Since the financial crisis there has been a spate of critiques–some good and important, but most superficial and ill-informed–of the study of economics.
This editorial from the Daily Telegraph makes some good points but gets a lot wrong.
1. It is true that academic economics has become too obsessed with mathematical modeling. Granted, the mathematization of economics (effected by the late Paul Samuelson) began with the intent of transforming economics into a true science. This was a good goal, but framing all economic questions mathematically causes economists to ignore factors that can’t be mathematically modeled. Ideally, we should continue to advance the mathematical rigor of economics while adding to that with other sources of knowledge. This is a critique of the way economics has been done recently, not the field as a whole.
But there are a few things this piece gets wrong. Keep in mind 3 things whenever you read another editorial excoriation of economists.
1. It’s misleading to say that modern economists are responsible for the economic crisis. Imperfect economics played a role, of course, but so did bureuacratic stupidity, corrupt businessmen, and sheer bad luck. It is, in fact, one of the predictions of economics that the financial world is unpredictable precisely because available information is incorporated into prices so quickly. Since the unpredictability of financial markets is a tenet of modern economics, it’s a fallacy to say that economists’ failure to see it coming shows how wrong they are.
2. Economists do know a lot of things, especially about political economy. Economists do know that protectionism generally makes us all worse off. The amount of money economists save mankind each year by restraining politicians from taking over ever single industry, is, as Deirdre McCloskey points out, enough to pay the salary of every economist in the world a thousand times over.
3. Free-market economics has not been discredited. The fact that markets are imperfect and often lead to downturns does not mean that government is perfect. Many people believe that free-market economics was based on the idea that people are perfectly rational. This is false. Free-market economists are those who believe that individuals’ localized knowledge generally allows them to make more rational decisions for themselves than any central governing body would. That’s a modest claim. In real life we choose between the lesser of two evils–free-market economists are still right that, most of the time, markets are less irrational than government.
So, what’s my talking point? 1) Academic economics needs to change its direction a bit, not by being less mathematical, but by being more of other things–taking more account of common sense, that which can be persuasive without being mathematically modeled. 2) Economists do know a lot, and do a lot of good for politics. 3) Financial markets are special cases, in general. As we rethink how we regulate financial markets we shouldn’t undermine freedom and competition elsewhere. The economic downturn hasn’t changed the fact that rent control hurts everybody or that high taxes drive jobs away.