Tuesday, June 9, 2009

The Failure of Economics

After a crisis, it is instinctive to look for someone to blame. (who is to blame for credit crunch) It is usually more complicated than pointing your finger at a number of people. Also, hindsight is a wonderful thing; anyone can be wise after the event. Yet, since the gravest economic downturn since the Great Depression took many economists by surprise, there has been much soul-searching of the economics professions. In particular are economists placing enough attention to the key issues which actually affect people and society - or do they get sucked into insignificant debates over obtuse mathematical models.

Abstract Mathematical models Within the economics profession, many have criticised the prominence of complex mathematical models built on micro-economic foundations. It is suggested the economics profession rewards mathematical brilliance above a greater practical investigation of empricial data
Too Many Assumptions. One criticism levelled at the economics profession with regard to the current crisis is the assumption that financial markets needed little investigation. There was a lazy assumption that deregulation of financial markets would provide the optimal allocation of resources based on free market principles. However, the limitations of financial institutions and poor incentives has sunk many economic models. (Crazy compensation)
The current crisis has shown the extent to which turmoil in financial markets can affect the wider economy.

Ideologues. Like all professions economists often get stuck in defending certain ideologies, seeking to find data to support their own ideology rather than having a greater flexibility to understand when the model gains greater limitations.

The failure of Economists by by David Colander, Hans Föllmer, Armin Haas, Michael Goldberg, Katarina Juselius, Alan Kirman, and Thomas Lux:

"We believe that economics has been trapped in a sub-optimal equilibrium in which much of its research efforts are not directed towards the most prevalent needs of society. Paradoxically self-reinforcing feedback effects within the profession may have led to the dominance of a paradigm that has no solid methodological basis and whose empirical performance is, to say the least, modest... We believe that the failure to even envisage the current problems of the worldwide financial system and the inability of standard macro and finance models to provide any insight into ongoing events make a strong case for a major reorientation in these areas and a reconsideration of their basic premises...."
It should be remembered economists don't run the economy. They don't even necessarily make the decisions which influence the economy. The failure of economists is partly due to the difficulty of keeping upto date with a very fast changing financial system. But, there is still huge room for improvement

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