2009 September 20 Sunday
Federal Reserve Influence Stifles Dissent

Ryan Grim of the Huffington Post (yeah, left-wing but I'm not - so what) has written a good piece on how the US Federal Reserve employs and otherwise funds so many economists that the Fed stifles debate about Fed assumptions and policy.

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed's thrall, the economists missed it, too.

"The Fed has a lock on the economics world," says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. "There is no room for other views, which I guess is why economists got it so wrong."

The tendency toward consensus and group-think is a big problem. Look at the housing bubble and the larger credit bubble. The vast bulk of professional economists did not recognize the problem. Some of those who did recognize it were not associated with either major universities or the Fed.

One can't simply dismiss this as left-wing carping at free market economists. Milton Friedman thought that the Fed's influence was not healthy.

Even the late Milton Friedman, whose monetary economic theories heavily influenced Greenspan, was concerned about the stifled nature of the debate. Friedman, in a 1993 letter to Auerbach that the author quotes in his book, argued that the Fed practice was harming objectivity: "I cannot disagree with you that having something like 500 economists is extremely unhealthy. As you say, it is not conducive to independent, objective research. You and I know there has been censorship of the material published. Equally important, the location of the economists in the Federal Reserve has had a significant influence on the kind of research they do, biasing that research toward noncontroversial technical papers on method as opposed to substantive papers on policy and results," Friedman wrote.

I'm struck by the fact that Alan Greenspan did not have an impressive set of private sector accomplishments. Timothy Geithner doesn't either. I wish more people who ascend to high positions in government first make their mark in ways totally independent of government-created status hierarchies. We need more people who are from the outside with proven records of accomplishment taking the reins of power.

Share |      By Randall Parker at 2009 September 20 12:10 AM  Economics Financial Regulation


Comments
Cleanthesbrule said at September 20, 2009 6:11 AM:

Good call on this HuffPo piece. Too much of the thinking going on has a Hegelian bent more suited to a 19th century making sense of the French Revolution. What's wrong economically does not parse well into a left/right division. Throughout US history, the Democratic party has not had much consistency - on civil rights, on the size of government, etc, almost changes with the decades except: until the Obama administration the Democratic party has always been the party of the debtors, while the Republicans/Whigs/Federalists were the creditor party. Obama, though, has been as much the banker's friend as Bush. This comes from policy capture, just as you say. It's groupthink.

James Bowery said at September 20, 2009 7:19 AM:

A better diagnosis than "groupthink" is "theocracy" in the most general sense of rule by theoria or contemplation rather than exprimentation.

This absence of controlled experiment afflicts all of the social sciences and dooms any attempt at enlightened statecraft, but perhaps even more fundamentally it derives from a failure of ethics, as I describe in Secession from Slavery to Free Scientific Society:

Secession is necessary to free society. Free society starts with mutual consent. Mutual consent implies the option not to consent. "Freedom From" compliments "Freedom To".

Secession is necessary to true social science: We can best discover causal laws by testing theories with controlled experiments. This is true of all science. Controlled experiments require separate experimental groups, treated according to different theories and comparing the measured results with predictions. In practice, human ecologies can form separate experimental groups only by upholding geographic boundaries that prevent cross-contamination between treatments cross-contamination with its resulting confusion and confounding of results. We can argue how best to achieve this in practice, but the principle of giving experimental evidence priority over any amount of argument, debate, deliberation, peer review or judicial proceeding stands as more self-evident than anything in the Declaration of Independence.

In a free scientific society, an individual is subject to treatment only after giving informed consent.

These two pillars of social good -- truth and freedom -- stand upon the foundation of secession.

Tyranny of the majority, limited only by a vague laundry list of selectively enforced human rights -- the sine qua non of "liberal democracy" -- must submit to the right to secede or it violates truth and freedom, hence all social good.


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