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.
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I happen to know a world class mathematician who is happily developing stochastic models for investment banks. And a friend ours who is a former scientist (but not nearly the caliber of that mathematician) is doing the same. Never ever did either of them tell me that they can calculate it all. But both of them are making tons of money because they can calculate what really matters to their employers. Which is exactly how good science works. Neither math nor science can calculate everything. But we are trying to calculate what we can and what matters.
I think the reality here is this:
Those who can, do. Those who can't, blog (or rant).
The above opinion is an example of a blog which indicates that the author can't. If he could, he would have given us plenty of factual details of what is missing in modern economics or what goes wrong. Instead he is trying to indoctrinate us. Sorry, I am not buying.
"Those who can, do. Those who can't, blog (or rant). "
Just as Simon probably can't design and build some terrible weapon of mass destruction, so too with the practice of the voo doo " science" of economics: Why would he (or any rational person) want to. It doesn't take a Phd to recognize the damage that both have done!
But once again we get from you a line of reasoning that says that only the Priests get to criticise the rules. Problem is--they are the ones who made the rules. In the real world we call that a conflict of interest.
Economics as a field is very diverse. There are some things that can be done quite well with it and then there are others that can't. Economists could have told you that running up a credit card bill without a predictable source of income to pay it back is not a good idea. And that interest-only mortgages are the equivalent of playing Roulette. There was not a chance in hell that those would ever be good investments for anyone.
Some economists like my friend can tell you how to beat players in the derivatives market who don't have mathematicians working for them. If you were to play against her without having read her papers and written equivalent software to predict the average outcome of that game, you would be a fool.
All these things are mathematically perfectly predictable because they are based on pretty rigid mathematical results that can be understood and exploited.
If, on the other hand, you want a long term predictor for a single stock, you might as well ask for a time machine.
The people you are really raging against are not the economists but the shills and the political abusers who buy their opinions. There is a whole industry out there which sells nothing but opinion. The products of that industry make it into the papers and blogs. But that is not economics. It just poses for it. And if you don't know the difference, you are at a real disadvantage.
Kill, we are lucky to have Simon Jenkins at Huffpo. I've never read a bad essay by Jenkins. You are right about one thing: Those who can, do. And Simon Jenkins knows how to write social criticism and he just wrote a good one. Where are the economists, indeed.
It's not economics, It's the economists. They bend to the monied interests in our society and the middle class and poor suffer. You cannot keep wage growth flat and keep sqeezing wages via expenses and not have that spill over to the corporations.
I keep hearing that government revenues increases when capital gains tax is lowered, but all the money is going into few hands in the form of defense contractors. The current Republican Parties policies are a plague to the middle class and the environment.
There are still Universities that have Economics courses offered out of either the Social Sciences Dept or the Business Dept. Some even teach a version from the Math Dept.
Just an interesting observation.
Your piece really deals with a bigger question, which deals with accountability at all.
In the world of science-science, the notion of peer review and accountability are big but there is also acceptance for theories or hypotheses that are proven wrong later. Social Sciences, highly immature as they are today, still follow the basic methodology of science.....peer review, validation/replication of findings, etc...
I don't see any of this here. While it's hard to generalize about "all economists," it's also true that there are a bunch of them who are responsible for steering political or financial processes. There are some who are "pop-Economists" who are pundits as well. It's these people who make no pretense of being part of the scientific process, and who should be held to account for things they say that have undesired impacts on financial or political processes. The problem is - what constitutes "accountability?" In the TV business, if someone gets ratings we can see that it does not matter if they are right or wrong. In the financial marketplace or politics, accountabiility is more clear-cut, but ultimately it's up to us consumers and voters to make noise and try to force accountability
Academic economists are just as peer reviewed. But most people never get to see that work. The papers are highly technical and very hard to read and comprehend without being in the field. I happen to have a PhD in physics and have done maybe eight years of theory. And yet, I do not understand the math in most modern economic papers. It's simply a matter of effort. I could read any of those paper if I had a years worth of time and maybe in two or three I could start writing my own. Now, imagine the effort someone would have to put int who has nothing but high school math, which is the most that most of our politicians and the public have access to.
The disconnect between what we know academically and the knowledge that we can use in reality is enormous. In economics as much as in any field.
Don't bother reading the mathematica papers in economics. Just understand one sentence, Keynes' favorite (and mine) , and you will understand everything there is to understand about economics: "Natura saltum non facit".
Hi, KillTheMessenger.
As a physicist you of course, realize that no scientist would refuse to revisit his/her theory if when put to the test, it failed to reliably predict actual real world results. If you have read Naomi Klein’s “The Shock Doctrine” (if you haven’t, you should) you know that when Freidman’s theory was tested in Malaysia, and South America it failed in just this manner. Instead of re-examining the theory, the Berkeley and Chicago school economists sought instead to excuse its failures. The most notable excuse being that the slate was not clean enough for the Freidman theory to work and that the society had to somehow be “shocked” into a primitive state before the benefits of this "theory" could be realized.
This proved beyond any reasonable doubt that these guys were anything but scientists. This is exactly they way Ideologues act and the results can be and were horrific. Ideology has no legitimate place in either economics or politics.
At its very best, economics can provide the tools to somewhat manage a nation’s wealth. Those tools however, have to be intelligently applied and their wielders quick to realize, admit, and correct their own errors.
I think what we're forgetting is that economics is still a social science. Unlike mathematics, physics, or other "hard sciences", economics deals with human behavior, which as any other social scientist (e.g. political scientist, psychologist, sociologist) will tell you is always complex, varied, and unpredictable. Economics does have some guiding principles, but much of it is theoretical and still looking for empirical support. Using math and econometrics has become a new cornerstone in making economics more of "hard science", but assumptions are almost always necessary because markets very often have asymmetries and exogenous shocks that prevent model predictions from coming true. Economists, both micro- and macro-, are in many ways observers using limited tools to keep the economy functioning.
Additionally, just like in political science, there are different opinions about what constitutes "good economic policy". That all depends on what the perceived end of the policy is. If we're talking about free markets as the primary end, that policy will look a lot different than a policy whose aim is to maximize social welfare. Opposing interests permeate economics, just as they do other disciplines - even ones that are supposedly more "settled", like medicine, biology, and chemistry. Perhaps the frustration with economists stems from the certitude that many of them convey about economic issues, which in all honesty they probably shouldn't be doing. So, the problem lies on both sides of this equation.
In the hard sciences, when a theory has disastrous failings or jibes with reality, most real scientists revisit the theory to revise or scrap it, working to develop a theory that better conforms to observable reality (e.g., the Bohr atom vs today's atom; astrology vs astronomy; alchemy vs chemistry, the nature of light, medicine, etc.).
Unfortunately (IMO), economics in this country has fallen victim to "conservative" ideology. Thus, when something disastrous occurs unexpectedly, too many economists are unwilling or unable to revisit their initial premises (blasphemy!) or to consider options that may be politically foreign/unpalatable.
Or maybe you just failed to read the papers of modern economists?
When too much money gets concentrated into too few hands; when the 3 monkeys are the financial markets' totem; when "players" are esteemed over "workers" then it doesn't take a PHD to predict that an "econoquake" is in the offing.
Currently spread thru-out the U.S. -- Stanford, Harvard, U. of Chicago -- getting brain drains. New OS being installed -- will run without glitch on current software.
Didn't I read somewhere that economics is the greatest failed discipline of the twentieth century? Aren't these the people who make weather forecasters look good with their predictions?
The better question is "Why should we ever bother to listen to economists?"
Indeed.
Don't we all know that the function of government is to protect the rich while providing just enough to the rest of us to keep us from rebelling?
Econ 101
Econ 101, yes, and when they first started teaching economics it was called
"Political economy" and it was taught in the Law Schools (future government administrators took the law).
In other words, "economics" is not separable from "politics". I guess they took the word "politics" out of economics at about the same time they changed the Department of War to the Department of Defence.
Someone (Hazel Henderson?) once said that economics is really politics in disguise.
I'm reading Soros' new book about the old paradigm of financial markets (based on unsustained assumptions) and proposing a new paradigm. It's helped me make sense of what's happening now. One of the points he makes is that social sciences always must incorporate "reflexivity," whereas the natural sciences do not.
As an econ major in college, I was confounded by the intricacies of econometric models. When I entered the real world, I realized my lack of understanding was actually a sub-concious but intelligent rejection of false constructs. Keynesianism and monetarism each have something to contribute but both rely too much on such models. Economics is a purely social science that is totally intertwined with the other overaching social structure, politics. Over the last twenty years, the ideas of Jude Wanniski stand out for me as the single best roadmap for, to quote his book title, The Way the World Works. Jude's advantage was that he wasn't a trained economist but rather a journalist. His reporter's attitude led him to search for facts and relationships for answers rather than theory and numbers.
With a few exceptions, economists are total frauds. They are exactly the same as priesthoods 3000 years ago convincing people that there was a divine order that made it right that the poor should pay taxes to the least productive members of society. In fact, they are worse, because they inflict enormous harm on people's lives, and then completely walk away from the consequences. Maybe economics should be called an anti-social science.
Funny thing is, the rare, true economists, who study how actual societies respond to scarcity, make fascinating, accurate and important insights.
Good blog, Simon.
There is a reason why economics is nicknamed "the dismal science."
Maybe economics is a slow-moving science, like medical research? I read that we only have had now a demonstration of the emptiness of Reaganomics with the failure of Bush, Jr. economics. Cutting taxes and deregulation seemed to have worked for Reagan. Bush tried that and showed it doesn't work. It took 20 years for us to see the proof.
econmics is not a science, slow moving or otherwise. It is teh modern equivalent to crystal ball gazing and tea leaf reading.
"...worked for Reagan?"
Did you mean it worked for him personally?
Reaganomics, or 'trickle-down', only works if you pretend the federal deficit wasn't there. Only then, using pretend accounting, did Reagan accomplish one of the main goals of Conservatism, fiscal responsibility.
Reagan fooled the middle class into believing that lowering taxes on the wealthy would lead to more investment in business and therefore more jobs. He could have just tied tax cuts directly to those who create jobs, but by making the wealthy the middleman beneficiary, he gave them more power over the American economy. The wealthy, tax cuts in hand, crushed unions, consolidated and dismantled entire industries, automated jobs and shipped jobs overseas.
So the middle class makes less now, the upper class has more, and future generations are indebted to China, Japan and the Saudis who hold debts that are accruing interest at alarming rates. The Earned Income Tax credit has done more then anything in my lifetime to reverse the stovepiping of American wealth.
Didn't take 20 years for people with common sense....
The Austrian school (e.g., Ludwig von Mises) has long ago foreseen the failures guaranteed to follow government control of the currency and more generally of the economy. But its teachings have yet to penetrate the statist mindset of our times.
Margaret Thatcher is reputed to have presented her economists with Hayek's Road to Serfdom and told them to read it: Hayek was along with von Mises was a leading Austrian school economist.
Grover Norquist, a Reagan theorist, said, let's make government so small we can drown it in the bathtub.
Didn't he.
Thatcher's policies resulted in the British recession and preview of today's housing collapse in Britain in 1991. Reagonomics resulted in a massive deficit and we are in the ruins of Bullshienomics. The Austrian school theories were applied and they failed.
To some extent, "not to intervene in the economy" is to intervene in the economy. That's why most historians blame the Irish potato famine on the British despite the way they acted all innocent based on the theories of John Stuart Mill.
I don't know, furthermore, where Ludwig von Mises seriously called for banks and merchants to issue scrip. If you mean a return to the gold standard, that was a massive intervention in the "economy" in fact in Britain, in 1925, when Churchill, ignoring Britain's decline, returned Britain to the gold standard, a move which caused massive unemployment and a general strike.
It appears that to do nothing is to preserve a status quo of winners and losers. The question that remains happens to be Lenin's (eek!).
What is to be done?
Or if you prefer another Russian, it is Tolstoy's.
What must we then do?
End amoral and pseudo-scientific economic theorising, for a start.
Spinoza, interesting. As for Churchill, the tanking of his economy was more a function of the Banks teaching him a lesson. No one messes with the credit economy of the Central Banks! He escaped with his life. When JFK ventured the same thought about America (and ending the war) he paid with his.
Economics, of the 19th century type we have adopted as our "ideal" is based on the idea that we cannot know everything but the economy will sort things out as if if had an "invisible hand" as Adam Smith put it in 1776.
Ironically, just at the point when the internet has made it possible for an "intelligence" to know everything that is happening at any one given time and therefore made it possible that socialism could be a working model, most of the socialist countries have turned to the capitalist model.
Personally I am not a socialist because politics scare me to death and economics is politics above all. However, Simon Jenkins' question once again takes on meaning for me: Where are the economists? Everybody needs health care, right? So why doesn't the government simply dispense health care through the internet, the all seeing, all knowing god? Wouldn't that be infinitely more efficient than our hodge podge crazy quilt system that adds layer after layer of leeches on the system for no discernible reason?
Of course, private sector control of the currency is worse.
Yessir.
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