Economics is not a hard science, and mathematical models do not explain why people behave as they do. A much broader perspective is needed.

Economists around the world are frequently asked: is the world is heading for another global financial crash? They give different answers and some of the answers are unrelated with the rest. Yet we turn to economists as if they are armed with scientific predictions about the behaviour of the body economic. We need to be more realistic about what economics can do. 

Following the great crash that began nearly a decade ago, there has been some soul-searching about where the economics went wrong. Probably the self-criticism should have been more far-reaching for both academia and administration.

Leading academic economists did challenge the mathematical models of market perfection. Nonetheless, the dominant strain of academic economics and of policy-making bodies failed to see the crisis coming, and actually contributed to it.

The economists too often assume that market actors not only behave rationally but do so according to the same models deployed by them. Modern big-picture economics (macroeconomics) also largely ignores the operations of the financial system and in particular, the role of banks.

Market fundamentalists consider themselves as diametrically opposite of the communist command economy, but in fact make the same cardinal mistake: to believe that a rational model could encompass, predict and optimise the dynamic complexity of collective human behaviour. As socialist planner, the economists believe that they can accomplish great feats, because they assume that they have finally discovered the fully determined mechanism which drives market outcomes.

Politicians and decision-makers listen to economists in ways that they do not, for example, listen to political scientists of the rational choice. This may partly be because a politician who practices rational choice politics may soon be kicked out of office.

This does not mean we should not pay attention to economists, nor that economics is unworthy of a Nobel Prize. Done properly, it takes account of culture, history, geography, institutions, individual and groups. John Maynard Keynes observed that an economist should be "mathematician, historian, statesman and philosopher in some degree".

In another remarkable formulation, Keynes wrote: "Economics is essentially a moral science." Indeed, one could argue that the Nobel Prize for economics belongs somewhere midway between those for physics, literature and peace. 

If economics is like other disciplines, it probably changes more slowly than it should, because of the strong inertial effect of older faculty personally invested in a certain way of doing the subject. Then there's the conduct of major players, be they ministers, central bankers or business leaders. 

We ordinary punters should learn the same lesson. We should ask of our economists, as of our doctors, only what they can deliver. There is a scientific component to medicine, larger than that in economics, but medical studies themselves indicate how much our health depends on other factors, especially psychological ones, and how much is still unknown. Economists are like doctors, but only less than them.

saleh.akram26@gmail.com

  [Read More]

—–
Source: The Financial Express