Jake Young has a skeptical take on the contention that science can save the economy. He ends:
In short, I think the suggestion, while well-meaning, is misguided. If all that would happen in this project was that more brains would be applied to the problem, I would support it. It would probably be harmless even if it was ineffective. However, I think it may be worse than that. Given the dismissiveness bordering on contempt with which most scientists hold economic problems, I think their participation would be actively unhelpful. What would result is a lot of acrimony and very little progress.
The pretension exemplified by articles like this are the problem, not the solution. Why do we assume that scientists riding in like the cavalry will save the day? Scientists need to get some humility and some goddamn'd respect in dealing with economic issues. The economy is no less difficult than the subjects we are studying, and we all know how long progress can take.
Further, the defining feature about all recessions and booms is that they end. This is something that neoclassical economics got right. The Great Depression and the Japanese recession during the 90s did end eventually. The long-term may take a long time in coming, but eventually it does arrive.
First, scientifically trained people are very common in quantitative finance. Second, history would probably have helped us see what was going to go down; the idea that property values were always going to go up was the latest tulip mania, though the idea was buttressed by "rigorous models."
The way scientists can help the economy is simple: keep doing science & engineering and increase economic productivity through the generation of new techniques and technologies. That's the real engine of growth & wealth. I think we've really hit the era of diminishing marginal returns when it comes to increasing efficiency through more intelligent capital allocation. Perhaps the lost luster of hedge funds and the financial sector more generally will mean that those trained in the mathematical sciences will remain in those fields. The argument in Knowledge and Wealth of Nations the modern affluence is the product of spillover effects from technological innovation should make it clear what the most optimal allocation of cognitive power is, at least when it comes to aggregate social utility.
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"Scientists need to get some humility": absolutely. Especially physicists. It would do economists good, too.
Maybe we should get novelists working on the problem. At least we have imagination.
I have a friend who left engineering (he gained a distinction from Imperial College in his MSc) to enter finance -- he was following the money.
The first thing he told me, a month into his new job, was the total lack of academic rigour to which he had become accustomed to in his previous job.
He couldn't believe people with PhDs and advanced degrees in maths or engineering were promoting bullshit.
Of course, he is now looking for a job (he can't find work in the current market) and wants to return to engineering...
And many economists thought that the idea that house prices were always going to go up, in real terms, was absolute nonsense. I am an economist, and I never came across a model that buttressed the idea that real house prices would always go up. There was a problem with models that *assumed* that real house prices would always go up, but making an assumption in your model is very different from having a model to support that assumption (physicists often assume that there is no friction, but that's not an argument that there is no friction - if your model keeps on churning out the most accurate predictions that does bolster the idea).
What was happening in the financial markets was that people were making money in the short-term by betting that house prices would continue to go up. Psychology tells us that positive reinforcement is very powerful.
Where economics failed was in predicting the very bad consequences of the bubble bursting.