Should People Just Ignore Economists?
"What Good Are Economists Anyway?" asks BusinessWeek's April 27, 2009 cover story.
The article makes the important point that, since most economists failed to predict the current crisis, the worst economic collapse in nearly 80 years, we need to consider whether or not their work has any value.
Unfortunately, after bringing this failure to our attention, the article, written by economics editor Peter Coy, concludes that it's important to accept advice from the same economists who demonstrated their incompetence by not seeing this financial collapse in advance.
Peter Coy begins by quoting some noneconomists critical of the economics profession. Fans of Mises.org, I suspect, would tend to applaud these observations. Coy appears to be unaware of the Austrian School of thought and his assessment applies to the mainstream of the economics profession.
First, a blogger is quoted as saying,
"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."
Few economists saw this crisis coming, and many economists openly argued that there would be no recession. Such economists should question the investment they have made in their education. Society would be better off if these economists accepted work outside of the economics profession where they could produce something of value, and, more importantly, they could stop harming society with their destructive economic views.
Nassim Nicholas Taleb, author of The Black Swan, says, "We have to build a society that doesn't depend on the forecasts by idiotic economists."
Taleb is also right.
Next, finance expert Paul Wilmott asserts that "Economists' models are just awful. They completely forget how important the human element is."
Right again. Mainstream economists depend on mathematical models for understanding economic relationships. The false precision of the models may give them intellectual comfort, but the models provide a mechanical view of economic decision making. While Austrian theorists are focused on human action (Austrians call this analysis "praxeology"), the modelers overlook the purposeful behavior of decision making. Models fail to incorporate the full spectrum of human decisions, giving us, at best, an incomplete view of economic relationships (for an explanation of the limitations of economic modeling, see Gene Callahan's "Models: What Are They Good For?"). Recent events show that models can show us trends in economic variables, but have difficulty predicting changes in these trends.
The BusinessWeek article also takes a swipe at the last two chairmen of the Federal Reserve. Coy notes that before the collapse, Alan Greenspan argued that there was no housing bubble, and admitted in his Senate testimony last year that his earlier pronouncements regarding the soundness of our economy were flawed.
Coy also quotes current Fed chairman Ben Bernanke. In a 2002 speech commemorating Milton Friedman's 90th birthday, Bernanke noted the Fed's role in the Great Depression, addressing Friedman: "You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
That was a false promise. Under the leadership of Greenspan and Bernanke, they have done it again. In fact, they were doing it, pumping up the economy just as they did in the 1920s, at the time of Bernanke's quote. Given the events of the last year, that statement alone shows that Bernanke does not understand what caused or what will solve this crisis.
Because of economists' demonstrated incompetence, Coy is tempted "to ignore the whole profession." But, according to Coy, "that won't do." He concludes that in order to recover from this crisis, we must listen to the best economists, and by that he means the top mainstream economists.
To make his case that economists have made important contributions to society, Coy points to research from the 1970s that shows "the importance of having a strong, independent central bank" in order to eliminate chronic high inflation. Coy's brief defense of central banking indicates that he does not link the current financial collapses to Federal Reserve policy. The Federal Reserve pumped large amounts of newly created money into credit markets, much of which went into the housing and stock markets. The artificially low interest rates generated by these policies caused malinvestments; the downturn occurs when investors realize their mistakes.
A strong central bank is the creator of, not the cure for, inflation and the business cycle (for more on the Austrian view of the financial crisis, see the Mises.org Bailout Reader).
Coy wants us to follow the "very best thinking of a generation." While he doesn't specifically say who the best thinkers are, Coy's article mentions several top mainstream economists, including recent Nobel Prize winner and hyper-Keynesian Paul Krugman. While these economists do not escape criticism, Coy argues that the profession (apparently meaning these economists) needs to come to an understanding about the cause of this crisis and lead us out of the recession. The "next agenda for macroeconomists will be to help make the economy far more robust — enough to survive the blunders of politicians, bankers, and economists of the future."
First of all, making the economy robust falls outside the job description of any economist; second, we cannot construct an economy that will withstand future attacks from political operatives and central bankers.
On the plus side, Coy leaves us with a story that should make us skeptical about Obama's Keynesian stimulus program:
As World War II ended, many economists worried that growth would lapse as military spending fell. Sewell Avery, the CEO of Montgomery Ward, was so anxious about a postwar depression that he refused to open new stores. Economists still aren't sure why he was wrong, so they can't say reliably whether fiscal stimulus will end this recession or just interrupt it.
The post–World War II economy tells us why the government's current program to stimulate the economy by spending trillions of dollars of revenues generated by borrowing and creating new money will fail. As Robert Higgs has shown, when the federal government drastically cut spending after World War II, the economy boomed. The recovery from the Great Depression was due to the reduction of government spending after the war.
Reducing the amount of government predations (Murray Rothbard's term for the government burdens on the economy) improves productive economic activity just as the massive increases in predations today will harm our economy. The economists who worried at that time that spending cuts would lead to a recession were wrong, just as the economists who are now in positions of political leadership are wrong about the causes and cure for the current panic.
BusinessWeek has done us a favor by pointing out that most economists continue to accept the very theories that prevented them from anticipating the financial collapse. However, the magazine errs in concluding that we should now listen to those same economists. It would make more sense to ignore those economists that not only failed to predict but also had a hand in creating the crisis.
BusinessWeek would have done their readers a favor if they had pointed out that one school of thought, the Austrian School, foresaw this downturn and understands how markets will correct the errors of the central bankers.
The magazine should have advised their readers to listen to Congressman Ron Paul and financial advisor Peter Schiff, and pointed their readers to the writings of Ludwig von Mises (The Theory of Money and Credit), F.A. Hayek (Prices and Production), Murray Rothbard (America's Great Depression), Jesus Huerta de Soto (Money, Bank Credit, and Economic Cycles), and Tom Woods (Meltdown).