We have just witnessed them make a massive failure in diagnosis. Despite the fact that there was rampant evidence of trouble on various fronts – a housing bubble in many countries (the Economist had a major story on it in June 2005 and as readers well know, prices rose at an accelerating pace), rising levels of consumer debt, stagnant average worker wages, lack of corporate investment, a gaping US trade deficit, insanely low spreads for risky credits – the authorities took the “everything is for the best in this best of all possible worlds” posture until the wheels started coming off. And even when they did, the vast majority were constitutionally unable to call its trajectory.
Now of course, a lonely few did sound alarms. Nouriel Roubini and Robert Shiller both saw the danger of the housing/asset bubble; Jim Hamilton at the 2007 Jackson Hole conference said that the markets would test the implicit government guarantee of Fannie and Freddie; Henry Kaufman warned how consumer and companies were confusing access to credit (which could be cut off) with liquidity, and about how technology would amplify a financial crisis. Other names no doubt belong on this list, but the bigger point is that these warnings were often ignored.
Shiller has offered a not-very-convincing defense, claiming that economists were subject to “groupthink” and no one wanted to stick his neck out. That seems peculiar given that many prominent policy influencers are tenured. They would seem to have greater freedom than people in any other field to speak their mind. And one would imagine that being early to identify new developments or structural shifts would enhance one’s professional standing.
But if a doctor repeatedly deemed patients to be healthy that were soon found to have Stage Four cancer that was at least six years in the making, the doctor would be a likely candidate for a malpractice suit. Yet we have heard nary a peep about the almost willful blindiness of economists to the crisis-in-its-making, with the result that their central role in policy development remains beyond question.
Perhaps the conundrum results from the very fact that they are too close to the seat of power. Messengers that bear unpleasant news are generally not well received. And a government that wanted to engage in wishful, risky policies would want a document trail that said these moves were reasonable. “Whocouldanode” becomes a defense.
But how economists may be compromised by their policy role is way beyond the scope of a post. To return to the matter at hand: there appears to be an extraordinary lack of introspection within the discipline despite having presided over a Katrina-like failure. Jeff Madrik tells us:
At the annual meeting of American Economists, most everyone refused to admit their failures to prepare or warn about the second worst crisis of the century.
I could find no shame in the halls of the San Francisco Hilton, the location at the annual meeting of American economists that just finished. Mainstream economists from major universities dominate the meetings, and some of them are the anointed cream of the crop, including former Clinton, Bush and even Reagan advisers.
There was no session on the schedule about how the vast majority of economists should deal with their failure to anticipate or even seriously warn about the possibility that the second worst economic crisis of the last hundred years was imminent.
I heard no calls to reform educational curricula because of a crisis so threatening and surprising that it undermines, at least if the academicians were honest, the key assumptions of the economic theory currently being taught.
There were no sessions about why the profession was not up in arms about the deregulation of so sensitive a sector as finance. They are quick to oppose anything that undermines free trade, by contrast, and have had substantial influence doing just that. The sessions dedicated to what caused the crisis were filled, even those few sessions led by radical economists, who never saw turnouts for their events like the ones they just got. But no one was accepting any responsibility.
I found no one fundamentally changing his or her mind about the value of economics, economists, or their own work. No one questioned their contribution to the current frightening state of affairs, no one humbled by events.
Maybe I missed it all. There were hundreds of sessions. I asked others. They hadn’t heard any mea culpas, either.
Madrik goes on in the balance of his piece to offer a list of things economists got wrong. Unfortunately, it’s off the mark in that he contends that economists (in effect) had unified beliefs on a lot of fronts. It’s a bit more accurate to say that there was a policy consensus, and anyone who deviated from the major elements had a bloody hard time getting a hearing (Dean Baker regularly points out that the New York Times and Washington Post still keep quoting economists who got the crisis wrong). The particulars on his list need some work too, but at least it’s a start (reader comments and improvements on it would be very much appreciated).
But Madrik does seem spot on about the lack of needed navel-gazing. I looked at the AEA schedule and did not see anything that questioned existing paradigms. And one paper that did was released recently, “The Crisis of 2008: Structural Lessons for and from Economics,” fell so far short of asking tough questions that it proves Madrik’s point. The analysis is shallow and profession serving. And that is not to say the author, Daron Acemoglu, is writing in bad faith, but to indicate how deeply inculcated economists are.
For instance, one of the three (only three?) ways in which he says economists took too much comfort in the Great Moderation;
The seeds of the crisis were sown in the Great Moderation… Everyone who patted themselves or others on the back during that time was really missing the point… The same interconnections that reduced the effects of small shocks created vulnerability to massive system-wide domino effects. No one saw this clearly.
Huh? The problems with the Great Moderation were far more deeply rooted than this depiction suggests. Acemoglu’s take is that the economy became more susceptible to shocks (that is, absent the bad luck of a shock, things could have continued merrily along). Thomas Palley argues, persuasively, that it was destined to come a cropper:
The raised standing of central bankers rests on a phenomenon that economists have termed the “Great Moderation.” This phenomenon refers to the smoothing of the business cycle over the last two decades, during which expansions have become longer, recessions shorter, and inflation has fallen.
Many economists attribute this smoothing to improved monetary policy by central banks, and hence the boom in central banker reputations. This explanation is popular with economists since it implicitly applauds the economics profession by attributing improved policy to advances in economics and increased influence of economists within central banks. For instance, the Fed’s Chairman is a former academic economist, as are many of the Fed’s board of governors and many Presidents of the regional Federal Reserve banks.
That said, there are other less celebratory accounts of the Great Moderation that view it as a transitional phenomenon, and one that has also come at a high cost. One reason for the changed business cycle is retreat from policy commitment to full employment. The great Polish economist Michal Kalecki observed that full employment would likely cause inflation because job security would prompt workers to demand higher wages. That is what happened in the 1960s and 1970s. However, rather than solving this political problem, economic policy retreated from full employment and assisted in the evisceration of unions. That lowered inflation, but it came at the high cost of two decades of wage stagnation and a rupturing of the link between wage and productivity growth.
Disinflation also lowered interest rates, particularly during downturns. This contributed to successive waves of mortgage refinancing and also reduced cash outflows on new mortgages. That improved household finances and supported consumer spending, thereby keeping recessions short and shallow.
With regard to lengthened economic expansions, the great moderation has been driven by asset price inflation and financial innovation, which have financed consumer spending. Higher asset prices have provided collateral to borrow against, while financial innovation has increased the volume and ease of access to credit. Together, that created a dynamic in which rising asset prices have supported increased debt-financed spending, thereby making for longer expansions. This dynamic is exemplified by the housing bubble of the last eight years.
The important implication is that the Great Moderation is the result of a retreat from full employment combined with the transitional factors of disinflation, asset price inflation, and increased consumer borrowing. Those factors now appear exhausted. Further disinflation will produce disruptive deflation.
Palley wrote this in April 2008, although he had touched on some of these issues earlier. Did this view reach a wide audience? No. Understanding why might help us understand better why the economics profession went astray.
Acemoglu’s paper had a couple of other eye-popping items: Even though he gives lip service to the idea that the economics was unduly infused with ideas from Ayn Rand, he then backtracks:
On the contrary, the recognition that markets live on foundations laid by institutions— that free markets are not the same as unregulated markets— enriches both theory and its practice.
“Free markets” is Newspeak, and the sooner we collectively start to object to the use of that phrase, the better. Because it is imprecise and undefined, advocates can use it to mean different things in different contexts. I cannot take any economist seriously who uses “free markets” in anything more rigorous than a newspaper column (and even there it would annoy me). It has NO place in an academic paper (save perhaps on the evolution of the concept).
We also have this:
A deep and important contribution of the discipline of economics is the insight that greed is neither good nor bad in the abstract.
This reveals that Acemoglu has been corrupted by Rand more than he seems willing to recognize. No one would have dared write anything like that even as recently as ten years ago. Let us consider the definition of greed, from Merriam Webster:
a selfish and excessive desire for more of something (as money) than is needed
14 Responses to “Why So Little Self-Recrimination Among Economists?”
Insofar as Economics is a “soft science”, it seems to me that it is infinitely more difficult to predict economic trends or undercurrents accurately and effectively. The best model are linear while the real world is highly nonlinear. I follow Yves Smith’s blog on a daily basis and what I noticed, apart from her caustic and carefully fashioned insights, is the large degree of uncertainty and the widely varying opinions. In any event, hindsight is always 20/20.
Madrick is spelled with a ‘CK’.
A Really Scary and Totally Irresponsible Plan by Washington Consensus Economists. “Punish savers and force them spend money”. Of course, we are in this mess because consumers went on a reckless spending spree. Unfortunately, Bernanke and Paulson are considering this absolutely insane idea right now.http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article5469589.ece“Near-zero interest rates and even a tax on bank deposits are necessary to force those with cash to use it productively.Instead of reducing taxes on interest payments, the Government could tax all bank deposits and other risk-free savings. This would create a negative risk-free interest rate, encouraging savers either to invest in property, shares and other productive assets – or simply to save less and consume more. In either case, the result would be more consumption and physical investment, less unemployment and faster recovery from the slump.”
A deep and important contribution of the discipline of economics is the insight that greed is neither good nor bad in the abstract.Yes, I was rather enjoying his article- even considering buying his book. Which would be quite a step for me, since economics is a long way from my profession. But you really do have to think in abstract to see greed as something neutered of it true intent.
This is an easy answer: many economists have a strong desire to conform. The succumb to peer pressure. Moreover, many are Clumsy in Obama-love, media-love and job-love (as Fergie would put it).Until economists use their brains and not the environment they work in, we will have more of the same.Credibility– ZERO.Most are right up there with Weathermen now.Shame on them.
(Note – the last para from “naked capitalism” has been left off)Yves, thank you so much for this much needed comment on the state of Economics.The Global Financial Crisis has generated a huge amount of commentary, but almost none on “why economics did not enable us to avoid the disaster”.But I am troubled by your conclusion: “positive view of greed allows for ambitious actors to increasingly bend the rules and amass power. . . . incentives (or even means) for checking such behavior.. . . But our collective standards have fallen so far I am not sure we can reach a better equilibrium there.”We want a free society, where individuals have the opportunity to be productive, and enjoy the fruits of that productivity. Gigantic stuff-ups like this crisis threaten such simple but universal goals.That goal implies largely free markets (yes, that needs definition). So we need economics to work, at least in the sense of being able to predict potential instabilities in the markets, and to provide policy-makers with viable options to avoid crashes.But how many economists would agree that this is the major objective of their discipline?Here the comparison with Meteorology has some value. Weather forecasting has, and still is, technically challenging. But, after decades of hard work, the meteorologists do pretty well.One of the key differences between meteorology and economics is that economics tries to start with generalizations as a basis for theory, whereas meteorology starts with solid physics and lots of measurements, and endeavours to extrapolate from there.The Free Marketeers are still out in force, wanting no regulation, and wanting a grand blood-letting of all businesses too weak to survive unaided. I will not comment on what should or shouldn’t be allowed to collapse. However, regulation is an essential component of a stable financial system, and will probably be essential to the goal of accurate economic predictions.The “ideal” business is one with a captive supply chain, a captive market, and no regulation. This is what businesses strive to become. Looking around the business world, elements of this appear time after time after time. For example, BHP-Billiton’s efforts to merge with Rio Tinto.We want business to be that way. That is how we harness ambition and drive to serve society’s needs. But we do not want that motivation to dominate to the point where the financial system is de-stabilized. And that requires regulation.Hopefully, some leading economists will pick up the challenge of reforming economics. Hopefully articles like yours will promote such an effort. But if we give up on this, we are condemning the world to a pretty dismal future.
Why blame economists alone for lack of self-recrimination? Delusion is a national disease. All professions; Medical(can’t cure a single disease in 50 years), Engineering(thriving on planned obsolosence) and Education and Media(spreading of mis and disinformation.Humanity is devolving…
Shoot the accountants too. They’re obliged by SAS92 and other SFAS statements from their professional organizations to attest to the soundness of the clients. Remember ENRON? Arthur Anderson? probably not.It’s culture wide I think, this lackadaisal, comfortable someone else its taking care of it mentality of Economists, Accountants, businessmen and politicians of all stripes. Or is it the ruling elite of each profession that aren’t up to leadership responsibilities. We seem to be a world of immature adults.
All “group think” economics is explained by the failure of banks. These failures are explained by the oxymoron “toxic assets.” Let us call these “assets” what they really are – FUNNY MONEY.Combine that with the Feds “easy money” – and we know why we are where we are, reagrdless of all the economists dancing on the head of pins.
It’s simple. The economics profession is corrupt. It is so corrupt that they don’t even realize how corrupt they are. They regularly comment on subjects where there exists blatent self-interest. I see it all the time on television.Economics is a technical endeavor and,as Dick Feynman said, reality must supercede politics in a technical endeavor or it will ultimately fail…like the Challenger space shuttle.THAT is why economists are not asking themselves questions. Remember over 100 people perjurered themselves in the ’21′ game show scandel… because each one was corrupted by it.
“We seem to be a world of immature adults.“Do you mean adolescents? Adolescents thrive on group think, cliques, follow the leader before they reach the point of trying to decide their own identity as an individual (sometime in twenties or thirties). Non-conformists are shunned or ridiculed, left out, and certainly not followed.
As a scientist/engineer, having spent the last 38 years in this endeavor in high tech development I’m abasolutely amazed and flabbergasted that in 160 years of “economics”, it still hasn’t evolved into even a rudimentary form of science. I must therefore conclude that the reason for this is that there’s no incentive (yet) for it to become a science, and in fact to the contrary… it must therefore serve its purpose well as it is. One must then honestly begin to question the purpose its serving so well as it is…. .which is to say, what is the dis-incentive to it becoming a science.
It is true that in any profession other than economics, massive failure of agreed upon procedures would cause more upheaval. Engineers can’t just say “@hit happens” when the bridge falls down; especially when it was designed and built to code.The core issue for me is first world debt, underemployment and loss of manufacturing capacity to “developing” countries. This can’t be considered charitable. Most of their people work like slaves, live like paupers and suffer the health consequences of industrial pollution from producing what they can’t afford.This has been driven by greed. Ayn Rand was a writer of fiction. We need a world trade and monetary policy that encourages trade or charity, but not debt.
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