Blame economists not economics

It was economists who legitimized and popularized the view
· Unfettered finance was a boom to society.
· Spoke with near unanimity when it came to the ‘dangers of government over-regulation’.
A very few among them raised alarm bells about the crisis to come.
Perhaps worse still, the profession has failed to provide helpful guidance in steering the world economy out of its current mess. On Keynesian fiscal stimulus, economists’ views range from ‘absolutely essential’ to ‘ineffective and harmful’.
So is economics in need of a major shake-up? Should we burn our existing textbooks and rewrite them from scratch? Really refurbishment required?
Actually, no, without recourse to the economist’s toolkit, we cannot even begin to make sense of the current crisis.
Why? For example, did China’s decision to accumulate foreign reserves result in a mortgage lender in Ohio taking excessive risks? If your answer does not use elements from behavioral economics, agency theory, information economics, and international economics, among others, it is likely to remain seriously incomplete.
The fault lies not with economics, but with economists. The problem is that economists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation (financial engineering) transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful.
ü Labor economists focus not only on how trade unions can distort markets, but also how, under certain conditions, they can enhance productivity.
ü Trade economists study the implications of globalization on inequality within and across countries.
ü Finance theorists have written reams and reams on the consequences of the failure of the ‘efficient markets’ hypothesis.
ü Open-economy macroeconomists examine the instabilities of international finance.
Advanced training in economics requires learning about market failures in detail, and about the myriad ways in which governments can help markets work better.
Macroeconomics may be the only applied field within economics in which more training puts greater distance between the specialist and the real world, owing to its reliance on highly unrealistic models that sacrifice relevance to technical rigor. Sadly, in view of today’s needs, macroeconomists have made little progress on policy since John Maynard Keynes explained how economies could get stuck in unemployment due to deficient aggregate demand.
Economics is really a toolkit with multiple models- each a different, stylized representation of some aspect of reality. One’s skill as an economist depends on the ability to pick and choose the right model for the situation.
ü Instead of presenting menus of options and listing the relevant trade-offs—which is what economics is about—economists have too often conveyed their own social and political preferences.
ü Instead of being analysts, they have been ideologues, favoring one set of social arrangements over others.
ü Furthermore, economists have been reluctant to share their intellectual doubts with the public, lest they ‘empower the barbarians’.
ü No economist can be entirely sure that his preferred model is correct. But when he and others advocate it to the exclusion of alternatives, they end up communicating a vastly exaggerated degree of confidence about what course of action is required.
When economists disagree, the world gets exposed to legitimate differences of views on how the economy operates. It is when they agree too much that the public should beware.