Editor’s note: Nobel Prize winning economist Paul Samuelson has been hugely influential in promoting his views from the day he published his economics textbook in 1948. He also penned a regular column in Newsweek magazine for fifteen years during the 1960’s.  Little wonder then, that Samuelson has been referred to by one economic historian as the “Father of Modern Economics.” Samuelson’s book is now in its 19th printing and has sold nearly four million copies in over forty languages. Generations of students, economic scholars, business men, and government officials have grown up with few counterpoint views of what makes the economy tick. Yet, Samuelson’s belief that it is best for government to social engineer our society is still a prevalent view. He has, in fact, stated that “America spends too little rather than too much on government.” Samuelson’s ideological lens was simply too clouded to consider alternate views. Economist, Robert Nelson, after a thorough study of Samuelson’s work has concluded that “If economists have in the end been priests of a secular religion, the ‘theology’ of economics was particularly well expressed in [Samuelson’s textbook] Economics.”

It is a rare economist who doesn’t wear a mask of ideology. And, it is ideology that drives what the American lay public (and many who are otherwise sophisticated about business and finance) presumes is apolitical, clinical, and neutral economic analysis rendered for the betterment of our society. Alas, such is not the case as ideology is the predicate for much of what we understand to be dispassionate economic analysis. Ideology comes in many forms: as academic arrogance, institutional bias, or political partisanship. Maybe all of this makes sense if we view economics as more of a political ideology than an objective science. Still, Americans must be aware of the masquerade. As the noted Economics journalist Henry Hazlitt stated in his book, Economics in One Lesson, “Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough…but they are multiplied a thousandfold by … the selfish pleading of selfish interests.”

The “can’t fail” models of Myron Scholes and Robert Merton, Nobel Prize winning economists both, were the centerpiece of the hedge fund they, with others, founded as Long Term Capital Management (LTCM) in 1994. The founders’ notoriety was based on the mathematical work they did, along with Fisher Black, to value the theoretical price of derivatives (the so-called Black-Scholes model). Big investment banks among them Merrill Lynch and UBS went for the bait with minimum $10 million investments. At the end of August 1997, the firm sported a capital base of $6.7 billion and the firm was rocking. Scarcely a year later, however, following the collapse of the Russian economy, LTCM was left with an almost worthless portfolio of assets. The firm, whose self-assessed risk of failure, had been calculated to be near zero had to be bailed out by the Federal Reserve Bank of New York in league with fifteen banks as a way to avoid a contagion of the financial markets.

Some economic models are so narrowly framed (never mind that they lack empirical verifiability) that their applicability has little or no value in a real-world context. The founders’ own post-mortem after the LTCM collapse was that their data base had not gone back far enough to pick up all historical market perturbations. So, their mathematical pyrotechnics were one-of-a-kind but their common sense was nil. Still, there is a bumper crop of economists, notwithstanding the debacle that was LTCM, whose elegant equations are believed by many to speak to science and truth in explaining some real-world phenomenon. Worse, once a certain celebrity is achieved by the PhD economist doing the theorizing or the modeling, especially when abetted by a compliant academic or popular press, if not a Nobel committee, then the individual is venerated for his sagacity in areas far afield from his narrow-gauge expertise. This makes a burlesque of the field of economics and it should be seen as such by all Americans.


The caption heading above was a prognostication voiced by the 1995 Nobel Prize winning economist Robert Lucas. In 2003, in his presidential address to the American Economic Association, Lucas further added that the problem, “…has in fact been solved for many decades.” Then, as if to double down on his incantation, in the aftermath of the Lehman Brothers collapse, Lucas stated he was skeptical that the economy would slip into recession or that the subprime mortgage crisis was of any more general consequence. “If we have learned anything from the past 20 years,” said Lucas, “it is that there is a lot of stability built into the real economy.”

Eugene Fama, the Nobel Laureate in Economics in 2013 is the father of the efficient-market hypothesis. The hypothesis essentially argues that it is impossible to beat the market as all of the information that is available about a stock is already baked into the price. In essence, Fama was saying that stock picking was a dart throw. So far so good except that if you take Fama’s hypothesis to heart there is no place for regulations of any kind. How could there be when everything you need to know about a stock is already known? Fama’s influence was profound. It was no coincidence that in late 2000 Congress passed the Commodity Futures Modernization Act which, for all practical purposes, deregulated derivatives and credit default swaps. Brooksley Born, a non-economist and Chairwoman of the Commodity Trading Futures Commission at the time warned of the dangers posed by the unregulated market. She was summarily slapped down, however, by Larry Summers, Secretary of the Treasury and by his mentor, the almost universally deified, Federal Reserve Chairman, Alan Greenspan. Neither one of these men saw fit to rein in the gunslingers on Wall Street. Predictably, when credit markets froze in 2008 forcing the collapse of firms such as Bear Stearns, American International Group, and Lehman Brothers it was a direct result of a failure to regulate the derivatives market. At that point, the notional or face value of derivatives swirling around in the market was $683 trillion.

When asked if his efficient market hypothesis applied to housing, Fama went on to explain that: “Housing markets are less liquid, but people are very careful when they buy houses. It’s typically the biggest investment they’re going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.” Fama, the brilliant economist, obviously failed to incorporate the human factor into his equations. As we have noted in a separate essay, The Service Ethic: The Ultimate Guarantor Against Moral Hazards, everyone from home buyers, to mortgage brokers, to mortgage underwriters, to regulators, to credit-rating agencies, to the Federal Reserve all had a hand in the subprime mortgage meltdown of 2007. So much, for Fama’s efficient-market hypothesis.

David Lereah, chief economist for the National Association of Realtors, in 2005 published the awkwardly titled, Are You Missing the Real Estate Boom? The Boom Will Not Bust and Why Property Values Will Continue to Climb through the End of the Decade – And How to Profit from Them. Lereah, as others before him, was lionized by the media and his message became both ubiquitous and indisputable.

To be fair, not every economist failed to read the housing market tea leaves. Two are noteworthy:

  1. Robert Shiller. An economist who didn’t drink the Kool-Aid was a Nobel Laureate with Eugene Fama and Lars Peter Hansen in 2013. Shiller argued of irrational markets – not of efficient ones as his co-Nobel Prize winner Eugene Fama argued – and warned of a housing crash in 2006. Amazingly, Shiller also warned of a tech bubble just before the dot com fiasco.
  2. Raghuram Rajan. A professor at the University of Chicago and a former Governor of the Reserve Bank of India as well as Chief Economist at the International Monetary Fund is credited for his prescience, when in 2005 he warned about the growing risks in financial markets. For his insight, Rajan was called a Luddite and his warnings “misguided” by Larry Summers.


British economist Lionel Robbins famously stated that the job of the economist is to report what is and not what ought to be. It is fair to say, however, that economists then and now have failed to heed that lesson (or have chosen to ignore it) and thus theorize, not necessarily in accordance with the facts, but in accordance with their own political worldview and predispositions.

Larry Summers  did more than denigrate Raghuram Rajan as a modern-day Luddite.  While in a position of great influence and power during the 2008 meltdown Summers argued against a cram down that would have allowed the courts to force banks to reduce mortgage balances, cut interest rates or lengthen loan amortizations that would have helped millions of homeowners. Sadly, Summers’ signal policy achievement while in Washington was the aforementioned disaster known as the Commodity Futures Modernization Act. Long after the damage was done, President Clinton lamented that he had received the wrong advice from Summers in not regulating derivatives.

Summers is now on his high horse as an “intellectual” anti-Trump activist. When Summers proffered that ten thousand people would die as a result of the President’s tax reform package his rationale was couched in so many “what-ifs” as to be meaningless. And, when he told CNN that the tax plan will make “middle class Americans poorer” he demonstrated that he is pseudoscientific as well as incapable of rising above petty political jealousies. Summers is not alone, however, as a contemporary big mouth and wrong-headed economist.


Nobel Prize winning economist Paul Krugman is not to be outdone for his caustic partisanship. In the aftermath of President Trump’s election Krugman assured his readers at the New York Times that the world’s stock markets would never recover. The election of such an “irresponsible, ignorant man,” said Krugman, would bring about the “the mother of all adverse effects” on the economy. “So, we are very probably looking at a global recession, with no end in sight.” That is hardly an intelligent economic observation so much as it is unbridled animus toward the President.

The numbers, ruefully for Krugman and his acolytes, tell a different story from his apocalyptic view. During President Trump’s Administration Gross Domestic Product  exceeded 3% and the unemployment rate dropped to levels not seen in decades. Consumer confidence, too, rose to historically high levels. The stock market added over $5 trillion in wealth. And, the number of Americans receiving employee bonuses, pay hikes, and increases in benefits was in excess of 2,000,000.  Bumps in capital spending, and charitable contributions were also announced by companies in reaction to President Trump’s December, 2017 tax reform: AT&T, for one, announced plans to spend an additional $1 billion in capital spending in 2018; Comcast, also indicated it would spend $5 billion over the next five years; and Wells Fargo announced that it would pump $400 million into community chests in 2018.

It is clear that Krugman’s bias is such that he would rather engineer the economy according to his predilections than simply study it and objectively report on it. His mantra has been for years that America’s apparent economic success is due to the fact that “…our rich are much richer.” So much for the analytical prowess of a Nobel Laureate: a man whose ideology prompts an answer before a question has even been asked.

The Nobel committee’s vetting of Krugman’s work in economic geography was sloppy if not politically motivated. The field, including the mathematical elegance that is ascribed to Krugman, goes back for decades. What is worse, Krugman gives scant credit to those who preceded him. That is shameful.

Mathematical economist J. Barkley Rosser Jr., Professor of Economics at James Madison University, who has reviewed Krugman’s work has cited all of the previous relevant work which Krugman purposely ignored. Rosser concludes his review by stating that “if [Krugman] is indeed the emperor of the new economic geography, then he is an emperor who has no clothes.”

Other economists are more forthright about their social engineering biases. Economist Robert J. Gordon, notable among them, lays the nation’s lack of productivity growth at the feet of social factors such as the inequality between the haves and the have nots which he proposes to correct. Among the nostrums he points out in his book, The Rise and Fall of American Growth, are the following: drug legalization, incarceration reform to include shorter sentencing guidelines and aggressive pardoning of people behind bars, raising the minimum wage, increasing the Earned Income Tax Credit, introducing “super bracket” tax rates for high income earners, relaxing patent and copyright laws, spending more for education, and reducing occupational licensing requirements.

That the nation’s prosperity might have been eroded through decades of government overreach, imprudent fiscal policies, sleight-of-hand monetary policies, high taxes on corporations and individuals, a vast tangle of regulations, the decay of law and order, and an assault on individual liberties seems not to have occurred to these social engineers who masquerade as objective economists.


Do economists have a code of ethics that ensures they won’t dissemble, parse the facts, or reveal their personal biases when conducting their analyses? No, says Martha Starr, Professor of Economics at American University. As editor of the book Consequences of Economic Downturn: Beyond the Usual Economics, Professor Starr states that “Unlike almost any academic profession – statisticians, physicists, sociologists, you name it – economists have always opposed adopting an ethical code outlining how they should act.”

Professor Starr goes on to say that “A well written code of conduct could make people think hard before, for instance, accepting $135,000 in speaker’s fees from an investment bank, then giving that investment bank privileged access to the White House.” This, an obvious reference to the payment made by investment bank Goldman Sachs to White House economic adviser Larry Summers in 2008.

As I suggested at the outset, it is possible that economists can’t help but show their prejudices because economics is not a science after all. When the public interest is at stake – as it often is in the hands of macroeconomists especially – then empirical evidence and not ideology should guide the work of economists. Regardless, economists will never win the public trust unless and until they abide a professional code of ethics.

Management Advisor


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