The Economist has its lead editorial and two articles (here and here) on the state of play in the economics discipline, given its failure to see the financial train wreck coming and its dismissal of those who raised early warning flags. I must confess I only got a few paragraphs into it before getting thoroughly annoyed. It’s one of those damage control affairs that does a clever job of asserting the failing of the discipline are really not all that serious. In fact, the refusal of the discipline to cop to much in the way of error is remarkable. By contrast, a period of failing enrollments in the 1990s produced vastly more soul-searching (doubters can read Mark Blaug, “Disturbing Currents in Modern Economics” Challenge, 1998, and contrast it with the state of play now).
Linda Beale. professor of law and creator of the blog, ATaxingMatter, will have none of it. She agreed to run her take on it as a guest post her.
The July 18th issue of The Economist is focused on the economic crisis and the economic theory that failed to prevent or, for most, even foresee the crisis. The cover is telling–a book labelled “Modern Economic Theory” that is melting away, with the words “Where it went wrong-and how the crisis is changing it” beneath. That sounds like the magazine intends to investigate the sources of the crisis in modern economic theory. But does it? Only in a sort of halfway approach. There’s a lead-in on “what went wrong with economics” (page 11). It claims that economics as a discipline “deserves a robust defence” and that “so does the free-market paradigm.”
There is, to be quite clear, very little real justification for those statements. Both, in my view, have failed us, in that the free-market paradigm does not work–without substantial state processes and institutions that impose restrictions on free markets–such as regulatory agencies looking out for consumers, anti-trust enforcement preventing singular companies from growing so large that they can have a systemic effect on the system–we will have skullduggery llike the Madoff ponzi scheme and market control such as that exerted by the several large banks who have essentially set anti-consumer/pro-rent policies in lockstep over the last few years, while engaging in speculative behavior and abetting tax avoidance in many cases like UBS’s that are bad for the system and bad for ordinary Americans but good for greedy bankers.
What does the lead-in admit to, then (if it still thinks economic and free market theory are worth defending)? It acknowledgs that the discipline is subject to three critiques:
1) it helped cause the current economic crisis
2) It failed to see it coming
3) It doesn’t know how to fix it.
In my book, that doesn’t leave much out. A theory that actively causes harm, can’t prevent it, and can’t cure it is not much of a theory.