Don’t blame the economists for the crisis…
by Benjamin on May 1, 2009
Noted by Stephen Kinsella, Barry Eichengreen just published a long list of points arguing that the economy came undone through the action of bankers, bad theory, institutional biases, business schools, misunderstanding the markets and so forth… But one group of people are not to blame: the economists… no no, says Eichengreen, blame the users of economic theory:
the problem was a partial and blinkered reading of that literature. The consumers of economic theory, not surprisingly, tended to pick and choose those elements of that rich literature that best supported their self-serving actions.
Don't point the finger at economists... We pointed it at you first
The economists were good people who tried to model behaviour, risk, incentives and agent behaviour, all of which was useful. “What got us into this mess, in other words, were not the limits of scholarly imagination” it was those fools who used our work. If any complaint should be laid at the door of economists, we might say that
Equally reprehensibly, the producers of that theory, benefiting in ways both pecuniary and psychic, showed disturbingly little tendency to object.
We built it in good faith, and failed to protest how it was later implemented… You know, Guns don’t kill people, apes with guns kill people – so don’t blame the good and honest gun maker. This all echoes today’s BBC coverage and British Parliament blaming bankers (and users of economic theory) for making an “Astonishing mess” of the economy…
Can we be honest and say that standard economic theory has not really tried to deal with the economy over the last many years, and that is where the problem started? (If we were paying attention to the economy, we might have noticed some of those policies…) The problem is not with the user, who can only use what is given to them, but with the producers of thousands upon thousands of pages re-affirming the veracity of Value at Risk models, stable monetary regimes with long run equilibria and econometric sophistry showing the emergence of the Great Moderation, a new ‘plateu of economic stability’ (as Fischer infamously called the U.S. economy two weeks before the great 1929 crash…)
Eichengreen himself is more diplomatic about it. Even though he doesn’t want to lay the problem at the feet of the economics profession, his final paragraphs which aim to look forward, inevitably needs to discard the economics professions approach in the late 20th century. What we have been doing was too unrealistic and too ‘malleable’ – meaning always returning to a stable fictional equilibrium – and it needs to make space for empirically grounded models which use history and institutions, while economics begins to weed out the purely abstract thinking.
The late twentieth century was the heyday of deductive economics. Talented and facile theorists set the intellectual agenda. Their very facility enabled them to build models with virtually any implication, which meant that policy makers could pick and choose at their convenience. Theory turned out to be too malleable, in other words, to provide reliable guidance for policy.
In contrast, the twenty-first century will be the age of inductive economics, when empiricists hold sway and advice is grounded in concrete observation of markets and their inhabitants. Work in economics, including the abstract model building in which theorists engage, will be guided more powerfully by this real-world observation. It is about time.
About time indeed, and maybe in ten years he will write it in unequivocal terms.
