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Economics isn’t useless and isn’t dead

Posted by Richard D North in Money / Truth & Trust on 11 August 2009

Why we posted this: This is a bad time for economics and economists. The public and media are somewhere between amused and angry at the profession’s apparent failure. Actually, economists may well have been arrogant about their trade, but the rest of us always knew its weaknesses and perhaps underrated its strengths.  

The original story:
“In defence of the dismal science”
Robert Lucas
The Economist
6 August 2009

Summary of the story: 
Robert Lucas, a distinguished economist, defends his trade. He argues that economists are getting better at forecasting the effects of various possible and likely future events, and better at dealing with events as they come along. He adds that the future to a large extent is a mystery and will remain one.

(Other valuable contributions to the debate came from Robert Skidelsky and Samuel Brittan, in the Financial Times, 6 August 2009.)

livingissues comment:
This is nothing like the last word on a very difficult problem. In effect, Robert Lucas seems to be saying that economists are good at dealing with economic facts provided they are known. This implies (for instance) that when a bank owns assets whose value and riskiness is unknown (as was the case with quite important chunks of bank assets in 2007 and 2008), it’s pretty hard for economics to get a grip on the banks’ situation. So predicting a banking collapse isn’t all that easy. But he goes on to say that the same sort of economics (especially the use of complex modelling) which is accused of knowing less than it thinks, actually was able to respond much better to the 2008/9 crisis than would have been the case previously. What’s more, it built on insights from Keynes and Friedman.

Some of this is in line with the kind of problem Donald Rumsfeld usefully described as he accounted for the difficulty of running a war.

 “….  as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.”

It is possible to argue that economists don’t properly acknowledge how little they understand, let alone how little they know.

But they don’t need to. The general public already accepts that economists can’t all be right. We often mutter that, “Whenever there are six economists, there are six different opinions.” We are bound to be taking a risk when we pick just one of the six economist to be in charge of our fortunes, and are probably taking as big a risk when we rely on a committee of six economists.

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