Queen told how economists missed financial crisis
The Queen has been sent a letter by a group of eminent economists explaining how "financial wizards" failed to "foresee the timing, extent and severity" of the economic crisis, it was reported.
The Financial Times reported, There is nothing like a monarch’s pointed question to make the great and good squirm. Queen Elizabeth stumped her hosts at the London School of Economics by asking why no one had seen the financial crisis coming. Scholars at that and other universities should feel the sting: if they cannot be counted on to spot dangers to the economy, why have economists at all?
Some of Britain’s leading economic experts have now sent the Queen a reply. They point out that some did foresee the crisis, prominent economists included. What failed was the “collective imagination of many bright people”.
More can be said. The economics profession’s obliviousness to imminent collapse has led it to search whatever soul it may have to learn where it went astray. A prime suspect is a theory too optimistic about the rationality of people’s choices and the possibility of capturing them in mathematics.
The truth may be simpler and more depressing: that no economic theory can perform the feats its users have come to expect of it. Economics is unlikely ever to be very good at predicting the future. Too much of what happens in an economy depends on what people expect to happen. Even state-of-the-art forecasts are therefore better guides to the present mood than the future. though they may also be self-fulfilling prophecies.
Dabbling in paradox limits the use of economics as a practical guide. Today the profession’s best advice must convince politicians and the public to combat a crisis born of insufficient thrift by a recourse to record borrowing. Those who saw danger had no easier task: even reminding people of gravity’s existence is a hard sell when everything is going up.
If predictions of physics-like precision are in demand, they will be supplied. Collective delusion must therefore be blamed as much on the consumers of economics – companies, investors, the media – as its producers. But its irresponsible use does not mean economics is useless. It is rather good at explaining the past and guessing unintended consequences of well-meaning policies – invaluable tools for cleaning up financial markets.
So we do need economists in public debate, but ones not blinded by mathematical sophistication or paradoxes beyond the lay public’s grasp. The public intellectual’s virtues – curiosity about other fields, aversion to dogma – could do the discipline much good. Unfortunately these are no longer much valued in the academic hierarchy. University presidents should perhaps take up Her Majesty’s query.
The Queen has been sent a letter by a group of eminent economists explaining how "financial wizards" failed to "foresee the timing, extent and severity" of the economic crisis, it was reported.
The Financial Times reported, There is nothing like a monarch’s pointed question to make the great and good squirm. Queen Elizabeth stumped her hosts at the London School of Economics by asking why no one had seen the financial crisis coming. Scholars at that and other universities should feel the sting: if they cannot be counted on to spot dangers to the economy, why have economists at all?Some of Britain’s leading economic experts have now sent the Queen a reply. They point out that some did foresee the crisis, prominent economists included. What failed was the “collective imagination of many bright people”.
More can be said. The economics profession’s obliviousness to imminent collapse has led it to search whatever soul it may have to learn where it went astray. A prime suspect is a theory too optimistic about the rationality of people’s choices and the possibility of capturing them in mathematics.
The truth may be simpler and more depressing: that no economic theory can perform the feats its users have come to expect of it. Economics is unlikely ever to be very good at predicting the future. Too much of what happens in an economy depends on what people expect to happen. Even state-of-the-art forecasts are therefore better guides to the present mood than the future. though they may also be self-fulfilling prophecies.
Dabbling in paradox limits the use of economics as a practical guide. Today the profession’s best advice must convince politicians and the public to combat a crisis born of insufficient thrift by a recourse to record borrowing. Those who saw danger had no easier task: even reminding people of gravity’s existence is a hard sell when everything is going up.
If predictions of physics-like precision are in demand, they will be supplied. Collective delusion must therefore be blamed as much on the consumers of economics – companies, investors, the media – as its producers. But its irresponsible use does not mean economics is useless. It is rather good at explaining the past and guessing unintended consequences of well-meaning policies – invaluable tools for cleaning up financial markets.
So we do need economists in public debate, but ones not blinded by mathematical sophistication or paradoxes beyond the lay public’s grasp. The public intellectual’s virtues – curiosity about other fields, aversion to dogma – could do the discipline much good. Unfortunately these are no longer much valued in the academic hierarchy. University presidents should perhaps take up Her Majesty’s query.
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