The economics profession must bear a lot of the blame for the current crisis. If it is to become useful again it must undergo an intellectual revolution—becoming both broader and more modestby Anatole Kaletsky / April 26, 2009 / Leave a comment
Published in April 2009 issue of Prospect Magazine
Was Adam Smith an economist? Was Keynes, Ricardo or Schumpeter? By the standards of today’s academic economists, the answer is no. Smith, Ricardo and Keynes produced no mathematical models. Their work lacked the “analytical rigour” and precise deductive logic demanded by modern economics. And none of them ever produced an econometric forecast (although Keynes and Schumpeter were able mathematicians). If any of these giants of economics applied for a university job today, they would be rejected. As for their written work, it would not have a chance of acceptance in the Economic Journal or American Economic Review. The editors, if they felt charitable, might advise Smith and Keynes to try a journal of history or sociology.
If you think I exaggerate, ask yourself what role academic economists have played in the present crisis. Granted, a few mainstream economists with practical backgrounds—like Paul Krugman and Larry Summers in the US—have been helpful explaining the crisis to the public and shaping some of the response. But in general how many academic economists have had something useful to say about the greatest upheaval in 70 years? The truth is even worse than this rhetorical question suggests: not only have economists, as a profession, failed to guide the world out of the crisis, they were also primarily responsible for leading us into it.
By “economists” in this context I do not mean the talking heads and commentators (myself included) employed by the media and financial institutions to explain the credit crunch or the collapse of house prices or the rise of unemployment or the movements of currencies and stock markets—usually well after the event. Neither do I mean the forecasters whose computer models churn out scientific-looking numbers on future growth or inflation, numbers that have to be revised so drastically whenever something “unexpected” happens (as it always does) that they are not really forecasts at all but descriptions of recent events. An IMF study of 72 recessions in 63 countries found, for example, that in only four of these cases had economic forecasters predicted a recession three months or more before the event. Economic forecasters and pundits cannot predict the future for the same reason that weather forecasters cannot predict the weather—the world economy is too complex and too susceptible to random shocks for precise numerical forecasts to have any real meaning.