So, these days the recipients of the economics...
So, these days the recipients of the economics ‘nobel prize’* in economics have been announced. It went to Bernanke, Diamond and Dybvig, that is, three male US-based economists, which is, let’s say, consistent with the pattern of past choices by the same committee. While Bernanke is quite well-known due to his role as a FED chairman, Diamond and Dybvig are probably better-known for their 1983 paper on bank runs. The paper is somewhat sterile as its two equilibrium-outcome approach (a ‘stable’ outcome and a ‘bank-run’ outcome) is very much based on ad-hoc assumptions and amounts to a mere existence proof. I have repeatedly found that this paper was much cherished after the financial crisis – I had many mainstream colleagues back then, who pointed me to this paper saying that mainstream economics had all this covered. This was a pity as the paper focuses very much on the role of deposits and thereby implicitly downplays the impact of risk-seeking and credit expansion, which made the paper somewhat beside the point. Back then, I emphasized alternative viewpoints, such as advanced by Kindleberger or Minsky, which led to the same ‘paradigmatic’ controversies as they seem to pop up today (see here, here or here for a focus on Bernanke).
In a somewhat tragic mishap, even the committe’s press release repeats that error by stating that for “the economy to function, savings must be channelled to investments”, ignoring that current investment is typically financed by means of credit or past savings so that, for any given period, the inverse causality applies. You might say this error is shocking or disappointing, but you should all have known that economics is known as the ‘dismal science’. In reality, economics could, of course, be a science of hope, but decisions like these and the intellectual pathways underlying such decisions are, in my view, mainly responsible for the ‘dismal’-label being somewhat accurate ;-)
To be fair, the Diamond and Dybvig paper also has a constructive aspect as it motivates some sensible macroprudential policies on the deposit side, like deposit insurance or central bank reserve provisioning. But still, paradigmatic closure is all too prevalent in economics, it complicates our efforts and stands in the way of progress. And as this is mainly a matter of attitudes, it is worth noting that different attitudes are indeed possible, and we can even observe them occasionally within the mainstream. A neat example is given by a book featured in this issue of the Newsletter, Anti-Blanchard Economics by Emiliano Brancaccio, which is accompanied by a somewhat kind endorsement by Olivier Blanchard himself:
“When Emiliano asked me to endorse Anti-Blanchard Macroeconomics, I was a bit taken aback. You can guess why. But I agree with him that we should always question our assumptions, confront them with the facts, and be open to change if the facts dictate it. […] For the time being, I stand by the conclusions of my textbook, but I am happy and indeed eager to see them challenged.”
You can still disagree with some of the conclusions in Blanchard’s widely read textbook, but I admit: I like the attitude!
All the best,
Jakob
- As most readers will know it is not a ‘true’ Nobel Prize, but rather the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.