Economics in crisis?

This is a column published in the Irish examiner 27/October 2012
Economics is in crisis. We know that this is the case because many have said so. Even such personages as the queen of England, who famously is so divorced from the hurly burly as to not carry a purse, has asked why economics didn’t see the crash coming. Economics is in crisis….except where its not.

Economics is not a discipline – nor is it a profession. It is instead a way of thinking. In its best manifestations modern economics shows its roots as an outgrowth of the philosophical wing of the Scottish enlightenment. In its worst this thinking has become more in common with the Taliban, with dogma and assertion replacing argument and evidence.

When people say economics is in crisis and it didn’t predict the crisis they typically point the finger at one or two subsectors. Macroeconomic theory and financial modeling tend to be hauled, rightly, over the coals, and their deficiencies exposed. In the case of macro theory the argument is that in treating finance and the financial sector as a residual, frictional, element in an otherwise beautiful model the theory could not account for the stresses that built up and eventually blew the model and the modeling, the symbol and the referent, apart. In addition, the economics profession underwent, especially in macroeconomics, a revolution in how people thought, with the Keynesian story of what happens in the relationships between aggregate demand, unemployment and money being lost to many. In finance, in particular in some parts of finance theory, a subliminal belief in some form of market efficiency and its consequences, prevailed. Both macro theory and finance modeling became more and more mathematically sophisticated but in the absence of an understanding again that limited models and a lack of the ability to model people in small groups interacting to many these models ultimately failed.

So economics is not immune from criticism. However, and perhaps for the best, we do not have economists making decisions on economic policy. That is and must remain the democratic prerogative of government. Where economics failed was mostly in communicating to policy makers that their policy prescriptions were the outcome of models, that these models were imperfect, that they were of necessity based on particular assumptions and that they were in essence guides. They were guilty perhaps of overselling the outcomes as oracles, but not Delphic ones.

And yet, these areas are neither the sole nor even the largest areas of economic endeavor. The most widely used classification system for economics is that of the Journal of Economic Literature. It allows papers to be classified into 20 broad and a host of sub categories. Macro and monetary economics are one and financial economics another. If we examine where research is at now by looking at the papers published in 2011 and 2010 in the American Economic Review (the most prestigious general journal in the field) we note that it is microeconomics (over 20%) and Industrial Organization (9%) and Labour Economics (8%) that are most investigated (assuming that papers are published in proportion to the extent to which they are written). Economic Development is almost as much published as Macro or Finance. Economists are researching and publishing on areas that impact directly on people. We live in the micro economy and it is our aggregate activity which makes the macro economy.

There are lessons here for Ireland. There are large swathes of economic activity and research output, beyond macro finance research, that bear directly on government policy. We have excellent research in labour, health, education, behavioral economics, international trade, which do not shout their results. But a careful reading of these would suggest that in particular where the results are congruent with other fields and other countries, the government and commentators might wish to take note. We have evidence on how there is vast return on early childhood education , yet we are cutting same. We have evidence on the importance for policy making of a pool of behavioural economists, but the universities are losing world class exemplars of same; we have a health care system where there are inbuilt and self reinforcing conflicts of interest but no urgency in remedying same; we have research aplenty on the need for coordinated spatio-economic planning, but little evidence that such exists. We could go on….

Economics is a way of viewing the world. Macroeconomics in particular used to be called political economy, recognizing that at the end it is the politicians that will take decisions. Where modern macro can be faulted most in my view is that it has at one and the same time taken its eye off the political and simultaneously got into bed with politicians. Some macro theorists ignored the propensity of politicians to hear what they wish to hear; others became spokespersons for particular economic ideologies and left behind their critical thinking. But then, the same can be said for many other areas of human endeavor. Nor are the media blameless . In Ireland we persist in having presented as unbiased in the media the views of persons employed to undertake economic analysis for banks, unions and employer groups.

Perhaps the best we can hope for is that we see an expansion of the initiative to have declarations of financial support noted. Perhaps an expansion to include whether someone had ever been a member of a political party, or undertook paid consultancy for a body would help clarity in understanding.


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