Since 2008, I have cheekily asked “have all the engineers and other graduates of MIT generated enough economic value to offset the economic value lost by its Economic PhD graduates?”.  So imagine my surprise when there was highly regarded Economic Historian, Robert Skidelsky, asking

Would we have had any less economic growth if nobody had invented economics?

He then answered his own question.

I am not convinced Economics added a crucial element of value to the economy.

I could not possibly agree more with Professor Skidelsky’s answer.  The facts are Economics or at least how the PhD Economists practice it has been a huge value destroyer.  Hence, my cheeky question.

If Economics doesn’t add any value, then why have we been living in the Age of the Economist for the last 40 years?

It provided the narrative to shift the balance in the economy away from labor to the 1% and bankers.

As Thomas Palley observed,

Even if the banker is honest, there still remains the fundamental question of why would selfish politicians go against their own interests and appoint a conservative independent central banker? Doing so is tantamount to proving they are not selfish, in which case there is no need for an independent central bank. That microeconomic contradiction suggests something else is going on with the shift to central bank independence. By definition, selfish politicians cannot be authorizing it out of public interest. Instead, they are doing so out of self-interest, which is the clue to understanding the real reasons for the shift to central bank independence … That implies central bank independence is not the socially benevolent phenomenon mainstream economists and central bankers claim it to be. Instead, somewhat obviously, it is a highly political development serving partisan interests …

The real issues are why do independent banks go after inflation harder, and what is the role of independence?

The reason they go after inflation harder is they are aligned with capital. That is because capital is politically in charge and sets the goals for central banks.

But this quote stops short of the damage caused by PhD Economists.  The 2007 Financial Crisis and the subsequent 2008 Bank Crash were their fault.

In addition to the independent central bank narrative, they also pushed a number of false narratives like the Efficient Market Hypothesis.  The strong form of this hypothesis asserts all information, including information known only to insiders, is reflected in the price of a security.  The impact on regulation is to suggest you don’t have to worry about disclosure.  But what happens when you have a structured finance security that has no insiders?  Or what happens when the insiders have an incentive to see the value of their securities mis-priced (think bank executives)?  You get the opaque securities necessary for a financial crisis.

PhD Economists also like to observe the market is self-regulating.  Of course, the necessary condition for this to be true is there is transparency.  But checking to see if this necessary condition exists doesn’t stop PhD Economists.  By using the EMH, they assume the problem of ensuring transparency away.

Having set the stage for the financial crisis and bank crash with their narratives, PhD Economists then multiplied their value destruction*.  They did this through the response to the financial crisis they lead as the heads of the EU, UK and US central banks.

Rather than use the financial system as it is designed (see Iceland in 2008/2009), the PhD Economists decided to “socialize the losses” instead.  The fact a decade later the BIS finds over 12% of companies are now debt zombies (they are unable to repay their debt) and almost 50% of Americans are still worse off than before 2008 shows this policy response was a failure.

And this is before we look at the growth in inequality driving the rise in Populism or the breaking of the capital markets as the risk/return valuation driven price discovery mechanism gives way under trillions of dollars in negative yielding debt.

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*The BoE’s Andy Haldane put the “cost” of the financial crisis (what I will call value destruction) at well over $10 trillion.