There’s an excellent (long) article on the role and response of academic economists in the current crisis/recession/apocalyse/trendy-noun over at the Boston Globe. Not a lot of it is tremendously surprising, but it does interview a lot of big names in the profession to get their opinions. The rub is this: why didn’t economists see all this coming, and what now for the profession?
There are (at least) two distinct kinds of failure that are possible here. The first one is a failure in reality, a failure to see things coming. The second is a failure of imagination, a failure to imagine what would happen as a result of that unforseen thing. In today’s terms, the first would be a failure to predict that everything would go all to hell, while the second would be a failure to predict the consequences if things had gone to hell.
If you ask me, the first one is forgiveable. The article quotes Laurence Ball as saying “Nobody ever sees anything coming,” he says. “Nobody saw stagflation coming, nobody saw the Great Depression coming, nobody saw Pearl Harbor or 9/11 coming. Really big, bad things tend to be surprises”, which might be a tad extreme but is a sentiment I can agree with. It takes an extreme fatalist to think that we can see everything coming if we just try hard enough.
However, the second might not be forgiveable at all. It represents a failure of contingency planning. One might stem from the other: if I think it’s very, very unlikely to rain, I might not want to waste too much time planning my umbrella strategy. If, however, we believe the article’s claim that “some warned of a housing bubble, but almost none foresaw the resulting cataclysm. An entire field of experts dedicated to studying the behavior of markets failed to anticipate what may prove to be the biggest economic collapse of our lifetime”, then we should be a bit perturbed. Again, the failure to see something coming is forgiveable, but to see it coming and fail to imagine the consequences is just plain strange.
This is a little scary, but I confess I have very little idea of how I, an economist, would be able to attack macroeconomic questions. I disagree with the first half of this (though not the second, which is that failure of imagination again):
“We have a very restrictive set of language and tools, and we tend to work on the problems that are easily addressed with those tools,” says Jeremy Stein, a financial economist at Harvard. “Sometimes that means we focus on silly questions and ignore greater ones.”
Similarly, I’m sceptical of this:
“…many of the models used to explain and predict the dynamics of financial markets or national economies have been scrubbed clean, in the interest of theoretical elegance, of the inevitable erraticism of human behavior. As a result, the analytical tools of the trade offer little help in a crisis, and have little to say about the sort of collapses that led to this one.”
I am a believer in the predictive and descriptive power of the abstract model. Instead, the view I relate to is that of Jeffrey Kling:
“What we’re experiencing now is a good old-fashioned financial panic… This is perhaps the biggest scale, but on some level it’s not that different.”
I think the economist’s toolbox – the one that contains no doctrine, no assumption, just method – is well equipped to understand most everything. Unfortunately, the principle of ‘garbage in, garbage out’ applies to economics as much as it does to computer programming; perhaps the real failure is not of the discipline of economics, but the imagination of those who practice it. We are, of course, not rewarded by universities or journal editors for asking questions like “if there is a housing bubble, and if it bursts, then what?” Those questions aren’t “research”; they’re not rewarded and we don’t have time for them. How can we be surprised that we were surprised?