I’m coming a little late to this party, but only fashionably so.
This all started last Sunday with Paul Krugman’s thought-provoking/anger-inducing article in The New York Times Magazine, “How Did Economists Get It So Wrong.” The following day, Andrew challenged some of Krugman’s basic assertions in a post that got Pete exercised the day after. Yesterday, possibly just to embarass me for being late to class, Bruce expressed a few thoughts as well. And earlier today, Andrew added some fuel to the fire with this.
Gentlemen…I admire and respect you all but thou doth protest too much me thinks. Economists are not the problem.
The question shouldn’t be whether, why, and how the economics profession has failed. The better question is, given the absolute certainty that uncertainty and a lack of perfect information exists in macroeconomics, why do we keep taking what economists say as if it is a pronouncement from on high?
And this isn’t even a new question. Does no one else remember (or remember reading about) the debate that took place after the Kennedy administration when the economic team was convinced it could “fine tune” the economy?
And why in the world are we arguing about salt water vs. fresh water or Keynsian vs. monetarist economics as if any one of them could possibly be the answer to everything all of the time?
A few other comments in no particular order…
1. As much as economists might like to believe (and might like others to believe), economics is anything but an exact science. In fact, we should admit that economics is not really a science at all. Nothing can be tested in a lab with controlled conditions so results are always tainted.
2. The fact that some economic events happen that we don’t expect and can’t predict with any certainty is almost absolute proof that, given the current state of what we know, economics and economists can’t, don’t, and won’t always get it right. There’s no shame. Get over it.
3. Krugman, Andrew, Pete, and Bruce are all being far too defensive. Economists don’t make policy choices by themselves or on their own and decisions are not made solely on the basis of economic theory or practice. Unlike the situation in Isaac Asimov’s Foundation trilogy, where psychologists ruled, decisions are made in a highly charged political environment that almost never allows for economic purity. With very few exceptions, every economic polciy decision is a compromise that, if we were all honest with ourselves, doesn’t really allow conclusions to be reached about them even when the policy succeeds.
4. Besides, even if it looks similar, the next situation to which that same policy may seem appropriate will be at least somewhat different than the last time it was used.
5. Economists are not today’s equivalent of high priests or partisan eunuchs. In much the same way that pollsters read numbers differently depending on their political affiliation, economists are often political animals whose views are frequently stated in partisan terms or for partisan reasons.
6. As much as we might like to believe otherwise, at least some markets clearly are not inherently stable and it’s ridiculous to believe otherwise. More importantly, these days many market participants thrive precisely because of that instability and do things that create it if it doesn’t occur on its own.
7. Andrew indicated that he was surprised by the fact that rating agencies were, in his words, “in on the con.” This is not that different from Alan Greenspan’s much-quoted comment (I’m obviously paraphrasing) that he was shocked to learn that Wall Street firms’ actions were not based on what was right for the markets.
Is it really that surprising that rating agencies and financial firms operated on what was best for them rather than for the market as a whole? Isn’t “what’s bad for the market” an externality that individual participants seldom, if ever, take into account? Isn’t that what government is supposed to do?