In Defence of Economists

Economists have come under severe criticism for being unable to foresee crises, so much so that the efficacy of economics as a discipline is being questioned. Besides, people often point out that economists have been guilty of using models that are not applicable in the real world. Some of the criticisms are fair. However, to question the very efficacy of economists on the ground that economists have not be able to predict crises in misguided.

Firstly, many of the crises that people often quote can be attributed to asymmetry of information more so the recent Global Financial Crisis. Financial firms sell exotic financial products. The only information you have about these products is that they represent some underlying asset which will yield returns in the future. These products often come with an ostensible ‘Investment Grade’ rating from the rating agency and hence do not explicitly state the exact nature of the underlying asset. In such a scenario it is safe to assume that the investment products are a relatively safe investment. However, the problem arises i.e. a crisis takes place, when the financial firms or the rating agencies pass off toxic investments as good investments. The information that the economist has is that the investments are indeed good. All calculations are based on this information. This being the case there is no reason for the economist to believe that a crisis can occur. Then in the event of a crisis occurring people jump to conclusions that the economists have failed to predict the crisis. The real cause of the crisis is often not understood, in this case; being the lack of proper information about the financial products. Why should the economist be blamed if financial firms commit outright fraud?

Secondly, on using models that are far away from the real world; the very definition of a model is that it is a hypothetical description of a complex event or thing. The main purpose of any model is to simply whatever it is intending to explain. Thus, when an economist uses a model he/she endeavours to break down real life phenomena to a level where a study can be done with relative ease. The model is just a depiction of a complex happening in a way that is easy to understand or deconstruct. With the models many underlying assumptions are stated explicitly. These assumptions point out that the model is indeed a deviation from the real world scenarios. The economist, to his credit, makes it ostensible that the model is based on assumptions. In such a case is it fair to hold the economist responsible if someone else uses the model without fully understanding the implications of the assumptions being violated. Clearly, it is not.

Thirdly, “...the evil that men do lives after them, the good is oft interred with their bones…” goes the famous Mark Anthony speech. Economists are treated in this way. The work done by economists is often forgotten. The recovery after the crisis has been steady. Timely interventions have saved the day and prevented another Great Depression from occurring. Economists have pointed out that government’s role in the economy is imperative and therefore the G-20 nations have accordingly undertaken coordinated fiscal stimuli of their economies. This action has stalled the free fall that the world economy saw during the financial crisis.

The cogency of the economist’s trade rests heavily on correct information being available. All deductions are based on information that is available. There is no reason for things to go wrong if the information available is correct. Thus, holding the economist responsible for dupery committed by others is not right.