Economists, implicated

John Maynard Keynes famously wrote that “[i]f economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid”. Many economists, somewhat uncharacteristically, might well be craving that type of anonymity at the moment. Because they’ve been getting a hard time of it. And the discipline may be about to get even less popular.

The arrival of the film Inside Job is likely to fuel the public’s anger at bankers for causing the financial crisis. And not only causing the financial crisis, but subsequently carrying on with business pretty much as usual, while the fallout of the crash is felt in public spending cuts, unemployment and welfare benefit reductions.

But the film does more than that. It broadens the scope of criticism to implicate a range of other professionals. It wasn’t just the corporate bankers: lawyers, central bankers, accountancy firms, lobbyists and government officials were also complicit in pushing a deregulatory agenda. Their actions magnified systemic risk and increased the instability of the financial system in ways that theory said shouldn’t happen. The real world clearly hadn’t read the script.

In amongst the culprits identified are academic economists.

Economists in the US come in for particular criticism. There is a cohort of senior academic economists who stand accused of taking large and undisclosed payments from private corporate interests in return for acting as cheerleaders for deregulation. And for providing a veneer of academic respectability to profitable financial instruments of such complexity that regulatory oversight was near impossible.

While the story that implicates economists is perhaps only now reaching the public consciousness, it is not, perhaps, entirely news – if you know where to look. Sociologists of knowledge, for example, have spent much of their time studying the way that natural scientists go about their work in the laboratory. But over the last decade they have also turned their attention to financial markets and financial economics. In his brilliant 2006 book An Engine, not a Camera: how financial models shape markets, the sociologist Donald Mackenzie provides examples of senior economists, from the 1970s onward, who were not content to restrict their interventions to the academic journals but also felt moved to engage more directly in paid lobbying activity in pursue of changes in the law – generally in the direction of deregulation and creating a more ‘hospitable’ environment for financial innovation.

The problem isn’t one of which the economics profession itself is entirely unaware. I am in the middle of reading George F. DeMartino’s recent book The Economist’s Oath: On the Need for and Content of Professional Economics Ethics. DeMartino is arguing that, in contrast to many other social scientists, economists’ prescriptions and actions in applied policy contexts have potentially huge ramifications for the well-being and quality of life of millions of people. He considers a number of concrete cases of economists acting as social engineers – including prescriptions for shock therapy applied to transition economies with sometimes devastating results. DeMartino argues that the discipline’s almost complete neglect of ethical questions – again in contrast to all other social scientists – is unacceptable and unsustainable. He advocates for the equivalent of taking the Hippocratic Oath before any economist be allowed to practice.

Apart from the ethical dimension, there is the issue of how the discipline of economics has become quite so closely associated with the rationalisation of policies and social arrangements that have proved so disastrous. That is a whole other question. It is one that can fruitfully be investigated from a sociological perspective. There are at least two components to the argument.

First, it is in part a function of the way the mainstream of the discipline has come to constitute ‘valid’ economic knowledge. There is a strong strand of abstraction and idealism. If one wishes to succeed within the mainstream of the discipline then there is not simply a reluctance but a positive disincentive to get too involved with data and the real world.

Second, the discipline is the only social science with a clear global hierarchy, and the upper echelons of that hierarchy have been colonised by (typically US) economists who value mathematical and theoretical sophistication over real world relevance. When mainstream economics becomes entangled in social engineering it tends to view the world as something that needs to be reshaped to fit the procrustean bed of the theoretical model, rather than recognising that models are inevitably simplifications that need to be applied, if at all, with extreme care.

There is a letter in today’s Guardian by Mike Cushman of the London School of Economics that provides an insight into how these features of the discipline are reinforced.

But is all this inevitable?

In one sense, the scale of the field is so vast it is hard to get a handle on how things are evolving. One can find signs that the grip of the mainstream is strengthening. But equally one can find signs that the mainstream is now more open to recognising the limitations of established modes of analysis – for example, in the willingness to look more seriously at models of bounded rationality. And there continue to be heterodox voices at the margins arguing for different approaches: approaches which recognise the need for a more institutionally sensitive economics more firmly anchored in empirical engagement with the real world economy. It could plausible be argued that these voices are becoming more numerous and more organised. One place to investigate these views further is through the Real World Economic Review, which also runs a blog (which can be found here).

One problem with economics at the margins is that only occasionally does it offer the sort of concrete and confident prescriptions and predictions that economic advisors to government are typically required to give. When one recognises the open-textured and contingent nature of the economy the enthusiasm for hard prediction is significantly tempered. Yet, as long as there is a demand for spuriously precise economic advice, supply is likely to be forthcoming.

In this respect a recent paper by Charles Manski – currently available as a working paper – is interesting, important and encouraging. From a perspective within the mainstream, Manski is asking some searching questions about the sort of policy analysis that economists can and should engage in. His concern is very much the misplaced certitude that is too frequently demonstrated.

So maybe there’s hope. Perhaps some of the hubris is being knocked out of mainstream economics and there is a future for the discipline in which it is populated by the “humble, competent people” Keynes thought so splendid. There are some there already. But there is plenty of room for more.

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