If one wonders why economists have had so much difficulty predicting and explaining the economic crisis it might be helpful to look at who pays their salaries. Isn’t there an old saying that he who pays the economist calls the tune? As most economists work for large corporations, governments or universities (paid indirectly by governments) they have to answer ultimately to chief executive officers or presidents/prime ministers.
The question then is what do these people want to hear? Does the chief executive of a major bank want to hear that he is participating in a Ponzi scheme or does the president want to hear that we are going into a major recession and that his voters are going to have to accept a decreasing standard of living?
Probably not. So economists tend to focus on things that will not be offensive to these people or that will help to support them.
Consider the book Freakonomics by Steven Levitt and Stephen J. Dubner. This popular book is very interesting but it doesn’t touch on any of the big economic issues with which we are currently trying to deal. People who have lost their jobs and homes to the crisis will not find much here to help them. Nor will the book encourage them to become drug dealers. (Here is the Wikipedia entry on Freakonomics. http://en.wikipedia.org/wiki/Freakonomics )
Another example is this article ( http://www.economist.com/node/12851150 ) from The Economist, December 30, 2008. This article lists eight up and coming economists and talks briefly about the work they are doing. None of them are doing research which will help us understand or cope with the current economic crisis. Here are three quotes from this article which I think help make the point.
They share the same knack for finding ingenious ways to answer unlikely questions, often by plundering forgotten troves of data.
Mr Gabaix made a splash in 2006 when he concluded that the “excessive” pay of chief executives was not necessarily excessive. Compensation may have grown sixfold from 1980 to 2003 not because managers were six times greedier, but because the firms they ran were six times bigger.
What, then, unites these eight young stars and the discipline they may come to dominate? Economists still share a taste for the Greek alphabet: they like to provide formal, algebraic accounts of the behaviour they explain. And they pride themselves on the sophistication of their investigative methods. They are usually better at teasing confessions out of data than their rivals in other social sciences. What defines economics? Economics is what economists do—the best of them, anyway.
So long as the economy was growing it didn.t much matter what questions economists asked and most of their research assumed continued economic growth. As a student I learned regression analysis with its upward sloping line. It wasn’t until later that I learned about fractals with their ups and downs. I speculate the people who sign economists’ pay cheques would not be much interested in economic projections based on fractals.
I believe most people who study economics want to make the world a better place. Also we tend to think and act in our own short-term interests and for most people that is their pay cheque. The economists I am criticizing probably believe they are helping make the world better – or would be if only people would listen to them. Who is to say one person is right rather than another when it comes to solving deep problems and shaping the future. Sometimes, to others, our vision of the future is wishful thinking.
What then is the role of economists if not to make accurate forecasts and to solve major economic problems. Shortly after starting my study of economics I decided economists were the theologians of the twentieth century. Some of their debates are as relevent as the medieval debate over how many angels could dance on the head of a pin.
I have a theory that we need to believe the things we do are important and necessary. Sometimes we need people to reinforce this belief. As most of what we do involves the exploitation of resources we need to believe this is good. As it becomes more difficult to extract the remaining resources it becomes even more important we have people to help reinforce our work ethic. The theory is that this is the true role of economists.