Where Were They? Bashing Economists and other Experts

In the wake of the financial catastrophe that is unfolding in slow motion across the globe, a lot is being written about the economics profession. Where were the economists? Why didn’t they predict this? Two recent articles, one by Peter Coy, economist editor at BusinessWeek, and one by economics professor Barry Eichengreen at the University of California, Berkeley, published in The National Interest, provide interesting answers to those questions.

One of the things that bothers me about the attack on the economics profession is that they are used to justify the view that expertise of all kinds is overrated. With the democratizing (one might say lowest-common-denominating) force of the Internet, it’s become popular to predict the irrelevance of expertise and the end of the dominance of professionals of all types (from journalists to film makers). And, sorry to veer into politics here, but the fact that the Bush administration was so often dismissive of the role of  science and expertise in policy making seemed to have galvanized those would believe that any challenge, no matter how complex, can be met with gut instinct and values alone. That camp seem to be consider “expertise” to be a false god or an egghead preoccupation.

I sure hope expertise doesn’t become obsolete. While it might sometimes be misguided or misused, our society has become way to complex to navigate by gut instinct alone.

These two articles argue, in part, that the trouble with economics here is not that it was misguided, but that it was misused–specifically, that important elements of it were suppressed and ignored.

Coy emphasizes flaws with technical approaches to economics, and dwells on the fact that, with the damage done, economists now find themselves in violent disagreement about how to repair it and move forward:

People are starting to wonder: What good are economists anyway? A commenter on a housing blog wrote recently that economists did a worse job of forecasting the housing market than either his father, who has no formal education, or his mother, who got up to second grade. “If you are an economist and did not see this coming, you should seriously reconsider the value of your education and maybe do something with a tangible value to society, like picking vegetables,” he wrote on patrick.net
The rap on economists, only somewhat exaggerated, is that they are overconfident, unrealistic, and political. They claim a precision that neither their raw material nor their skill warrants. Too many assume that people behave like the mythical homo economicus, who is hyperrational and omniscient. And they take sides in quarrels that freeze the progress of research. Those few who defy the conventional wisdom are ignored.

Stieglitz says that a rich vein of theory was available to explain, predict and avoid the current crisis but that social forces suppressed some views and brought others to the survey. How could the economics profession be so misguided? The problem, he suggests,

lay not so much with the poverty of the underlying theory as with selective reading of it—a selective reading shaped by the social milieu. That social milieu encouraged financial decision makers to cherry-pick the theories that supported excessive risk taking. It discouraged whistle-blowing, not just by risk-management officers in large financial institutions, but also by the economists whose scholarship provided intellectual justification for the financial institutions’ decisions. The consequence was that scholarship that warned of potential disaster was ignored.

… The top PhD-granting departments only rarely send their graduates to positions in banking or business—most go on to other universities. But their faculties do not object to the occasional high-paying consulting gig. They don’t mind serving as the entertainment at beachside and ski-slope retreats hosted by investment banks for their important clients.

Generous speaker’s fees were thus available to those prepared to drink the Kool-Aid….What got us into this mess, in other words, were not the limits of scholarly imagination. It was not the failure or inability of economists to model conflicts of interest, incentives to take excessive risk and information problems that can give rise to bubbles, panics and crises. It was not that economists failed to recognize the role of social and psychological factors in decision making or that they lacked the tools needed to draw out the implications. … The consumers of economic theory, not surprisingly, tended to pick and choose those elements of that rich literature that best supported their self-serving actions. Equally reprehensibly, the producers of that theory, benefiting in ways both pecuniary and psychic, showed disturbingly little tendency to object

The problem, I think, is not too much intellect. It’s not enought intellectual honesty. I hope we can take that to heart.

If you have any thoughts on what’s wrong with economists, or anything else, I’d love to hear them.