When the Going Gets Tough

Economists go very quiet.

Yasutaka Kojima

They’re happy to take the credit in the good times, but the disciples of this false science are hard to find in a recession.

So the Footsie has tumbled again. Forgive me for asking, but where are the economists? As the nation is mired in a recession, an entire profession seems to have vanished over the horizon – like conmen stuffed with cash – leaving thousands destitute. They said recessions were over. They told politicians to leave things to them and all would be fine. Yet they failed to spot the subprime housing crash ... and now look at the mess.

When I studied economics we were told we would be masters of the universe. Our noble science had harnessed the verities of math to those of human behavior and would go on to conquer politics. Rampant recession would go the way of hyperinflation. Like leprosy and cholera, they were epidemics that modern science had rid from our shores.

It did not matter if the economists were welfare Keynesians such as Myrdal, Robinson and Galbraith or free-marketeers such as Marshall and Friedman. All were “social scientists.” They claimed to have cracked the dna of economic exchange – to have turned the base metal of money into political gold. We believed them. We believed the Keynesians until we slumped into stagflation. We believed that light-regulation capitalists such as Margaret Thatcher and Gordon Brown could convert boom-bust into an upward sloping plane of glory. We believed the Bank of England when it said that, in its hands, inflation was dead and prosperity eternal. It was bliss to be alive – and an economist.

If Britain were now in the grip of bubonic plague, there would be all hell to pay from some profession or other.

If Britain were now in the grip of bubonic plague, there would be all hell to pay from some profession or other. An “influential” committee would be summoning the chief medical officer and subjecting him to the third degree. Why no national rat strategy? Why no crash inoculation?

The espionage pundits were likewise castigated for wrongly leading the nation to war against Iraq, for giving dud professional assessments on fallacious intelligence. The architectural profession has taken the rap (very occasionally) for the grotesque failures of public housing in the 1970s. Climate scientists may yet be damned for the costly lunacy of new energy sources, such as wind turbines and biofuels.

Yet economics is a Teflon profession. A quarter of a century ago, 364 practitioners wrote a letter denouncing the policies of the then Thatcher government as having “no basis in economic theory.” They were wrong in fact and wrong in judgment. Thatcher’s policies laid the groundwork for a strategic shift in the underpinning of British prosperity. There was no inquiry, no hearing, no peep of retraction or remorse. Since then economists have flooded into government; there were roughly a thousand at the last count. What do they all do? Despite reports of demoralization in the Treasury, that department remains the home base for public sector management through financial aggregates. During the Blair/Brown era it has held government in thrall.

Economic managers have always claimed credit for the success of Brown’s Treasury regime. They have espoused quantifiable outputs, targets and delivery indicators. They invented the celebrity consultant and the maxim that only what is measured matters. Above all, the economics profession (and its house journal, the Economist) was ecstatic when Brown delegated monetary control to the Bank of England. This was supposed to isolate the economy from political pressure, subcontracting the regulation of interest rates and markets.

Today we are older and wiser. Controlling the agencies of credit has proved beyond the finest professional minds in the game. Where now are the effortless pundits of the Treasury and the Bank of England? Where now the gilded ones of Moody’s and Standard & Poor’s, credit raters to the mightiest in the land?

When the shit hits the fan, economists always blame politicians.

Alan Greenspan, former chief of the us Federal Reserve Board and a Brown adviser, is unrepentant. He recently declared that “anticipating the next financial malfunction ... has not proved feasible.” There is nothing so unseeing as a wronged economist.

When the shit hits the fan, economists always blame politicians. They would have some justice if they did not take credit when things go right. I was always uncomfortable at the overselling of economics as a science, when it is rather a branch of psychology, a study of the peculiarities of human nature. Its spurious objectivity, manifest in its ridiculous love affair with math, induced a “Jupiter complex,” a conviction that scientific certainty, applied with enough rigor to any problem, triumphs over all.

Economic management is and always will be about politics, about the clash of needs and demands resolved through the constitutional process. The delegation of interest rates to the Bank of England worked when it ran in parallel with politics, but not anymore. Now that reflation seems urgent for recovery, the system is biased against common sense, yet no politician dare tell the Bank to cut rates and risk inflation.

The newest craze is “nudge” economics, from Americans Richard Thaler and Cass Sunstein. They put the subject firmly among the behavioral sciences – if not the arts. Human actions are too mysterious and unpredictable to be liable to quantification and modeling. They are responsive to what the academic Paul Ormerod called “butterfly economics.” Nudge steers, but does not order or plan.

This requires knowledge of the working of markets, incentives, expectations and panics. But converting microeconomics into macro has always been a dangerous game. Much has been made of the success of Spain’s dirigiste banking regulators in putting security before runaway profit. But this was a triumph of politics over economics. Greenspan may laconically remark that “we can never have a perfect model of risk,” but we can have alertness to risk and we can have caution.

Economics has long traded on being a science when it is not. For a third of a century since the 1976 IMF crisis, it has enjoyed great influence over British policy. Now it has met its Waterloo and a little humility would be in order. Once again economics must be rescued by that true master of all things: politics.

Simon Jenkins, “When the Going Gets Tough, Economists Go Very Quiet,” Real-World Economics Review, no. 47. This article first appeared in the Guardian, guardian.co.uk.