In opening remarks in his editorial published on Bloomberg.com, titled Economists Need to Admit When They’re Wrong, Mark Buchanan discusses the scientific method and then applies it to the state of economics:
In the popular imagination, scientists do their job by testing theories against the facts and deciding what’s right. In reality, what matters most is figuring out what’s wrong — an endeavor in which the economics profession has been failing spectacularly.
As the physicist Richard Feynman put it, “We’re trying to prove ourselves wrong as quickly as we can.” Only in this way can scientists replace dominant ideas with better ones. The best theories take risks by making specific predictions — they “stick their necks out,” to use another Feynman phrase. Unscientific ideas, by contrast, have a bloblike ability to conform to any set of facts. They are difficult to prove wrong, and so don’t teach us much.
Several years ago, most people took the financial catastrophe of 2008 as definitive proof of profound errors in economic thinking. Some academic economists even lamented the discipline’s failure. After three decades of exuberant celebration of the wonderful efficiency and inherent stability of modern markets, all supposedly supported by volumes of sophisticated mathematics, it seemed that researchers could finally jettison some deeply flawed ideas and search for new ones.
Not so. The dominant paradigm in macroeconomics recovered remarkably quickly, leading one to wonder if any conceivable turn of events could falsify the prevailing faith. Much of academia went into complete denial, while some people suggested that a few minor tweaks may be necessary to put things back on track.
What drives such desperate efforts at rationalization? In a new book, “Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown,” the economic historian Philip Mirowski points to a self-reinforcing confluence of factors.
Most important, Mirowski argues that … If economists used more realistic assumptions, the theorems wouldn’t work and claims to any insight about public welfare would immediately fall apart. Take a few tiny steps from mathematical fantasy into reality, and you quickly have no theory at all, no reason to think the market is superior to alternatives. The authority of the profession goes up in a puff of smoke.
Clinging to happy visions of market-based perfection, Mirowski writes, serves an array of interests in business and finance for whom the “markets always work best” mantra paves the way to profit. They care more about short-term gain than about better science or better policy or social welfare. Hence, the profession’s claim that nothing is seriously wrong with economic thinking has found ready allies, especially in conservative and libertarian-leaning think tanks and foundations.
It’s a long way from the ideal we might hope for, where economists would be trying as hard as possible to prove themselves wrong. If they have no incentive to do so, eventually a bigger crisis — and the social response it engenders — will do it for them.
Libertarians think there is nothing wrong with the current paradigm of economic thinking? Libertarians of nearly all stripes have found plenty wrong with the current paradigm, from Scott Sumner to ardent followers of Mises.
That comment aside, I agree with Buchanan that there is a serious problem in the economics profession of not wishing to objectively find what went wrong and to fix it. Instead, most of the practitioners dog-pile on top of each other, insisting on the rightness of their own individual choice theory that meshes well with their choice ideal of political utopia – uncompromisingly forgetting about public welfare, with the quoted Mirowski being no exception. It’s sad that in this fight most libertarian economists are equally guilty; while the worst offender, (non-libertarian) Bernanke, is certainly guilty of stubbornly clinging to a failed theory of inflation and interest rates – and we have all suffered for it the world over.
My opinion is that we could do without the finger-pointing, pontificating, politicking, and CYA by powerful people to get to a place where they could all put their heads together and come up with a plan to at least come to the old point of order. I do lean more libertarian than not, but I have long been willing to compromise on returning to the way things used to be pre-Bernanke Fed in order to restore hope and optimism about the future. Bernanke made a huge mistake in fixing what wasn’t broken, like a hammer looking for a nail. Roll that mistake back by returning to an implicit NGDP target while making up for what’s behind and much of the crisis will fade away – no major overhaul of the political economy is needed to accomplish it.