The Economist Article “What Went Wrong with Economics” focuses on the current debate of the role of economics after the recent financial collapse. It is interesting to us because it discusses the ways in which Economics as a profession/science/ideologue is discredited and how it is not. The article speaks about the role of Keynesian policies vs. strictly monetary policies. And finally, the article itself is unique in that it puts the science up for self-scrutiny, since it is coming from The Economist magazine.
The accompanying illustration above and the fact that The Economist magazine itself would publish an article on the failures of economics are quite self-critical. I find it fascinating that the magazine choose to respond to the claim that economics as a whole is “discredited” by publishing such an article.
“In its crudest form—the idea that economics as a whole is discredited—the current backlash has gone far too far. If ignorance allowed investors and politicians to exaggerate the virtues of economics, it now blinds them to its benefits. Economics is less a slavish creed than a prism through which to understand the world. It is a broad canon, stretching from theories to explain how prices are determined to how economies grow.”
The article discusses the how various camps had created a “consensus between purists and Keynesians” on use of monetary policy, but this has been broken down. During the crisis, central banks used extraordinary means to prevent the collapse of banks, beyond the normal means of lowering the interest rate. To hear that squabbling within the profession on the correct way to fix the problem results in outsiders considering their recommendations as useless confirms that there is a lot of uncertainty about the validity of Economics in general.
“Macroeconomists also had a blindspot: their standard models assumed that capital markets work perfectly. Their framework reflected an uneasy truce between the intellectual heirs of Keynes, who accept that economies can fall short of their potential, and purists who hold that supply must always equal demand.”
“What about trying to fix it? Here the financial crisis has blown apart the fragile consensus between purists and Keynesians that monetary policy was the best way to smooth the business cycle. In many countries short-term interest rates are near zero and in a banking crisis monetary policy works less well. With their compromise tool useless, both sides have retreated to their roots, ignoring the other camp’s ideas. Keynesians, such as Mr Krugman, have become uncritical supporters of fiscal stimulus. Purists are vocal opponents. To outsiders, the cacophony underlines the profession’s uselessness.”