Essay on the State of Economics

Good essay:

The reputation of economics and economists, never high, has been a victim of the crash of 2008.  The Queen was hardly alone in asking why no one had predicted it.  An even more serious criticism is that the economic policy debate that followed seems only to replay the similar debate after 1929.  The issue is budgetary austerity versus fiscal stimulus, and the positions of the protagonists are entirely predictable from their previous political allegiances.

The doyen of modern macroeconomics, Robert Lucas, responded to the Queen’s question in a guest article in The Economist in August 2009.[1]  The crisis was not predicted, he explained, because economic theory predicts that such events cannot be predicted.  Faced with such a response, a wise sovereign will seek counsel elsewhere.

But not from the principal associates of Lucas, who are even less apologetic.  Edward Prescott, like Lucas, a Nobel Prize winner, began a recent address to a gathering of Laureates by announcing ‘this is a great time in aggregate economics’.  Thomas Sargent, whose role in developing Lucas’s ideas has been decisive, is more robust still.[2] Sargent observes that criticisms such as Her Majesty’s ‘reflect either woeful ignorance or intentional disregard of what modern macroeconomics is about’. ‘Off with his head’, perhaps.  But before dismissing such responses as ridiculous, consider why these economists thought them appropriate.

via John Kay – The Map is Not the Territory: An Essay on the State of Economics.

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  2. What Has Economics Ever Done For Us?
  3. Grand Pursuit: The Story of Economic Genius
  4. Sunday Drive-By/Grassroots Economics
  5. When Has Economics Been Correct on Anything Important?

Comments

  1. cs702 says:

    Good essay. Thank you for sharing it.

    Alas, like many other good essays on the subject, this one will be read and understood by the really tiny number of people around the planet who have at least a rudimentary understanding of macroeconomics.

    Everyone else — from the Queen of England to most politicians and business leaders — can't tell who's right and who's wrong when it comes to macroeconomics, and will continue supporting ideas and policies that appeal to them in a moral, emotional, and/or financial sense.

    Forget about macroeconomic *theories*: most of the smart, educated, curious people I've come across don't really understand basic macroeconomic *facts* like the saving-investment identity, what GDP measures, how money is created and destroyed, and so on.
    http://cs702.wordpress.com/2011/09/29/on-the-econ

  2. kiers says:

    What about "Financial Economics"? At least econ has some basic undeniable identities.
    Markowitz Portfolio Theory (drummed into EVERY student of this fine field) would dictate that every (long-short) equity Mutual Fund should offer only ONE portfolio to ALL clients! This is "Markowitz Optimal", "the Efficient Frontier" etc.

    So what does it say of the theory where EVERY practitioner in this $2 Trillion industry (this is real money) completely ignores this gem of a theory and really just looks for AUM?!

  3. Complex/chaotic systems don't lend themselves well to 'precise' predictions though probabilities and trends are certainly discernible.

    Sometimes in such situations its useful to rely on an ancient human mechanism.

    It's often called "Common Sense"!

    For instance when house prices rise much farther and faster than incomes… and you can see a continual downward pressure on wages while jobs are exported and debt is exploding…

    It shouldn't (and doesn't) take an economic 'whiz-bang' to figure out there's going to be a problem.

    Nobel Prizes?

    These guys should be either in prison or halfway houses for the hopelessly naive.

    Or are they simply well-paid for being intentionally but obscurely STUPID!

  4. rcyran says:

    Great essay.

    Here's another take on the same topic written in a somewhat more accessible manner on why econ often isn't even wrong. He slightly off on some of the small details because he is from outside the field (he's a mathematician), but it's a much more stinging critique.
    http://www.nakedcapitalism.com/2011/09/economics-

    a choice bit:
    Another day, some economists noticed that sometimes people are stupid and do things that waste money. They made a theory about this called “behavioral economics.” Since economists before that assumed “perfect information,” [and rational expectations] or in other words, people know everything that is happening everywhere in the world and always do whatever makes the most money, they were amazed at how smart these economists were and gave them Nobel Prizes.

    There were also some economists who noticed that if you give another kid your lunch and tell him to hold it for you until lunch, he might eat your chocolate bar and then tell you that someone stole it. Their theory is called the “principal/agent dilemma.” This theory also seemed very new and exciting to other economists.

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