Economics is in crisis.
We know this is the case because many have said so. Even such personages as Britain’s Queen Elizabeth II, who is so divorced from the hurly-burly as to not carry a purse, asked why economics didn’t see the crash coming.
Economics is in crisis… except where it’s not.
Economics is not a discipline — nor is it a profession. It is, instead, a way of thinking. In its best manifestation, modern economics shows its roots as an outgrowth of the philosophical wing of the Scottish enlightenment. At its worst, this thinking has more in common with the Taliban, with dogma and assertion replacing argument and evidence.
When people say economics is in crisis and it did not predict the crisis, they typically point the finger at one or two subsectors. Macroeconomics theory and financial modelling tend to be hauled — rightly — over the coals, and have their deficiencies exposed.
In the case of macro theory, the argument is that, in treating finance and the financial sector as a residual, frictional element in an otherwise beautiful model, the theory could not account for the stresses that built up and eventually blew the model apart.
In addition, the economics profession underwent, (especially in macroeconomics), a revolution in how people thought, with the Keynesian story of what happens in the relationships between aggregate demand, unemployment, and money being lost to many. In finance and, in particular, in some parts of finance theory, a subliminal belief in some form of market efficiency and its consequences prevailed. Both macro theory and finance modelling became more and more mathematically sophisticated, but ultimately they failed.
So economics is not immune from criticism. However, and perhaps for the best, we do not have economists making decisions on economic policy. That is, and must remain, the democratic prerogative of government. Where economics failed was mostly in communicating to policy makers that their policy prescriptions were the outcome of models, that these models were imperfect, that they were, of necessity, based on particular assumptions and were, in essence, just guides. They were guilty perhaps of overselling the outcomes as oracles, but not Delphic ones.
There are lessons here for Ireland. There are large swathes of economic activity and research output, beyond macro finance research, that bear directly on government policy. We have excellent research in labour, health, education, behavioural economics, and international trade, which do not shout their results. But a careful reading of these would suggest that, particularly where the results are congruent with other fields and other countries, the Government and commentators might wish to take note.
We have evidence on how there is vast return on early childhood education, yet we are cutting same. We have evidence on the importance for policy-making of a pool of behavioural economists, but the universities are losing world-class exemplars of same; we have a healthcare system where there are in-built and self-reinforcing conflicts of interest but no urgency in remedying same; we have research aplenty on the need for co-ordinated spatio-economic planning, but little evidence that such exists. We could go on...
Economics is a way of viewing the world. Macroeconomics, in particular, used to be called political economy, recognising that, in the end, it is the politicians who will take decisions. Where modern macro can be faulted most is that it has taken its eye off the political and simultaneously got into bed with politicians.
Some macro theorists ignored the propensity of politicians to hear what they wish to hear. Others became spokespersons for particular economic ideologies and left behind their critical thinking. But then, the same can be said for many other areas of endeavour. Nor are the media blameless. In Ireland, we persist in presenting as unbiased in the media the views of persons employed to undertake economic analysis for banks, unions, and employer groups.
Perhaps the best we can hope for is that we see an expansion of the initiative to have declarations of financial support noted.
Perhaps an expansion to include whether someone had ever been a member of a political party, or undertook paid consultancy for a body would help clarity in understanding.
* Brian Lucey is professor of finance at Trinity College Dublin
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