Economists under fire

As to be expected in the wake of the deteriorating economic situation, economists (and economics!) are at the forefront of criticism. Ilanna Bet-El reireated her view in the The Guardian (Economists should get smarter) that 'economics may be less than a science, quoting Jane Jacobs, author of Cities and the Wealth of Nations. "Never has a science, or supposed science, been so generously indulged. And never have experiments left in their wakes more wreckage, unpleasant surprises, blasted hopes and confusion, to the point that the question seriously arises whether the wreckage is reparable."'

'The massive stimulus bill just passed in the US is apparently an attempt to repair the current wreckage. However, since it is mostly based upon economic theory, there is room to doubt its future success: this may be yet another vastly expensive experiment based on a model, which is the tool of the economist. And given simulated models of securitised mortgages are what brought about the crisis to start with, what is now needed is a severe dose of harsh reality, combined with some common sense.'

She challenges the assumption that the answer to our economics woes is to get consumers back into the shops. Many consumers just don't have the money, credit has dried up and most of us in developed countries have sufficient consumer goods and don't actually really need anything. 'There is no obvious solution to the financial crises, but it should be clear that they cannot be resolved by economic theory or by depending on mass consumerism: that is a way back to the bad past.'

Instead economists should use 'a full range of tools as appropriate to a specific situation rather than sticking to a specific model or theory. In other words, rather than just veering between tax cuts and stimulus, between funding banks and buying up their bad debt, there should be room for examining each case in the round of a given economy and society – and seeking to balance both, not just the books.'
We should 'start thinking about "smart consumerism": a mode in which need and quality would be at the heart of production and consumerism rather than cheap credit and greed. More money would be exchanged per item, but less frequently: both sides would therefore stand to gain, and the environment would be filled with fewer cast-off items. '

Link to article

The mechanistic approach to economics has failed. We need to embrace creativity

Very thought-provoking piece by larry Elliott in today's Guardian. He considers whether we are on the brink of a 'depression', concludes that we just don't know and points the finger at economist who have come to rely on mechanistic models with flawed assumptions. 'One reason we are in this mess is that we assumed far greater foresight than actually existed. All the fancy models purporting to show only a minuscule risk of financial blow-out were flawed. They assumed the complexity could be captured by mathematics and pseudo-science. One silver lining to the storm cloud over the global economy is that there will now be an overdue revolution in how we do economics. Already, the cutting edge of the profession is looking to other disciplines - biology and psychology in particular - to explain why models that work in theory come a cropper in practice.' He draws on a new book by Richard Bronk to support his view. 'As Richard Bronk notes in his fascinating new book (The Romantic Economist): "Standard economics assumes that economic agents are perfectly rational; that is the basis of its predictive equilibrium-based models. Modern versions generally allow for certain types of information problem and market failure, and recognise that institutions and even history play a role; but they still assume that these factors do not call into question the underlying model of agents as rational utility maximisers within those constraints... There have been many economists down the years who have expressed scepticism about reducing their discipline to a mechanistic subject. Malthus told Ricardo to be wary of becoming too attached to abstract hypotheses; Schumpeter talked of creative destruction; Hayek saw the market as a voyage of discovery; Keynes stressed the importance of "animal spirits".

The models rely on past behaviour for their predictive ability and 'What we now know is that even the very recent past is an unreliable guide to the future; that risks are not distributed in a linear and predictable way; that human beings do not always act rationally even when they think they are; and that shocks are much more likely than economic orthodoxy would suggest. All of which explains why it is virtually impossible to say where the global economy goes from here. '

Read the article (Link) and consider reading the book!

How does it make you think about the models we use in economics?