Home > crisis, The Economics Profession > “Given the extraordinary level of incompetence shown by these economists, one may ask. . . .”

“Given the extraordinary level of incompetence shown by these economists, one may ask. . . .”

from Edward Fullbrook

This post has now started a discussion  Punish Economists For Bad Advice?  at the WEA Ethics Conference.  If you go there, you can take part in the debate.

An article “Stop letting economists off the hook”  by Philip Soos in the Business Spectator should be required reading for economists.  It raises the question: “If other professions can be held accountable for poor job performance, why not economists?”   Here is one section of Soos’s  article.

According to conventional economic theory that the majority of economists advocate  (neoclassical economics), these assets bubbles should not be forming. Supposedly, the more market-oriented an economy becomes, through deregulation and privatisation, the more efficient it becomes at pricing assets, resources, goods, services and labour. Thus, there should be little to no bubble activity within a freer market economy. History, however, has revealed the opposite.

One would think that given the wide gulf between theory and reality, the economics profession should have performed some sort of self-assessment. Instead, they seem to have fervently congratulated one another for having saved economies.

There is, of course, some truth to this assertion: economies would likely have been worse off had the government not intervened and allowed the banks to collapse. Clearly, this is not the point being made – the point is that if economists were not asleep at the wheel, economies would not have been driven into a brick wall, requiring bailouts in the first place.

It is outrageous those economists in important policy-making and influential positions even keep their jobs. What comprises these positions is obvious: senior economists within the central bank, treasury, the financial regulator, commercial lenders, investment banks, and supranational organisations.

If a taxi driver was to crash while drunk driving, injuring passengers, they would be fired and can be charged by the authorities. A nurse that continually gives patients the wrong medicines, resulting in suffering or even death, will lose their job in short order. A cook that leaves the stove on after finishing work, burning down the restaurant, will predictably lose their job.

On the other hand, economists who are complicit in the collapse of multi-billion dollar corporations and trillion-dollar economies are still employed, often working in the highest levels of government, industry and academia, while unemployment, bankruptcies, and general misery blows out of all proportion among the public.

Given the extraordinary level of incompetence shown by these economists, one may ask why they are still employed. Surely the economics profession should be treated similarly to other professions: incompetence on the job should result in disciplinary measures and penalties.

One explanation can be found within economic theory itself. Economists believe that the prices of goods and services within an economy are determined by the impersonal forces of supply and demand; everything, that is, except for the supply and demand of economic theory itself.

The rich and powerful create strong demand for economic ideology that justifies their wealth and power. Thus, …….  Read the full article here: Stop letting economists off the hook

  1. March 19, 2012 at 1:10 pm

    I did wonder about this, some of the decisions that have clearly been the wrong choice have just swept under the rug. I guess there isn’t really any clear guidelines with economics, where you can say this has clearly been wrong, because you don’t know what could have happened had the other choice been made.

    With a nurse giving the wrong medicine, it’s clear they are at fault. With economies so intertwined it’s hard to apply fault to single people. But I agree their should be blame attached, as these “leading” economists have made some questionable decisions.

  2. March 19, 2012 at 4:31 pm

    The compulsory reading should be Progress and Poverty by Henry George, published in 1879.

    Calling a spade a spade, he describes this bubbles as land price bubbles, not “asset bubbles”, explains their origin and dynamic, and says what need to be done to prevent their recurrence.

    Unfortunately he got sidelined.

  3. Stuart Birks
    March 19, 2012 at 6:16 pm

    1. On accountability of economists, there is a collective rather than individual responsibility given that the fault lies in the application of “best practice”.

    2. Mainstream theory describes an “ideal” economy (with “market failures” tacked on) and has the ambiguous position of describing how people are assumed to behave as well as how people “should” behave. Perhaps it would be more realistic if we saw the world as full of “imperfections”, as in second or third best situations, and questioned our choice of perfect competition as the “ideal”. This would make it harder for economists to speak with authority, but we are fast losing this anyway.

    • March 19, 2012 at 6:33 pm

      Hi Stuart,

      Notice perfect competition drives Profit toward zero.

      We currently seek to perpetuate Profit because that is what our investors expect to be paid for the risks they take.

      But let’s reconsider who we choose as investors.

      Imagine we gather 1,000 raw-milk drinkers to buy and co-own a milk dairy from a farmer who is otherwise be foreclosed upon.

      We immediately re-hire the farmer to manage the operation, and must continue to pay all other wages to all other workers, and all other costs, just as normal.

      But, since we, the consumer/owners will be accepting the Product itself as the ROI, there will be no sale, and so no chance for Profit to occur.

      Eliminating that final transaction also eliminates any external government’s attempts at sales-tax.

      Please see http://en.wikipedia.org/wiki/Imputed_rent paying special attention to how that trade has been short-circuited.

      • Stuart Birks
        March 20, 2012 at 8:28 pm

        Thanks for your comment, Patrick. You show one of the many reasons why the real world does not fit the simplified model of the “ideal”. Of course, the ideal has also been criticised, but it still is an implicit foundation of many economics recommendations.

        I take it you realise that zero profit in economics means zero abnornal profit, not a completen absence of profit.

  4. March 19, 2012 at 6:21 pm

    The many conflicting schools of thought cause these many ‘experts’ to disagree.

    For example, there is still no agreement as to the origin of Surplus Value (Profit).

    Those we call ‘Economists’ have preconceived notions that box-in their attempts
    to approach the problem anew, with a fundamentally different perspective.

    Notice Profit does not exist when the consumers co-own the Means of Production
    and accept Product as the return for their investment risk because, in that case,
    the Product is not sold – for it is already the property of those who will use it.

    This proves the origin of Profit is the consumers lack of ownership in the Means
    of Production, and can be ‘balanced’ by treating any Profit collected from late-
    comers as an investment from that Payer – causing all users to incrementally gain
    co-ownership in the Means of Production required for the Products they need.

    Eliminating the need to purchase Product is one step toward real economics.

    That transaction is imputed when the consumers co-own the Means of Production.

    • Stuart Birks
      March 20, 2012 at 8:30 pm

      Surely the profit still exists. However, it is not monetised but instead distributed in kind.

  5. March 19, 2012 at 6:32 pm

    I am reminded to two books, both published in 1994. The first was by Alfred Malabre, Jr., who had by then retired from his position as economics editor at the Wall Street Journal. His book, “Lost Prophets,” recorded his interactions with economists over the years and his generally negative view of the accuracy of forecasts by economists and their explanations of the causes of economic trends. The second book was far more challenging to the notion that economics is as taught and practiced in any real sense a scientific discipline. This book, written by three authors — University of California professor of economics Mason Gaffney, Bard College professor of economics Kris Feder, and economic journalist Fred Harrison — was titled “The Corruption of Economics.” In this book, the authors provided evidence that the leading professors of economics in the early 20th century were recruited by the wealthy beneficiaries of entrenched privilege to create a discipline in defense of the status quo, to counter and silence the criticisms of reformers such as Henry George, and later professors such as Scott Nearing or John R. Commons. Marxism and the far left demands for direct government ownership of essential industries beyond commonly understood public goods meant that any economist who wanted to distance himself or herself from “radicalism” was essentially captured by a defender of a system of law, of taxation and policy that benefited the few at the expense of the many, what Gaffney, Feder and Harrison would describe as the “rentier” class.

  6. March 20, 2012 at 4:41 am

    Time for everybody to read Zombie Economics: Dead Ideas still walk among us”. It is an excellent read about the theoretical problems of economics.

    • March 20, 2012 at 5:07 am

      The Catholic church muddied the waters with Rerum Novarum (1891) and its stance on the question of property rights.

      On the other hand, given its defence of the right to private property – an assertion that was made primarily to counter socialist doctrines, it was not difficult to argue, as Chesterton did, that if that was the case everyone should have some, which was not possible if a few had too much.

      Subsequent Social Teaching Encyclicals have tried to recover the situation but it was not until the Caritas in Veritate of 2009 that the emphasis on justice above all was stated clearly and unabigiously. All the 20th century ones tend to beat around the bush. Hooray for Benedict XIV.

      The unfolding economic chain of events still have a long way to go before they play out to their catastrophic conclusion.

      It is not inevitable but these false ideas much be sidelined. Unfortunately, they still have a firm grip on economists and politicians around the world.

  7. davetaylor1
    March 21, 2012 at 12:26 am

    Henry @ #10 has a bee in his bonnet about Leo getting at cross purposes with Henry George, but where did this come from? Leo is just as much concerned with justice as Benedict, but in 1891 the new problem was accumulation of property due to unjust laws, wage slavery and usury, and the non-solution of the [state] socialist reaction to it. To see this in context read http://www.papalencyclicals.net/Leo13/l13rerum.htm (at least paras 3-5). There is nothing muddy about para 22:

    ‘… “It is lawful,” says St. Thomas Aquinas, “for a man to hold private property; and it is also necessary for the carrying on of human existence”. But if the question be asked: How must one’s possessions be used? — the Church replies without hesitation in he words of the same holy Doctor: “Man should not consider his material possessions as his own, but as common to all, so as to share them without hesitation when others are in need. Whence the apostle saith, ‘Command the rich of this world . . to offer with no stint, to apportion largely’.”[12] True, no one is commanded to distribute to others that which is required for his own needs and those of his household; nor even to give away what is reasonably required to keep up becomingly his condition in life, “for no one ought to live other than becomingly.”[13] But, when what necessity demands has been supplied, and one’s standing fairly taken thought for, it becomes a duty to give to the indigent out of what remains over. …’

    • March 21, 2012 at 4:36 pm

      Rerum Novarum, in many ways an excellent document, certainly did muddy the waters on the issue of property. Unfortunately.

      First, property consists of both the God-given and that which is the product of human labour. The two need to be treated differently. RE fudged this.

      Second, the word used in the English translation is “ownership” of property which suggests that people can “own” land, which is philosophically nonsensical, since land titles are a certificate of entitlement to rights, guaranteed by the state, nothing more. “Own” and “hold” are two different things.

      Subsequent encyclicals back-tracked on the subject, but none has clarified. The latest, Caritas in Veritate, provides an opportunity to make a fresh start on the subject.

      Had RN been clear on the subject of ownership, Catholic Social Teaching could have been developed into a coherent alternative to socialism. Instead, all that could be done was to fight a rearguard action, which led to an alliance between the Catholic church and some very dubious anti-Communists.

      Now that Communism has collapsed, discredited, and “Capitalism” is in chaos, there is space to present an alternative based on economics with justice, but where is it to be seen and who will do this work?

      There is an interesting background to this. Cardinal Manning met Henry George on one of his visits to London. They were brought together by the Catholic journalist and intellectual Wilfred Meynell. There is a signed copy of Progress and Poverty in the library of the Meynell family home at Pulborough, Sussex. It has been suggested that Manning was the author of Rerum Novarum. If this is the case, I have long wondered if there was some editing between a possible Manning draft and the final document.

      The whole subject became contentious within the Catholic Church hierarchy, with Bishop Nulty of Meath being a strong supporter of the ideas of Henry George, whilst in the USA, a priest was suspended for holding the same views.

  8. March 21, 2012 at 4:43 am

    No economic advisor, consultant or government bureuacrat is ever going to be punished, because they all failed conventionally, following the economic paradigm:

    Click to access Sy59.pdf

    • March 21, 2012 at 5:13 am

      There is punishment nevertheless. It is just that everyone gets punished. Ultimately, it is everyone’s responsibility to understand how economic processes work.

      • March 21, 2012 at 9:11 pm

        Yes, your sort of “throw away” comments are exactly why economic rhetoric has got us nowhere and what’s wrong with the world.

        “Everyone gets punished” is unjust, because not everyone is responsible for the economic policy, which landed us in the mess. You may go as far as including the economic profession, even though there were some who tried hard (may be not hard enough) to prevent the then-impending wreck.

        You said: “it is everyone’s responsibility to understand how economic processes work”. Again this is nonsense. Economists don’t “understand how economic processes work”. How do you expect everyone else to?

        By saying “everyone”, you are letting economists and the economic profession “off the hook”.

      • March 21, 2012 at 10:38 pm

        Economics can be understood in its broad outlines without recourse to academic textbooks and doing advanced courses in the subject – which on the whole tend to spread confusion. A lot can be learned by careful observation of, and reflection on, one’s own conduct and through one’s own encounters with the economic system – certainly enough to expose the conventional wisdom of academic economists as, substantially, obscurantist nonsense. Outside the established academic structures, there are courses to be taken and books to be read, using the Socratic method.

        Failure to understand this does indeed bring punishment, on guilty and innocent alike, but many of us are guilty through indifference or laziness. The present situation in the UK is a good example – when the best-selling newspaper was that rag called “News of the World”, it is not difficult to understand why it is difficult to sustain intelligent public discourse on any subject, why the democratic institutions of the land offer a choice between two sets of idiots, and why there can be little hope that the country will get itself out of its current mess in the forseeable future. That is the punishment for indifference and stupidity. Actions and the lack of them have consequences. As I do not live in the UK, or in an English-speaking country, it is perhaps easier to see what is happening as it can be viewed comparatively and in a broader context.

  9. Alice
    March 21, 2012 at 11:53 am

    We should stop letting economists off the hook – especially when one of the main economists at fault is Mr B Bernanke. In one of the very latest versions of his text – he just makes the M disappear completely from C+I+G+X-M. Not only is there no discussion of imports but there is no mention of imports in the index except in the form of “import quotas”. Maybe thats because they dont want the US students to realise that US producing firms have moved elswhere, taken their production with them and are now happily and profitably draining the US economy of growth by exporting back to their ex residence. If you have an offending variable you dont want anyone to notice – you just write a new text and make it disappear. He offers as an alternative that Cd is now domestic consumption and that Cd is apparently C-M yet Cd is no different to the old C and furthermore the M simply isnt discussed.
    I guess thats one way to “fix” the model. The republicans want to shrink G, I is eyeing oseas opportunities, X cant be looking good and as for Cd – whats left to spend?
    Do they think we are all idiots?

    • Edward J. Dodson
      March 21, 2012 at 1:06 pm

      Corporations are adept at “rent-seeking” and use their financial reserves to see to it that the laws of each society in which they operate are rent-seeking friendly. In the United States this takes the form of contributions to political campaigns and the funding of research organizations that produce analysis consistent with their vested interests. Corporations are not alone in this behavior, of course. Individuals who derive most or even all of their income from passive and speculative investment have successfully lobbied to have gains on the sale of financial assets treated as “capital gains” for tax purposes and beneficially under general accounting standards. Actual capital goods rarely, if ever, sell for more than the acquisition price; they depreciate in market value and in functional utility. The economists who have come to advise political leaders take the system as it is and try to come up with fiscal and monetary tools that mitigate the stresses imposed by the labyrinth of tax and other subsidies resulting in wealth and income concentration. Under existing systemic conditions sustainable economic growth is not achievable.

  10. May 22, 2012 at 4:35 am

    Neoclassical economics is nothing more than a support for capitalism. They are doing their job to keep the rich, rich. If we are to turn economics into the science it should be then transparency and true alternatives are neccesary. Holistic economics is an attempt to theorise based on a more sophisticated model of our choices as humanbeings acknowledging as many dimensions of the individual and collective beings that we are and that we share our existance with. Holistic draws support from other economic theories, PROUT, Geoeconomics, some Marxist ideas(economics used as a tool for class domination), Christian economic thought. We have to really go beyond our graphs and charts and get real about the possibilities.

  11. Udom Emem
    September 10, 2012 at 8:01 pm

    A nurse giving the wrong medicine to her patient knows that what she is going is wrong and a drunk driver should be punished but an economist deals with society as a whole. A policy might work on a short run perfectly but can not work on a long run. We have to talk about the factors that affect demand of a consumer, and these factors changes.

  12. Udom Emem
    September 11, 2012 at 4:45 am

    I totally agree with kaneprior.

  1. March 27, 2012 at 3:57 pm

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