Time to stop rewarding economists for bad behaviour

May27
by David Lawson on May 27, 2012 at 7:26 pm

flattr this!

By Philip Soos

Source: The Con­ver­sa­tion

45fwn2ph-1331696151

 

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.

underclassrising.net

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.