"When the going gets tough, economists go very quiet"

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This comment in the Guardian by Simon Jenkins is a tad unfair, since it treats economists as having a fair degree of unanimity of thinking. Dean Baker, Nouriel Roubini, and Calculated Risk, among others, point out that there were economists (and market participants) who saw the housing bubble and the credit crunch coming. Jim Hamilton warned the Fed at Jackson Hole last August that the GSEs were sufficiently undercapitalized as to be running the risk of insolvency and thus at risk of having the implicit Federal guarantee tested. And some economists, like Kenneth Rogoff, Carmen Reinhart, Brad Setser, and Menzie Chinn, do solid empirical work and don’t push their conclusions further than the data takes them.

But the Jenkins piece is colorfully written, and while it does engage in some stereotyping, the examples cited above in some respects prove Jenkins’ point. Minority views are not well tolerated. Roubini was regarded as a doomster until proven correct; Hamilton, who goes to some length to express his concerns in as anodyne a fashion as possible, appears to have been ignored despite the importance of his message. And that pattern extends to matters of doctrine, as an active discussion of the marginal standing of so-called heterodox economists attests.

Even though the price goes out of its way to be provocative and uses broad brushstrokes, it nevertheless makes an observation that rings true: there is often a lack of humility and accountability in the economics profession. And that is dangerous given how much power it has.

From the Guardian:

So the Footsie has tumbled again. Forgive me for asking, but where are the economists? As the nation approaches recession, an entire profession seems to have vanished over the horizon, 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 hyperinflation. 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 of 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 we slumped into stagflation. We believed light-regulation capitalists such as Margaret Thatcher and Gordon Brown, that they could convert boom-bust into an upward sloping plane of glory. We believed the Bank of England when it said that, in its hands, inflation was dead and prosperity eternal. Bliss was it in that dawn to be alive – and an economist.

If Britain were now in the grip of bubonic plague, there would be all hell to pay from some profession or other. An “influential” Commons committee would be summoning the chief medical officer and subjecting him to the 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 having “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; there were roughly a thousand at the last count. What do they all do? Despite reports of demoralisation in the Treasury, that department remains the home base for public sector management through financial aggregates. During the Blair/Brown era it has held government in thrall.

Economic managers have always claimed credit for the success of Brown’s Treasury regime. They have espoused quantifiable outputs, targets and delivery indicators. They invented the celebrity consultant and the maxim that only what measures matters. Above all, the economics profession (and its house journal, the Economist) was ecstatic when Brown delegated monetary control to the Bank of England. This was supposed to isolate the economy from political pressure, subcontracting the regulation of interest rates and markets.

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

Alan Greenspan, former chief of the US Federal Reserve Board and a Brown adviser, is unrepentant. He recently declared that “anticipating the next financial malfunction … has not proved feasible”. 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 delegation of interest rates to the Bank of England worked when it ran in parallel with politics, but not any more. Now that reflation seems urgent for recovery, the system is biased against common sense, yet no politician dare tell the Bank to cut rates and risk inflation.

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 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. 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. For a third of a century since the 1976 IMF crisis it has enjoyed great influence over British policy. 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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  1. Anonymous

    I more or less agree, but economics is no different to any other social science for it’s boundary problem. Put simply, social sciences find it much harder to exclude charlatans than the physical sciences. Stanislav Andreski has an excellent discussion of this in his “Social Science As Sorcery” book.

    This is a problem with economics as a profession, not (necessarily) economics as a discipline.

    So long as economics is elevated within the power structure it will attract the louts, the charlatans, the fanatics, the bureaucrats and the gamers. It will also constantly suffer from political meddling and the temptation to take credit for the rain while dodging criticism for the drought.

    I think Jenkins deliberately conflates bad economists with bad economics. Pretty dishonest IMHO.


  2. River

    ‘The only function of economic forecasting is to make astrology look respectable.
    John Kenneth Galbraith ‘

  3. Richard Kline

    Economics is above all things an ideology, and a Panglossian one at that. Oh, there are individual economists who take themselves seriously as scholars, and produce substantive studies of observable phenomena. They are few. Most are in the profession of believing and communicating to others a priori that Everything Is Fine.

    Articulate and persuasive backers of the status quo are always well rewarded; so too, these. Their object isn’t to learn anything but to justify everything. One might go so far as to opine that telling folks the lies they want to hear are the surest path to short term success. There is too much of this in economics. —Which accounts for their teflon status, no? Or so to me it does. For to repudiate them for their obtuseness, vapidity, and all too often patent falsehood is to repudiate the prevailing ideology, and few indeed are open to such a radical conversion. One has to give up those precious lies one wants to here. That prosperity is just around the corner. That growth is endless, low cost, and equitable (except for lazy sluggards of the wrong color who can look out for themselves or just get out of the way). That ‘externalized costs’ magically vanish down a rabbit hole into somebody else’s dimension, never to be heard of again. That wealth without labor is an ideal which ennobles. That profit without community is sane or just. That everyone can buy low and sell high. That you can get something for nothing if you vote the right way and back the right side. That the next thing you buy will make you a better person. You know: All those sweet little capitalist noughates that stick to the teeth of one’s mind from childhood; toff’s taffy.

    TANSTAAFL, baby. Grow up, world; read more history and less cononomics. And learn to think for yourself. That list in another post today of hedge fund managers who lost less or more: You can bet your bank account that those who lost less think for themselves rather than hiring an economic diploma to tell them precious little lies.

  4. Anonymous

    “Above all, the economics profession (and its house journal, the Economist) was ecstatic when Brown delegated monetary control to the Bank of England.”

    Central banking is a form of central planning. Economists can explain the ruinous perverse incentives which caused communism to fail. But when it comes to western-style central planning via central banks, most economists are in thrall to the powers that be. Not merely those who work in government, but the legions outside it devoted to analyzing government policy. Whatever private doubts they may harbor, it simply is not politic, career-wise, to diss the monetary authorities. But the prevailing mindset in the profession seems to be that central banks add value — a notion which I vehemently reject.

    Thaler and Sunstein get it exactly right in putting economics among the behavioral sciences. A fundamental assumption of classical economics — that of rational actors — is hopelessly wrong. Humans in groups are subject to herding, such that prices systematically overshoot and undershoot. This sentiment effect is at least as important as fundamental factors. That’s why economics is, at root, a behavioral science.

    Statistics are employed in psychology papers, just as they are in economics, to validate the significance of correlations. But no one should be misled into believing that economics is a hard science, any more than psychology is. Even if the economic “law” which integrates sentiment, supply and demand to determine prices could be stated in closed form, the data to solve it for real-world problems are unavailable, as we cannot enter the subjective minds of every participant. At best, economists may be able to offer some heuristics.

    That the majority of economists still accept central banking is a damning indictment of the profession. A majority of physical scientists used to accept that the earth was the center of the universe. But that was centuries ago. Economics, in its most basic tenets, remains disgracefully mired in purblind medieval error.

    Mamas, don’t let yo babies grow up to be economists.

  5. Danny


    I love your analogy to former physical scientists believing the earth was the center of the universe.

    And I agree with the rest of your post. It isn’t a coincident that the greatest (I am confident eventually people will recognize this) economist of the 20th century, Mises, called his opus, ‘Human Action’.

  6. Independent Accountant

    I have often likened economists to alchemists. The latest incarnation of alchemy is “structured finance”. Economics is guilty of “scientism”, i.e., aping the methods of science to invoke its prestige. Some humility on the part of economists is in order. That’s one reason I liked Milton Friedman. Uncle Miltie wasn’t afraid to say things like there is little economists can do to ameliorate a situation.

  7. martenscs

    Economics is very simple in a capitalist society. Children sit down and understand it. They play Monopoly and understand the end game.
    The issue is how we try to change the end game to come up with a happier ending. That is the purpose of Economists. Figuring out a happier ending for Monopoly.

  8. Anonymous

    I am still amazed that the economists are getting off so easy. The last eight years has been an upside down, free-lunch orgy of debt and money expansion. Anyone taking the time to use their common freaking sense would have noted that the US was eating it’s seed corn in an orgy of borrowing against it’s accumulated wealth.

    The detonator for this bomb has been the economists at the CB’s across the world. The debt bubble and the destruction of savings are two sides of the same coin. Cannot have one without the other. A sure fire recipe for individual wealth destruction that somehow has been rationilized at the national (international) policy level.

    Truly a winter of economic thought that continues.

  9. Spencer

    Maybe we could use a new maxim:

    “Economics is always and everywhere a political phenomenon.”

  10. jest

    i always felt that economics was a branch of philosophy. weren’t the first classical economists (say, ricardo, smith, etc.) philosophers and writers, rather than scientists?

    austrians seem to be the only ones who understand this, and likewise get things right more often than not.

    but i agree; the quacks have out worn their usefulness. i’d lump them in the same category as central bankers, mutual fund managers, and stock analysts. they exist only to push marketing material for their constituents.

  11. JR

    Saying that that the economists are to blame for the current economic crises we are experiencing today is missing the point fo what has gone wrong. Those to blame are those who extracted every rent, penny, and pence at every opportunity. I mean really, is it the economists fault that banks routinely and perversely ignored their decades of knowledge as lenders and lent too much money to those who could not help themselves? Is it the economists fault that I-Banks securitized every loan good and bad and sold them as a homgenous product? Is it economists fault that Glass-Steagal and related regulations were overturned? Absolutely not is the answer to all of these questions and others; the free-market, laisez-faire, turn a blind to regulation body of economic philosophy has been in existence much longer than the seeds of this current economic malaise. The people you should be turning your bile upon are the greedy, the con-men, and the usurers who enriched themselves at the expense of the world economy. Friedman, Galbraith, Rand, et al. didn’t get us here, but Phil Gramm, John Merriweather, Chuck Prince and friends did (to name a small few). It is unfathomable how some of you people can lose sight of this.

  12. Juan

    giving up objective value theories in favor of need/individual preference based marginalist theories took place during the later 19th century and was for practical purpose the transforming of economics into an ideology appropriate to a moment of greater working class size and cohesion while the previous class of revolutionary capitalists was being displaced by a new and still more effete group.
    Relative weights were shifting, owners of capital no longer required the working class as partners in the overthrow of ancien regimes but were increasingly on the defensive v. that class which they depend(ed) on. Theories of value based on labor were too empowering and had to be denied, no matter that this put end to much if not most explanatory power and possibilities for relatively accurate prediction.

    By the mid 1950s, Samuelson could write: by means of appropriately reinforcing monetary and fiscal policies, our mixed-enterprise system can avoid the excesses of boom and slump and look forward to healthy progressive growth (Paul Samuelson, Economics, 1958) A year which also happened to be one of recession though I think he had written the same in 1955.

    In 1969, when he should have noticed the already becoming evident transition, Harrod could write in his manual Money that fairly full employment should now be regarded as an institutional feature of the British economy. (Roy Harrod, Money, London 1969)

    Even better, Stoleru’s 1970 assertion: It has often been said that a crisis such as the Great Depression could no longer take place today, given the progress made in techniques of state countercyclical intervention. These claims, presumptuous as they may seem, are not without foundation. (L. Stoleru, L’équilibre et la croissance économique, Paris 1970)

    In contrast, a Belgian heterodox economist wrote in 1969:
    [We] reached three conclusions: first, that the essential motor forces of this long-term expansion would progressively exhaust themselves, in this way setting off a more and more marked intensification of interimperialist competition; secondly, that the deliberate application of Keynesian antirecessionary techniques would step up the worldwide inflation and constant erosion of the buying power of currencies, finally producing a very grave crisis in the international monetary system; thirdly, that these two factors in conjunction would give rise to increasing limited recessions, inclining the course of economic development toward a general recession…[which] would certainly differ from the great depression of 1929-32 both in extent and duration. Nonetheless, it would strike all the developed countries and considerably exceed the recessions of the last twenty years. Two of these predictions have come true. The third promises to do so in the seventies. (E. Mandel, Intercontinental Press, 14 July 1969)

  13. Anonymous

    What criticism of economists! Time and again I find that those who ridicule science are more often than not those who understand it the least. This debate appears to be no different. Science, in theory or method, is not a panacea for a healthy economy. Science in the context of economics has never purported to have the wherewithal to predict, explain, or cure the constructed institution of all markets at all times. All to often economists have conducted exemplary research that contributes to our perceptual understandings of markets only to have the ‘no-it-alls’ extend such findings far beyond the scope of the research itself. That is to say, it is usually others that draw, extend, or flat out make up implications of the research as they deem fit or as they do not really understand the research in the first place. It is a pity that many of these folks think that because they have taken a semester or two of econometrics that they are now in a trained position to conduct such criticisms accurately or fairly. Never mind that fact that few, if any, economists or critics have ever taken the time to study the philosophy and methods of science and theory construction.

    Moreover, many of these discrepancies may soon be corrected and/or better understood. First, as the still emerging and successful research program of positive political economy becomes more prevalent in the academy we will also see dramatic shifts in the demographics of the political and economic professions. Second, the stronger emphasis of bridging the gap between empirical and formal models of politics and economics will begin to weed out poorly performing models as empirical model are nested in formal deductive theories and formal models are validated by derived empirical models with more advanced modeling techniques and larger data sets. Third, many of the problems with economic models have been the reliance on (becomingly) crude technical applications. Unfortunately, our tools seem to lag behind our instinctual understanding of politics, economics, and markets, and the world in general. Until recently nearly all advanced economic research has been conducted under the rational actor and linear perspectives when we have known for years that actors are not rational, nor is anything linear. Advances in approaches that emphasize nonlinearity are rapidly materializing in a very serious way. It would be wise for one to keep their eyes pitched to computational methods: particularly agent based computational economics and it appendages.

  14. Richard Kline

    To Anon of 2:26 AM: I’ll say this pal: you’ve got the market on pomposity cornered. Anyone who for a second imputes to economics the primature of a ‘science’ brands themselves a self-promoting fool in my book. And ‘the unwashed are to dim to understand us’ broadbrush could be read another way as ‘our results are too trivial and self-contradictory for common sense to engage them.’

    Look, I’ll give a fair hand to _some_ economists, too, as well as a back hand. I do think that the best economists understand the _limitations_ of their tools, and try to scale their conclusions to the real and near limits of what they can justifiably conclude. That makes for modesty of a kind little in evidence in the perspective of your pro-disciplinary comment. Economics, to me, perhaps works best at disconfirming hypotheses by relatively straightforward statistical and mathematical tests where the data is such that these get traction. Again, I think the best economists understand this and get the conceptual measure of their focus of study before they wade in with quantfication; they reason well, and only use the math to test and verify a conclusion. And math is used that way in other human disciplines, sociology or social history, for example. Yes, quantification can be a disaster there if one thinks that a number is in and of itself a better answer, but good work can be done _with_ math, but not with match alone.

    And re: nonlinear economic models, I couldn’t be more interested in them than you are yourself. I have felt that the studies I have read, no more than a fraction of this literature even so, are more talk than result, even if they do try. If you have citations or particular bodies of work you think good in this sub-field, I suggest that you mention them for those interested; that would indeed be more of a contribution than thus demonstrated. And your views would have more credibility if you identified yourself. You might drop in on the guest post of 13 July and make some real input from your perspective on the literature.

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