‘We Don’t Face Any Good Options’
Nobel Prize–winning economist Vernon Smith on the financial crisis, Adam Smith’s underrated insights, and his journey from socialist to libertarian
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Google“I remember the ’30s like it was yesterday,” says economist Vernon Smith. And he’s not kidding. In 1935, when the future Nobel Prize winner was 7 years old, his family decamped to their Kansas farm to wait out the hard times. “On the farms,” Smith explains, “you can eat.” His parents only made it to eighth grade, but “they were people who read,” and they expected their son to go to college. They got their wish—and then some.
Smith’s higher education began with remedial work at a local Quaker college (“I was not a good student in high school,” he says) but eventually took him from a Caltech electrical engineering degree to an economics Ph.D. at Harvard. Beginning at Purdue University, and then at the University of Arizona and George Mason University, Smith founded and developed the pioneering field of experimental economics, which studies actual human behavior—a major breakthrough in a discipline obsessed with abstract models. This work culminated in 2002, when Smith was awarded the Nobel Memorial Prize in Economic Sciences “for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms.”
Over that time span, Smith’s political views evolved in tandem with his economic insights. He left behind the socialism he learned at his mother’s knee for a more libertarian outlook. He says “experimental economics destroyed whatever was left in me of the notion that somehow you could do better than to find institutions that organized this decentralized information and create.” Now continuing his lab work at Chapman University, Smith is riding out the second most serious economic crisis of his 84 years in sunny California.
In July, Smith sat down with reason.tv Editor in Chief Nick Gillespie to discuss his ideological journey, how FDR (and perhaps George W. Bush) saved capitalism, why some of Adam Smith’s most important intellectual contributions are overlooked, and what experimental economics has to say about the collapse of the housing market.
reason: We’re sitting in your office at Chapman University, a beautiful campus in Orange County, California. Tell us about your setup here, what kind of experiments you’re running, and what you’re hoping to find with them.
Vernon Smith: We’re asking some questions that came out of the economic crisis. We started doing asset-trading experiments in the ’80s and discovered bubbles, quite unintentionally.
reason: In your experiments, you were able to create bubbles, or did they just pop up?
Smith: They popped up. We thought we would create bubbles, but we never had to.
reason: How does a bubble take place?
Smith: Right now, we don’t understand why people get caught up in self-reinforcing expectations of rising prices. The first time you’re in this experiment, you may have bought early and you may have sold before the break. Bring those same people back in another two or three days, put them in the same environment, and we get a lower-volume bubble. Typically, it booms earlier and crashes earlier; they are expecting a bubble. Bring them back a third time, and they tend to trade fairly close to fundamental value.
reason: How does this type of experiment map onto, say, the last five years in America?
Smith: If you think about the housing bubble, buyers, sellers, borrowers, lenders, real estate agents, government regulators—everybody believed that prices would rise and continue to rise. And that is the essence of a bubble. Suppose a regulator in 2003 or 2004 said, “Hey, this thing is not sustainable. We’ve got to do something to stop it.” I think he’d have been fired. If the bubble had been stopped in 2003 or 2004, it probably would have been a lot less damaging. But who’s going to know that?
(Interview continues below video.)
Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time.
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Only libertarian economists' Nobel Prizes count: the other economists and Nobel Prize Committee are mistaken.
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derp!
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Whatever you say, Jason/
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Diddling his italics around little boys.
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Henceforth you [CITY]+[STATISTS] shall refer to me only as El puerco blanco originale !
So let it be written....so let it be done!
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It shall be done. However, it should be El original puerco blanco or El puerco blanco original, not originale.
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CURSE YOU GOOGLE TRANSLATE! VILE MINION OF THE [AGRICULTURAL]+[CITY]+[STATISTS]
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So I fucked up on the HTML, Jason.
At least I don't post bullshit about the Shackbrah Life.
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Only libertarian economists' Nobel Prizes count: the other economists and Nobel Prize Committee are mistaken.
Well, being right counts for a lot.
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Correct.
Since their theories just keep wrecking economies, they award themselves participation trophies instead.
"I'm Paul Krugman, everything I have ever written is profoundly wrong, but I got a Nobel!"
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I didn't know they had Bill Murray give the awards out. He's more versatile than I thought.
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Very versatile. Rumors are that he will star in a serious role in a new comedy about the Iranian nuclear bomb. Coming full circle to his early work in movies about WWII.
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The vast majority of markets work fine. And the reason why they work is that you can’t steal; you have to trade.
This would be a great t-shirt slogan - and save me having to say it for the 1,000th time to some numpty whinging about the immorality of markets.
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My favorite t-shirt slogan is either:
Reasonista for Gambol Lockdown
or
I am for Gambol Lockdown
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Part 1: The Problem is Civilization
Prison
“The world of the Takers is one vast prison, and except for a handful of Leavers scattered across the world, the entire human race is now inside that prison.”
“Naturally a prison must have a prison industry. It helps to keep the inmates busy. It takes their minds off the boredom and futility of their lives. Our prison industry? Consuming the world.”
“White male inmates are indeed inmates and not warders. For all their power and privilege—for all that they lord it over everyone else in the prison—not one of them has a key that will unlock the gate. It should be noted that what is crucial to your survival as a race is not the redistribution of power and wealth within the prison but rather the destruction of the prison itself.”
“The inmates of the Taker prison build the prison anew for themselves in every generation. When it’s done, it’ll be the work of all of you, men and women alike. Even so, the women of your culture have never been as enthusiastic about the prison life as the men—have rarely gotten as much out of it as men have.” But men do not run the prison. “As long as the food remains under lock and key, the prison runs itself. The governing that you see is the prisoners governing themselves. They’re allowed to do that and live as they please within the prison. For the most part, the prisoners have chosen to be governed by men—or allowed themselves to be governed by men—but these men don’t run the prison itself.”
“The unspoken agreement among businesses to limit their obligation [to their employees] to issuing a paycheck is precisely what gives our society its prison ambiance. Workers have ‘no way out’. Prisons are always arranged to suit the warders. That’s the anticipated order of things. No one thinks that prisons are built to suit the needs of prisoners or that businesses are built to suit the needs of workers.
A Condensation of Daniel Quinn Thought
www.lejournalmural.be/english-.....lla-1.html -
HAHAHA DISREGARD THAT I SUCK COCKS
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If civilization is the problem, why don't you leave it?
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From some of the more recent comments it would seem that my brother is too fat to gambol.
...am I free to gambol about the plain and forest Officer Jenny Craig?
Clearly, years behind a keyboard has made you unfree and unable to gambol.
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This guy for me is how a real economist should talk, he asks questions, he does not lecture. He does not sell silver bullets that governments can use and suddenly solve all their economic problems. Not like most "economists" who are simply cheerleaders for their favourite political party(eg. Krugman).
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Mostly say "hooray for our side."
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International relations, politics...is there nothing Steven Stills can't do?
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...vast spreads of industrial farmed-out wasteland that couldn't grow shit without heavy doses of artificial fertilizer.
Mesopotamia was once a thick cedar forest. Now it's the Iraqi Desert.
Half of the midwest's topsoil has been washed away in an extremely short time.
Now we're gonna burn the last 6 inches of topsoil through our gas tanks.
Think about it.
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You can still survive by farming and easier than ever. You just can't get rich that way because margins are low.
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Is GM working on a soil-burning engine?
Tell us another tale, Jason.
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Please make a note of it.
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I'm not in favor of ethanol. Never have been. But soil is soil, and I wasn't the dumbshit who typed the following stoopidity:
"burn the last 6 inches of topsoil through our gas tanks"
A little clarification would have made a more sensible sentence, Jason.
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What is artificial fertilizer? Is it a substance that makes plants grow without giving them the nutrients they need?
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What is artificial fertilizer?
White Indian's credibility.
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Nope, that shit's alllll natural.
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Mesopotamia was once a thick cedar forest. Now it's the Iraqi Desert.
And there's vast areas of arable land that used to be glaciers. So what?
As for government wealth transfers (all farm subsidies, not just biofuel) that have distorted the agricultural economy, you're right, and we will pay a greater price ongoing.
That's your beloved government at work.
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"Property rights come out of human sociality and then eventually get into civil government. But they arise originally in small groups."
Of course, every fucking thing humans do arose from small primates! Hell, from bacteria! Yes, nuclear fission rose from bacterial binary fission!
• "Thermonuclear weapons come out of human sociality and then eventually get into civil government. But they arises originally in small groups."
• "Fascism comes out of human sociality and then eventually get into civil government. But it arises originally in small groups."
• "Communists come out of human sociality and then eventually get into civil government. But they arise originally in small groups."
• "Prisons come out of human sociality and then eventually get into civil government. But they arise originally in small groups."
• "Thieving politicians come out of human sociality and then eventually get into civil government. But they arise originally in small groups."
• "Taxes come out of human sociality and then eventually get into civil government. But they arise originally in small groups."
• "Domination comes out of human sociality and then eventually get into civil government. But it arises originally in small groups."
• "Nancy Pelosi types come out of human sociality and then eventually get into civil government. But they arise originally in small groups."
• "Wars come out of human sociality and then eventually get into civil government. But they arise originally in small groups."
• "Nobel prize economists come out of human sociality and then eventually get into civil government. But they arise originally in small groups."
• "Keynesians come out of human sociality and then eventually get into civil government. But they arise originally in small groups."
• "Kenyans come out of human sociality and then eventually get into civil government. But they arise originally in small groups."
It's like
MorpheusNobel Prize thinkery has freed my mind.Somebody stop me!
Where's my Nobel Prize? Actually, I wouldn't have one up my ass if I had room for Texas.
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You mad, bro?
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No, NPEI is just RACIST!
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• "Whitbred Texans from Kennebunkport come out of human sociality and then eventually get into civil government. But they arise originally in small groups."
Do I get the fucking Nobel nomination from you, or not, Suki?
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Somebody stop me!
If only they could.
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I've seen your ass. More than enough room for a Nobel and the suitcase you travel with to Stockholm to receive it.
....are you free to Gambol?
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It seriously amazes me how White Idiot has so much time to spout his bullshit. I'm convinced he's a 22 year old living in his mom's basement while attending community college for his poli sci/history double major.
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Shall we make a bet? ~WOPR
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Sure, we can bet. I'll give you my address and you can come to where I work and where I live. Then we can discuss gamboling. Or NC's newly enacted home defense laws.
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I can get that much liquid in a week. Or aren't you endowed with that productive capacity? How much do you want to bet, little man?
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Half a million Zimbabwean dollars?
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U.S. Federal Reserve Notes.
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But then I have to give the satchel back to mom.....sigh
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I don't think the Feds will allow you to gambol out of their treasury with their notes, half a million of them...
Property rights and all that.
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I don't BELIEVE in your CITY-STATIST property rights, therefore they don't exist.
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U.S. Federal Reserve Notes.
There's a little old man in a top hat in the middle of them.
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Jason embezzlement doesn't count!
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I can get that much liquid in a week.
Leave your urine fetish out of this.
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....honey....come drink your grape soda before all the fizz goes out of it.
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Has got it going on.
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He's a libertarian who thinks FDR saved capitalism and that bailing out banks was necessary. What's a libertarian again?
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But in the US, it's mainly people who deliberately suppress their human capacity for empathy and compassion.
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It's easy to be compassionate with other people's money.
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liberals are working hard at trying to convince everyone that greed caused the mortgage meltdown. The government caused it by forcing banks to lend to people with small chances of paying back the money. Banks were forced to act in a way they did not usually act or want to act. Of course once the loans were made, they did their best to make money out of them.
Re incentives, as he points out subsidizing things reduces responsibility and produces more of what is subsidized. Up until the mid sixties, the black marriage rate was almost the same as that of whites, and the black illegitimacy rate was a little higher than that of the general population. When the government started subsidizing women having children on their own, it was enough to destabilize marriage, parenthood, relations between men and women, and many other rules and conventions and morals that people had lived by. Money matters, just as if you go to an African village and give the women resources and not the men, the entire culture of the village is upset.
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And once you spell saggin' backwards, you'll know what I mean.
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"Re incentives, as he points out subsidizing things reduces responsibility and produces more of what is subsidized."
Vermin shit is here for attention. Keep giving vermin shit attention and vermin shit will keep coming back.
See? It's simple. -
Sevo shits the place up good.
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I don't think it was forcing banks to make those loans that caused the problem, banks forced to take losses making loans would have eventually just quit making loans. What caused the problem was buying those bad loan bundles from the banks and mortgage lenders through fannie and freddie. When you tell someone if they'll make a really bad loan but then you'll buy it from them at a profit who wouldn't go for that?
Consider, you force me to make widgets (costing $10 to make) but sell them for $5. I won't keep making widgets, I'll start making something else that will make a profit. But if you tell me to sell those $10 widgets for $5 and you'll pay me $6 for each widget I sell, now I'm going to sell widgets till the cows come home. As long as you guarantee me a profit on my widgets I don't give a rats ass if I'm selling widgets or giving widgets away.
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Your widget analogy is apt.
It was Fannie and Freddie hoovering those up, and they had a tacit understanding that they would be bailed out, and they were.
So it was the govt on the front and the back end. Fed easy credit and the GSE's clearing them so lenders could originate more.
The CRA, and 'affordable' martgage policy had an effect, but that alone would not have caused the bubble.
You can pressure banks they have to loan all you want but if you don't subsidize their losses or prevent losses they have to stop at some point.
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Those subsidies did create vast numbers of fatherless black men, who joined together in gangs to make up for the fatherless childhood. Now they are killing each other every day, and have almost put the KKK out of business. Why the libs get 98% of the black vote is a mystery to me.
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Why the libs get 98% of the black vote is a mystery to me.
Because the easy explanation (i.e. the one that appeals to primal emotion) for that result is: Rich Republican white people are keeping blacks down.
Liberals are very, very good at appealing to emotion, and emotion wins over reason nearly every time.
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Reason has the trashiest comments of any "serious" political site on the web. Why do the editors believe they attract such a readership?
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Beer, no longer just for breakfast.
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Things were so much better when Postrel was in charge.
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It's called freedom of expression. I see many thoughtful comments, some funny ones, some angry ones, some very foolish ones, and some insulting ones. I can deal with ignoring idiots and asses, you seem to prefer being treated like an idiot through censoring by some central authority so you don't have to ignore the comments of idiots.
Most libertarians prefer freedom to being protected from "trashy" comments at the expense of freedom.
Lastly, when a man calls me nigger I know pretty much what kind of man he is, when the government prevents him from calling me nigger so that I can't tell what kind of man he is my ability to judge that man is diminished. I'm much more comfortable knowing a man is a fool than being protected from that knowledge by some central authority who's afraid my feelings will be hurt by the truth.
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This hack has no problem with the existence of the Federal Reserve. Nothing he says is to be taken seriously.
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The proffered solution, free market currencies, is just another sop to idiocy. Government will always denominate its current taxes due in something. Whatever that something is will be the defacto currency of the nation and will be the majority -- by far -- currency that is used for transactions. The "why" is simple: Nobody in their right mind wants to wake up some morning and find that their currency du jour has been devalued by some sort of debauchery and their taxes due but not yet paid have suddenly doubled or more, instantly bankrupting them. The simplest and "zero cost" way to hedge against such an event is to transact in the currency you pay your taxes in. Sorry folks, but logic resolves this conflict and it doesn't go where the Paulites would like; you must employ magical thinking to get to their claimed nirvana.
The Market Ticker ®
Commentary on The Capital Markets
http://market-ticker.org/akcs-www?post=198116 -
Any one seen my Ben-Gay? I just don't have the pep i use to have.
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Nobody in their right mind wants to wake up some morning and find that their currency du jour has been devalued by some sort of debauchery and their taxes due but not yet paid have suddenly doubled or more, instantly bankrupting them.
You did what? You bet against the currency, pocketed the difference, then converted to pay your taxes and then effectively diminished your tax burden by a third? Master Soros, you have so much to teach us.
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Lesson One, old Padiwan: Hire Rogers.
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I think the paultards would argue that what you wrote is precisely why the government has a moral obligation not to inflate. But if the government is going to inflate anyway, the likelihood that your voluntarist currency X is going to be 'debauched' relative to the compounded debauchment of the dollar is low.
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Article 1, Section 8...No State shall make any Thing but gold and silver coin legal tender in payment of debt.
This has not been repealed, it is simply being ignored. The Fed is a private bank, don't you know?
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Wrong.
It's section 10. Which is important because section 8 deals with the powers of the Federal Government, specifically the Congress. Section 10 deals with the limitations of the individual States.
In other words, no STATE can print it's own money, but the Federal Government can.
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Thanks for catching that. Congress has the power to coin money and regulate the value thereof. But the States can't make any Thing but gold and silver coin legal tender in payment of debt. That's why the Federal Reserve Notes say they are legal tender FOR all debts, not in payment of.
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Gold is a currency the government cannot devalue. Listen to Peter Schiff if you want to be educated on currencies.
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Yeah, you have to read through a bunch of garbage to get to anything substantial most of the time. I'd like to discuss a couple of books I just read on the future state of the economy and this seems like a reasonable thread for it.
I'm worried to see that Smith seems to agree with the books I just read as to where we are headed next (inflation). I read Aftershock by Wiedemer (not the one by Reich). It's written for the Fox News crowd and is repetitive and full of ads for their financial advising services, but for all that I think they got the basics right. According to them the housing bubble is only the beginning of our misery (and it has further to fall). They also identify several other bubbles: discretionary spending, the dollar bubble and the government debt bubble. They agree that the next step is inflation which will ultimately crash the dollar as global demand for the dollar declines with our governments inability to pay the debt in constant value dollars.
I'll go ahead and recommend getting a Kindle copy of Eric Janszen's "Post Catastrophe Economy" (you can read it on the cloud reader without ever purchasing an actual Kindle). Janszen's book is much more subtle and aimed at more intelligent folks. He's clearly not a partisan (he's more of a libertarian leaning centrist, condemning socialism and central planning but also completely laissez-faire markets in which powerful corporate interests will do very damaging things). Janszen seems to cover the same points as Wiedemer, but with a lot more nuance. He has a better name for the dollar bubble: the "dollar cartel". He also expects it to crash soon for similar reasons to Wiedemer.
He is also concerned about peak cheap oil since worldwide GDP rises and falls with oil prices. Janszen should not be taken lightly as he predicted the dot com bubble, started recommending that people buy gold 10 years ago, and predicted that a new bubble would replace the dot com bubble (which was eventually identified as the housing bubble before it popped).
Interestingly, he says that the bubble cycle is now over (just when the idea of bubbles are becoming mainstream) because our economy can no longer sustain any serious bubble. He says that in the near future the economy will be dominated by the peak cheap oil cycle: oil companies only use oil sources that are profitable, eventually they run dry, prices go up, and deposits that weren't profitable before become so and prices go back down again when production goes back up. The problem is, that can only go on for so long until we hit peak cheap oil: the oil gets so hard to get that despite the best efforts of the oil industry, supply begins to decrease every year. Since oil affects the price of everything, that alone would cause serious inflation (in costs, not wages) and hence further depression. Combine that with money printing and the dollar bubble collapsing and we have very, very serious inflation coming very, very soon just as Vernon Smith calmly identified. I hope all of this is wrong, but Janszen's track record and non-partisan nature lends him a lot of credibility.
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Thanks for the thoughtful book reviews, I'll certainly look them up. This is the kind of commentary I expect from a publication called Reason.
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Excellent interview.
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The guy in the video was remarkably articulate One thing he said at the beginning of the interview, though, begged a fairly obvious answer:
"Suppose a regulator in 2003 or 2004 said, “Hey, this thing is not sustainable. We’ve got to do something to stop it.” I think he’d have been fired. If the bubble had been stopped in 2003 or 2004, it probably would have been a lot less damaging. But who’s going to know that?"
Umm, the Bush administration that tried to spearhead far more aggressive oversight of FM/FM in September 03?
PS- White Indian DOESN'T live in his parents' basement! They killed themselves A LOOOOOONG time ago and so it's HIS basement now!
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"The important thing is that those property rights provide people with the right incentives."
Probably the most important thing out there IMHO.
Things like securitization of mortgages provide the wrong signals, and so people act badly. They provide very little benefit to the economy, but HUGE amounts of risk.
I think most CDO's are in the same boat.
If you got rid of those, and put a 10x max leverage requirement that would solve most of the problems.
That and any bank that's "too big to fail" should be broken up. Not doing so WILL eventually result in bailouts, because anything to big to fail won't be allowed to fail.
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I agree with most of what he said, up to the point where he said "that can't be explained by game theory". The example he gives is a Newcomb-like problem, and game theories that two-box on Newcomb's problem are bad game theories.
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Dear Reason -
Please, please either reconsider your no-moderation policy or shut down the comment section.
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Dominika is what can only be described as a great girl - accomplished, sexy and with a stunning body. She is half Italian and speaks Italian perfectly.
The mother of a 5 year old son, Dominika was on the national team for her country in swimming and gymnastic. Despite her tiny frame she has a strong and very flexible physique. She just oozes sensuality and also tells us that she loves to hang out on nude beaches!
Dominika started modeling as little as 3 months ago as previously her ex-boyfriend stopped her from doing any kind of modeling.
Small but perfectly formed, this newly born model is a natural in front of the camera!
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Smith: If you think about the housing bubble, buyers, sellers, borrowers, lenders, real estate agents, government regulators — everybody believed that prices would rise and continue to rise. And that is the essence of a bubble.
The wide open FED's money spigot being a never mind for Smith, of course.... Nobel prize material and all.FUCK YOU, Smith!
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FUCK YOU, Smith
Enough about this Smith...more about Dominika and her love of the nude beach....no?
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It's fascinating that this guy supports government intervention in the economy during a crisis and on one around these parts, with the exception of OM's blowing a gasket above, bats an eye.
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when every female you are surrounded by is a 4, then you see a 6, and you don't jump to criticize so much.
also, the vast majority of the posts for this article have nothing to do with the article, so i am not surprised he wasn't discussed much.
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Ugh... FDR and GW Bush "saved capitalism"? The Fed did the right thing? With "libertarians" like this, who needs socialists?
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Exactly. Trying to fix the economy while ignoring the Fed is like ridding your lawn of dandelions by cutting off the flowers.