What use are economists anyway?

25 October, 2010

Well, the headline on this post is mainly just to get your attention, as I do believe we need more, not fewer, economists in Ireland, particularly (as Garret Fitzgerald has pointed out), in the Department of Finance.  In fact, I think economics should be a compulsory subject for all schoolchildren.

However, Jeremy Warner, assistant editor of The Daily Telegraph, has an interesting piece today called “Will someone please shut Krugman up” in which he condemns the US economist (and winner of the 2008 Nobel Memorial Prize in Economic Sciences) for his opposition to deficit-reduction measures in Britain.

Warner advises that “the idea that you can more or less indefinitely keep putting off deficit reduction until the economy is firing on all cylinders again just looks like an excuse to me for continuing to spend at unaffordable levels. …. [Krugman] conveniently skirts around the underlying issue, which is in essence that the country can no longer afford this expenditure……Osborne’s fiscal consolidation is aimed only at removing the structural deficit – which is the bit that won’t go away when the economy returns to normal. The Obama Administration’s reluctance to take similar action in the US is extraordinarily irresponsible, and one of the reasons why the Democrats are so hopelessly down in the polls.”

Here in Ireland, our own dismal scientists are fighting the same war amongst themselves: do we make huge cuts in government expenditure now, or phase them in over a longer number of years?  The gently-does-it school maintains that rapid and major cutbacks will condemn the economy to semi-permanent depression, while the slash-and-burn school point out that, since we are reliant on the willingness of foreign lenders to continue giving us money, we have no choice in the matter, and that deep cuts will hasten the return of economic confidence and, ultimately, financial recovery. 

So at this critical time in the history of the Irish State, when we cannot afford any more fiscal mistakes, we can be forgiven for tearing our hair out at the fact that economics is such a fallible discipline. We erroneously tend to invest it with almost the same respect we give to the natural sciences, probably because economists love to stuff their texts with arcane formulae which create a spurious sense of precision. Economic theories can have drastic real-life consequences (communism anybody?), but the complexity and messiness of human existence tend to make a nonsense of all rigid economic dogma.  Brian Lenihan might be as well off tossing a coin to decide what plan he follows, provided the execution of the chosen plan is transparent, speedy, and efficient.

I am intrigued by the fact that, in his speech at the 1974 Nobel Banquet, the (controversial) prize-winner Friedrich Hayek stated that if he had been consulted whether to establish a Nobel Prize in economics he would “have decidedly advised against it” primarily because “the Nobel Prize confers on an individual an authority which in economics no man ought to possess… This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally.”

We see the truth of this today in Ireland.

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