The Economist magazine is running an article in this week’s edition titled “What Went Wrong with Economics.” which adds yet another candidate to the “Blame Game” of “What went wrong?”  I feel compelled to rise in defense of the “hard science” I once majored in.  The author asserts in his opening paragraph that the reputation of economics has been badly mauled by this latest downturn:

“In the wake of the biggest economic calamity in 80 years that reputation has taken a beating. In the public mind an arrogant profession has been humbled.”

Well, outside of Alan Greenspan and Larry Summers, most economists I know and read are relatively humble folks squirreled away in academe huddled over some obscure economic theory like the Baumol Effect.  But let’s accept the personality disorder attributed to the craft, for argument’s sake, and reject the premise that economists were to blame.  Or that economists are to blame for this beast dragging out.

Are there theories of political economics that are being used that are to blame?  Absolutely!  Keynesianism, which was birthed with the publication of “The General Theory of Employment, Interest and Money” in 1936, is apparently the rage in Washington right now.  Keynes’ theory put simply was that in a downturn (like the Great Depression) the government could “prime the pump” by investing in infrastructure and keep interest rates low.  This was the premise behind the TARP legislation.  Sadly, the funds for TARP have gone to prop up state Medicare budgets and political pet projects.  This at a time when the state of our infrastructure in the United States is in pretty bad shape. According to the Urban Land Institute:

“The country faces a stark choice — either avert its slide from prosperity through greater investment and innovation or hurtle into more gridlock, congestion and potential systematic failure. If we continue to run our infrastructure into a ditch, we won’t be able to get our economy out of its hole.”

But that’s another fight…back to John Maynard Keynes and the other economists.  Keynes’ policies created massive short-term government projects in the 1930’s but do not deserve the credit for hauling the United States out of the Great Depression.  Full-scale economic production to fight a war as the “Arsenal of Democracy,” is what brought us around.  So here’s the central point of my defense: economists are not to blame if a policy maker a) chooses a bad theory AND b) executes a bad theory worse. If you are going to select an economist for your staff to help you predict market behavior, may I recommend that you also employ a historian to assess if the theories your economist is going to employ actually work?

One final note on Keynesianism before I move on – John Maynard Keynes never advocated the wholesale takeover and nationalization of industries from banking to automobiles to the proposed “public option” in healthcare.  The theorists behind that are Karl Marx and Freidrick Engels.

Nor can the “science” of economics defend the free market from unbridled, irrational greed.  There is no theory of economics that would suggest that housing values will rise indefinitely.  Yet that is the premise that the boy geniuses at Lehman Brothers operated under as they churned their derivatives out the door.

I do agree with the author at the end of his piece where he states:

But a broader change in mindset is still needed. Economists need to reach out from their specialised silos: macroeconomists must understand finance, and finance professors need to think harder about the context within which markets work. And everybody needs to work harder on understanding asset bubbles and what happens when they burst. For in the end economists are social scientists, trying to understand the real world. And the financial crisis has changed that world.

I submit that there has been too much specialization and silo building in a number of fields, real estate development included.  A retail developer no longer understands how to develop a residential project that can be integrated into a vision for an overall community.  Developers need to think more holistically and more globally as we approach our projects and less about whether we will make enough fees and be able to exit out quickly enough.  But clearly among economists, the academic specialization that tenure seeking publication production hounds have been forced into has created some pretty serious myopia.  If anything good comes out of this crisis, it might be that we all stopped…looked around…figured out what was good and right…and then got back to business.  That can only happen though if we can stay clear of policy wonks seeking to craft economic theories into legislative action.  Don’t shoot the theorists – shoot the folks that select the bad theories!

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