Social Welfare Minister Roger Sowry back when the National party was in the NZ government circulated a report entitled "Individual Provision for Retirement". Some economist is trying to look scientific in the production of a fancy formula for calculating the rate at which people save by taking into account a person's consumption, income and wealth and then factoring in a value for the "degree of capitalist spirit".

The equation is supposed to mean that people maximise the sum (over time and discounted over time) of three "utility" functions relating to consumption, leisure, and wealth with the wealth component multiplied by this notional "degree of capitalist spirit" all subject to a formula that describes the relationship between wealth, income and consumption. This is a great way to hide a lack of information and understanding. This factor called G or gamma (does that stand for Greed?) used to represent this capitalist spirit can range in value from zero to infinity. If G is greater than 1 it implies that the spirit is more important for saving than future consumption according to the report. Just put in a factor of 0 to infinity for this "capitalist spirit" and you can adjust a result to any answer you want. Economists have great faith in the rationality of people. This equation is supposed to represent our rational behaviour!

Here is another case for applying a malpractice suit onto a loony economist.

DERIVATIVE MATHS.
In 1997 the "Nobel" prize in economics (Click for more) was awarded to Myron S. Scholes and Robert C. Merton for creating a mathematical formula for pricing derivatives. P J O'Rourke in his book "Eat the Rich" presented the equation like this:

It trading on small differences that opened up between securities. It's 150 employees were known as rocket scientists, a testimony to the mathematics which in theory, they substituted for the less precise judgement of their peers. With their capital of $4bn as security they borrowed another $120bn, then used that to borrow around $1trillion.

Their profitable phase was not any better real investments during the period of expansion. They managed to make money while the market was going up and lose it when it was going down. When the good times stopped very abruptly, things went horribly wrong, but they stuck to their equations. These equations turned out to be wrong. They stacked up debt until no one would lend to them any more.

Among the casualties of the collapse of LTCM, was Merrill Lynch, which had to cut their staff by some 3000. The boss of the Swiss bank, UBS, lost his job thanks in part to the huge losses from loans made to LTCM. Barclay's Bank of the UK has lost a critical amount of money also. The head of Bank of America, America's largest bank, was another casualty, resigning after disclosing losses of $400m to another hedge fund.

Because the collapse was so significant in the US, it was bailed out with $4bn of US Federal Reserve money. "Moral hazard" is a term in banking to describe what happens when bad decisions get rewarded, such as in this case. The larger the debt, the more likely they are to be bailed out. So much for the wisdom of the market.

Many so called "Nobel" economics prize winners have lost favour in time with the economics establishment refuting their theories. Maybe there is now enough data to work out an average time for the credence given to "Nobel" economics prize winners.

LTCM should become a memorial to the hubris of economists. The incompetent trading of Neason brought down Barings bank, but actually using the sophisticated mathematical theories of the 1997 "Nobel economics prize", of Myron Scholes and Robert Merton, brought down LTCM.

While commenting on the "Nobel" economics prize, he says: "I have in my hand a working paper from the IMF on 'Inflation and Money Demand in Albania'. A typical sentence reads: 'Cointegration tests between p, e, and m (with R,y and the time trend as non modelled variables) were conducted in a third order vector autoregression with three lags of each variable in the autoregressive distributed lag equations; the test statistics and estimates for the Johansen procedure are reported in Table 3'"

McRae then mocked the IMF for this nonsense and suggested that what we really needed from the IMF staff was a better warning, in clear English, of the danger of contagion from the collapses in East Asia to the rest of the world economy.