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The problem with economists

Shanta Devarajan's picture

I flinched when, at a recent BBC World Debate Zeinab Badawi asked Bob Zoellick why, when there are so many economists at the World Bank, they couldn’t do anything about protecting developing countries from the impact of the global crisis. Were we asleep at the wheel? Montek Ahluwalia gave us temporary respite by pointing out that the economists in the industrialized countries didn’t see the global recession coming even in their own countries, much less that it would spread to poorer countries. 

But this begs the question of why economists didn’t forecast the global financial and economic crisis. Recently there have been two thoughtful pieces addressing this question. 

John Kay (hat tip to my colleague Apurva Sanghi) faults economists’ desire to develop a general theory of everything. Meanwhile, Barry Eichengreen (hat tip to Dani Rodrik) says that there is no problem with economic theory, but a problem with its application:

In fact, large swaths of modern economic theory focus squarely on the kind of generic problems that created our current mess. The problem was not an inability to imagine that conflicts of interest, self-dealing and herd behavior could arise, but a peculiar failure to apply those insights to the real world.

My own thinking is closer to Barry’s. Incorporating the factors that created problems in the financial markets makes the theory complex. But to be effective in the real world, to be able to communicate economic ideas, you have to simplify. Sometimes, you start believing your simplifications as if they were the general theory. 

Comments

Sound economy will depend on the brilliant idea of economist to come up with the most appropriate remedy.Everybody was on the look out the possible remedy to combat the recession. Bailout fund has been the typical remedy. During hard times we need to seek a lot of solutions and back up solutions. We need to be extra vigilant to know how to cope up when things seems to be adverse. An alternative financial plan comes in handy during hard times. The key to financial planning or planning of any sort is to always have a backup plan in case your first idea doesn't work out. One of the first things to do is to make sure you come in under budget every month. Don't spend more than you earn. (This means you, Congress!) Try to put money away into savings, and don't add any more debt if you can help it – this means no credit cards. Use a payday loan if you have to. An alternative financial plan that acts as debt relief and puts more money in your pocket is ideal.

Submitted by Umar Aminu on
In analysing issues of system failure such as the economic meltdown, we can not afford to neglect the issue of ethics as one of the major sources. The problem has more to do with policy initiators than theory or its application. Superstructure of governance is massonic, doesnt allow things to be known as they really are, but as deformed as the state is. Humanity is being eroded on daily basis as such, everything and/or everybody is a shadow of his or her natural self. Due to want as a result of his misdeeds, man resorts to scheming. Fighting for the little he expect to come, always trying to outwit the other-wether it individual, corporate, regional or international levels. In the aggregate, the world is operating at a superficial level with little or no value added, talkless of replenishment of natural endowments; the result being an inverted system that is corrupted, eating from its little reserves. Until man wakes up to understand the real meaning of humanity and of globalisation, there is really no way to forecast the future correctly. Its like asking the devil to explain something of divinity rightly.

Submitted by N. Bah gambia on
Few economists did forecast the economic melt down especially in the US, but their concerns where not taken seriously or just sweep aside as politically motivated.It is important for economists and other social science professional working and be able to deciminate their work for the ordinary person to be able to read it and understand it. There is no economy that can work without an effective and effecient government and strong institutions. Governments in the past decades have largely been re-engineered through and it size and role reduced. This has lead to lot of development and innovations and rapid economic developments especially in the developed and emergin markets. One of the problems of this down-sizing and less government involvement is given too much powers to few and loosening of rules and ethic of some professions. Too much discresions and domant institutions to monitor this power lead to such catastrophic economic delt-down. In the case of the developing countries (SSA), governments were advise to down-sze, when in the first place the institutions and the human capatal is not there. Even where there is a capacity, the institutions are weak and marred with poor governance. Moreover, developing countries markets are so weak and depended on Dollars for business, no matter what forecast is given, if US dollar plummets or if there is a financial crisis in the US, it will automatically affect us. Therefore even if they predicted it, the African countries had little or no other strategy but to wait and hope that the West fastly rectify the economic discripancies. A possible solution in the future is for example the economic regions with Africa (SADC; ECOWAS etc) developing their own regional currencies that can be used as an international currency and also the currency have equal or about the same value to currencies like the euro or the dollar. In such a way, ecomomists and politicians can make local strategies to solve their financial crisis and if there is a crisis in other parts of the world forecast can be made and solutions lead-down.

Submitted by Ibrahim Salihu on
Deciphering the inability of the world so-called economists to ponder on theories so as to foresee the present economic quagmire, cannot be reduced to the issue of theoritical evolution and policy formulations in the developed world. It is rather pertinent to scrutinize theoritical application and policy implementation in relation to the ever increasing and competing demands amongst individuals, corporate bodies and pathetically among nations (developed econommies). Policy supervision in the face of these plethora of complexities and involuntary greed is probably one of the step within other variables that was neglected, which invariably led to market imbalance due to negative practices and outright fraud among major actors in the global economy. The insatiability of human beings has come to its crescendo, and there is increase skepticism of globalization eg the case of Britain and the EU. False and make believe stance in most stock exchanges, banks and other financial institutions need to be checked or rather eliminated Superficial credit economies need to be tenaciously supervised, so as to safe job by regulating overspending (expenditure over netpay). These are stack realities, not forecast that is a product of so many probabilities.

Submitted by Daniel Chachu on
Shanta, if you flinched at the issues arising from the debate, let me say that I cringe whenever i get the impression that donors (especially the IFIs)are trying to force down policy presriptions down the throats of helpless countries -precriptions they are not sure about. The careful and humble response by economists to explaining the financial crisis and proffering solutions should inform their dealings with poorer countries as well. After all, these countries have for a significant part of their existence suffered serious bouts of macroeconomic challenges. In the midst of the so-called "technical advice", countries must be allowed to think for themselves. Chachu, Accra, Ghana

Submitted by Mark on
You are right Shanta, but when did economists ever forecast anything correctly? I would make 2 points: - most markets in the western economies were in recession 4-6 months before the financial crisis started, so any analysis should separate the recession from the banking crisis. - even now, economists are attempting to predict the end of the downturn by taking one or two monthly data points and extrapolating them for several quarters ahead, ignoring your point about how simpistic this analysis is.

Submitted by YorTz on
Sound economy will depend on the brilliant idea of economist to come up with the most appropriate remedy.Everybody was on the look out the possible remedy to combat the recession. Bailout fund has been the typical remedy. During hard times we need to seek a lot of solutions and back up solutions. We need to be extra vigilant to know how to cope up when things seems to be adverse. An alternative financial plan comes in handy during hard times. The key to financial planning or planning of any sort is to always have a backup plan in case your first idea doesn't work out. One of the first things to do is to make sure you come in under budget every month. Don't spend more than you earn. (This means you, Congress!) Try to put money away into savings, and don't add any more debt if you can help it – this means no credit cards. Use a payday loan if you have to. An alternative financial plan that acts as debt relief and puts more money in your pocket is ideal.

Submitted by YorTz on
I agree - positivism is very difficult at this juncture..."..but I am not as optimitic as you are. I think crisis will get stronger. And first who will affected hard by crisis are always countrys with the most problems. Hope you are right with your optimistic viewing - but cant believe at the moment."

Deciphering the inability of the world so-called economists to ponder on theories so as to foresee the present economic quagmire, cannot be reduced to the issue of theoritical evolution and policy formulations in the developed world.

In fact, large swaths of modern economic theory focus squarely on the kind of generic problems that created our current mess. The problem was not an inability to imagine that conflicts of interest, self-dealing and herd behavior could arise, but a peculiar failure to apply those insights to the real world.

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