ECONOMISTS SHUFFLE THE DECKCHAIRS / THE FINANCIAL TIMES COMMENTARY & ANALYSIS

Economists shuffle the deckchairs

By Samuel Brittan

Published: August 6 2009 17:17

On a visit to the London School of Economics last November, the Queen asked why no one saw the financial crisis coming. For if people with enough authority and influence had foreseen it, some preventive action would have been taken and either the crisis would not have occurred, or it would at least have taken a different form.

The British Academy convened in June a forum of “experts from business, the City, its regulators, academia and government” to debate an answer to the question. The result was a letter to Her Majesty by Professors Tim Besley and Peter Hennessy purportedly summarising the views of the participants. Although I was listed as an attendee, I have to dissociate myself from the views expressed. The letter starts off by saying that “many people did foresee the crisis” but no one foresaw the form it would take and its timing, onset and ferocity. It ended by expressing the hope that the various establishment bodies represented “might develop a new shared, horizon-scanning capability so that you never need to ask that question again”. Some hope. I am reminded of the sinking of the Titanic in 1912 with the loss of 1,500 lives. The ship had been considered unsinkable. In contemporary discussion, economists have been put in the role of the Titanic’s designers.

The popular view of economists is that they exist to make forecasts and do so badly. One of the more basic rules of the subject is that where a demand exists some people will come forward to supply it. The economists who have done so for forecasts have accordingly fallen flat on their faces. Their usual response is that most of the time they get it reasonably right. But what matters is whether they can identify significant turning points and systemic failures in good time. They cannot. This does not mean the subject is valueless. Evolutionary biologists cannot predict the future of the human race, even though some novelists, such as H.G. Wells, have tried.

It is fruitful to enquire who economists are and what they actually do. This was attempted by the Royal Economic Society in a survey summarised by Ruth Towse and Mark Blaug in an Economic Journal article in March 1990. They came up against the problem that, in contrast to, say, engineers or accountants, “there is no precise way to define the economics profession”. They settled for “someone with at least a second degree in economics” (which thankfully lets me off the hook). Only 8 per cent of economics undergraduates went on to higher degrees but “this has never been allowed to undermine the perception of most academic teachers” that “all their pupils must be trained as if they were going to be professional economists”.

On this definition they estimated that in the UK there were then 3,500 practising economists of whom 2,500 were academics, 600 in private business and 400 in the government. The high salaries paid to some City economists were “atypical”. My own observation is that their repute declined so much after events such as the UK’s forced departure from the exchange rate mechanism in 1992 that some practitioners redefined themselves as “strategists”.

A follow-up article by Stephen Machin and Andrew Oswald in June 2000 lamented the decline in the number of British students beginning economics PhDs. In October 1998 there were for instance three in Cambridge and zero at the London School of Economics. The authors remark that it should be made clear to parents that “within the foreseeable future their children and grandchildren will not be taught at university by UK-born economists”. It is also difficult to quarrel with their observation that “private-sector economists draw upon ideas that were discovered in university corridors”, principally US corridors.

We therefore need to examine US-style mainstream economics. An excellent introduction to the best of these ideas can be found in Partha Dasgupta’s contribution to the Oxford University Press Very Short Introduction series, published in 2007 just before the present crisis. He hardly mentions macroeconomics and presents mathematical and statistical findings in straightforward prose. The format is a comparison of the life chances of one girl in the suburban Midwest of the US and another in south-west Ethiopia. He does not play on western guilt feelings and puts much emphasis on institutional and political factors once regarded as “not economics”. If you think his focus is politically chosen, note that Prof Robert Lucas, the doyen of Chicago free market economics, also believes no problem is more important than reducing the gap between such societies.

But at least for the time being, the weakness of the western financial system and the prospect of renewed recession have come to be the biggest threats to the development of the poorer countries. It is not encouraging to find surveys of US graduate students reporting that the great majority believed that skill in mathematical manipulation was far more important for their careers than knowledge of their own or any other economy. At the very least both should have equal weight.

Copyright The Financial Times Limited 2009