Guest Post: Economics Has Lost its Way

This is a guest post by Simon Ogus, founder and CEO of DSGAsia, a firm which provides independent Asian economic and political analysis. He has a PhD in economics  from SOAS and has been researching the economies and markets of the Asian region since the mid-1980s.

Albert Einstein, a proper physicist if ever there was one, and certainly no social scientist with a bad case of physics envy, once remarked that: “Not everything that can be counted counts, and not everything that counts can be counted.”

One might have thought that after decade upon decade of one-in-ten-thousand-year events occurring, ahem, rather more regularly than every ten millennia, the economics profession might be willing to display just a little more humility in questioning its increasingly quantitative foundations. But, then again, as Upton Sinclair wrote in “The Jungle”: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

The idea that the Queen raised that nobody saw the crash coming is, frankly, self-serving humbug from an academic, bureaucratic and conflicted private sector analytical cabal for whom such a claim is extremely convenient from a backside-covering perspective. Plenty of analysts did point out the madness of what was happening (or more accurately was being allowed to happen) but the more independently-minded were largely shouted down and accused of being cranks that just did not understand the beauty of the newest manifestations of finance.

Après la deluge, the revisionist claim has been that, “apparently,” it was not that the models were wrong, but just that they just needed to be perfected; analogous to arguing that Communism didn’t fail due to its philosophical shortcomings but because it was never implemented properly. And herein is the crux. For professional insiders, from the world’s top central bankers to academics seeking publication and tenure, to disavow the received wisdom of the past thirty years is basically to admit that one’s fundamental worldview and body of work has been completely discredited. Make no mistake this is the enemy that the PCES is fighting.

Old Fart warning; I graduated from the Manchester economics programme some thirty years ago. I have spent most of the subsequent years living and working as a practicing (and I hope practical) economist in Asia, initially for major financial institutions and, when I could stand it no longer, running my own independent consultancy. Throughout my career I have interacted regularly with central banks and policy-focussed academics, and continue to do so. Yet even today, their continued focus on merely tweaking their highly complex, mathematically elegant, but fundamentally flawed models would seem to suggest we have learned very little.

Contemporary economics requires root and branch reform and the PCES is therefore spot on, in my opinion at least, in challenging the very essence of how the discipline is taught. Yet I rather fear that we need an even bigger crash, and a complete discrediting of the “money printing is the solution to everything” creed – a.k.a. monetary policy for rich people – before real change can occur. Unfortunately, the social consequences of such a revolution may be far from pretty.

I recently took the opportunity to visit the University and meet with various members of faculty and the student body, including the PCES whose campaign I have been following from afar. Many of my discussions touched on how the way the subject is now taught has changed immensely in recent decades. Back in the early 1980s, the Manchester economics course hewed closely to the classical idea of a broad social sciences experience that offered one a huge buffet of choices from across the whole social sciences faculty. Like many I suspect I was far too immature to fully appreciate the undergraduate experience. Nevertheless, the range of classes I took at Manchester, especially my study of the history of economic and political thought (under Terry Peach who has also contributed to this blog), convinced me that separating politics, sociology, history, psychology and the like from economics was a huge misnomer. They have also served to drive my healthy scepticism of reductivist models throughout my working career.

It is saddening though not completely unsurprising to learn that the social sciences buffet is no longer an option for those seeking a career in the civil service, central banks and finance in general. Let me be clear, I am not seeking to argue that mathematical and statistical modelling skills are unimportant as a way to question and test our all too human biases. Developments in artificial intelligence may soon make the need for human economists redundant albeit that is probably a discussion for another day. Until then, surely good policy making and analysis requires an appreciation of the myriad range of individual and societal behaviour drivers which cannot be fully modelled. The aim must be to try to produce a new breed of policy formulators whose breadth of knowledge extends beyond the latest econometric techniques.

The late, great Harry Johnson once said of public policy making: “The fundamental problem is that, as with all second-best arguments, determination of the conditions under which a second-best policy actually results in an improvement of social welfare requires detailed theoretical and empirical investigation by a first-best economist. Unfortunately policy is generally formulated by fourth-best economists and administered by third-best economists; it is therefore very unlikely that a second-best welfare optimum will result from policies based on second-best arguments.”

An inner sanctum of an economics profession indoctrinated at the outset by narrow-minded groupthink, even if it is populated the best-skilled mathematical automatons, is hardly a recipe for social welfare optimisation.

The historical giants would surely agree. To this end, I would conclude with a quote from Lord Keynes who would be almost certainly horrified by the contemporary ideas being promulgated in his name, not to mention how his “very easy subject” is now being taught: “The study of economics does not seem to require any specialised gifts of an unusually high order.  Is it not intellectually regarded, a very easy subject compared with the higher branches of philosophy or pure science?  An easy subject, at which very few excel!  The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts.  He must be mathematician, historian, statesman, philosopher – in some degree.  He must understand symbols and speak in words.  He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought.  He must study the present in the light of the past for the purposes of the future.  No part of man’s nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes a near the earth as a politician.”

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