CRISIS OF ECONOMICS or ECONOMIC CRISIS? Part 2
From the onset of the first edition, I raised critical question as to whether the global economy needs new economic thinking. If yes, then what is the new economic thinking? It is very obvious that the current global economic imbalances and the failures of economists, give room for concerns. Few economists saw our current crisis coming, but this predictive failure was the least of the field's problems. More important was the profession's blindness to the very possibility of catastrophic failures in a market economy. The call for new paradigm in the economics profession is justified then; for me, it does. Not in particular against existing theories, but for the simple evidence that existing theories have failed us in recent times.
Former Federal reserve Chairman, Paul Volcker made a profound statement on economics and how it is failing to scrutinize the realities surrounding humans when he said “it's clear that among the causes of the recent financial crisis was an unjustified faith in rational expectations and market”.
He further said that “The economics profession is in trouble. I have been involved in questions of economic policy for almost 60 years, and despite all the years of economic theorizing and the application of high-powered mathematical and statistical approaches, an analytic consensus on policy approaches has eluded us. Never has that been more evident than during these recent years of financial and economic turmoil.
We need to do better. We are dealing with an intellectual problem—a profession that has been absorbed by theoretical constructs abstracting from human behaviour. We are dealing with ingrained ways of thinking. The challenge is to raise questions about accepted approaches, in drawing lessons from recent experience”.
Paul Krugman, an American economists and Nobel laureate in economics (2008), made revealing statement about economics when his article titled 'How did economists get it so wrong?', published in the New York Times on September 2, 2009. He said, “As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn't sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations”. This was quoted in an article sub-titled 'mistaking beauty for truth', published in The New York Times in September 2, 2009. The underlining nuances are plenty and quite worrying. Economics and economists in particular ignored the limitations of human rationality.
He continued to say that, “this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy's operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don't believe in regulation”.
This is the clearest manifestation and the strong sense on the part of policy makers and the informed public that the economic profession is in crisis and has failed to provide guidance either in the run up to the financial crisis or in the events that followed. Many economists are now disillusioned. They find that what they learn fails to answer, or even illuminate, the large social questions which led them to take up the subject of economics.
The perfect market model
Many economics scholars believe strongly that perhaps some economics theories requires vigorous scrutiny for proper understanding and relevance, especially in the twenty first century. Trust me, one of such theories is the perfect market model. The perfect market model has some of the ridiculous assumptions in economic theories. Some of which include the following: utility maximization (opportunism), perfect rationality, preferences are transitive and stable, perfect competition, perfect information, certainty, no externalities (e.g. no pollution, no network externalities, no look-ins), no public goods, no economics of scale and scope, no distortions (e.g. tax), homogeneous goods, time is static, no measurement problems, all exchange is voluntary etc.
Here, you realize the neglect of human nature. There is no such thing now as perfect market and rational human being. No externalities and product homogeneity? You can understand why we are spending billions of dollars to tackle climate change. It is that simple, time is never static.
According to Joseph Stiglitz, a Nobel laureate in economics (2001) and professor of economics at Columbia University, his students keep asking this same question year after year; “Why are we wasting our time studying that perfect market model?” In their thinking, it clearly irrelevant a theory for studies, especially in this twenty first century. The idea is that, new economic thinking is required and the many of these assumptions underlining some economic theories are the worries. Like those students, the same worries are expressed by both economists and non-economists alike.
As a note of caution, he further said that there is the need to acknowledge the importance of irrational and often unpredictable behaviour, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, it will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems.
The simplicity of economics of market efficiency of the world may not always be true and it is that dangerous, looking at the complexities of the global economy. At least, from this current certain, human beings are now irrational, especially pertaining to economic choices, the effect of which are blatantly ignored.
Former Federal reserve Chairman, Paul Volcker also said that “it's clear that among the causes of the recent financial crisis was an unjustified faith in rational expectations and market”. The lack of the realism and the neglect of the nature of human, has brought a lot of pressure on economics.
New economic thinking
The new economic thinking to me, as I stated earlier on requires more intellectual rigor and interdisciplinary approach to the subject of economics. It demands the same standards of scrutiny as the economics of old. It should be able to embrace diverse views on the theory and practice of economics. This diversity can be enabled only be the active participation of scholars with varied theoretical inclinations, practitioners with differing experiences, and some representatives from emerging countries.
I am privilege to be associated with an organization of young economists across the world who believe that economics is an important field of study and it's going to be even more important in decades to come. Yet, there is the need to open the debate and establish a strategy for the re-launch of economics and make it more relevant. It is time to ask the questions that have not been asked before, measure that which have not been measured before and step forward boldly to say what has not been said before. It is a unique opportunity for young economists to step forward and examine the world freely without and shred of doubt.
The new economics requires a practical and conscious re-examination, the understanding and appreciation of economics. It requires a community of scholars and policy makers across nations. The Young Professional Economists Network has open the dialogue and started an already ongoing debate into the relevance of economics in solving our everyday challenge. At the Young Professional Economists Network, we share a common vision of championing a new economic thinking which is going to stay relevant to the twenty first century and beyond.
Paul Frimpong, Ch.E.
Chartered Economist and the founder of Young Professional Economists Network (YPEN)
He is also a fellow of the Bastiat Ghana Institute
The Young Professional Economists Network (YPEN), is a non-profit; non-partisan and an independent global organization which is established to raise new and young economic thinkers for the twenty first century and beyond. It has a vision of raising new economic thinkers who are going to positively impact the global economy.
Disclaimer: "The views/contents expressed in this article are the sole responsibility of the author(s) and do not necessarily reflect those of Modern Ghana. Modern Ghana will not be responsible or liable for any inaccurate or incorrect statements contained in this article."