10.29.2013 2 Comments
This has been said before, many times, in fact, but Zach Ward-Perkins and Joe Earle say it again because economists and their paymasters cannot learn from their past mistakes:
Every year thousands of economics graduates take jobs in the City, thinktanks and at the heart of government itself. Economics is highly technical and often mathematical, and this elevates economists to a position of expertise from which they mediate economic analysis to the British public. They are the guardians of our economy, charged with its upkeep, and they play an important role in shaping political narratives around economics. Yet British universities are producing economics graduates who are not fit for this purpose.
The financial crisis represents the ultimate failure of this education system and of the academic discipline as a whole. Economics education is dominated by neoclassical economics, which tries to understand the economy through modelling individual agents. Firms, consumers and politicians face clear choices under conditions of scarcity, and must allocate their resources in order to satisfy their preferences. Different agents meet through a market, where the mathematical formulae that characterise their behaviour interact to produce an “equilibrium”. The theory emphasises the need for micro-foundations, which is a technical term for basing your model of the whole economy on extrapolating from individual behaviour.
Economists using this mainstream economic theory failed to predict the crisis spectacularly. Even the Queen asked professors at LSE why nobody saw it coming. Now five years on, after a bank bailout costing hundreds of billions, unemployment peaking at 2.7 million and plummeting wages, economics syllabuses remain unchanged.
Catastrophes such as this are what one necessarily encounters when the mote remains in one’s eye.