In the conversations I’ve had about this Wednesday’s Ec 10 walkout, I’ve noticed how few come in support for the movement, writing it off as an unfortunate case of misplaced ideals. And to a large extent, that’s true; earlier this week Jeremy wrote a consummate defense of Ec 10, whose points I find myself in complete agreement with. However, I’m afraid this leaves the issue at an unsatisfying conclusion, because it ignores a more essential question: is there something flawed about economics – both the discipline and the profession itself – that hasn’t been sufficiently addressed in the fallout of the crisis? While participants of the walkout may have erred by putting Ec 10 as the object of their protests, their sentiments are worth considering.
This summer, I was able to watch The Inside Job, a film I would heartily recommend for anyone interested in the topic. While I do not endorse all of Ferguson’s accusations, he does raise important questions that are relevant to our debate here.
To begin with, Ferguson points out that most high-flying academic economists tend to hold positions either as consultants or board members in the financial industry, creating potential conflicts of interest. Like drug companies sponsoring doctors to formally endorse their products, Ferguson argues that many economists were either explicitly or implicitly paid in the pre-crisis era to justify financial deregulation, or promote the use of new instruments. In a striking case, he brings up a 2006 paper where co-authors Columbia’s Frederic Mishkin and Universty of Iceland’s Trygvvi Herbertsson extolled the soundness of Iceland’s financial institutions. Apart from the fact that their calculations were all wrong, Ferguson notes that Mishkin was paid $124,000 by the Iceland Chamber of Commerce to write the paper, and that this fact was not disclosed anywhere within its contents. Compared to this amount, the debate on the price of Mankiw’s textbooks looks frivolous. What we need to worry about instead is the opaque relationship between academia and the financial sector.
As much as I admire modern economics and the minds that inspired it, it seems that the discipline suffers from serious epistemological problems, namely, a chronic disability to recognize its own blind spots. Consider the literature produced during the heyday of the 2000s concerning the use of new financial instruments, when there was a near-universal consensus that these products helped to “allocate capital efficiently”. Then contrast that with the roaring 1920s when there was a near-universal consensus that buying stocks was unquestionably good for the economy, immortalized by Irving Fischer’s proclamation: “Housing Stock prices have reached a permanently high plateau”. Did nobody see the red flags, or did we really think that the modern economy was that different? Is there something in economic orthodoxy that makes it forget past errors? In their latest book, economists Carmen Reinhart and Kenneth Rogoff call this a “this-time-is-different” syndrome:
The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now. We are doing things better, we are smarter. The old rules of valuation no longer apply. Unfortunately, a highly leveraged economy can unwittingly be sitting with its back at the edge of a financial cliff for many years before chance and circumstance provoke a crisis of confidence that pushes it off.
In the end, Jeremy may be right in pointing out that this week’s criticisms against Ec 10 were unjustified, “full of sound and fury, signifying nothing”. But Ec 10 isn’t all of economics, and leaving the issue like that leaves the more important questions unresolved. Like the Occupy movement in general, it’s true that a lot of the anger of its followers has been misdirected, but that doesn’t mean the sentiment itself is wrong.
Photo Credit: Harvard Crimson