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.

Comments

[95flhtcu]

That was a great read. Thanks!

[Henry]

Imagine a pundit with the temerity to ask George GW Bush (holder of the Harvard MBA) if the tidal wave failure of the subprime mortgage securitization "is not proof positive that the markets must be regultated"??? The FSLIC was bailed by his father...he bailed Bear. These are hardly market discipline boys who believe in the old time gospel(of free markets and market discipline).
Serioulsy... do you think that question can be asked of the boy wonder? It was the humble boy from Texas, himself, who bragged that his administration wanted an "ownership" society. The statement itself amounts to an indictment of the free market philosophy. So...the ghoom-bah brand of right wing greed-o-nomics may be the seed of the problem, but it is GW himself where the buck has to stop. And... frankly it would be wonderful to observe his explanation. (his unscripted explanation) The public deserves to know...

[Toonadude]

I’d like to see your question directed at the Harvard School of Business as well. Please explain Harvard how it is that Bush "earned" a C minus in Economics 10 as a Yale undergrad yet was admitted to your highly prestigious and exclusive MBA program. And yet we are all expected to genuflect before any holder of a degree from Harvard, Yale, Princeton, etc. What rubbish. In the future, anytime I meet a graduate of one of these institutions I will automatically question whether the person earned a real degree or a Bush / legacy / privileged class degree.

And these are the foundries which mold our best and brightest into our nation’s leaders!!

What a complete and utter joke Ivies - Sorry.

[krocklin]

Bush's "ownership society" has two meanings:

1) One class owns everything - his class.
2) "You're on your own".

[swift goat pet for truth]

Economics is not a science.

It is a black art.

Soon, Christians will be burning the books.

[WIpatriot]

That's what they do....

[cktirumalai]

Professional economists can do theory, fundamentals, econometrics, but this by no means guarantees insight into the real economy and the complexity of human beings. Adam Smith was as interested in non-economic moral values as in economics. An exclusive emphasis on economic forces can lead one astray. War cannot be left to the generals nor the economy to economists.

[paixa3]

You are correct. How do NO BID contracts support supply and demand and price???????

In addition, modern economic theory does not include corruption.

[LibertyNotNegotiable]

paixa, this is not necessarily aimed at you, but I think many people on this post have an incorrect view of how economics works. There is a strong base of mathematical and statistical analysis that underlies almost all of modern economic theory, so the suggestion that it's comparable to tea leaf reading, star gazing, or something like that is naively cynical.

I wanted to respond to you paixa, because you're absolutely right about no bid contracts. I studied that phenomenon for my senior thesis, and no bid contracts (and others like "cost-plus" contracts) do not support the professed governmental goal of maximizing the welfare of society. Also, modern economic theory has begun incorporating corruption and other governmental influences in a field known as political economy - with new data sets economists are able to analyze the effect that formerly abstract concepts like "freedom", "corruption", and "happiness" have on an economy.

[Toonadude]

I guess that means that all wars should be waged by Harvard MBAs ??

[Henry]

The problem with economists is that they are not accountants. The problem with accountants is they are not economists. Accountancy is the language of business. Economics is the language of abstract marginal indifference demonstrated by differential calculus. Micro Economics is the same thing as Cost Accounting. Each is put forth in different languages neither of which is understood by the other. More than just a little bable going on in the professions, both of them.
"Risk" is not the domain of either profession, economics or accountancy. And the ghoom-bah brand of marketing "faith talk" like "adequately pricing risk" is right out of the rhealm of used car sales.
It's all a show. And it's all about coming up with some catchey quip... like "supply side economics". Has anyone bothered to assess the measure of this "voo-doo" on our faith-based psychology?
What is value anyway? What is wealth? What is capital? What does someone mean when they state: Today I "made" $10000 bucks? (is he a counterfitter?) and on it goes. And then mark to market vs mark to model.... what is fair value? How is it that the trader of wheat makes more than the farmer of wheat? It's all a show and they are hired to perform.

[WIpatriot]

Nice, Henry.