With all the sophisticated economic models around the globe, why didn’t economists see the financial crisis of 2008 coming? And why in the face of joblessness and a floundering economy are they, in the words of one top economist, “unable to be helpful.”
Yale economist Robert Shiller has a very simple answer – at least to the financial crisis question: His colleagues in the dismal science are wearing blinders these days, with most examining only narrow strands of data instead of taking a world view that encompasses other disciplines. Economists are no longer the “worldly philosophers” they once were, argues Shiller, who has become almost a household name because of the widely watched S&P/Case-Shiller Home Prices Indices.
“The financial crisis that started in 2007 and that continues today is widely taken in the popular press as evidence of a lapse, moral or otherwise, in the wisdom and judgment of the economics profession,” Shiller and his wife, Yale psychologist Virginia Shiller, write in a paper presented to the 9th annual conference of Columbia University’s centre on Capitalism and Society.
“Why was it that the profession as a whole failed to anticipate and raise any significant warning about the biggest financial crisis in the better part of a century? Countless critics from outside the profession think the models that economists relied upon were too rarified or specialised to allow most economists to see the big picture and to sound the alarm about problems that were developing.”
The Shiller paper points to John Maynard Keynes as an example of the broad thinking that economists today have largely abandoned for narrower pursuits. It says that Keynes’s book The Economic Consequences of the Peace “anticipated the economic, social, and political events that led to the tragedy of World War II.” Calling the book “one of the most significant successes in the history of forecasting by an economist,” the Shillers lament the trend toward specialisation.
These days, Robert Shiller said at the conference in late September, “Economists seems to miss things that are important” because they’re so busy. “specialisation coupled with strong competitive pressures within academia leads to a situation in which academics often feel that they just do not have time to ponder broad issues and learn even basic simple facts outside their specialty,” the Shiller paper says. “Their general knowledge may be embarrassingly limited, and so they may retreat into their own specialty and produce research which contributes in small ways to the development of the field, but fails to pay attention to the larger picture.”
But the notion that economists are too busy to be broad thinkers was hotly disputed at the conference by Oxford professor Ian Goldin. He said “economics has landed in this predicament” because the profession’s agenda has been captured by foundations, special-interest groups, and influential journals. Goldin said “It’s career suicide” for assistant professors to deviate from what the scholarly journals want. He called the power of the journals the “ideological hegemony of a fundamentalist clique.”
While the main economic journals were not mentioned by name, they include The American Economic Review and the Journal of Political Economy. And then each branch of economics has its own set of journals. For example, in financial economics there are The Journal of Finance and the Journal of Financial Economics.
Tufts economics Professor Amar Bhidé, co-editor of Capitalism and Society, says Goldin’s implication was that a right-wing ideology is at work at the big-name journals. But he sees it as more of a “technological ideology” that demands all economic questions be “mathematized.” He says if you are an economist “attracted to an older tradition, you are out of the conversation.”
In a critique of the Shiller paper presented to the conference, Bhidé writes: “The narrowing of economics in the last several decades seems indisputable; the claim that this has allowed for ‘great progress’ raises a question, however: From whose point of view? Paul Samuelson once said – approvingly – ‘in the long-run, the economic scholar works for the only coin worth having–our own applause.'”
“By this self-referential standard, progress has been remarkable. …But looked at from the outside, it is unclear whether increased specialisation has led to great progress … comparable to [that] produced in medicine or engineering. Think of all the artifacts and therapies that wouldn’t exist but for the engineering or medical research done over the last 30 years. Then ask yourself what difference it would make if no research in finance or economics had been done in the same period,” Bhidé writes.
Why is it important that the voices of economists with a world view be heard? Because academics without an ax to grind can make an important contribution when Washington looks to them for answers, Bhidé says. “If you think about the current financial crisis,” he adds, “congressmen don’t know squat.”