In the Calgary Herald on Saturday, Peter McMartin wrote a story that challenges the relevance of economists given that so few anticipated the recent economic crisis, and perhaps even worse, seem to have no clue as to how this mess might be fixed. The usual critics of neo-classical economics are represented by JK Galbraith's son James, an economics professor himself. About the abysmal forecasting ability of economists of late, Galbraith states:
"It's an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless."
But it's not just Galbraith. Agreeing with Galbraith, Rick Harris of SFU adds:
"What is it we teach? What is taught is the textbook properties of what I would say is a normal functioning economy. And most of that stuff has nothing to do with what is going on now."
Paul Beaudry of UBC is not as down on economists as Galbraith and Harris over the recent events since Beaudry discounts the importance of forecasting as one of our profession's core purposes. Instead, Beaudry sees economists in playing a bigger role in analysing events after the fact and to use that knowledge to prevent crises from re-occuring:
“Really, the science is managing (the economy) after all this stuff has come out. Have we learned from the previous crises? And if we’ve learned from previous crises, what policies should we follow to prevent them from happening again?”
From this story, it appears that economists are either irrelevant for understanding and managing the economy, or just useless over the short run.
Read the full story, Peter McMartin, "Economists go soul searching", Calgary Herald, Nov. 22, 2008, page C2.
Most of the story is available at:
http://www.canada.com/calgaryherald/iphone/business/calgary/story.html?id=e683dc66-0e6b-406a-8487-3e167bd2e05f
U.S.A. fact of the day
5 hours ago
10 comments:
Please note:
(i) Economics is more than macroeconomics (thankfully).
(ii) Economics is the study of self-interested actors. In this case the trust that had been developed between investors and managers was liquidated as a result of incentive structures that made it impossible for managers not to "cash out" and ignore long term damage to the firm and shareholders. What do I care if I don’t have a job next year if I make $30 million this year? The study of trust, and, in particular, when agreements are self enforcing based on developing a reputation for not acting opportunistically (and of course when they are not), is well understood in industrial organization.
Keynesian macro has not been an important force in policy making for at least two decades. Read Galbraith's biography by Parker if you don't believe that.
So did the IO economists see this coming?
If you want to counter Harris' claim that what we teach is not useful for something like this crisis, then what would IO economists propose as the policy solution for the policy crisis? Or, are we in a Beaudry world, where the insights of IO can be used to examine the crisis after the fact for the purpose of designing policy to avoid the crisis from happening again? Were the S&L crisis and the Enron situation too small to catch the attention of economists?
On the point of Keynesian policy being long in the past, that is definitely the Galbraith lament. I would be interested in knowing how a Keynesian policy regime would have helped us to avoid the current financial crisis and emerging recession.
economic history becomes relevant--the auto industry on the ropes; the real estate market in free fall- Windsor (1933:2008?) Bernanke at the helm- see his blueprint: 1983 AER paper on the "Nonmonetary Effects of the Financial Crisis of the Great Depression" or Field 1992 Jnl of Economic History of the "detritus" left behind by homeowners abandoning property
- at least, there is a harder budget constraint at the local level
Perhaps economic history is relevant- auto industry on the ropes; real estate market collapsing (Windsor 1933: 2008)
Bernanke at the helm using his 1983 AER article as a blueprint
at least there is a harder budget constraint at the local level
At least we know that the department of Economics at U of C is in favour of censoring dissent. Barely out of diapers and already deleting comments.
Blog fail.
I suggest a password-protected blog. That way you can stifle opinion early and often. But don't worry, it doesn't speak to ivory tower elitism at all. Not even remotely.
If I can go back in time I think I would still study economics. What I have noticed in life is that not many professions give you the geographical freedom whereas my economics education has enabled me to travel around the world.
Unfortunately, professors nowadays have been focusing too much on technical jargon rather than teaching students to critically apply economics in real world situations. It seems to me that professors have turned assignments and exams into exercises of mathematical manipulations as opposed to having students answer questions using economic logic.
In sum, I don't think an economics degree is irrelevant. However, I think professors should change their approach.
If I can go back in time I think I would still study economics. What I have noticed in life is that not many professions give you the geographical freedom whereas my economics education has enabled me to travel around the world.
Unfortunately, professors nowadays have been focusing too much on technical jargon rather than teaching students to critically apply economics in real world situations. It seems to me that professors have turned assignments and exams into exercises of mathematical manipulations as opposed to having students answer questions using economic logic.
In sum, I don't think an economics degree is irrelevant. However, I think professors should change their approach.
Couldn't the question be answered by pointing us to public commentary by economists who predicted the current situation? A cursory search of papers done by the contributors to this blog proved futile (full disclosure, I am not smrt), but perhaps their Casandra-like warnings were in the editorial pages of newspapers I do not read, or in other such fora. Simply showing how economists predicted the downturn in a public fashion would end the argument.
You could start with Paul Krugman, but I am more curious as to which economists from the U of C called this, out loud, and in public. They should stand up and take a bow, and get some credit for being right when all about them got it so wrong.
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