Since the beginning of the global financial crises in 2007, there have occurred numerous economic and financial crises around the globe, plunging often prosperous nations into hardship and even near bankruptcy. These crises, typically generated by overlending by the financial sector and crashing housing bubbles, are often blamed upon two parties – governments and banks – with considerable justification.
There is, however, a third villain that bears primary responsibility for these disasters. While politicians, government bureaucrats, financiers, bankers and the real estate lobby have come under withering assault in the eyes of enraged publics, the economics profession has largely escaped the fury. Given the importance of this profession in structuring economic and financial policy, the lack of attention and accountability poses an interesting question as to why this is.
Governments rely upon the advice of economists to implement policies that will advance economies in the conventional terms of growth, stability and productivity, on matters from the important to the mundane. It is these experts, with a wealth of experience, who have the greatest influence on public policy.
It should be predictable that if a particular policy was successfully implemented and incurred the expected outcomes, then the economists in charge will have their careers advanced. If the opposite occurs, then it is expected that the economists responsible should be subject to severe penalties.
Unfortunately, recent outcomes have ensured the former, but not the latter. For instance, the largest bubbles in US history – dot-com and housing – were followed by sharp economic downturns. Both times, the overwhelming majority of economists missed and/or denied the existence of the bubbles.
The aftermath of the tech bubble was a recession, and the collapse of the housing bubble could well have resulted in another Great Depression if not for the record-breaking bailout of the financial system and continued deficit spending.
According to conventional economic theory that the majority of economists advocate (neoclassical economics), these assets bubbles should not be forming. Supposedly, the more market-oriented an economy becomes, through deregulation and privatisation, the more efficient it becomes at pricing assets, resources, goods, services and labor. Thus, there should be little to no bubble activity within a freer market economy. History, however, has revealed the opposite.
One would think that given the wide gulf between theory and reality, the economics profession should have performed some sort of self-assessment. Instead, they seem to have fervently congratulated one another for having saved economies.
There is, of course, some truth to this assertion: economies would likely have been worse off had the government not intervened and allowed the banks to collapse. Clearly, this is not the point being made – the point is that if economists were not asleep at the wheel, economies would not have been driven into a brick wall, requiring bailouts in the first place.
It is outrageous those economists in important policy-making and influential positions even keep their jobs. What comprises these positions is obvious: senior economists within the central bank, treasury, the financial regulator, commercial lenders, investment banks, and supranational organizations.
If a taxi driver was to crash while drunk driving, injuring passengers, they would be fired and can be charged by the authorities. A nurse that continually gives patients the wrong medicines, resulting in suffering or even death, will lose their job in short order. A cook that leaves the stove on after finishing work, burning down the restaurant, will predictably lose their job.
On the other hand, economists who are complicit in the collapse of multi-billion dollar corporations and trillion-dollar economies are still employed, often working in the highest levels of government, industry and academia, while unemployment, bankruptcies, and general misery blows out of all proportion among the public.
Given the extraordinary level of incompetence shown by these economists, one may ask why they are still employed. Surely the economics profession should be treated similarly to other professions: incompetence on the job should result in disciplinary measures and penalties.
One explanation can be found within economic theory itself. Economists believe that the prices of goods and services within an economy are determined by the impersonal forces of supply and demand; everything, that is, except for the supply and demand of economic theory itself.
The rich and powerful create strong demand for economic ideology that justifies their wealth and power. Thus, those economists who supply such ideology will be rewarded regardless of performance. This observation goes unheeded among economists for obvious reasons.
Another explanation is what has been satirically called “academic choice theory”, a play upon public choice theory that argues politicians will follow specific behaviors to maximise their own economic benefits.
Thus, wealth-maximising economists will serve monied interests in order to enrich themselves, regardless of the effects upon others. Within modern economies, the wealthy are increasingly invested in the financial rather than industrial sectors. Accordingly, economists seek to work at the behest of financial institutions: commercial lenders, investment banks, hedge funds, money management funds, etc. The owners and managers of these institutions, dedicated to maximising short-term profit and power, naturally seek that economists advocate theories and policies that empower them economically and politically.
Within the economics field, there exists a substantial literature on the capture of institutions: for instance, government capturing producers, or industry capturing government regulators, for the purpose of empowering the institutions performing the capturing. Less well-known is the capture of the economics profession, whether it is individual economists or entire schools and departments at universities.
Universities are often dependent on outside funding to keep their economics and business schools functioning. Corporate-friendly businesses, think-tanks and wealthy individuals will meet this need and provided the necessary funding. Although there may be no strings attached legally, the entire funding is an enormous string in itself. Crafting theories and policies that run counter to what the funders want to hear will not ingratiate them to the recipients.
The phrase “don’t bite the hand that feeds you” is rather apt to this situation. The course of action to pursue, therefore, is to speak the words pleasing to the funders, which often means pro-corporate theories and policies.
Economic policy tends to run in a similar fashion, with a clique of leading economic thinkers chosen to reform policy in accordance with best practice – or so we are told. For those less burdened with such delusions, best practice means not what is in the best interests of the public, but rather what benefits the narrow sectors of concentrated private wealth and privilege that huddle behind the conservative nanny state, including the economists who are devising these policies.
As history has shown, these policies, primarily financialisation of the economy, have greatly harmed the public while enriching the fortunate few beyond avarice.
There is no natural law that says that the economic equivalents of Doctor Death should continue to devise policies that have shown to be detrimental. If other professions can be held accountable for poor job performance, why not economists?
Economists are fond of examining the role of incentives. Providing a set of penalties in the form of fines, loss of employment, and even imprisonment in the worst cases of financial and economic crisis, can provide economists the incentive to advocate policies based upon scientific theory of how the economy does function in the real world, rather than how it ought to work in a textbook.
Michael Shand
Michael Shand is a Friend of The Conversation.
Software Tester
Awesome Article, I think you nailed it on the head. It seems that we currently operate around the concept of an ever increasing economy, which does not reflect the reality we live in. Economic's definitely needs to be bought down to earth.
Andrew Hack
IT Project Manager
I think moreso, it comes down to the philosophies behind economies, than any individual interests. I'm talking about the various schools of thought in political economy. Keynesianism of course being the dominant theory. It is the dominant theory because that's what helps politicians achieve their goals through massive deficit spending. Thus, it is natural that politicians will heed their advice.
"The aftermath of the tech bubble was a recession, and the collapse of the housing bubble could well…
Read moreAndrew Hack
IT Project Manager
should read "philosophies behind economics"
Cameron Perks
Geologist
i agree with Andrew, I think you seriously need to reconsider what you think about what the dominant thought in economic theory is. You REALLY need to do some more research on regulation of the industry. perhaps you should read "say's law and the keynesian evolution' by steven kates? Kates is a living example btw, that classical theory is certainly NOT dominant today
Cameron Perks
Geologist
in come the negative ratings with nothing useful to say :)
Philip Soos
Masters research student, School of Humanities and Social Sciences at Deakin University
No one can claim that Western economies are less capitalistic than they were during the peak of social democracy during the 1950s-70s. The problem here is adherence to equilibrium thinking that stipulates crises are only generated externally, either by government, industrial policy, unions, social welfare, etc. whereas markets can never been seen to endogenously generate crises.
Stephen Maher
Investment Banker
It has always struck me as odd that economics is a profession where a practicioner can engage in wholesale experimentation on the public with little or no testing of processes or theories on sample populations beforehand. Drugs need to be extensively tested before being prescribed. Aircraft, cars, bridges, etc, etc (and the list goes on) undergo extensive testing. Where is the practical testing of theories prior to their being unleashed on an unsuspecting population (probably a little too emotive…
Read morePhilip Soos
Masters research student, School of Humanities and Social Sciences at Deakin University
That's why I call for economists to be held accountable. At least politicians can be subject to public embarrassment, perhaps kicked out of the party or the entire party can loose the next election. No such democratic mechanisms exist to ensure the same with top-level economists.
Astronomers have developed an empirically-based science without ever having performed an experiment. After all, they can't manipulate planets, moons, dark matter or stars. They have used the data to construct models and subjected them to rigorous testing. In the mainstream economics profession, however, data are often ignored or 'massaged' through econometrics so that data fits economists' preconceived models of the economy.
Tim Hawes
Mr.
It seems pretty rich for a Researcher in International & Political Studies to be pointing the finger at Economists. Economists don't control fiscal spending, politicians do. You can't blame economists when your Debt to GDP ratio is above 90%. You can talk to the Fabian Socialists about that one.
As for the US, who repealed Glass-Steagall Act?
Actually Phillip, I am very interested to hear whether you have affiliation or a link to the Prosper Australia think tank. Because if you did, then it…
Read morePhilip Soos
Masters research student, School of Humanities and Social Sciences at Deakin University
The Glass-Steagall Act was repealed by politicians, thoroughly connected to the financial sector, backed by huge corporate lobbying and advocated by prominent mainstream economists.
No to your other questions.
Anthony Walters
Retired Secondary School Teacher
Thank you Phillip for this "at last!" article.
The real problem is economic rationalism. Why? Because is irrational. It does not take the environment into account nor issues round social justice. Until we move to a steady-state economy we will continue to have the economic upheavals to which you refer.
Philip Soos
Masters research student, School of Humanities and Social Sciences at Deakin University
I find that market fundamentalism branded as "economic rationalism" in Australia is propagandistic. After all, who can be against rational policies? No good PR agent would promote mainstream policy as "economically irrational".
Dale Bloom
Analyst
I would regard economics as similar to social science and political science. Not one scientific law has ever developed. Economists, social scientists and political scientists develop theories, but not one theory has ever been proven beyond doubt, and become a scientific law.
There is now a question whether economists, social scientists and political scientists ever follow the scientific method either, or do they simply make up a theory, and inflict it onto the public.
Lisa Milne
Education at Southern Cross University
Dale,
Theory, in hard science, is not generally understood that way any more by many and has not been for some time (Popper, falsification etc) that why it's called a theory..
http://macaulay.cuny.edu/eportfolios/liu10/files/2010/08/KPopper_Falsification.pdf
The question vis you is what you think there can be to gain from repeating the same two or three ill-informed gripes in the comments sections of every article on this site. Moderators? It would be great to have the conversation be really constructive from the get go which might mean screening out the more obvious trolls.
Dale Bloom
Analyst
Lisa,
I understand. Perhaps I should have mentioned attempts to increase profits by destroying unions and reducing wages, or by developing globalised economies so that products could be made cheaply in one country, and then sold for much higher prices in another country.
Or perhaps I should have mentioned attempts to increase profits through easy credit, finally culmininating in “Ninja” loans, where loans were given to someone with no income, no job and no assets. Or perhaps I should have mentioned the “to big to fail” syndrome, where ultimately the taxpayer was asked to pay the debts of the banks and financial institutions.
All that and more was known to economists.
Andrew Hack
IT Project Manager
It's highly political and comes down to power and special interests. Kind of what the author here was getting at although I think the issue is far more than just a few individual economists looking after their own personal interests. It is fundamental to their learnings as every economist in training tends to become indoctrinated by one of the theories of political economy.
Unfortunately, the indoctrination is so hardcore that despite all the clear and obvious signs that have come about over the years, in particular the last few, they remain utterly stubborn in keeping the status quo and continuing on their demented path.
There is a french saying "Déformation professionnelle" which describes it well.
http://en.wikipedia.org/wiki/D%C3%A9formation_professionnelle
Andrew Hack
IT Project Manager
Hi Dale,
It is a social science. I think the dilemma you describe is discussed well by Von Mises in the Introduction to his treatise "Human Action". I sincerely urge you to read it as I think you are of a similar mindset on this topic:
http://mises.org/Books/humanaction.pdf
You describe economists as simply making up a theory, and perhaps trying to find evidence to support that theory instead the other way around where you should be formulating the theory after examining the evidence. Von…
Read moreDale Bloom
Analyst
To be fair, I think a certain amount of what has been happening has been driven by the public and company shareholders, and their desire for higher returns. This then drives banks and investment companies to take greater risks to get the higher returns.
Perhaps the public will have to be satisfied with small but steady growth, and maybe 2-5% return on their investments, rather than 10-50%.
Andrew Hack
IT Project Manager
The banks took all the risks because moral hazard dictated they do so. Actually in many cases they were forced against their will to take on bad loans under the Community Reinvestment Act:
http://en.wikipedia.org/wiki/Community_Reinvestment_Act
The obsession with growth, in my opinion, is largely to do with the debt-based monetary system we operate in. Aka Keynesian economics. Without a consistent amount of growth the system collapses like a house of cards.
Dale Bloom
Analyst
Andrew,
Granted that many schemes were destined to fail eventually, and the public was left to bail out the banks and financial organisations behind those schemes.
But how does a system create incentive, and stimulate innovation without a desire for growth?
Jeff Dean
Political Researcher
A good argument I've heard is that an economy is more like a biological system than a jet engine in that you don't need an accurate understanding of how it works in order for it to work. An engineer who doesn't understand physics will fail catastrophically, whereas a doctor's administrations may help, hinder or do nothing at all for the patient, yet the patient may still live.
Economists today are more like snake oil salesman or quack physicians.
Philip Soos
Masters research student, School of Humanities and Social Sciences at Deakin University
Much like weather existed before the science of meteorology.
david henry
Electrician
Snake oil salesmen?
Economists, like researchers, can be ethical or unethical. Generally, economists, like the rest of us, predict the future by extrapolating current trends. Obviously they are influenced by the source of their income, again no different to researchers.
I have a question for you, if you buy snake oil, are you responsible or is the salesman?
Alice Gorman
Lecturer in Archaeology at Flinders University
I teach a little bit of classical public choice theory to my graduate students to show them the background to competitive tendering. As an archaeologist concerned with researching human behaviour in the past, I am always amazed when reading economic texts by the assumptions made about human behaviour, assumptions no archaeologist could get away with, but which seem unquestioned in this discipline (from the perspective of an outsider). There are far fewer consequences for us in getting it wrong; the consequences in contemporary economic policy affect the everyday lives of millions of people.
Tim Hawes
Mr.
Alice,
Would you be able to give examples of these assumptions? I'm genuinely curious.
Alice Gorman
Lecturer in Archaeology at Flinders University
Hi Tim, I wish I had kept some notes about this as I found it very interesting at the time - it was in the context particularly of theories around free markets and stock markets. My memory is a little hazy! One aspect was certainly about individual actions collectively producing certain market behaviours, which were then predictable.
david henry
Electrician
Tim,
The cause-effect assumption of modern economists is perhaps what Alice is referring to.
A fundamental assumption made by most economists is that news/events/information drive markets and economies. However this is inconsistent with the observation that good news prevails at market peaks and bad news prevails at market bottoms.
As Alan Greenspan himself said, markets are subject to extremes of human pessimism and optimism. Teasing out how much of pessimism/optimism is cause and how…
Read moreMichael Burrows
Mr
Excellent article, this reinforces my thinking on being surrounded by 'false economies'.
Since the GFC we have heard terms like 'double dip', 'new bottom', 'where's bottom' (my favourite:), stimulus, bailout - might as well go fishing with Ovid.
Bailouts and stimulus amount to the avoidance of trading whilst insolvent, should governance, accountability, austerity measures or the like not be enacted with these choices; a heavier 'sinker' is added to the line.
WHAT IF?(run a theoretical model) no bailouts or stimulus and people, corporations and government were all held accountable to the plight of the day. Would we be better-off, worse-off or same? I personally believe better-off as those enacting the scenario would be brought to bear. Yes the innocent would suffer (as they are anyway) but should at the least have a course of negligent litigation to pursue; from inappropriate transactions(behaviour) to which they may have been exposed.
David Collyer
Campaigner
Economics has become an instrument of class warfare operating on behalf of the 1%.
Economics is an extension of Politics, not Mathematics.
Look at how tattered our tax system is - the rich pay optionally while low and middle income earners are caught deeper and deeper into the PAYG tax snare with every inlation-induced pay rise. Government now takes all the cream on salaries while rentiers ride free.
The gaming by privelege is drawing to its natural conclusion. Their handmaidens, the neo-classical economists, will be revealed as wilfully destructive frauds.
Michael Romano
Senior Systems Engineer
Philip, I think your generalising all economists as free market fundamentalists. Nouriel Roubini and Joseph Stiglitz often disagree with this type of economic philosophy and regularly write articles which are in the interests of social welfare.
The problem is more to do with a minority of economists who act on behalf of entities with vested interests, instead of acting in the interests of the public. You see crooks like these in every industry though. I think there's a misconception that economists…
Read morePhilip Soos
Masters research student, School of Humanities and Social Sciences at Deakin University
Stiglitz and Roubini are the New Keynesian types, not all that different from neoclassicals. Top-level economists should be held accountable, regardless of the school of economic thought they adhere to.
Andrew Hack
IT Project Manager
Your analysis of the NBN is incorrect. Most of us who oppose the NBN (myself included) are not opposing the technology. That being, that it is the government's responsibility. The government has a terrible record in running big projects. Private enterprise is much better. Whether you agree with that or not is a different point. My point is that it is not so much the technology itself (fibre etc) but that the government should be forking out the cash (at taxpayer's expense) and whether the government should and can efficiently run this type of project and industry.
That is a question of politics or in more philosophical terms, political economy. A subject which in my experience is not widely understood by most people in the IT industry.
Andrew Hack
IT Project Manager
Instead of "That being, that it is the government's responsibility." it should probably read better as "We oppose that it should be the government's responsibility".
Michael Romano
Senior Systems Engineer
I completely understand where you're coming from as I also used to think that private enterprise would provide more efficient results than the government. However Australia is a geographically large country in relation to its population and no private enterprise will provide a service to people outside the metropolitan cities due to their lack of return.
I think that it's in Australia's best economic interest to properly service smaller towns with better quality internet. In fact, we can use it…
Read moreAndrew Hack
IT Project Manager
The problem with the argument that it isn't profitable for private enterprises to service the rural areas, is that means you are supporting the idea that people who are in metropolitan areas are to subsidize those who are not. On principle I do not support that because on a practical level that is economic inefficiency and is a malinvestment and on a philosophical point it is forcibly taking from one group and handing it to another. It removes an incentive to live in a more metropolitan area and…
Read moreSandra Kwa
Grad Cert Ethics and Legal Studies, CSU
Just in response to the issue of urban-rural cross subsidies for infrastructure - actually aren't we ALL one 'group'? Urban dwellers are not separate from rural people and it is the government's job to make us all work like a single organism. If infrastructure does not connect cities with sparsely-populated rural areas, where do you think you will get your food, fibres (not optical - wool, cotton etc) timber, minerals, eco-tourism etc from?
Roger Simpson
logged in via LinkedIn
I have always viewed the theories of Milton Friedman as being fallacious attempts to validate the primacy of the wealthy elites. Thank you Phillip.
Jim Wright
Retired Civil/Structural Engineer, IT Consultant/Contractor
When I started reading this article, I thought "Great! I can really go to town on this one!". Then I started reading the comments and found out that a lot of clever people had pre-empted just about everything I might have wanted to say. However, I might offer one or two quick ideas. Economists tend to rubbish Keynesianism, and instead hang their hats on so-called economic rationalism. However, Keynesianism always has been a work-in-progress (as Keynes himself admitted), capable of change to suit…
Read moredavid henry
Electrician
Politicians, government bureaucrats, financiers, bankers, the real estate lobby, economists, Roubini, Stiglitz, Kynesians, Austrians....ARRGGHH! You're totally missing the point!
The people responsible for the financial crisis are the people staring back at us from mirrors all around the world. INDIVIDUALS! All behaving with the same herd mentality. be they bankers, politicians, economists, or be they mothers, fathers, children, brothers and sisters...Few of us have enough cash in the bank to pay our debts, few of us could tolerate easily a fall in the value of our assets or a rise in the cost of out debt (interest rates). How are we any different to Greeks, pointing fingers, at the EU, at Germany, at Goldman Sachs etc.. Perhaps personal responsibility has been the greatest casualty
It's like a flock of birds looking at each other dazed and confused as they plummet to the ground after crashing into a mountain, trying to work out who is at fault!
Sandra Kwa
Grad Cert Ethics and Legal Studies, CSU
Bravo! Brave! Breath of fresh air! But ... it seems the crux of the problem lies in the brief the economists are given. If they were briefed by their masters to serve the public interest, then clearly they have failed, but if briefed to perpetuate the an ideology based on wealth creation AND concentration within corporations, then they have performed well. They won't be punished unless the requirement of corporations to serve the public interest becomes law. The business ethics course I am studying points out that Stone (in Where the Law Ends, 1971) proposed that large corporations have a corporate officer appointed by law to oversee corporate operation regarding their social/public impact. Has this happened? If not, WE have to change the law.
Dale Bloom
Analyst
Sandra,
Many companies didn’t create wealth, or didn't create long term wealth. They created short term increases in return on investment, but those returns didn’t last, and many companies went bankrupt, or the public had to bail them out.
A “corporate officer appointed by law to oversee corporate operation regarding their social/public impact” may be a good idea, but this gets into the area of social science, which would be much less reliable than economics.
Another possibility is for yearly reporting or biennial reporting by companies, rather than quarterly reporting. This enables companies to focus more on the longer term, rather than focus on short term gains or short term profits.
david henry
Electrician
"economies would likely have been worse off had the government not intervened and allowed the banks to collapse" (bailouts are good)
"If a taxi driver was to crash while drunk driving, injuring passengers, they would be fired and can be charged by the authorities" (bailouts are bad)
Could you clarify the apparent philosophical hypocrisy of these statements?
Jeffery J. Smith
logged in via Facebook
Economists can not become scientific until they admit to the difference between owning and earning, between rent-seeking and useful production, and between never-produced land and resources and constantly-produced goods and services. To do that takes confronting the powers that be. To see how Big Business created the economics discipline, check out Mason Gaffney’s Corruption of Economics.
As for being able to predict … At least three geonomists, using the 18-yr land-price cycle, predicted the…
Read morePhilip Soos
Masters research student, School of Humanities and Social Sciences at Deakin University
Yes, these economists have done some great work, their books are well worth reading.
I especially liked Harrison's Ridcardo's Law, where he showed that progressive taxation and the social welfare state is a fraud because the rich claw back decades of progressive taxes they've paid within several years of a real estate boom due to the uplift in in land values of their property holdings.
Gaffney's section in The Corruption of Economics is a fantastic read.
Michael Czajka
logged in via Facebook
One way to address bad advice is to require the disclosure of conflicts of interest aka funding (and where it comes from). Many economists deny conflicts of interest while denying the public the right to know where their funding is coming from. This is most important at universities and on government committees.
This is not always a problem in Australia... but is more commonly a problem in many other economies which we trade with. The US is one of those economies.
A second problem is recruiting…
Read moreMark Robertson
logged in via Twitter
Problems of economics are related to patently bizarre assumptions, and then implimentation of economic models base don the bizarre assumptions
1) Efficient markets
2) General equilibrium theory - assumption on one equilibrium as opposed to multiple equilibria - this would need proof based on evidence
3) Rational agents - one of the most truly absurd
4) lack of incorporation of nonlinear dynamics & resulting feedback effects and threshold effects
I realise that there are people at the top…
Read moreJeffery J. Smith
logged in via Facebook
A bigger problem than false assumptions -- since one can get the right answer using the wrong reasoning -- is the inability of nearly all economists, whether neo-classical or Keynesian -- to see human economies as part of the ecosystem, to see so-called "human nature" as greater than Western customs (keeping ignorant of anthropology), and, closer to home, their inability to see the difference between spending that rewards another's inputs of labor and capital, as when one buys goods and services (which stimulates more production), and spending that rewards privilege, as when one must buy/lease land/resources or borrow newly "minted" money (which stimulates more rent-seeking, lobbying). And this from a discipline supposedly concerned with incentives! No wonder only those few who do make the distinction were the only ones able to predict the recent recession.
Mark Robertson
logged in via Twitter
I can agree with much of what you say. However, the sentence "since one can get the right answer using the wrong reasoning" I would disagree with fundamentally. If you construct a model of 'reality' based on false assumptions, and even if linked with logical reasoning, then the model is wrong, your predictions are wrong, and the effects observed will be completely unrelated to the model - therefore you cannot have the 'right' answer! You will have no idea what the 'right' answer is. To base poltical decisions on an ideology which is based on patently false assumptions is bizarre, if it was not so tragic in its consequences for many of the people suffering from the ideology of neoclassical economics imposed upon them.
Trevor S
Jack of all Trades
” could well have resulted in another Great Depression if not for the record-breaking bailout of the financial system and continued deficit spending.”
“economies would likely have been worse off had the government not intervened and allowed the banks to collapse. ”
Who told you this ? An Economist ?