Have Economists Learned From the Great Recession?

The Chronicle of Higher Education, June 12, 2012, 1:30 pm
http://chronicle.com/blogs/brainstorm/have-economists-learned-from-the-great-recession/48045?sid=pm&utm_source=pm&utm_medium=en
By Todd Gitlin, sociologyst, Chair Communication Program, Columbia University
If an unanticipated earthquake measuring 9.0 on the Richter scale had just sunk the island of Manhattan, I’d like to think that departments of geology worldwide would be feverishly reexamining their research priorities, curricula, and syllabi. But I have the impression that no such urgency is evident in the profession of economics after most of it resoundingly failed to anticipate the global meltdown of the last decade (and continuing).
Poking around the Web to see who else is interested in this academic default, I came across this February 2012 openDemocracy piece by Philip Mirowski, a historian and philosopher of economics at Notre Dame. Mirowski asks why the economics profession has been so sluggish about reforming itself now that its dismal failure to anticipate the financial meltdown is apparent to everyone but, well, economists. His answers are, in brief: 1. Top economics departments (and business school) are nicely knotted together with the financial industry.  2. Economists who have a lot of power in university administrations are not alone in cheering on the commercialization of university research.  3. “Whenever the economic orthodoxy has written about the ‘problem of corruption,’ it only parsed the problem as besetting those individuals working in the public sector.” When private hands scratch private backs, that’s good business, and none of the public’s business (except to sit back and enjoy the trickle-down).
I’ve also come across a 2009 article in the Cambridge Journal of Economics by the redoubtable British journalist Godfrey Hodgson, “The great crash of 2008 and the reform of economics.” Hodgson thought it opportune to take a look at economics syllabi from top universities around the world to see who’s been paying attention to John Maynard Keynes or Hyman P. Minsky (who, in Hodgson’s words, ”argued that financial capitalism has an inherent tendency to instability and crisis, due to speculation upon growing debt….[and] gave a number of warnings about the severe consequences of global financial deregulation after 1980). He
tried without success to find the work of Keynes or Minsky on any reading list available on the web of any macroeconomics or compulsory economic theory course in any of the top universities in the world.
BBC 4, unlike our own public radio system (whatever its other merits), hosts a weekly discussion of ideas, run by the British sociologist Laurie Taylor, and nicely named “Thinking Allowed.”  In 2008, Taylor asked his listeners to name an economist who had predicted the bursting of the credit bubble.  At the top of the list was an obscure financial economist named Richard S. Dale, who in a 1992 book
argued that the entry of banks into speculation on securities … precipitated the 1929 crash, and that growing involvement of banks in securities activities resulting from incremental deregulation since 1980 might precipitate another financial collapse.
Hodgson has a chart (p. 1209) showing declining citations of Keynes and Minsky over recent decades, and as for Dale, he barely gets on the chart.
Hodgson places a good deal of weight on the baleful effect of the mathematization of economics:
Arjo Klamer and David Colander … reported a survey which showed that only 3 percent of graduate students on top U.S. economics programs perceived ‘having a thorough knowledge of the economy’ to be ‘very important’ for professional success, while 65 percent thought that ‘being smart in the sense of problem-solving’ is what matters and 57 percent believed that ‘excellence in mathematics’ was very important.
He also notes the negative evidence of all negative evidence about the fetishization of mathematical models:
In 1997 Robert C. Merton and Myron S. Scholes were awarded the Nobel Prize in Economics. Scholes had helped to devise the Black–Scholes equation, upon which a prominent hedge fund was based. However, following the 1997 financial crisis in Russia and East Asia, the highly leveraged fund lost U.S.$4.6-billion in less than four months in 1998 and failed. Did this lead to significant discussion concerning the limits of models? Alas no.
But doesn’t the financial industry and its academic appendages specialize in the assessment of risk? Isn’t that the whole point of quantification?  Hodgson makes another telling point:
The cult of metrication that prevails in contemporary private and public bureaucracies means that the consultant is pressured to provide a quantitative assessment of any risk. Yet the whole point about complex and open financial markets is that future outcomes are uncertain rather than risky. Uncertainty … applies to circumstances where quantitative calculation of probability is not possible. But few mainstream economists ponder on the difference any more, partly because it is difficult to fit non-quantitative uncertainty into a model. It is a concept banished from mainstream economic theory.
While contemplating the economics profession, which overall seems to be gussied up more to impress itself than to learn from its flagrant errors, I’ve been reading Charles Ferguson’s Predator Nation:  Corporate Criminals, Political Corruption, and the Hijacking of America, which elaborates on his remarkable documentary, Inside Job, to cite chapter and verse on criminal activity in the financial sector–activity that, at the very least, seems worthy of federal prosecution. You may recall Ferguson telling a 2011 Hollywood audience, on receiving the Oscar for Inside Job, that not a single financial perp had yet been criminally prosecuted:
Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that’s wrong.
Predator Nation was published three weeks ago, and by Crown Business, which is not chopped liver. It’s selling OK on Amazon.  But I can’t find a single review of it published in a daily newspaper or magazine outside the precincts of the Left. Not one.
The academy is busy protecting itself. Journalism is busy avoiding ideas. Public media are besotted by Personalities. All this in a nation founded upon ideas.