Introspection Time For Economists
Niranjan Rajadhyaksha -
Monday, March 16, 2009 4:23 PM
It is by now widely accepted that the economic crisis has blown away the comfortable consensus that ruled academic and policy economics for maybe at least two decades.
It is now introspection time.
Willem Buiter posted a typically sharp and caustic attack on contemporary monetary economics, which he has called "useless".
"Most mainstream macroeconomic theoretical innovations since the 1970s (the New Classical rational expectations revolution associated with such names as Robert E. Lucas Jr., Edward Prescott, Thomas Sargent, Robert Barro etc, and the New Keynesian theorizing of Michael Woodford and many others) have turned out to be self-referential, inward-looking distractions at best. Research tended to be motivated by the internal logic, intellectual sunk capital and aesthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works - let alone how the economy works during times of stress and financial instability. So the economics profession was caught unprepared when the crisis struck."
The New Keynesian DSGE models that most central banks and macroeconomists use these days have also been assailed.
Dani Rodrik says that the fault is not with the underlying economists but with the economists who used the textbook tools.
"So is economics in need of a major shake-up? Should we burn our existing textbooks and rewrite them from scratch?
Actually, no. Without recourse to the economist's toolkit, we cannot even begin to make sense of the current crisis."
and...
"The fault lies not with economics, but with economists. The problem is that economists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful.
They forgot that there were many other models that led in radically different directions. Hubris creates blind spots. If anything needs fixing, it is the sociology of the profession. The textbooks at least those used in advanced courses - are fine."
Now Dani Rodrik is a high-class economist and I have only the greatest respect for him. But his "Blame The Economists, Not Economics" view reminds me of what the US gun lobby says: Guns do not kill people. People kill people.
To shift the burden of guilt on the user (the economists) rather than the gun (modern textbook economics) is a bit unconvincing, at least as far as I am concerned.
Anyway, there seems to be new hopes that some of the marginal schools of economic thinking may gain more prominence now.
Here is one article that pins its hopes on evolutionary economics. (Hat Tip: PSD Blog)
"You’d be forgiven for confusing the two in the midst of the financial mayhem tormenting the world’s economies. Armchair observers, financial leaders, and increasing numbers of economists are using the language of Darwin to describe the current crisis. “There is vicious natural selection going on right now in the financial services industry, and it’s appropriate,” said Mark Carney, governor of the Bank of Canada, in a November BBC interview. “Those who weren’t on top of things are gone or going.”But can the relation of evolution to economics go further than skin-deep terminology? Can it actually change the face of the discipline? For more than a century, the scientific undercarriage of economic theory has been physics, the neoclassical idea that predictions can be based on a series of unchanging and universal laws. Swapping out the forecasts and equilibriums of physics for the complexity and chaos of biology’s main engine would require a complete makeover."Yet with the neoclassicists and free-market cheerleaders bearing (fairly or not) the brunt of the blame for the current financial meltdown, some economists say the time has come for just such a philosophical reset.