One of the age old laws of Newton stated that, for every action, there is an equal and opposite reaction. The practical wisdom of this law is we will face an equal and opposite reaction for every one of our action. The Ethiopian has a nice way of saying which explained the above analogue easily and best. They said “one can harvest what he saw”
It is a much said and debated issue that the world in general and the US and Europe in particular are hard hit by the current economic crisis. All are facing the equal and opposite reactions of their actions. In other words, as the Ethiopian saying goes, all are harvested what they saw.
Meanwhile, governments, politicians, businessmen and the economists alike have long engaged themselves to find a possible culprit for the crisis and a target to blame. In their quest, governments blamed businessmen and economists. For instance, our Prime Minister Meles Zenawi in many occasions and on his different academic studies strongly blamed and hold responsible the very idea and modus operandi of the neo-liberal economic principle for the very many woes of Africa’s economic development.
By the same token, both the politicians and economists strongly blamed the government time and again for the economic crisis, while the economists wiggle their fingers against the government and politicians as the main cause for the crisis to happen.
In their quest to find a possible culprit to blame shift and attack, the arguments and explanations from the side of the economists are relatively intense and well explained. In their argument and explanation, one of the distinguishing features is they are not only blamed the other actors completely, but also swallow their pride to take the blame for their wrong doings.
Interestingly enough, a noted American economist Diane Coyle in his very latest article stated his personal feeling on the above issue as follows: “I wasn’t doing macroeconomic forecasting, and I never worked in finance. But am I still somehow to blame for the current crisis just because I’m an economist? Is it my fault? Has my profession, just by the way it thinks about the economy, caused all this damage? We have to ask ourselves this question.”
Diane Coyle’s last statement is a good point worth special attention. Many economists lamented that as the saying goes, this is attacking the messenger than the message. Many of the criticisms people now make of economics have been made in the past. As revealed by different economic studies, the post Real World Economics Movement has been gaining prominence, but it has been around for a long time. The difference now is that the crisis seems to be proof that the criticisms are true. They are not so easy now for the mainstream of the economics profession to shrug off. In fact, many economists are taking the critique very seriously.
Here, there is a paradox. Economics is both in crisis, and experiencing an extraordinarily fruitful renaissance. There is already a new approach emerging from the pre-crisis framework, like a butterfly hatching out of its chrysalis. It is much less tied to a particular theoretical approach. It is both more pragmatic and more empirical. It is rooted in a lot of existing work that has been more or less hidden from public view, but is what most economists actually do. It is vital for the contribution of economics to the real world that people don’t throw this baby out with the bathwater.
Actually, it is true that practitioners and policy makers acted as if the strong form of the Efficient Markets Hypothesis held true. In other words that price instantly reflects all relevant information about the future, even though this clearly defies the reality. The computer and communications technologies fed the trend as well, by making more and more financial transactions possible.
Here, Diane Coyle explained that, “I think an honest, conventionally-trained economist has to at least acknowledge that we grew intellectually lazy about this. Although we all knew at some level that the rational choice assumption was being made to bear too much weight, very few economists openly challenged its everyday use in justifying public policy decisions. Very few of us put this weight on it in our own work. But not all that many economists challenged its pervasive use in the public policy world”.
Well, one result has been that many critics think all economists are right-wing free marketers. The “Occupy” movements would blame economics for much more than just the financial crisis, in particular the much greater income inequality in almost all advanced economies now. Meanwhile, the evidence from surveys revealed in a bit technical terms, is that left-of-center economists outnumber right-of-center economists, although by much less than in the other social sciences.
Critics also dislike what they see as the reductionism of economics, the philosophy that the economy can be understood as the aggregation of individual profit- or income-maximizing decisions by independent economic agents. At this point, economists would acknowledge that there are definitely circumstances where this assumption is not valid, and it has been used as a matter of practicality, of simplicity. Again, though, it was very much taken for granted. The crisis, so strongly marked by herd behavior, firmly underlines its limitations.
For all these reasons, the financial and economic crisis also spells a crisis for certain areas of economics, or approaches to economics. Financial economics and macroeconomics are particularly vulnerable. They are the subject areas where the consequences of the standard assumptions have been most damaging, because they are actually least valid.
There is a good reason for using these models, though. Because understanding and forecasting the aggregate behavior of millions of businesses and individuals is an impossibly hard task. It is much harder than long-range weather forecasting because it ought to incorporate the effects that individual decisions have on each other, and because it ought to incorporate expectations of the future into today’s decisions.
According to Diane Coyle, another problem is the economics curriculum in universities. He argued that, in most cases, students are taught one macroeconomic worldview as if it were true, with no intellectual context, no history of economic thought. They learn almost nothing about economic institutions such as the banking system. They have little sense of economic history, which is usually not required now, although it used to be in many Ph.D. programs.
Economists have also come to have a particularly influential role in public policy, compared to other social scientists. Some critics complained that we have chief economists in most government departments in both the USA and Europe, but not chief anthropologists or chief psychologists. Other social scientists of course give policy advice as well, but unlike economists they do not have specific roles in the administration.
It would be ironic, and regrettable, if the crisis causes people to distrust economics at exactly the time when it has more to offer. This is one reason that economists have to put their house in order now, and acknowledge their collective faults. The bottom line is that it’s no good making criticisms without suggesting solutions.