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Economist Always Tell the Truth? Trust Me

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It is difficult to listen to news or financial reports these days without seeing Economist Paul Krugman or hearing his name mentioned.

Now I have absolutely nothing against Nobel Laureate Krugman, I believe he is sincere, hard working, and has lots of good ideas.

But a word to the wise - Don't Drink the CoolAid.

Remember, there is a new winner of the Economics prize every year and every time he is English speaking he gets a lot of face time on U.S. TV. ("HE - I'm not the sexist here, quick, name a female economist.)

The problem with the "science" of Economics is that often the new Nobel Laureate wins by contradicting an earlier winner.

Now I've studied under several Nobel Laureates and actually knew one prize winner well enough to sit around and shoot the bull with him (so to speak) so I know something about this.

My friend at Harvard got his prize for physics - in fact for work he had done about 40 years earlier in quantum mechanics.

I mention that because in those 40 years AND in the decades following, no one has seriously contradicted his theories, certainly they haven't become Nobel Laureates by proving him wrong.

Turning to the economics prize I will just remind you of one concrete, easy to understand example. (Several other winners have also contributed to our current crisis - caused, not fixed - but that isn't quite as clear yet.)

In 1997 Myron Scholes and Robert C. Merton, were co-winners of the Nobel Prize in Economics because their efficient portfolio theory had proven that there was a way to always make money in the market while having no risk at all. In fact, Scholes is the Sholes half of Black-Sholes, the equation which shows how to value options. Essentially they showed how to find no-risk investments (That's the lay summary, but pretty accurate.)

Anyway, there was a company which relied on the Merton-Scholes economic theory and applied it to finance.

It was called LTCM (Long Term Capital Management) and both Merton and Scholes sat on the board of directors.

LTCM earned about 40% profit in each of the first five years.

Unfortunately, in 1998, the year after Merton and Scholes received their prize money, LTCM lost $4 billion (that was real money back then) in a couple of months.

It was rescued by The Federal Reserve (Alan Greenspan - who stated last October that his economic theories had turned out all wrong) putting a lot of pressure on large banks and investment companies to buy them out - LTCM collapsed completely in 2000.

As far as I know, Merton and Scholes haven't been invited back on a lot of talk or business shows recently.

Even worse, the Nobel Committee has no procedure for revoking a Prize award.

Now I'm not saying that NO economist or economics prize winner is ever right, just that if you can stretch your mind enough to even consider a few decades of recent history, you might want to test out their ideas for a few decades before you bet the country on them.

Merton and Scholes got the prize because they were lucky enough to be the two economists whose theories had been working for the most recent few years.

I believe the Economics Prize has only be awarded since 1969 so we don't know if Hoover's top economic advisor would have won, but, given its short history and serious record of choosing bad economic theories to reward, perhaps the Prize committee should rethink this one and find some more worthy science such as astrology or Texas Holdum before their bad choices in economics taint all their good work.

It only remains for me to remind you that even a broken clock (analog clocks used to have hands) is correct twice a day (or, ironically enough, once a day if it is a 24-hr. military clock.)

John McCormick is a reporter, /science/medical columnist and finance and social commentator, with 17,000+ bylined stories. Contact John through NewsBlaze.

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