What went wrong with economics?
The Economist recently published a cover story article that describes how the economics discipline needs to change to avoid the mistakes of the past. It begins with the sobering statement that “Of all the economic bubbles that have been pricked, few have burst more spectacularly than the reputation of economics itself.” No argument here.
The article goes on to state that two central parts of the discipline need to be severely re-examined – macroeconomics and financial economics. Not surprisingly though, the magazine feels that the current backlash has gone too far and it defends the free market paradigm as being unrelated to the current crisis.
Given the colossal damage and hardship caused by the crisis and the abject failure of economists to see it coming, a strong case could be made that the backlash against economics has not gone nearly far enough. Even the Queen of England excoriated the profession last November during a visit to the London School of Economics when she demanded an explanation for why the crisis was not anticipated. In response, a group of eminent economists recently wrote a letter to the Queen explaining that the credit collapse was the result of “a psychology of denial”, “wishful thinking” and “hubris.”
Yet it is no small concession for a fairly conservative publication such as The Economist and for practitioners of the profession the world over to be eating humble pie and finally acknowledging that markets do not regulate themselves, that financial innovation is not always beneficial and that capital markets do not work perfectly.
What is equally significant, however, is what is missing from the litany of apologies, from the Economist article, as well as from virtually all other commentaries regarding this ‘crisis’ of the mainstream economics profession. And this is namely the other monumental crisis currently underway – the environmental emergency, which is one that many in the economics profession would prefer to think has nothing to do with economics. Sticking with the Royal Family theme, none other than Prince Charles put it well recently when he said that “The quest for unlimited economic growth is unsustainable and could bankrupt the environment through climate change and depleted natural resources.”
While it is acknowledged that the manner in which current economics is practiced has led to the “biggest economic calamity in 80 years”, according to The Economist, this is only the half of it. There is absolutely no mention of the fact that globalized free market capitalism based on the mantra of endless economic growth has also led us to the ecological brink in terms of climate breakdown, poisonous chemicals in our environment, collapsing ecosystems and a massive wave of species extinctions.
Why is it that publications such as The Economist and mainstream economists have little difficulty recognizing economic pitfalls but seem unable to connect the dots to the environmental crisis? For instance, a new documentary from director Rupert Murray called ‘End of the Line‘ makes the compelling case that consumer ignorance, the clout of the fishing industry, and rising sushi demand in the West are causing “crashes” of numerous fish populations, leading to their collapse. All of which are signs of an economic system that has no way of putting limits on consumption or the production of wastes. No way of measuring when we have taken too much. In fact, restoring pre-crisis (i.e. unsustainable) levels of consumption is often advocated as the way out of the current economic downturn.
If economists truly want to understand what has gone wrong with economics, perhaps they should broaden their analysis beyond the insular, myopic and increasingly disconnected world of credit default swaps and collateralized debt obligations.