Wednesday, February 11, 2009

Should economists be apologizing too?

As a natural scientist, my perception is that a lot of my peers feel less than entirely happy with economics, and its role in the current crisis, especially in the English-speaking world. Here are some initial thoughts:
  • It's not simply the case that the crisis was caused by rapacious bankers. This is true, of course, at one level, but it was important that the game they were playing appeared to have some sort of intellectual foundation. This was tacitly (and sometimes quite explicitly) provided by economics.
  • I realize that it's not as though there was ever a theorem which said that what was happening (e.g. wages, impacts on the wider labour market) was in some sense optimal, at least under real-world conditions, but the impression was often given that there was.Countless WSJ and FT comment pieces from the boom years have this tone, sometimes pretty explicitly. This was an intellectual deception, which I think played a key role in getting us to where we are today.
  • I realise that economists, if asked about this point blank, would always be equivocal, but my impression is that during those years the bulk of the profession was happy to go along with the story. Why? Well, it didn't hurt the profession as a whole to be so closely associated with an industry sector raking in 30-40% of all corporate profits. I'm not talking about direct benefits like endowments and speaking fees, but more the intellectual glow of feeling that your work provides the theoretical edifice on which what seemed a hugely profitable sector was based.
  • Again, there were dissenting voices, but my impression is that these people (for example Dean Baker and Steve Keen; quite often Krugman and Stiglitz) were viewed as academically minor-league (DB, SK) or politically motivated (PK, JS) and therefore not entirely in tune with the academic mainstream in the profession, at least on these issues.
  • To take one example: most people outside economics always thought that salaries in finance were somehow wrong. This was a widely shared perception. Yet economists mostly seemed to support the notion that these wages reflected value added (perhaps this is the wrong term, but you know what I mean), or least didn't appear to question what were huge changes in the labour market. It is now clear that lay people were broadly correct.
  • It's perfectly alright to be wrong about something, especially when the subject of study is something as complicated as the economy. I do not pretend natural science has the answers, and I hugely respect economics for taking on the challenge of at least trying to understand these things. But when the profession as a whole was wrong, or at least seen to be supportive of positions that were wrong, I think it's time to explicitly refute some of the intellectual claims of the bubble era.
  • Surfing the econ blogs, I see a lot of technical discussion about the crisis but little by way of apology, contrition or even just a "hey we were really wrong about this".

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