Has the crisis that so “humbled” the discipline of economics also humbled The Economist? A few lines into this article, and one might think so:
Economics is less a slavish creed than a prism through which to understand the world. It is a broad canon, stretching from theories to explain how prices are determined to how economies grow.
I never thought I would read that in The Economist! Where is the spirited defense of capitalism? the stalwart support of neoclassical economics? Oh, here it is, two lines later…
And if economics as a broad discipline deserves a robust defence, so does the free-market paradigm. Too many people, especially in Europe, equate mistakes made by economists with a failure of economic liberalism.
The efficient market hypothesis, the article admits, is partly to blame for the crisis, having given investors an overconfident view of the market.
But economists were hardly naive believers in market efficiency. Financial academics have spent much of the past 30 years poking holes in the “efficient market hypothesis”. A recent ranking of academic economists was topped by Joseph Stiglitz and Andrei Shleifer, two prominent hole-pokers. A newly prominent field, behavioural economics, concentrates on the consequences of irrational actions.
I’m glad to know that economists are no longer “naive believers,” but many economics students are, since we still learn the efficient market hypothesis in most macroeconomics courses.
And the solution, according to The Economist? Better models, and more “enlightened” economic theory. Don’t you dare meddle with the economy, though…
Economists need to reach out from their specialised silos: macroeconomists must understand finance, and finance professors need to think harder about the context within which markets work. And everybody needs to work harder on understanding asset bubbles and what happens when they burst. For in the end economists are social scientists, trying to understand the real world. And the financial crisis has changed that world.