Time to stop rewarding economists for bad behaviour

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By Philip Soos

Source: The Con­ver­sa­tion



In times of finan­cial col­laps­es, banks and gov­ern­ments are paint­ed as the vil­lains. But what about econ­o­mists?

~ dgies

Since the begin­ning of the glob­al finan­cial crises in 2007, there have occurred numer­ous eco­nom­ic and finan­cial crises around the globe, plung­ing often pros­per­ous nations into hard­ship and even near bank­rupt­cy. These crises, typ­i­cal­ly gen­er­at­ed by over­lend­ing by the finan­cial sec­tor and crash­ing hous­ing bub­bles, are often blamed upon two par­ties – gov­ern­ments and banks – with con­sid­er­able jus­ti­fi­ca­tion.

There is, how­ev­er, a third vil­lain that bears pri­ma­ry respon­si­bil­i­ty for these dis­as­ters. While politi­cians, gov­ern­ment bureau­crats, financiers, bankers and the real estate lob­by have come under with­er­ing assault in the eyes of enraged publics, the eco­nom­ics pro­fes­sion has large­ly escaped the fury. Giv­en the impor­tance of this pro­fes­sion in struc­tur­ing eco­nom­ic and finan­cial pol­i­cy, the lack of atten­tion and account­abil­i­ty pos­es an inter­est­ing ques­tion as to why this is.

Gov­ern­ments rely upon the advice of econ­o­mists to imple­ment poli­cies that will advance economies in the con­ven­tion­al terms of growth, sta­bil­i­ty and pro­duc­tiv­i­ty, on mat­ters from the impor­tant to the mun­dane. It is these experts, with a wealth of expe­ri­ence, who have the great­est influ­ence on pub­lic pol­i­cy.

It should be pre­dictable that if a par­tic­u­lar pol­i­cy was suc­cess­ful­ly imple­ment­ed and incurred the expect­ed out­comes, then the econ­o­mists in charge will have their careers advanced. If the oppo­site occurs, then it is expect­ed that the econ­o­mists respon­si­ble should be sub­ject to severe penal­ties.

Unfor­tu­nate­ly, recent out­comes have ensured the for­mer, but not the lat­ter. For instance, the largest bub­bles in US his­to­ry – dot-com and hous­ing – were fol­lowed by sharp eco­nom­ic down­turns. Both times, the over­whelm­ing major­i­ty of econ­o­mists missed and/or denied the exis­tence of the bub­bles.

The after­math of the tech bub­ble was a reces­sion, and the col­lapse of the hous­ing bub­ble could well have result­ed in anoth­er Great Depres­sion if not for the record-break­ing bailout of the finan­cial sys­tem and con­tin­ued deficit spend­ing.

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 labor. 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 orga­ni­za­tions.

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.

Bad eco­nom­ics played its part in the Greek debt cri­sis.


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, those econ­o­mists who sup­ply such ide­ol­o­gy will be reward­ed regard­less of per­for­mance. This obser­va­tion goes unheed­ed among econ­o­mists for obvi­ous rea­sons.

Anoth­er expla­na­tion is what has been satir­i­cal­ly called “aca­d­e­m­ic choice the­o­ry”, a play upon pub­lic choice the­o­ry that argues politi­cians will fol­low spe­cif­ic behav­iors to max­imise their own eco­nom­ic ben­e­fits.

Thus, wealth-max­imis­ing econ­o­mists will serve monied inter­ests in order to enrich them­selves, regard­less of the effects upon oth­ers. With­in mod­ern economies, the wealthy are increas­ing­ly invest­ed in the finan­cial rather than indus­tri­al sec­tors. Accord­ing­ly, econ­o­mists seek to work at the behest of finan­cial insti­tu­tions: com­mer­cial lenders, invest­ment banks, hedge funds, mon­ey man­age­ment funds, etc. The own­ers and man­agers of these insti­tu­tions, ded­i­cat­ed to max­imis­ing short-term prof­it and pow­er, nat­u­ral­ly seek that econ­o­mists advo­cate the­o­ries and poli­cies that empow­er them eco­nom­i­cal­ly and polit­i­cal­ly.

With­in the eco­nom­ics field, there exists a sub­stan­tial lit­er­a­ture on the cap­ture of insti­tu­tions: for instance, gov­ern­ment cap­tur­ing pro­duc­ers, or indus­try cap­tur­ing gov­ern­ment reg­u­la­tors, for the pur­pose of empow­er­ing the insti­tu­tions per­form­ing the cap­tur­ing. Less well-known is the cap­ture of the eco­nom­ics pro­fes­sion, whether it is indi­vid­ual econ­o­mists or entire schools and depart­ments at uni­ver­si­ties.

Uni­ver­si­ties are often depen­dent on out­side fund­ing to keep their eco­nom­ics and busi­ness schools func­tion­ing. Cor­po­rate-friend­ly busi­ness­es, think-tanks and wealthy indi­vid­u­als will meet this need and pro­vid­ed the nec­es­sary fund­ing. Although there may be no strings attached legal­ly, the entire fund­ing is an enor­mous string in itself. Craft­ing the­o­ries and poli­cies that run counter to what the fun­ders want to hear will not ingra­ti­ate them to the recip­i­ents.

The phrase “don’t bite the hand that feeds you” is rather apt to this sit­u­a­tion. The course of action to pur­sue, there­fore, is to speak the words pleas­ing to the fun­ders, which often means pro-cor­po­rate the­o­ries and poli­cies.

Eco­nom­ic pol­i­cy tends to run in a sim­i­lar fash­ion, with a clique of lead­ing eco­nom­ic thinkers cho­sen to reform pol­i­cy in accor­dance with best prac­tice – or so we are told. For those less bur­dened with such delu­sions, best prac­tice means not what is in the best inter­ests of the pub­lic, but rather what ben­e­fits the nar­row sec­tors of con­cen­trat­ed pri­vate wealth and priv­i­lege that hud­dle behind the con­ser­v­a­tive nan­ny state, includ­ing the econ­o­mists who are devis­ing these poli­cies.

As his­to­ry has shown, these poli­cies, pri­mar­i­ly finan­cial­i­sa­tion of the econ­o­my, have great­ly harmed the pub­lic while enrich­ing the for­tu­nate few beyond avarice.

There is no nat­ur­al law that says that the eco­nom­ic equiv­a­lents of Doc­tor Death should con­tin­ue to devise poli­cies that have shown to be detri­men­tal. If oth­er pro­fes­sions can be held account­able for poor job per­for­mance, why not econ­o­mists?

Econ­o­mists are fond of exam­in­ing the role of incen­tives. Pro­vid­ing a set of penal­ties in the form of fines, loss of employ­ment, and even impris­on­ment in the worst cas­es of finan­cial and eco­nom­ic cri­sis, can pro­vide econ­o­mists the incen­tive to advo­cate poli­cies based upon sci­en­tif­ic the­o­ry of how the econ­o­my does func­tion in the real world, rather than how it ought to work in a text­book.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.