Apology for Economics: A Critique on the Field's Shortcomings and Justifications
The Dominance of Mainstream Economics in Policy-Making and Its Shortcomings
Mainstream economics, long considered the cornerstone of modern policymaking, has been subject to rigorous scrutiny in recent years, with its failures and ideological divides casting light on deeper systemic flaws within the discipline.
The financial crises of 2007-2008 revealed a stark inability on the part of economists to foresee the impending disaster, as Queen Elizabeth famously asked a group of prominent economists, "Why did none of you see this coming?" This question echoed widely, sparking debates about the credibility and value of mainstream economics in shaping policy decisions.
There are two principal interpretations of this predicament. First, economists were never purposed to act as clairvoyants. Just as geologists are not blamed for failing to predict every earthquake or volcanic eruption, so too should economics be granted a modicum of understanding. However, many economists, particularly those employed in banking and government, regularly make projections. They ought to have foreseen the runaway inflation of the 2007-2008 bubble, given its conspicuous expansion and the egregious behaviors of many bankers. Among the few economists who did sound the alarm was Edward M. Gramlich, a Federal Reserve Governor from 1997 to 2005, but his warnings went largely unheeded. Too many opted to ignore the danger signs, choosing instead to condone the excesses of the banking sector. The fault lies not so much in the shortcomings of economics as a discipline, but in the absence of courage and integrity.
In the annals of economic history, there can be little doubt of the significant contributions made by mainstream economics. John Maynard Keynes, for example, played a pivotal role in liberating governments from the constraints of classical economic doctrine during the 1930s, when persistent unemployment threatened to cripple the global economy. His General Theory offered insights into how the world could be extricated from the Great Depression. Although Keynesian ideas fell out of favor in the 1970s, they were expediently revived in the wake of the 2007-2008 crisis, leading to an unprecedented expansion of the money supply. As a direct consequence, the ensuing recession did not metamorphose into a full-blown depression, though the judicial response to the financial crisis was far less impressive. Few bankers in the United States or Europe were held accountable, with Iceland standing out as a rare exception.
Economics offers valuable insights into the benefits of trade, the detrimental effects of tariffs, oligarchies, and monopolies, and the rewards of free competition balanced by responsibility and a measure of equality. This balanced approach facilitates ends such as increased living standards and low prices, but only if the resulting gains are equitably distributed. An assessment of a nation's economic health must encompass both average income per person and the distribution of income and wealth, lest we judge the worth of an asset solely by its return without taking the risk into account.
Questions of social justice have long been omitted from mainstream economics, but this may be gradually changing, in large part due to rising income inequality since the 1980s. Acknowledging the significance of fairness is increasingly seen as essential in the modern economic landscape. This development may come as no surprise to philosophers or psychologists.
Economics is not a straightforward science, akin to physics or chemistry. It is far more complex, grappling with impalpable human behaviors – behaviors that are never entirely predictable or consistent. Isaac Newton himself admitted that "I can calculate the motion of heavenly bodies, but not the madness of people." Economists often struggle to distinguish economics from politics, with some applying political views to their economic analyses, which creates intricate ideological divisions. Keynes’ General Theory, for instance, continues to be a subject of controversy, with opponents of government intervention resisting theories that demonstrate its potential benefits and crisis prevention capabilities.
Although economists are divided on fundamental issues, such as the nature of the rational homo economicus, they largely converge on the damaging effects of tariffs. Advocates of tariffs often argue that they can achieve the same objectives as lower taxes or reduced interest rates, but with less damaging side effects. In the United States Congress' response to the 2007-2008 crisis, however, ideological tensions influenced the decision to institute a smaller increase in government spending than many experts deemed advisable. Consequently, the recovery was slower than it could have been, although it may have mitigated inflation.
Political differences notwithstanding, economists remain united in their understanding that tariffs are generally harmful. Global average tariffs have fallen steadily since 2002, from eight percent to four percent in 2021, due to economists' best efforts to persuade policymakers. President Trump’s announcement of steep tariff increases on imports during his second term caused widespread apprehension, as a similar move in the 1930s, prompted by the Smoot-Hawley Tariff Act, contributed significantly to the deepening of the Great Depression. Whether the inner circle of President Trump’s administration is oblivious to history or silent is anyone's guess. Regardless, the ongoing debate goes beyond the realm of economics, reaching into the heart of democracy, courage, and the true purpose of policymaking.
Thorvaldur Gylfason, professor emeritus of economics at the University of Iceland and a former member of Iceland’s Constitutional Council, serves as a prominent voice in this discussion.
Reference(s):[1] Raskin, H. B., & Hafer, B. P. (2011). Economic policy in America: An introduction, 13th edition. Prentice Hall.[2] Ohanian, L. R. (2019). The Great Recession and America's tragic economic policy tragedy. The University of Chicago Press.[3] Stiglitz, J. E. (2015). Capital in the 21st Century. W.W. Norton & Company.[4] Chang, H. J. (2019). Economics: The user's guide. Penguin Books.[5] Galbraith, J. K. (2017). The Nature of Capitalist Crisis. Springer. ]
- The dominance of mainstream economics in policy-making extends beyond finance and business to education-and-self-development and politics, as its implications are far-reaching and can impact general news.
- The failure of mainstream economics to predict the 2007-2008 financial crisis has sparked debates not only within the industry but also among policymakers and the public, questioning the discipline's credibility and its role in shaping policy decisions.
- In the battle of ideas among economists, some argue that the discipline must consider social justice and address issues of income inequality to stay relevant in today's complex economic landscape. However, this shift may face resistance from politicians and policymakers, creating intricate ideological divisions that challenge the true purpose of policymaking.
