In her 1969 book, On Death and Dying, the Swiss psychiatrist Elisabeth Kübler-Ross identified five separate stages or aspects of the grief process. These were denial, anger, bargaining, depression, and acceptance.
The field of economics experienced a traumatic loss during the financial crisis, which left Alan Greenspan in what he called in 2008 testimony “a state of shocked disbelief.” Economists are now working their way slowly through the grief progress, as they realise that their treasured economic models not only failed to predict the crisis, but played an active role in creating it.
The first two stages have already been charted in this blog. A 2014 post asked Is economics in a state of denial? (the answer was: yes). 2015’s Book burning economists discussed the anger that some economists were venting on certain critics (e.g. me). The next stage – and the subject of this post – is “bargaining”. Part of this is bargaining with the future – if we follow certain rules perhaps we can put things right – but another is a kind of retroactive bargaining with the past, saying that the event would not have occurred if only such-and-such had happened.
A case in point is the book Economics Rules: The Rights and Wrongs of the Dismal Science, by Dani Rodrik of Harvard University, which sets out to explain “why economics sometimes gets it right and sometimes doesn’t.” Rodrik’s conclusion is that mathematical models “are both economics’ strength and its Achilles’ heel.” On the one hand they offer a degree of clarity and consistency which is not possible with purely verbal descriptions. However they are easily misused or taken out of context.
Telling a story
As Rodrik points out, models are best seen as a kind of story. No single model can accurately capture every detail of the economy, but it can illuminate some aspect of the system. The trick is therefore to choose which model is the most suitable for any particular situation. One conclusion is that very large and general models, of the sort often favoured by macroeconomists, are not very useful: “I cannot think of an important economic insight that has come out of such models. In fact, they have often led us astray.”
Rodrik also acknowledges that most economists missed the causes of the financial crisis, with some notable exceptions who were quickly shouted down (such as the IMF’s Raghuram Rajan, who in 2005 told an audience of central bankers including Alan Greenspan and Ben Bernanke that financial innovation had introduced new risks into the financial system, only to be called a “Luddite” by Larry Summers).
According to Rodrik, the reason that the profession did not cover itself in glory before and during the crisis was that leading economists had bought into the dominant efficient market paradigm which saw markets “not only as inherently efficient and stable, but also as self-disciplining.” Regulators just had to get out of the way and the invisible hand would do its job. However, economists use all kinds of models in their work, and “what makes this episode particularly curious is that there were, in fact, plenty of models to help explain what had been going on under the economy’s hood.”
If only they had chosen the right model, perhaps something could have been done! Indeed one such model, which Rodrik does not mention, is that of Hyman Minsky, whose work on financial stability became famous after the crisis, but was all but unknown before it; an assessment published a year after his 1996 death concluded that his “work has not had a major influence in the macroeconomic discussions of the last thirty years.” Curious indeed.
Rodrik also seems a little surprised by claims, from student-based groups such as Manchester University’s Post Crash Economics Society, that economics is overly narrow and lacks pluralism. “How do we understand these complaints,” Rodrik asks, “in light of the patent multiplicity of models within economics?”
A possible reason might be that economists have what he notes is a “guild mentality” which “renders the profession insular and immune to outside criticism.” He observes in a couple of places that “Only card-carrying members of the profession are viewed as legitimate participants in economic debates.” But later he cites the influence of behavioural psychologists and so on to conclude that “the view of economics as an insular, inbred discipline closed to outside influence is more caricature than reality.”
His answer instead is that there is nothing wrong with economics per se, there is just a communication problem. Most economists are poor at presenting their arguments to the public, because they “see themselves as scientists and researchers whose job it is to write academic papers.” Also undergraduate students at Manchester, or Rodrik’s Harvard where students launched their own protest in 2011, obviously don’t get exposed to the full rich diversity of economic thought. Though this still doesn’t quite explain why, as Cambridge University economists Ha-Joon Chang and Jonathan Aldred wrote in 2014, their subject “is the only academic discipline in which a significant and increasing number of students are in an open revolt against the content of their degree courses.”
Rodrik concludes his book with “Ten Commandments” – though “bargaining points” might be a better term – for economists, and ten for noneconomists. The latter includes “If you think all economists think alike, attend one of their seminars” and “If you think economists are especially rude to noneconomists, attend one of their seminars” (as if rudeness were a sign of healthy debate). However there is no such exhortation for economists to attend seminars outside their own field; and indeed the book makes little attempt to find out what these complaints from students, hetereodox economists, and other non-card carriers actually are.
For example, one of the major criticisms of economic models is that they rarely account for the effects of money, banks, credit, or the financial sector. This omission, which played a hugely important role in the crisis, is beyond curious, it is downright bizarre; but as with other such books to emerge from the mainstream there is hardly any mention of money, apart from the observation that phenomena such as bubbles and bank runs have been known about for a long time. Nor does the book come to grips with the interesting questions of why theories of non-conformists such as Minsky were repressed, or why the field’s core teachings of efficiency, rationality, etc. came to be so perfectly aligned with the PR needs of the financial sector.
Economics Rules offers many useful and valid insights into the nature of economic models, but attempts to rationalise away the problems which confront the field rather than face them squarely. So here is not a commandment, but a gentle suggestion to economists in this difficult time: let’s try to get stage 4 (“depression”) over with quickly, it’s time for stage 5: “acceptance”.
Update: A version of this article was published in the February issue of the WEA Newsletter.