Tongue in Cheek

“Why did no one see the crisis coming?” asked Queen Elizabeth.

Here is a cheeky reply from Robert Shrimsley at the Financial Times:

Madam, When you visited us last year you asked why economists were so useless – although you were kind enough not to put it that way. Naturally we have given much thought to this matter.

You asked why we failed to predict the credit crunch. We would contend that there were many economists who did predict the credit crunch, in all but its time, scale and severity.

But, to use a trusted economic method, let us assume that we had predicted the credit crunch.

What would have been the result? Would bankers have heeded our warnings? Would regulators have confronted the banks? Would craven politicians have acted to limit a popular credit boom? We think not.

So we cannot be said to have failed in our duty since the outcome would have been the same. To speak up, therefore, would have been an inefficient use of our resources.

With no incentive to deliver the warning, we instead all went off and wrote books like Freakonomics about how economics can explain the real world. They may not have done much to avert the crunch but they did very nicely for us, thank you.

So the question, your Majesty, is not why did we fail to predict the crunch but why did you all fail to incentivise us to predict it?

In highlighting the right question to ask, we hope we have shown you the true value of economists.

We remain your most humble and obedient servants.

The above is a lot more honest than the official response here.

But Shrimsley uses the economists very own language to hoist them on their own petard.

Let's see if I have the spirit of this right. If I have the "skill" of an economist then:

• I can clearly predict the winner of next year's Kentucky Derby, but I may get the specific horse's number wrong. Ignoring that, it is clear that I can pick the winner.


• I could have rushed out and saved that child in the path of the out-of-control car, but I stopped and thought that somebody might misinterpret my interest in the child and accuse me of paedophilia. So a rational calculation indicated I should stand an await futher developments.


• I could have rushed out to save the child, but I realized that I had a 3:00 o'clock appointment and that would make me late. One must always keep one's priorities straight.


• I would have rushed out to save the child but I stopped when I realized that the incentives were all wrong. I don't need my picture in the paper. I want hard cold cash. Unfortunately there was not time to negotiate another deal, so unfortunately things took a bad turn.


• The question isn't why I didn't rush out there to save the child, the right question is "why was that child was so insistent on walking in front of the car?" Let's address that question first!

Yes... to understand incentives and to appreciate that we are all cold-hearted, purely rational calculating machines. That is the economist's lesson to learn here.