Many believe that science is about innovation that can improve the living conditions of humanity. For decades, the study of economics was conceived and taught as a “moral science,” until the fateful day Cambridge University decided to categorize economics under the school of “social science.” One of this year's Nobel Prize winner for economics is a keen advocate of efficient markets, a school of thought that has contributed much to the current financial meltdown. In light of the current economic crisis, we wonder: What has economic science done for humanity?
A pair of US economists, one of whom is from the discredited “Freshwater School" of economics and whose faith in efficient markets played a part in stoking up the global economic crisis, have just won the Nobel prize for economics. The decision to give them the award has had what can best be described as a 'mixed reception'.
The two dismal scientists – Thomas Sargent, of New York University, and Christopher Sims, of Princeton University – received the prize in recognition of their work developing tools that make it easier to measure the impact monetary policy has on an economy.
Related: And the Nobel Prize goes to...
Both are “empirical macroeconomists” and richly deserve the award since they "saved macroeconomics" after John Maynard Keynes, claimed Edward Glaeser, professor of economics at Harvard University. Glaeser said they have “destroyed the false certainty of an older Keynesian orthodoxy" and managed to develop robust tools that shed light on public policy over the business cycle. Writing in his Bloomberg column, Glaeser, author of Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier, added:
[They] are part of a small cadre of intellectual rebels who have pointed out the logical inconsistencies buried within seemingly impressive Keynesian models of macroeconomics … [they] tried to build something new from the wreckage of Keynesianism, and are being honoured for their contributions to empirical work…
However, others were less positive about the decision of the Royal Swedish Academy of Science to honour Sargant, in particular, given that the prize is normally given to people whose work has made a major contribution to the betterment of mankind.
In The New Yorker, John Cassidy wrote:
Three years after the great financial crisis of 2008 discredited the ruling orthodoxy in macroeconomics and finance, the [Swedish Academy] has chosen to honour one of the leading creators of that orthodoxy: Tom Sargent, of New York University ... The Nobel committee should have picked out one of the economists who stood up against the ruling orthodoxy in macro, not one of its highest high priests.
Cassidy said he was happier about Sims getting an award, given that Sim’s methodology – Vector Auto Regression, or VAR – enables researchers to make predictions and analyze policy changes without the need to subscribe to any particular economic school.
Cassidy said the approach of economists like [Robert] Lucas, Sargent, and [Neil] Wallace did not stop at criticizing government interventionism. It also came with its own methodology, which involved trying to build everything up from micro foundations with snazzy new maths. Also called “Freshwater Economics” (a subset of "classical economics"), this became prevailing orthodoxy in economics departments, such that non-believers were banished from economics faculties. However, there was a slight problem. Freshwater economics was built on a couple of significant falsehoods.
The first (Eugene Fama) is that financial markets are efficient. The second (Lucas/Sargent/Wallace) is that the economy as a whole is a stable and self-correcting mechanism.
Breaking the myth
Others wondered whether Nobel prizes should be handed to economists at all, given that their subject is not a science but a pseudo-science.
This is the view of the British author Hywel Williams. Writing in the Daily Mail, he reminds us that the underlying nostrums of classical economics (see Cassidy quote above) have been proved manifestly untrue by the global financial crisis. But still the charade goes on. Williams wrote:
The idea that economics is a science that might deliver the answers to perplexed policy makers was one of the great illusions of the 20th century. If an objective answer could be found to these questions of how human beings behave in material terms would it not have been discovered by now? Economics as a 'discipline' is a fraudulent prospectus torn to shreds by the current financial crisis - a global phenomenon that caught the economics 'profession' by surprise.
The idea that they are the possessors of an arcane wisdom which can chart us into the seas of the future is claptrap.
Williams said given the damage they have wrought, it is astonishing that economists remain the “great secular priests of our own time”. For further evidence of the charlatan-ism of the economics profession, and the damage it has wrought, read this interview with Black Swan author Nassim Nicholas Taleb (in which he says that those who lost money in the crisis should sue the Swedish central bank for funding gongs for economists whose theory brought down the global economy) or watch this episode from Adam Curtis's Pandora's Box (BBC, 1992). Like most of Curtis's work the latter, titled "A Fable from the Age of Science", is utterly brilliant.
By Ian Fraser
Ian Fraser, a journalist since 1988, is working on programmes about the banking and financial crisis for the BBC. He writes about business and finance for the Financial Times, the Sunday Times, the Independent on Sunday, the Daily Mail, and the Mail on Sunday. Since 2009, Fraser has been a visiting lecturer in financial journalism at the University of Stirling.
Given the economic devastation they've caused, should Sweden's academy really be honouring economists? is republished with permission from the QFinance Blog.