Economic historian, Gregory Clark, details why times have changed for academic economists:
The current recession has revealed the weaknesses in the structures of modern capitalism. But it also revealed as useless the mathematical contortions of academic economics. There is no totemic power. This for two reasons:
(1) Almost no-one predicted the world wide downtown. Academic economists were confident that episodes like the Great Depression had been confined to the dust bins of history. There was indeed much recent debate about the sources of "The Great Moderation" in modern economies, the declining significance of business cycles.
Indeed as we have seen this year on the academic job market, macroeconomists had turned their considerable talents to a bizarre variety of rococo academic elaborations. With nothing of importance to explain, why not turn to the mysteries of online dating, for example.
I myself was so confident of the consensus of the end of the business cycle that I persuaded by wife after the collapse of Lehman Brothers to invest all her retirement savings in the stock market, confident that the Fed would soon make things right and we could profit from the panic of a gullible public. The line "Where is my money, idiot?" is her's.
(2) The debate about the bank bailout, and the stimulus package, has all revolved around issues that are entirely at the level of Econ 1. What is the multiplier from government spending? Does government spending crowd out private spending? How quickly can you increase government spending? If you got a A in college in Econ 1 you are an expert in this debate: fully an equal of Summers and Geithner.
The bailout debate has also been conducted in terms that would be quite familiar to economists in the 1920s and 1930s. There has essentially been no advance in our knowledge in 80 years.
He also describes that academic economists previously commanded very high salaries, but that is probably changing as well.
Just my opinion, but I suspect economists previously commanded high salaries because of the perception that their predictions about the economy provided some sort of crystal ball. English and physics professors, by contrast, never claimed mastery over their subjects. The human condition and the theory of relativity remain much the same.
I don't intend to pick on economists. I find the subject fascinating, and I don't think that the conditions for long-term growth that they have delineated over the years have fundamentally changed. It is just smacks of interpretive over-reach to suggest that the business cycle had been conquered, and those who believed that are now paying the price.
This recession hasn't shaken my faith in the merits of capitalism or my awareness of its defects, but it has reiterated my deep skepticism of the pronouncements of professors (and indeed all "experts"). Studies on the expert performance have suggested that even the best educated are morons at predicting the future.
Maybe we should equally apply this skepticism of experts to the just-as-vociferous ones who are now explaining how we will get out of this mess.
Hat-tip: Razib
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I don't think the problem is with economics as much as the egos of economists. The last 80 years have had some significant advances in understanding, but they mainly come in the form of recognizing that there are even more degrees of freedom to account for than was previously thought. For example, the introduction of the Keynesian framework provided a new set of assumptions to work from, but it increased the uncertainty into the results since then economists had to chose whether to use the Keynesian or classical assumptions rather than just plug in the classical ones. The same goes for the later recognition that the Philips Curve shifts based on inflation expectations, resulting in a more accurate understanding of the relationship between inflation and unemployment but one that made much less concrete predictions.
Of course, saying that we have a much better understanding of how limited the ability of economics to make useful predictions isn't a crowd pleaser, so people who make bold predictions tend to get more attention, whether they're wrong or not. I don't think this is unique to economics - it seems to be an issue with how science is done in general. Models which generate correct and practically significant predictions are prefered and come to dominate a field once they're discovered, but when none exist for a phenomenon, models which generate incorrect practically significant predictions come to dominate the field over models which generate correct predictions with limited or no practical signficance.
What about "if something cannot go on forever, it will stop."
Wasn't that a sufficient prediction, given a finite planet?
Oh, wait, they didn't accept _that_ premise?
"I myself was so confident of the consensus of the end of the business cycle that I persuaded by wife after the collapse of Lehman Brothers to invest all her retirement savings in the stock market, confident that the Fed would soon make things right and we could profit from the panic of a gullible public. The line "Where is my money, idiot?" is her's."
This guy is very lucky. His wife is extremely nice. She could have asked for a divorce, and she'd have serious grounds for it. Actually, isn't "persuading someone to invest all their savings in the stock exchange" akin to defrauding the public, and shoudln't it take you directly to jail?
One important thing: academic economists, "Nobel-prize" fodder, got it all wrong, sure. Fortunately, they're not the only ones. Others had predicted that things would tourn very ugly. The only thing they couldn't know was when exactly it would happen.
The Bush-Obama plan is exactly the Hoover-Roosevelt plan. When do we get WWIII
There is a classic quote from Truman, supposedly after his economic advisor said "...on the other hand..."
Truman: "Bring me a one-armed economist."
Johnson also had an interesting quote about economics:
"Making a speech on economics is a bit like pissing down your leg. It seems hot to you but never to anyone else."
What I personally find ironic is that a lot of the climate change denialists argue against climate change on the basis of the uncertainty of the science -- and at the same time quote economists on how focussing effort on the climate would hurt our economies.
Grounds, yes. But maybe they can't afford it now?
But surely you don't want to suggest that WWII was caused by the New Deal!?!
So do we all worship Paul Krugman now, or what?
The Austrian economists saw exactly what was happening. Look up Israel Kirzner, Ivan Pongracic, Lawrence White, and many others. Read Ludwig von Mises and Murray Rothbard. What we have seen are not "weaknesses in the structure of capitalism" -- they are easily-explained market phenomena that have resulted, largely, from undue government regulation and intervention.
I'm not convinced that the problem is with economists per se - it's with which economists get listened to. It seems to me that economists whose arguments favour the interests of the rich and powerful are more likely to be listened to (by the rich and powerful) than those of other persuasions.
"Others had predicted that things would tourn very ugly. The only thing they couldn't know was when exactly it would happen."
Only somewhat true. I remember even three or four years ago seeing predictions, not from economists but from people working in the mortgage industry, who were able to make what turned out to be pretty good timelines, extrapolating from the terms and quality of the contracts they were seeing going by their desks.
I, for one, am too cynical to "believe" in any economic theory. Human greed and stupidity are the only limitless resources in this world, and no matter what system you set up, people will cheat. No matter how much you account for the cheating and the stupidity, people will try to come up with ways to cheat even more. They will claim that this is "innovative" financing. Eventually they will cheat enough to break your system, or be stupid enough to be caught by some unforseen circumstance, even when it was a circumstance created by their own cheating. It has been this way throughout human history, and will continue to be in the future.
The Austrians are in the enviable position of being able to take credit for "predicting" any crisis because their standing prediction is not much more interesting than, "Bad things will happen at some time in the future, and it will be the fault of government meddling." A stopped clock does a great job of anticipating that it will eventually be 6:30.
My economics professors were largely heading for cover on the housing industry in 2003-2004. The hard part was not the realization that we were in a housing bubble and that the bubble would pop. The hard part was predicting when and exactly how bad the fallout would be. When it comes to the herd psychology of speculative bubbles, I don't think that we'll ever be able to make those types of predictions.
Those Austrians are right! We shouldn't be letting the government protect property rights or enforce contracts. That's far too much meddling.
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"The Austrians are in the enviable position of being able to take credit for "predicting" any crisis because their standing prediction is not much more interesting than, "Bad things will happen at some time in the future, and it will be the fault of government meddling."'
It always seems that whenever someone mentions the Austrians, it's always in the form of a directive, and never an argument relating to what's actually going on in the world. But then, they're, you know, Austrians, so I guess that's to be expected.