Economics - An Apology

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Mainstream economics has shaped modern policymaking, but its failures and ideological divides reveal deeper systemic flaws.

Mainstream economics, it has often been claimed, has faltered badly in recent years and requires a thorough overhaul. It is true that most economists failed to anticipate the financial crises of 2007-2008 and, as a result, did not issue warnings. Queen Elizabeth underscored this shortcoming when she posed a blunt question to a distinguished – and visibly stunned – group of economists she had summoned: Why did none of you see this coming?

First, economists were never intended to be clairvoyants. It would be unreasonable to fault geologists for failing to predict every volcanic eruption or earthquake. We would not abandon geology as an academic discipline on those grounds. Should economics not be afforded the same understanding?

While it is true that economists are not expected to predict the future with certainty, many – particularly those employed in banks and government – make forecasts as a matter of routine. The bubble that burst in 2007-2008 was so conspicuously inflated, and the conduct of many bankers so egregious, that economists – and others – should have raised the alarm. Edward M. Gramlich , a Federal Reserve Governor from 1997 to 2005, was among the few who did, but his warnings were ignored. Too many others chose to look the other way, aligning themselves with the excesses of the banking sector. The failure, therefore, was not so much one of economics as a discipline, but rather of mentality – a lack of civil courage.

Over the course of time, economics has done considerable good, equipping governments with effective tools to stimulate faltering economies through fiscal and monetary expansion, and to curb inflation through fiscal and monetary restraint. When confronted with the inadequacy of classical economic doctrine to address persistent unemployment during the 1930s, John Maynard Keynes developed his General Theory . His work explained how the global economy could be lifted out of the Great Depression. Although Keynes's ideas fell out of favour in certain academic circles in the 1970s, they were revived in response to the 2007-2008 crisis, prompting an unprecedented expansion of the money supply. As a result – consistent with textbook economics – the crisis led to a recession rather than a full-blown depression, which would have been far more painful.

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