07/17/2008 05:12 am ET | Updated May 25, 2011

Where Are the Economists?

So the markets tumble again. Forgive me for asking, but where are the economists? As the world approaches recession, an entire profession seems to have vanished into the mist, like conmen stuffed with cash and thousands left destitute behind. They said recessions were over. They told politicians to leave things to them and all would be fine. Yet they failed to spot the sub-prime housing crash, and now look at the mess.

When I studied economics we were told we would be masters of the universe. Ours was not a dismal but a noble science. It had harnessed the verities of maths to those of human behaviour and would go on to conquer politics. Rampant recession would go the way of hyper-inflation. Like leprosy and cholera they were epidemics that modern medicine had rid from our shores.

It did not matter if the economists were welfare Keynesians such as Myrdal, Robinson and Galbraith or free-marketeers such as Marshall, Friedman and the Institute for Economic Affairs. All were "social scientists". They claimed to have cracked the DNA of economic exchange, to have turned the base metal of money into political gold.

We believed them. We believed the Keynesians until they slumped into stagflation. We then believed light-regulation capitalists such as Ronald Reagan and Margaret Thatcher, that they could convert boom-bust into an upward sloping plane of glory. We believed the central banks when they said that, in their hands, inflation was dead and prosperity eternal. Bliss it was that dawn to be alive -- and an economist.

If we were now in the grip of bubonic plague, there would be all hell to pay from some profession or other. Politicians would summon public health officials and subject them to third degree. Why no national rat strategy? Why no crash inoculation? Why so many planning delays on plague pits?

The espionage pundits were likewise castigated for wrongly leading the nation to war against Iraq, for giving dud professional assessments on fallacious intelligence. The architectural profession has taken the rap (very occasionally) for the grotesque failures of public housing in the 1970s. Climate scientists may yet be damned for the costly lunacy of new energy sources, such as wind turbines and biofuels.

Yet economics is a Teflon profession. A quarter of a century ago 364 practitioners wrote a letter denouncing the policies of the then Thatcher government as "have no basis in economic theory." They were wrong in fact and wrong in judgment. Thatcher's policies laid the groundwork for a strategic shift in the underpinning of British prosperity. There was no inquiry, no hearing, no peep of retraction or remorse.

Since then economists have flooded into government. What do they all do? Economic managers have always claimed credit for past successes. They have espoused quantifiable outputs, targets, and delivery indicators. They invented the celebrity consultant and the maxim that only what measures matters.

Today we are older and wiser. Controlling the agencies of credit has proved beyond the finest professional minds in the game. Where now the gilded ones of Moody's and Standard and Poor's, credit raters to the mightiest in the land? They should have stuck to goose entrails.

America's former Federal Reserve Board chief and Brown adviser, Alan Greenspan, is unrepentant. He recently declared simply that "anticipating the next financial malfunction... has not proved feasible." His blind faith in markets and competition is undimmed. There is nothing so unseeing as a wronged economist. The Bank of England's apologias over Northern Rock have been protests that regulation is a mess and government indecisive.

When muck hits fan, economists always blame politicians. They would have some justice if they did not take credit when things go right. I was always uncomfortable at the overselling of economics as a science, when it is rather a branch of psychology, a study of the peculiarities of human nature. Its spurious objectivity, manifest in its ridiculous love affair with maths, induced a "Jupiter complex", a conviction that scientific certainty applied with enough rigour to any problem triumphs over all.

Economic management is and always will be about politics, about the clash of needs and demands resolved through the constitutional process. The newest craze is "nudge" economics, from the Americans, Richard Thaler and Cass Sunstein. They put the subject firmly among the behavioural sciences -- if not the arts. Human actions are too mysterious and unpredictable to be liable to quantification and modelling. They are responsive to what the academic, Paul Ormerod, once called "butterfly economics". Nudge steers but does not order or plan.

This requires knowledge of the working of markets, incentives, expectations and panics. But converting micro-economics into macro has always been a dangerous game. Much has been made of the success of Spain's dirigiste banking regulators in putting security before runaway profit, and thus guarding its finances from shock. But this was a triumph of politics over economics. Greenspan may laconically remark that "we can never have a perfect model of risk," but we can have alertness to risk and we can have caution.

Economics has long traded on being a science when it is not. In this it is like war. Now it has met its Waterloo and a little humility would be in order. Once again economics must be rescued by that true master of all things, politics.