Economics And The Icelandic Collapse

Inside Job was recently shown on the Icelandic equivalent of BBC 1. In the wake of it, bloggers and the public either made fun of the economists and bankers behind the whole collapse or continued cursing them to the “debts” of Hell. Frettabladid, a newspaper, published a comic of Tryggvi Thor Herbertsson watching Inside Job but Herbertsson was the co-author of the “Financial Stability In Iceland” report that notoriously changed its name to “Financial Instability In Iceland” on Mishkin’s CV (the red ink text reads “impudent, impertinent, unreasonable, unfair”. The guy behind Herbertsson (basically) asks him what he’s watching).

Others, such as Styrmir Gunnarsson, former editor of Morgunbladid (one of the daily newspapers back home, now edited by David Oddsson, former PM during 1991-2005 and the governor of the Central Bank of Iceland 2005 - 2008), correctly pointed out that one could hardly see who had been deeper in the pockets of bankers, politicians or scholars. Furthermore, no serious discussion had been amongst scholars about whether the economics departments of the universities of Iceland had played any role in the economic collapse of Iceland.

Gunnarsson also writes: "Economists and economics professors, especially at American universities, have repeatedly given all kinds of advices and analysis to financial firms in last years and been rewarded handsomely. One can therefore hardly expect many of them to have given warnings what was going on, although they should have had more chances of understanding it rather than other people." (my italics).

Although Gunnarsson is spot on when he mentions the lack of throughout discussion amongst academic economists about the role of economics teaching behind the collapse, he is not running a home run on this point. Exactly because so many economists, such as Mishkin and Herbertsson, were using neoclassical economics that ignore the role of private debt in the economy, one cannot expect them to understand the problems that were mounting up before the Global Financial Crisis hit.

I mean seriously, can one expect economists that use economics where marginal productivity of capital equals interest rates, marginal productivity of labour equals wages, where one can add single demand curves up to get a downward sloping market demand curve, where people are walking calculators that can calculate in a splinter of a second their utility of all possible choices even from now to eternity, where the economy is repeatedly modelled using a single eternal representative agent, where firms maximise profits by supplying their good into the market until marginal revenues equal marginal costs, where debts and nominal figures are repeatedly or naturally ignored, and so on, to understand that the real economy that we live in is on the brink of collapse? No, no we cannot because all of this is incorrect! Never again may we do the same mistake!

Economics at the University of Iceland

I finished my undergraduate degree (BSc.) from the University of Iceland in May 2008. Parallel to my studies, I worked as a part-time analyst at the research department of Kaupthing Bank in Reykjavik.

Today, I must admit that I feel ashamed not to have noticed the nonsense that I was being fed at the University. But even though I may have noticed something, chances are that it would not have mattered. I remembered that when my fellow students pointed out or asked about something dodgy that was written on the whiteboard, the lecturer normally said that economics were simplification of reality and assumptions had to be made to reach conclusion that could then be applied to the economy. That’s all fair and well. But over simplification and assumptions that do not apply in the real world can be seriously distorting for the conclusion. One should never swallow without questions a conclusion that is reached by using unrealistic assumptions that transform the world we are trying to inform ourselves about into something that can never be thought of being anything else than a shadow of reality, if it manages to be that. Assumptions matter, whatever Milton Friedman said.

After I moved to England in September 2008 I came across economics that I had never imagined existed (thank you Amazon.co.uk!). I drowned myself in financial history, especially because Iceland was shoulder deep in a financial crisis that nearly no one had anticipated – a psychiatrist publicly did it back in 2007 and was immediately made fun at by Icelandic economists that said he didn't understand basic economics, just as they themselves didn't understand basic psychiatry. "Let the economists to the economics and be quiet" they said.

 I was shocked to see how common financial crises were. In the undergrad program back at the University of Iceland none of my lecturers had more than mentioned financial crises. Throughout discussion about how or why they developed didn’t exist.

In April 2010, I sent an email to a prominent blogger who is also the host of a talk show about whatever not – he interviewed my in January 2011 about the bleak future of the Icelandic pension system. The email was a comment I sent to him personally after he had blogged about economics in Iceland and in it I criticised the economics department of University of Iceland for basically being crap. He asked me if he could post the email on his blog and I told him he could if he wanted to, and so he did.

My former teachers weren’t all happy with it. Some of them thanked me for the comment and said that it was well worth discussing within the economics department. Others were straightforward sullen and told me I was unfair and off track.

The words of one them not only surprised me but quite frankly worried me:

“The main purpose of teaching economics [at the University of Iceland] is to provide solid economics knowledge to students that can suffice them as foundations to further studies at good universities outside of Iceland. This we have succeeded at quite well, as you should know yourself.” (I had finished my MSc. and started my PhD at this time at a "good university outside of Iceland").

But seriously, think about this for a second! The “main purpose of teaching economics at the University of Iceland is to provide solid economics knowledge to students that can suffice them as foundations to further studies at good universities outside of Iceland” even though this economics is quite often straightforward mathematically wrong, not applicable in the world we live in and to a large extent responsible for the economical situation in the whole world, from failed privatisation in ex Communist nations in Eastern Europe to underdeveloped economies in Africa all the way to over-indebtedness of developed economies. What a track record! What a splendid economics to teach!

If this is seriously the case, then shame on the economics department of the University of Iceland! How about teaching economics that is not mathematically wrong, more applicable to analysing the workings of the real world and understands the immorality and the financial instability that is an unmistakable part of modern capitalistic economies, no matter if it helps the students into "good universities" abroad or not? How about teaching the economics of the real-world economies but not economics of dreamt-up, non-sensible and non-human economies of neoclassical economics?


If you want to read economics of the real world, you should not attend the economics department of the University of Iceland but start by reading books such as those on this list: Which Books To Read About Economics. Debunking Economics by Steve Keen is a must read, it may well be the only book on economics you have to read in your entire life to know when to stop listening to economists if you feel like they are wasting your time, talking nonsense.