Economists can serve their profession (and the policy world) better if they don’t take their findings and formulae too seriously or lose sight of the big picture.
Amidst all the blaming and shaming of Economics that is currently going on in the media in the context of the global economic crisis, I feel, as a veteran member of the profession, strangely guiltless. (I felt the same way many years back when I was teaching in Delhi. A housewife I met, on finding out that I am an economist, blamed me for the rising prices she faced on her grocery shopping.) In a recent op-ed piece (Financial Times, August 5, 2009) Robert Skidelsky referred to the British Queen’s puzzle at the failure of economists in predicting the crisis, and then he went on to suggest ways of rebuilding the ‘shamed subject’. A sensible economist like Skidelsky surely knows that most of the Economics discipline is much more complex, nuanced, and multifaceted than the wooden caricatures of the subject that the media (maybe even advisers to royalty) now denounce. Very few economists have ever claimed knowledge of the exact timing of a crisis, and in general economic forecasting has often been regarded in the profession as “making astrology respectable”. Many notable economists have been pointing to the gathering clouds, saying (some of them quite noisily) for some years that the pattern and pace of debt-financed consumption in the US was unsustainable, and that the financial market was overreaching itself in the opacity of the risk packages it was pushing, though none of them gave an exact date or measure of the imminent financial storm. Many economists I know both in the US and abroad never displayed any trace of blind faith in self-regulating markets, even though they did and continue to value the important coordinating and disciplining functions of the market mechanism. In a world of imperfect information, expectational errors and herd behaviour, and uncertainty beyond measurable risks, many agreed that one should be cautious in applying the standard market principles to the financial market.
Yet the media and the policymakers often ignored the naysayers, played up the free market yahoos, and ascribed the doubts and heresies of the dissenters to the influence of ideology, from which they themselves were supposedly immune. The general public played along as no one wanted to be a spoilsport when the stock markets were booming and the housing markets were flush with liquidity. Now after the crisis, the ferocity of which shocked everybody, the same media are pointing fingers at the whole subject of Economics. Some are even blaming the tendency to build mathematical models in the profession (and Skidelsky concurs).
In good times as well as bad the media play up largely the part that has to do with macroeconomics. Economics has a thriving micro part, which while lacking the immediacy and stridency of business headlines, goes on studying how millions of individual decisions are made and what impact they have on the daily lives of people from America to Zambia; in recent years microeconomics, while not giving up any of its theoretical rigour, has turned more and more to empirical data and new ways of testing hypotheses. In macroeconomics, in the last quarter century or so there has been a healthy turn towards establishing micro-foundations of macroeconomics, basing it ultimately on decisions by individuals rather than on vaguely derived aggregates. But in taking this turn some economists resorted to a kind of hyper-rationality in individual decision-making and ignored informational traps and financial frictions. A whole host of other economists (particularly those specialising in the economics of imperfect information and behavioural finance—fields by now well-established in Economics, and recognised by their own Nobel prizes) have been convincingly criticising this trend, pointing to human frailties (systematic departures from rationality) as well as asymmetries of information among the market participants. In this kind of critique, as in the received theories, economic analysis has sometimes involved complex models that have required mathematical abstractions. That some mindless applications, by hedge-fund whiz kids and other sharp operators, of mathematical formulae in option pricing or in valuation of complex financial instruments have brought about disastrous results in financial markets does not detract from the general need for using abstract models in getting a grip on complex reality. A model often helps in thinking about and sorting out the essential from inessential aspects of the problem at hand, in puzzling out the implicit assumptions that we often make even in our best intuitive judgments, and in discovering unifying principles that can connect a mass of seemingly unrelated issues.
This is not to suggest that all is well with the way we teach and research in Economics. Our courses and research seminars are often steeped in a kind of technique fetishism, and marked by a deplorable oversight of history and systemic issues. The latter, for example, made many economists in their zeal for financial deregulation in the US oblivious of the corrupt influence of the financial oligarchy (described in vivid terms by Simon Johnson, the former chief economist of the IMF, in a widely noted article, ‘The Quiet Coup’, The Atlantic, May 2009). One can detect similar systemic obliviousness among the over-enthusiastic liberalisers in India of the corrupt grip of the industrial oligarchy in the political life of the country.
The complicity of the academia is reinforced by the fact that the beginning courses in major graduate schools of Economics in the US often succeed in weeding out students with lively minds still curious about general structural problems of an economy in the larger context of history and society, and mainly allow those who have the stamina and the manic perseverance to follow the current technical fads in their narrow groove. The premium is on cleverness, not on balanced judgment or wisdom. We can serve our profession (and the policy world) better if we don’t take our findings and formulae too seriously or lose sight of the big picture, which historians and sociologists grapple with in a less precise, but often more insightful, fashion.