Even economists are beginning to notice there is something wrong with economic theory

The New York Review of Books ran a seminar series on “What’s Wrong with Economics” which may be found here, including the videos of the various sessions. It has taken more than half a decade for the penny to finally drop that the policies we have been applying do not work and that there may be something wrong with the economic theories we have been applying. This is the “preface” from the NYRB which is so wrong-headed in even setting out the issues that you can already see there is no possibility that they are going to get anywhere near the right answers. But at least the questions are finally being asked, because there is finally recognition that things have gone badly wrong.

This conference is taking place eight years after the onset of the Great Recession in December 2007, and nearly six years after the recession was declared to be officially over in the US in June 2009. Yet the events of six and eight years ago continue to haunt us. One of the great powers of the global economy, the Eurozone, has yet to put the recession behind it, while the uneven performance of the US economy—spurts of growth accompanied by stagnant real wages—has led economists such as Paul Krugman and Larry Summers to ask whether the US has succumbed to “secular stagnation”: Is the economy now burdened with structural impediments which will make strong and sustained growth difficult to achieve?

The Crash of 2007-2008 was an acute crisis of market disequilibrium which has imposed itself upon an economics discipline still giving pride of place to models where market forces nudge economies in the very opposite direction—towards equilibrium. Crises of disequilibrium have occurred with increasing frequency over the past thirty years: with the Latin American debt crises of the 1980s, the American Savings and Loans collapse of the late 1980s, the Scandinavian banking crisis of the early 1990s, the Asian and Russian financial crises of the late 1990s, the American “dot-com” bust of 2000, and the Crash of 2007-2008 itself which has been global in impact.

Yet treating these crises as a series of near-identical events susceptible to economic modelling does not, on the face of it, do justice to the complexity and singularity of the forces which combined to bring them about. Many of these influences seem to have had their origins well beyond the home territory of economics. Doing justice to these outside forces may require a knowledge of ethics, anthropology, contemporary history and politics, public policy, and an understanding of the beliefs, frequently delusional, which seized many of the economic actors before and during the crises.

Among these disciplines it is, unsurprisingly ethics which intrudes questions of value deepest within the territory of economics, and forces a reappraisal of where the discipline stands in the disciplinary continuum between the humanities and the natural sciences. The overwhelming preference of economists themselves is to be as closely aligned as possible with the natural sciences. But with the intrusion of such ethically charged issues as the human fallout from the Crash, and the unrelenting growth of economic inequality in the US and most European countries, the scientific and the normative in economics are becoming increasingly difficult to keep apart.

Disputes between economists which seem to derive from disagreements about data and methodologies may on closer examination be rooted in profound disagreements about values. So it can be argued, and often is, that all of us are responsible for making the best of the opportunities open to us. Those who have ended up on the wrong side of the inequality divide must have failed to make the best of these opportunities and must bear responsibility for their errors, with the state providing just enough support to save them from destitution.

Or, an opposing view, that those falling behind are very often the victims of circumstances beyond their control—globalization, technological change, corporate restructuring—and that the state has a strong obligation to support them generously through difficult times and to provide them with the knowledge and skills needed to cope with new technologies and work practices. But how are these conflicts of values embedded in conflicting views about policy to be resolved?

It may be that these are disagreements of a kind that arise frequently in political and moral philosophy and reflect conflicts of plural values which do not arise in the natural sciences and which cannot be resolved by the forms of reasoning employed by scientists. They may have to be resolved either by the choices and compromises achieved through the practice of liberal democracy, or by one set of values prevailing over another through intellectual and electoral force majeur—as for example the arguments for the legal equality of women prevailed over their opponents in the course of the twentieth century.

Once again a network of beliefs and judgments extending well beyond economics may be called into play, and once again these may be strung out along the ontological continuum between the humanities and the natural sciences. Does this mean that the economist as scientist is slowly but surely being displaced by that hybrid who seems better placed to bridge these divides—the political economist?

If you want to see things properly, you will, in my view, have to start if not exactly here, at least somewhere nearby. Paul Krugman can think we have fallen into some kind of secular stagnation which is not far from being the stupidest of all possible explanations. Having backed the stimulus and the fall of official interest rates to zero, he has no idea that there are others who think that is more than enough to account for the present dismal outcome. They are clueless in New York. I would leave them to their own devices except that they are likely to take the rest of us down along with them. With these people as the leaders of the profession, it is indeed a dismal science.

AND AN ADDED BONUS: There is also Jeff Madrick on Why the Experts Missed the Recession. And why was that? Whatever the reason, here’s why I know he doesn’t know:

By lowering the target rate of interest, known as the federal funds rate, the members of the FOMC can stimulate economic growth, and by raising it, they can dampen growth and inflation.

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