Economics, economists and differing perspectives

A few friends and colleagues have been politely (thus far) taking me to task for some of my postings about the role of economics, and thus certain types of economists, in relation to contemporary crises (notably the financial one, but more importantly the environmental one). It has been pointed out to me that as I write economics (or more correctly John Geanakoplos, of Yale University) is contributing fundamentally important new ideas. Time will undoubtedly tell how fundamental and important this new idea is. But contrast this perspective with that of Anatole Kaletsky (editor-at-large of The Times and Chief Economist of GaveKai Research).

His article in Prospect was reproduced in the Financial Review yesterday under the banner ' Never let the facts get in the way of a good economic theory'. Kaletsky opens by making the point that by today's standards Adam Smith, Keynes, Ricardo and Schumpeter would not be regarded as economists and certainly would not be published in top ranking economics journals. He suggests that if any applied for a top post at a University today they would almost certainly be rejected.

In relation to the financial crisis he goes on to say:

'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.'

Kaletsky has a strong critique of the focus that has emerged in 'mainstream economics' on quantification, forecasting and predicting, arguing that:

'economics should recognise that, as a discipline, it cannot be about predicting, but is instead about explaining and describing.'

The failure, and thus complicty of academic economists in the financial crisis, began, he argues, in the 1970s 'about “rational” investors and “efficient” markets'. .......And on those two reassuring adjectives, rational and efficient, the victorious academic economists erected an enormous scaffolding of theoretical models, regulatory prescriptions and computer simulations which allowed the practical bankers and politicians to build the towers of bad debt and bad policy.'

'So what is to be done?' he asks: 'There are two options. Either economics has to be abandoned as an academic discipline, becoming a mere appendage to the collection of industrial and social statistics. Or it must undergo an intellectual revolution. The dominant research programmes must be recognised as failures and instead of using oversimplified assumptions to create mathematical models that purport to give precise numerical conclusions, economists must re-open their subject to a range of speculative approaches, drawing insights from history, psychology and sociology, and applying the methods of historians, political theorists and even journalists, not just mathematicians and statisticians. At the same time, they must limit their ambitions to explaining only what the tools of economics allow you to understand.'

He thus argues the need for more heterodox approaches, something sadly lacking in Australia, because:

'they reject the ideological orthodoxies of rational expectations and efficient markets and the equally stifling methodological demand that economic insights must be expressed in mathematical formulae.'

My motivation in making the postings I have about the role of economics in our contemporary world is grounded in my own experience. From this experience I could not have expressed a better conclusion than Kaletsky's that:

'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.'