I am one of those who has enjoyed taking a pop at many academic economists recently.
Informally and to friends, I have compared academic economists of today to medieval scholastics: both beavering away on something which is more or less completely disconnected from and irrelevant to what the public understands them to be doing. In medieval times you have cloistered and often privileged monks debating theological niceties while those outside are ravaged by hunger, disease and wars from which God shows little inclination to save them; today you have academic economists constructing mathematical models which seem to have no bearing on the economics of the lives of ordinary people. The work done by contemporary academic economists appears impotent to resolve any of the increasingly desperate issues which are now debated nightly on our TVs, issues which are widely understood to be economic issues.
If you had a bunch of people in a university doing something called ‘physics’ which purported to understand the laws of nature and yet which, when taken outside of a university, seemed to have nothing to say about these laws as they affected our understanding of space, time, matter, energy and the cosmos, you would feel pretty grumpy about it – rightly so.
But is this really fair on economists? I think it might be time for some reassessment.
Firstly, it is not true that academic economics has always been rubbish. At the macro level, the majority view is that Keynes (who was a superb mathematician) is largely responsible for getting the world out of recession in the early 20th century and for setting up many of the structures that led to decades of peace and prosperity. On the other side of the fence, whatever you think of him, Friedman and his followers proposed policies that allowed for boom years that gave millions a lifestyle they could previously only have dreamt of. Those who critique this situation say either that we are about to realise just how much we had to pay for these grand theories and years of boom (as the Western economic world falls apart), or that the theories only worked and the boom years only happened because other poorer nations took up the slack. But the fact is that my generation, in the West, have lived through perhaps the best time ever in history to be alive. You can’t entirely sniff at that. There is no way to judge how it could really have been different and, taken purely at face value, millions in the West have had a remarkably good run for a remarkably long time. And a strong case can be made that this was due to good economic management, an understanding of monetary policy and banking based on deep and serious academic study. At the microeconomic level, too, during this time there have been innovations in insurance, pricing, accounting and so on which have benefitted firms and individuals – and many of these innovations have been devised by academic economists.
Secondly, apart from this positive view of the contribution of academic economics, there is the interesting philosophical question: is economics really so different from other branches of knowledge in having this crisis? No field is immune from getting large dollops of historical egg on its face, so is economics not just going through a rite of passage on its way to greater maturity?
Take physics. We now know that Newton was wrong. I’m with Hilary Putnam who says that Newton was not just ‘a bit’ wrong, as is sometimes said, but he was massively, conceptually and metaphysically wrong. Time does not flow equably. Time is a dimension in space-time, not exactly like space but much more like it than the picture of time as kept by an external clock, which Newton proposes. Relativity is not Galilean/Newtonian; it is Einsteinian. It is true that Newton’s laws can still be used brilliantly for big chunks of engineering and mid-scale physics. But philosophically, metaphysically the laws are wrong. They just work well as tools.
Of course you could say Einstein’s Relativity is wrong as well – or at least waiting to be proved wrong – and we could get into a discussion about physics vs metaphysics and a whole bunch of related stuff, but I don’t wish to get into arguments about these issues here – that is not the point. The point is that we could say that classical economics also worked for a time, just as Newton’s laws did, but that it is now in drastic need of revision. Ricardo’s law worked well when you didn’t have to worry about environmental issues and there was no global financial system. Becker’s work on human capital made good predictions about the value of training when there were abundant jobs for skilled workers. Even Smith’s ‘invisible hand’ of the market worked before the ‘market’ became a giant network of virtual wealth, fabricated by over-connected computers, and we began to realise that we could not just exploit anything at all in any old way in order to get rich. Sure, things have changed, and much of this economics no longer works. But things changed for physics too in the early 20th century and may well do again. Physics adapted, took a look at itself and worked out the implications for the – I guess I have to use this phrase – paradigm shift.
Similar cases could be made for biology and, of course, for religion – two other great fields of human endeavour.
I see no reason why economics and economists cannot adapt to the current intellectual shocks and come out better. Economists are often very smart people (though that sounds wrong for at least two reasons!). Many of them are not only superb mathematicians (which particular breed are generally acknowledged to be smart) but they are also able to model, to use their mathematics in creative ways. That is an impressive skill. The trouble is that at the moment they are at least putting junk into the models and so getting junk out; and maybe the sorts of models they are constructing need to change too.
So let us not think that economics is lost and that economists are a bunch of holy idiots. Yes, criticism and fiery debate is of the order now – just as it was when Newton was refuted and Darwin needed to be championed. But economics may come out much the better for this, 10-20 years down the line, provided economists are able to look one another in the eye, admit where the blunders are, and work out where to go next and how to do it.