Following yesterday’s generally well received diatribe about the shortcomings of the world’s economists, this Time Magazine commentary was stumbled upon that makes some of the same points, absent what I thought were important references to The Shining.
After the financial crisis of 2008, the Queen of England asked economists, “Why did no one see the credit crunch coming?” Three years later, a group of Harvard undergraduate students walked out of introductory economics and wrote, “Today, we are walking out of your class, Economics 101, in order to express our discontent with the bias inherent in this introductory economics course. We are deeply concerned about the way that this bias affects students, the University, and our greater society.”
What has happened? Rebellion from both above and below suggests that economists, who were recently at the core of power and social leadership in our society, are no longer trusted. Not long ago, the principal theories of economics appeared to be the secular religion of society. Today, economics is a discipline in disrepute.
First, economists should resist overstating what they actually know.
Second, economists have to recognize the shortcomings of high-powered mathematical models, which are not substitutes for vigilant observation. Nobel laureate Kenneth Arrow saw this danger years ago when he exclaimed, “The math takes on a life of its own because the mathematics pushed toward a tendency to prove theories of mathematical, rather than scientific, interest.”
Financial-market models, for instance, tend to be constructed with building blocks that assume stable and anchored expectations. But the long history of financial crises over the past 200 years belies that notion.
And that is why few economists saw the financial crisis coming – because they had their noses buried in models that failed to properly reflect what was happening in the real world.
I’ll never forget former Fed Chief Alan Greenspan’s remarks before Congress in 2004 or 2005 when he said there was virtually no stress in the banking system when, at the time, the real action was in the now-defunct “shadow banking” system.
Apparently, Fed economists didn’t see the need to model that.