The Knives are Out, Get the Economists!

Forget going after the big bonus recipients at AIG. The mobs with pitchforks and torches are about to turn on the academic economists. I'll be on the sidelines cheering them on.

Here is the opening bit of an article by Anatole Kaletsky in the Prospect Magazine of the UK:

Was Adam Smith an economist? Was Keynes, Ricardo or Schumpeter? By the standards of today’s academic economists, the answer is no. Smith, Ricardo and Keynes produced no mathematical models. Their work lacked the “analytical rigour” and precise deductive logic demanded by modern economics. And none of them ever produced an econometric forecast (although Keynes and Schumpeter were able mathematicians). If any of these giants of economics applied for a university job today, they would be rejected. As for their written work, it would not have a chance of acceptance in the Economic Journal or American Economic Review. The editors, if they felt charitable, might advise Smith and Keynes to try a journal of history or sociology.

If you think I exaggerate, ask yourself what role academic economists have played in the present crisis. Granted, a few mainstream economists with practical backgrounds—like Paul Krugman and Larry Summers in the US—have been helpful explaining the crisis to the public and shaping some of the response. But in general how many academic economists have had something useful to say about the greatest upheaval in 70 years? The truth is even worse than this rhetorical question suggests: not only have economists, as a profession, failed to guide the world out of the crisis, they were also primarily responsible for leading us into it.

By “economists” in this context I do not mean the talking heads and commentators (myself included) employed by the media and financial institutions to explain the credit crunch or the collapse of house prices or the rise of unemployment or the movements of currencies and stock markets—usually well after the event. Neither do I mean the forecasters whose computer models churn out scientific-looking numbers on future growth or inflation, numbers that have to be revised so drastically whenever something “unexpected” happens (as it always does) that they are not really forecasts at all but descriptions of recent events. An IMF study of 72 recessions in 63 countries found, for example, that in only four of these cases had economic forecasters predicted a recession three months or more before the event. Economic forecasters and pundits cannot predict the future for the same reason that weather forecasters cannot predict the weather—the world economy is too complex and too susceptible to random shocks for precise numerical forecasts to have any real meaning.

This doesn’t mean that economics is useless, any more than unreliable weather forecasts should lead us to ignore Newton’s laws of motion, on which they rely. But economics should recognise that, as a discipline, it cannot be about predicting, but is instead about explaining and describing. Smith, Ricardo and Schumpeter explained why market economies generally work surprisingly well, often in defiance of common-sense expectations. Others have explained why capitalist economies can fail very badly and what then needs to be done. This was the mission of Keynes, Milton Friedman, Walter Bagehot and, in his way, Karl Marx. And the economists who got us into this mess saw themselves as the self-proclaimed successors of these great theorists. Many of them are the academics who win Nobel prizes, or dream of winning them, and who regard themselves as intellectually superior to the journeymen who work for banks and governments, never mind the populist hoi polloi whose musings appear in newspaper columns or on television.

Academic economists have thus far escaped much blame for the crisis.

And here is the expected summary:

Economics today is a discipline that must either die or undergo a paradigm shift—to make itself both more broadminded, and more modest. It must broaden its horizons to recognise the insights of other social sciences and historical studies and it must return to its roots. Smith, Keynes, Hayek, Schumpeter and all the other truly great economists were interested in economic reality. They studied real human behaviour in markets that actually existed. Their insights came from historical knowledge, psychological intuition and political understanding. Their analytical tools were words, not mathematics. They persuaded with eloquence, not just formal logic. One can see why many of today’s academics may fear such a return of economics to its roots.

Should the economists start finding Dick Cheney "undisclosed locations" to hide alongside the AIG bonus recipient counterparts? Judging from the above... maybe!