Fallen Experts

Apr 27, 2009 Editorial

As the financial crisis continues to run riot over the economies of the world one facet does not seem to have attracted the kind of attention that we believe it deserves – the role of economists.

Finance, after all, is but a subset of economics – economics applied to the world of finance so to speak and if the reports are to be believed, economists were in the thick of things that created the brave new world that is crumbling around our ears. There has been a massive failure in diagnosis at the very least. We need to know what might have caused this breakdown since the same group of “experts” is being put in charge of leading us out of the mess.

In both the developed world and the developing one, Finance Ministers are regarded, typically regarded as just below the top executives – President or Prime Minister – and the individual is invariably an economist, surrounded by a host of other economists. The Central Banks that play such a pivotal role in guiding the macro-economy are also dominated by economists and finally, in the last few decades most major private banks and large corporations have taken to employing economists in key positions in top management. It has truly been the age of the economists.

As we have pointed out in the past, part of the reason for this surfeit of economists is that since the 1980’s, the neo-liberal dispensation – which was imposed on our economy by the IMF/World Bank as the “Washington Consensus – gave pride of place in “economic” activities to finance. The older models that stressed productive activities in the real economy gave way to economists versed in finance who displaced the engineers, inventors and entrepreneurs etc. that had driven the old model.

This newfound belief in the centrality of finance pulled numerous members from what had been dubbed the “dismal science” from the staid world of academia, into the go-go tumult of Wall Street and the “City”.

The best and the brightest were lured by the promise of spinning gold through the creation of more and more “sophisticated” financial instruments that delivered wealth to their firms in figures that were simply unprecedented. By the middle of this decade, billion dollar bonuses to the executives of major financial firms failed to raise eyebrows any longer. But the reason for the rise of the economists goes deeper than the lure of lucre.

The result of the “financialisation” of the economy – where for instance profits generated from finance grew from a base of single digit figures of the GDP of the US in the 1980’s to some 40% by the onset of the crash – created a new hybrid among the economic fraternity – the “quants”.

These were individuals that were heavily grounded in mathematics and used esoteric mathematical models from esoteric paradigms such as chaos theory that were supposed to predict the behavior of financial markets. The holy grail of making money had been unearthed.

Economics has long prided itself as a science, modeled after physics and the field became more and more influenced by mathematical modeling. However, the economists thought that science meant mathematical proofs of theories and econometric tests while in fact physicists spend most of their time trying to explain observed phenomena. The economists had turned science on its head.

The uncertainty inherent in observing the behavior of conscious humans versus the more predictable outcomes of energy acting on inert matter had at least introduced a modicum of prudence in the past, but now caution was thrown to the wind and the models were given precedence over common sense.

In science a model may be invented to explain observed phenomena but if new observations contradict the model, the latter is modified or even discarded and a new one proposed. It would appear that of recent, the new breed of economists saw facts as only good for wrecking their elegant theories. Facts, such as the new interconnectedness of global financing and its attendant risks, therefore were duly disregarded.

In attempting to once again lead us to the promised land – or at least out of the present pickle – we would urge economists, both domestic and foreign, to stick to the facts and nothing but the facts.

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