. This much is obvious with your hatred of voluntary exchange and your relentless search for a way to violently impose your preferred social outcomes on others.

    Good day to you all, criminals and goons, now begone!

  18. PS:

    This is CLASSIC, from the NYT article linked to--

    This insight led to Professor Diamond’s conclusion that higher levels of unemployment insurance could improve the workings of the labor market by making some workers pass up marginal jobs.
    Their models tell us that common wisdom — like the belief that higher unemployment benefits always increase unemployment — may be wrong and that policies that improve matching may have great value.

    Two things here:

    1.) If worker's are "passing up" jobs they otherwise would've taken (great abuse of the economic term "marginal", by the way, used here to describe a job that is not "well-suited" to the potential worker in question, however that is arbitrarily defined, rather than meaning a job "at the margin" of some group of possible jobs that a potential worker may choose from), it would seem that unemployment insurance is, in fact, causing unemployment.
    2.) The author states that these unemployment insurance schemes can have "great value". But what "value" is being measured? This is a common interventionist ploy, to abuse language and discuss economics in arbitrary and meaningless terms. Obviously they are not referring to the subjective values of participants in the marketplace, because we already know how people freely value jobs given this particular interventionist context. No, this is another attempt to define value objectively or mystically, in a way that only the supporter of intervention themselves can truly grasp, understand and work off of. The rest of us mere simpletons will have to get by with putting faith in the Greater Beings tasked with implementing these interventions.

    "Trust me on this", the battle-cry of arbitrary interventionist schemers everywhere.

  19. To Taylor Conant:

    I am the Anon poster: the NYT link is to an article written by a respected economist who knows a thing or two about economics. The point of it is to illustrate the contributions these 3 have made to economics (whether you like the contributions or not is up to you, the point is to first read an article about what they've done, so that you can have an informed opinion!).

    And btw, you haven't the slightest idea who I am, so saying that I am "confused, violent and angry [] with malice in [my] heart" is completely out of line. Perhaps you should take a chill pill and learn some manners.

  20. Anon,

    I don't care if he is a "respected" economist who "knows a thing or two". The article he just wrote demonstrates he has ignored the fundamental concepts of economics, clearly. To wit,

    Either value is SUBJECTIVE or value is OBJECTIVE. If value is SUBJECTIVE then no intervention in market the market could yield a superior outcome to those that would've been arrived at voluntarily.

    Having "respect" within the economic community given the current state of confusion, ignorance and irrationality concerning simple truths such as the one above can only mean that the person being respected is not worthy of the same by anyone with their head on straight.

    It is possible to do a lot of work in a given field and yet contribute nothing at all. This occurs when the work you perform is based off erroneous premises and the conclusions you arrive at are similarly erroneous and therefore, as an intellectual product, worthless. These 3 individuals have contributed nothing to economics, from what I just read.

    I don't have to know "who" you are (and who you "are", you don't seem too intent on divulging, obviously) to see what your mindset is. What's more likely is that you don't even know who you are or what you stand for. You are advocating a policy of violent intervention. There is nothing economic about it, unless you want to argue that the common criminal or petty breadthief has an important role to play in an economy, as well.

  21. hello everyone, especially those of you who apparently have no clue about economics, ESPECIALLY THE AUTHOR OF THIS ABSOLUTELY IGNORANT AND UNWITTY POST.

    instead of pretending that you have any clue about what search and matching theory of unemployment is about, why not just shut up? instead, you get angry that you don't know anything about economics and write up your lacking and false understanding of the matter.

    why don't you do what any uninformed and uneducated noneconomist should do? try to understand the gist of the theory by reading an article written for layman like you:

    i hope this helps with your issues.

  22. Apparently, we should be deferring to this Edward Glaeser, who "knows a thing or two about economics."

    Does he? Seems he's pretty clueless by his own admission:

    "So theory and data both predict that the 1.2 percentage point drop in real interest rates that American experienced between 1996 and 2006 should cause a price increase of somewhat less than 10 percent, yet prices actually rose over this period by more than 40 percent. Since interest rates have stayed low, low real rates can’t explain the post-boom drop in prices either. Standard models and statistical work don’t predict that the observed swings in real rates should have led to such massive housing price fluctuations."

    "I am not claiming that interest rates weren’t important, or that they didn’t play a role in creating the cocktail that led to a housing price bubble. I suspect that they did. I am not defending the wisdom of monetary policy. I am only dismissing the notion that we really understand what caused the bubble, where really understanding means – to me – that we have a well-specified theory that has been tested in many different ways and not rejected by the data."

    First, note the conflation of interest rate policy and monetary policy. If he understood them from a deductively arrived theory of economics and not a model fitted to a few decades of data, he wouldn't be scratching his head post-facto while the author of this post warned of the imminent housing bubble as early as 2004.

    To all the econometricians who've found this blog, please stay as you might "learn a thing or two."

  23. You have no idea what you're talking about. You should spend more time reading and less time blogging.

  24. Anonymous-

    Up until now it seems that you have contributed nothing to this discussion but insults and ad-huminem. If you are able to show why the post is wrong, please do that. Your behavior suggests that you have a weak argument; no one with a solid argument should behave as you do. Nevertheless it could be that you have a solid argument is solid. In that case I (and I guess that others too) will be glad to hear it.

  25. when I did my economics degree at the London School of Economics, the LSE was the only British unversity to offer a BSc; all others offered a BA. Economics is not a science (dismal science?), and anyone who refers to it as such has missed the point. Economics, as far as we can see its manifestations in growth, recession, unemployment etc. is the merging and/or reaction of numerous related or unrelated activities to/with eachother. To try and isolate one thing (QE?) as being able to provide a solution to what is actually a series of different problems (credit crunch? Consumer bust? Outdated/hollowed out industries?) is daft. The trouble with all the "respected economists" who "know a thing or two" about economics is that usually they have crafted their theories - and made their names - over a considerable period, and to stray from that path would be to undermine the basis of their reputations. Taylor, you make more sense than most. Anonymous, could it be the fragility of your theories that leads you to be so tetchy? It is always the ones who assert the most strongly that they are right, without listening to counter-arguments, that prove to be the most wrong. Twas ever thus. Joss Bolton