Economists and the Crisis

As has been tracked by several previous posts on this blog, there is by now a considerable debate on what the crisis teaches us about the role of economists.

One dimension of this debate has focused on the failure by the economics profession to predict the onset of the crisis.  A second quasi-related dimension relates to the failure to sufficiently appreciate the instability of the pre-crisis financial system.  To some, these failures suggest that those economists who did not accurately predict the crisis should have no role in resolving the crisis and constructing the new post-crisis economic system.    This debate is playing out at the global level and also in relation to the domestic situation.

These are all big issues and I do not attempt to provide a comprehensive set of answers here. Nevertheless, it may be useful to make a few points.  I also mainly focus on the role of academic/research economists and the field of macroeconomics.

First,  there is no doubt that the crisis has underlined a mis-allocation of research resources.  Over the last 15-20 years,  monetary economics in relation to the advanced economies  has focused on the analysis of ‘low-amplitude’ business cycles. While business cycles were certainly shallow during this period,  the social costs of rare-but-large crashes are so large that it is clear in retrospect that too few researchers were focused on the economics of large crises.   (An exception relates to those who focused on emerging market economies, where a lot of analysis has been conducted of the recurrent crises that have affected these economies.)

One role for the economics profession is to attempt to forecast the future behaviour of the economy. This is mainly done by economists in policy roles (since policymaking requires projections of future economic performance) and economists in financial firms (since the return on financial investments also turn on future economic performance).

In fact, very few academic economists get involved in this task: to do it well really requires a lot of data resources and and the tracking of many variables, such that is a full-time task that is best conducted by large teams of economists. However, even if not involved in day-to-day forecasting, academic economists can play an important role by providing an independent voice and focusing on ‘big picture’ issues such as whether the forecasting models are well designed and taking a longer-term horizon for forecasting (most forecasting is concerned with quarter-by-quarter developments or, at most, a 1-3 year horizon).

In fact, the main contribution may not be in forecasting per se but in detailing possible contrarian scenarios in order to challenge the conventional wisdom.  This can be very valuable but the limitation is that such ‘Cassandra’ warnings typically cannot be tied to a specific date and it is tempting for the mainstream to dismiss such warnings if they do not quickly come to pass.  Moreover, if a forecaster’s reputation depends on short-term performance, a bearish economist may quickly lose credibility if boom conditions persist and the day of reckoning is postponed.

However, the main goal in outlining low-probability but high-cost risk scenarios is not so much to alter ‘central’ forecasts but to encourage decisionmakers to adopt prudent strategies that are robust to the occurrence of the ‘disaster’ scenario.  In fact, the ideal is that decisionmakers are sufficiently prudent that the risk of the disaster scenario recedes and those offering the Cassandra warnings never see their worst fears realised.

Certainly,  we can point to several academic and non-academic economists who were assiduous in making warnings about the consequences of the lending boom and these deserve great credit.

For many others in academia, their research activities were directed towards other questions. In relation to policy-relevant macroeconomics,  a major focus has been on conducting research on ‘institutional design.’ That is, rather that focusing on macroeconomic forecasting, many have opted to contribute to the design of policy frameworks that can deliver enhanced stability and lower the cost of crises should they occur.  This includes work on:  the zero-bound problem in interest rate policy; macro-prudential financial regulation; counter-cyclical fiscal policies; tax policies vis-a-vis the property sector; the establishment of insurance devices such as reserve funds and rainy-day funds and other mechanisms to mitigate macroeconomic  risks.   Work on such issues has intensified since the onset of the crisis, together with much innovative work in areas such as the design of ‘non-orthodox’ monetary interventions.

Accordingly, the state of macroeconomics is in flux.   While there is much to regret concerning the course of pre-crisis research,  it is also true that many of the technical innovations over the last 20 years are now being applied in exciting ways to design crisis-resolution policies.  Indeed, it is somewhat ironic that the crisis has led to a tremendous resurgence in interest in macroeconomics:  economics is much more interesting in ‘bad times’ than in ‘good times’.

Another very promising development has been the enhanced integration of macroeconomics and finance. Many leading finance economists have responded very quickly to the crisis and have written superb analyses of various dimensions of the crisis and developed innovative new policies to restore financial stability and reduce the risk of future crises.

Many of these points apply equally to both the global and local economic situations. Regarding academic research on the Irish economy,  I will point out a ‘scale’ problem  –  the small size of the Ireland means that it is difficult to build a successful academic career by focusing on the local economy, in view of the limited publication opportunities and the small size of the domestic profession.  This is a problem.

Finally, some have argued that the crisis has shown the limitations of economics.  At one level, this is certainly true and an important lesson for all types of decisionmakers is to recognise that the future is uncertain and relying on Panglossian forecasts (where no downside risk is ever realised)  is not an appropriate risk management strategy.  It is also the case that economics needs to learn more from adjacent disciplines (pyschology, history and the other social sciences). However, the likely evolution is an ‘adapted/enriched’ economics rather than a fully-symmetric multi-disciplinary approach, since the technical basis for most economic policy analyses is predominantly driven by economic factors.

38 thoughts on “Economists and the Crisis”

  1. “Regarding academic research on the Irish economy, I will point out a ’scale’ problem – the small size of the Ireland means that it is difficult to build a successful academic career by focusing on the local economy, in view of the limited publication opportunities and the small size of the domestic profession.”
    It is astonishing, then, that we had quite so many ‘leadin’ economists telling us that the rise in house prices was sustainable. Or that the expansion of consumer credit was fine. Or that the bloating of bank balance sheets was nothing to worry our little heads about.

    Those of us who have lived elsewhere in the world and seen similar trends lead to the same problems that Ireland is now experiencing could readily conclude that what was likely to happen.

    Thankfully our lack of academic training failed to let us appreciate that the modelled risk of a sudden stop in the Irish domestic economy was low… and sure, we all know that low risks are not worth worrying about…

  2. “…an important lesson for all types of decisionmakers is to recognise that the future is uncertain and relying on Panglossian forecasts (where no downside risk is ever realised) is not an appropriate risk management strategy”.

    Wish our pro NAMA lot would appreciate this.

    “When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”
    Is this what happened to us?

  3. Thanks Philip for this contribution. There’s little point in us grumbling about being misunderstood if we’re not willing to step up and explain ourselves.

    I’d add another observation.

    When people say why weren’t all these economists forecasting this or that event over the past few years, one point that gets neglected is that the majority of academic economists are not macro or finance economists. Within Ireland, there are many fine economists who focus their research on things like evaluating the effects of specific tax and spending changes, labour market programs, international trade, developing new statistical methods and economic history. All of these are valid and important areas for research. But what this means is that there are, in fact, very few economists in Ireland at any point in time focusing their research efforts on macro and financial issues.

  4. @Karl
    What is the point of researching tax policy if you exclude macro effects? You might as well conclude in July that Turkeys lead long and happy lives by excluding Christmas (“I’m a fowl economist, not a Santa one….”).

    The point I’m trying to make is that the narrow focus is unhelpful. I blame mathematics. It’s easy in maths to concentrate on just a narrow area because the rest of maths isn’t going to change just because you are not looking at it.

  5. @yoganmahew:Without wishing to sound too defensive, I think most if not all of the cheerleaders for the house price bubble worked in the financial or housing sector. These folks were paid to do this, to lie in effect, and they are now discredited although some are creeping out of the woodwork again, Derek Brawn’s book is good on this. Basically if they are not independent their views are at best suspect and more likely, worthless.
    More generally, I think a comparable view on microeconomics would be useful.
    Similar issues arise to some of Philip’s observations. Many academic microeconomists don’t work on Ireland: if you are interested in labour markets and related areas the data is non-existent or crap so I use mostly UK data (plus I want to get published). There is also the nasty tradition of people and institutions sitting on data like its gold-dust (even if the taxpayer paid for it).
    In any event, as was pointed out months ago on this blog, the government in Ireland, is largely not interested in what economists have to say. I think any Western government & many developing countries, will make much more use of such expertise.
    On a related note there is a saying doing the rounds that ” recessions are macro event but recoveries are micro'”. Sounds good, doesn’t it? But I wonder it is more than platitude?

  6. @kevin denny
    I do agree with entirely that there is a huge absence of data. On all sorts of things that would have made the bubble entirely obvious – house prices, median wages, commercial property prices, rents, the whole nine yards of data.

    Is suppose the platitude is from the same school as the difference between a recession and a depression. Both are from the same “if I didn’t see it, it didn’t happen. And my eyes are shut” school.

    Unfortunately our government has its eyes shut and what is more, it has it hands over ours too.

  7. @Philip Lane

    “…the likely evolution is an ‘adapted/enriched’ economics rather than a fully-symmetric multi-disciplinary approach, since the technical basis for most economic policy analyses is predominantly driven by economic factors.”

    At last we seem to be getting to the heart of the matter – and many thanks for this post. But still I have the horrible feeling that the key, underlying problem is being ignored.

    There are many economic aspects of human behaviour, both past and present, that are worth studying – and the analysis can generate valuable insights, but the pressing requirement now for economics – both nationally and internationally – is to effect a gear change on the policy front that will generate more beneficial, sustainable and, dare I say, harmonious outcomes for all citizens.

    Krugman’s (and others’) depiction of the “freshwater economists” may serve a purpose in a polemical context, but it doesn’t help to move things forward – indeed it helps to characterise the debate as another example of Amercican “exceptionalism”. There is no doubt that Friedman, Lucas et al of the Chicago School proved to be exceptionally “useful idiots” for the business elites who trumpeted the virtues of “free markets, liberal democracy and the rule of law” – George W Bush’s “haves” and “have mores” – and who achieved international respectability (with rabid neo-con support) in the form of the “Washington Consensus”. This consensus may have been declared dead, but nothing has been constructed to replace it and those who profitted from its existence continue to operate as if it does.

    The business elites who hide behind this consensus hate free markets (and any regulatory and policy control designed to ensure these markets functioned efficienclty and effectively) and seek to rig, subvert and undermine the markets that exist and to accrue market power to the greatest extent possible. They loath liberal democracy unless they can subborn and/or intimidate those who govern to accede to their wishes. And they are prepared to comply with the rule of law only when they are confident that the power they exercise or the legal resources they are capable of deploying will ensure the desired outcomes.

    This is the reality that is being played out in this financial and economic crisis both nationally and internationally. Blaming economicsts for not predicting this crisis or for not advocating policies that would have prevented it or, at least, reduced its impact is like criticising the person who paints a wall for the existence of the wall.

    Until the economics profession confronts this reality, as Adam Smith did in his day, no progress will be possible. There seems to be a horror of confonting political and political economy issues on this site – it is treated as the most virulent form of polemics, but if economics is to address the efficient allocation of resources it must address the exercise of power over these resources. Economics is political.

  8. Sensible analysis. Your mention of adjacent disciplines is certainly appropriate – but will individuals take heed? Probably not. One psychological impediment arises due to the intellectual caliber of many ‘experts’. Stated bluntly, they are very bright (academically) individuals and they KNOW (with 101% certainty) that they are RIGHT. Hence all the rest of us lesser mortals can be simply dismissed or ignored. Argyris and Schone have written quite a bit about this inability of people to ‘learn’.

    In respect of the current economic and financial mess, both of these were telegraphed as far back as 1999. There were at least two (non-mainstream) economists involved; Roubini and Hudson. The other ten critics were from the business/financial world. Hence, it is understandable that many academic economists might easily have ‘missed’ the warning signs. Same cannot be said for those economists who got their pay-cheques from the financial and real-estate companies!

    Krugman has an interesting (long) article in NYT; ‘How Did Economists Get It So Wrong?. Tosses a few grenades in several directions. Principle conclusion you might draw from his musings is that virtual theory models and practical reality are not two sides of the same coin – they are completely different currencies! The other issue (not specifically mentioned) but of central importance would be the cognitive Models-in-Use by economists. These models would frame and guide their behaviours. You need to be explicit about your Model-in-Use.

    Brian P

  9. As a famous Nobel Prize winning economist once said: “the problem with forecasting in economics is that we cant predict the future”.

    Another leading Nobel Proze winner, Krugman, summed up the problem with economics as a quasi-science during the week; it is obsessed with logical-mathematical models, which are beautiful, but empirically incorrect.

    Economics as a social science needs to abandon many of its fundamental (and untrue) premises about human behaviour, and efficient markets. Humans make choices for a whole variety of reasons, most of which are irrational in text book economics. The myth of a perfectly competitive market is, well, just that, a myth.

    We need to bring the ‘social’ back into economics, as a social, recognising that markets are social constructs, an institution amongst many that make up the complex process of production, distribution and exchange.

  10. We have people here saying that it is not possible for economists to predict the future as an excuse yet we have thread after thread here by contributors telling us what the future will be if NAMA comes into being. That is really consistent ????

    I would think that the Irish economist community should put their hands up for being asleep as much as all of the other parties – Government, Central Bank, Department of Finance, Banks, Devolopers etc in not predicting the property bubble and related funding crisis of the Irish Banks.The Economist newspaper in the UK was the only ones early in the cycle to say this could not last here but were seen as party poopers. No serious economist here blew the whistle even though the monthly Private Sector Credit growth figures published by the Central Bank were alarming in the years up to 2007. Absence of data !!!!!!

  11. @Paul Hunt [& @Philip Lane – well done Philip – great idea]
    Paul Hunt is on the ball here …. or at least close enough to it to make him dangerous in certain Irish circles (-; … economics ISpolitical … IS political …. and political economy gets little attention. Useful of the 46 to enter the debate and to encourage further debate ….. but at the time I was tempted to send another letter to the Irish Times asking where were the institutionalists, behaviouralists, Minsky-ites (some serious stuff on the Levy Institute at Bard College recently which does get into broad political economy questions), psychologists, sociologists, philosophers, criminologists, political theorists et al As a citizen taxpayer am I not also paying these academics to ‘think’ (with a nod to Joe Lee). Life, and life post Naa-Maa for your every-day Paddy & Mary Citizen cannot be fitted neatly within neo-classical equations – no matter how sophisticated. And what about those economists who have been peddling neo-con versions of free market ideology [a way for the super rich to rip of the middle classes and the working class and divert the blame for poverty to those affected] – a good career move in certain academic and media circles and most who contribute here know them better than I do. Lets continue progress on that ‘critical curve’ – certainly beats Economics101 (which I never took incidentally). p.s. I’m enjoying that outbreak of Humpty-Dumpty_itis around Chicago at the mo! some of their science is sound but their ideology always makes me feel ill ……….. now can we have a few comments on Regulation and Enforcement in the Naa-Maa era?

  12. @David O’Donnell

    Many thanks for the response. Let’s see if others are of like mind. With regard to “…can we have a few comments on Regulation and Enforcement in the Naa-Maa era?” I might refer you to Brian Lucey’s observation in relation to NAMA in the earlier “Finance Dublin Editorial” thread:

    “I would like an independent, non irish, commission of banking, accounting, economic, real estate, legal and valuation experts to do a 25% random audit; to publish the details “borrower A” style’ ; to make themselves available to the oireachtas 3 monthly and to have ZERO input from any locals, with criminal proceedings against people who try to influence them. Now, that aint gonna happen.”

    We need something like this in every sector of the Irish economy. But we also need to empower the Oireachtas to be a locus of power separate from the Government and the “permanent government” behind it. In that way we might attract the calibre of public representative capable of exercising this power. As I have pointed out previously, almost 40% of Dail deputies are either teachers or farmers – the remainder bring little that recommends them as legislators. I realise that dealing with children and crops or animals may impart insights and wisdom that are valuable in a legislature, but they are unlikely to be very relevant in relation to the financial and economic crisis currently gripping Ireland.

    Appointing Prof. Honohan as Governor of the CB is very welcome, but it is a cunning move by Minister Lenihan – pragmatism is in his genes. It is unlikely to be symptomatic of any decisive break with previous behaviour.

    We have the potential in Ireland to build a good society and a good economy. You may nod to Joe Lee, but his “Ireland since 1912” captured the Irish atavistic preference for possession (of land, of property, of a professional position that secures unearned profits, or of a safe, secure, pensionable public sector post) over performance. Perhaps 800 years of deprival by the English of unhindered access to these possessions twisted the Irish psyche, but for 10 years from 1987 we focused on performance and we surprised ourselves. From 1997 Bertie-speak encouraged a resurgence of the repressed desire for possession and we are reaping the whirlwind.

    This may not fit well with “the ‘deep parameters’ of utility functions and production functions”, but this is the reality we are facing and until economists, both here and internationally, wake up to this reality (and confront it), they (and their discipline) will deserve all the opprobium they attract.

  13. I’ll be happy when I see “externalities” being treated with a bit more respect and not overlooked as being insignificant in the great Mathamatical graphs of the World.When the great Mathamatical gurus on Wall St. convinced themselves that toxic debt could be packaged in bundles sufficiently large enough to dilute their impact on “reasonably stable returns” they also convinced themselves that the irrational behaviour and even fears of a small number of Bankers could not undermine the great Global order.I started with the notion of “the straw that broke the camels back” or “tipping point” but before I knew it I had arrived at these thoughts..”are we missing the emergence of externality bubbles” where things like irrational fear can inflate quickly and collapse entire Economies.Maybe its time we accepted the fact that “free markets can not be plugged into some mythical automatic pilot which will correct itself as needs be,because the problem will always be the access some very irrational passengers have to the cockpit”. Ha Ha.

  14. @Ray
    “We have people here saying that it is not possible for economists to predict the future as an excuse yet we have thread after thread here by contributors telling us what the future will be if NAMA comes into being. That is really consistent ????”
    To be fair, the 46 are agreeing with you. They are pointing out that the assumptions that underlie NAMA are making predictions about future prices that are not sustainable (specifically that we are in a trough and prices will rise from here and concerning interest rates and income from ‘performing’ loans, much of the rest of the criticism is to do with any lack of supporting data for many of the assertions of NAMA – LTV, bond pricing etc.).

    @Stringer Bell
    Precisely. The state has greater firepower in coming up with mathematical models. If the direction of economics as a science is that these models are the best thing available, then the room for someone to criticise based on other, non-elegant criteria is hugely diminished. I notice that Mr. Roubini was originally criticised because he had no model to support his assertions that there was a debt-crash on the way…
    (August 2008)
    “When the economist Anirvan Banerji delivered his response to Roubini’s talk [at the IMF in September 2006], he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer…

    The dismal science, it seems, is an optimistic profession. Many economists, Roubini among them, argue that some of the optimism is built into the very machinery, the mathematics, of modern economic theory. Econometric models typically rely on the assumption that the near future is likely to be similar to the recent past, and thus it is rare that the models anticipate breaks in the economy. And if the models can’t foresee a relatively minor break like a recession, they have even more trouble modeling and predicting a major rupture like a full-blown financial crisis…

    True though this may be, Roubini’s critics do not agree that his approach is any more accurate. Anirvan Banerji, the economist who challenged Roubini’s first I.M.F. talk, points out that Roubini has been peddling pessimism for years; Banerji contends that Roubini’s apparent foresight is nothing more than an unhappy coincidence of events. “Even a stopped clock is right twice a day,” he told me… All of Roubini’s predictions, Banerji observed, have been based on analogies with past experience. “This forecasting by analogy is a tempting thing to do,” he said. “But you have to pick the right analogy. The danger of this more subjective approach is that instead of letting the objective facts shape your views, you will choose the facts that confirm your existing views.”

    Kenneth Rogoff, an economist at Harvard who has known Roubini for decades, told me that he sees great value in Roubini’s willingness to entertain possible situations that are far outside the consensus view of most economists.”

    I really hate that stopped clock analogy. The point to me is that those dismissive of speculative/historically-driven analysis (the stopped-clockers) are saying we will reach this time. Those who dismiss them are basically saying “we will never reach this time” – time will magically skip over doomsday midnight…

  15. @stringer bell. Niels Bohr, a Nobel laureate in physics, said “Prediction is very difficult, especially if its about the future”. I wonder is that who you had in mind?

  16. During the Irish bubble, the academic economists left the public arena to their counterparts in financial services, who in a Finance Magazine poll in 2004, had selected Charlie McCreevy as the “best” finance minister in the history of the State.

    There was plenty evidence from the US that while cutting taxes was easy, raising them risked political death (“Read my lips. No new taxes”), nevertheless, the cheerleading from economists provided the intellectual underpinning for the reckless politicians and property interests.

    When Jim O’Leary abandoned the money changers in their high temple, for Maynooth, and produced research with colleagues, which showed that benchmarking was a sham, it was potentially an important development.

    The research was a direct contradiction of the Government’s basis for raising public pay and pensions, by an average of 9%. The same government supported the financial industry’s opposition to a mandatory pension system in the private sector which Lord Adair Turner said was necessary to end pensioner poverty because “a purely voluntary system was not going to work….employers won’t provide adequate pensions for employees and individuals won’t go out and buy pensions themselves.”

    Even though ministers did not question O’Leary’s findings on benchmarking, they had nothing to fear from the media. Political correspondents wouldn’t hassle them about economics while the State broadcaster RTÉ would always facilitate them with unthreatening formats. It’s not a surprise that the Taoiseach has been interviewed twice on the Late Late Show in the past 15 months.

    So while academic economists could have called their counterparts in finance to account, it wouldn’t have mattered much.

    Looking forward, what is so striking today after the crash, is that there is still little interest in significant reform in conservative Ireland.

    NAMA is continuing the Victorian culture of secrecy at the Dept of Finance; in the aftermath of Bord Snip lifting the veil on the insiders’ network of public spending largesse, the vested interests have marshalled their forces but there is no constituency for transparency that would have a long-term impact; Opposition leaders have made noises about adjusting the number of TDs but there is little evidence of a commitment to significant change.

    The area of institutional reform should merit attention from economists as all roads lead to the rotten head of the fish and the system of limited accountability, where the buck stops nowhere.

  17. Since the 18th century, economics has claimed it should be considered as a predictive science.

    Yet, as has been seen in crisis after crisis, it has failed to do just that.

    Yes, there are a number of high profile economists that have got it right on this occasion. However, they have been constantly outnumbered by the “free marketeers at any cost” who counter that even a broken clock is correct twice a day.

    Apart from the doomsayers, there was barely a whimper about the looming crash. We now have to ask why.

    I touched on this in previous posts on this blog. Our new CB governor elect has ample experience of previous bank and financial crisis

    For anyone interested, I would recommend reading the world bank paper:

    Beyond capital ideals : restoring banking stability

    It is ten years since the Honohan – Caprio Worldbank policy research paper was published.

    Although it was in response to the collapse of the financial institutions in many emerging markets, it makes for interesting reading in light of the current crisis.

    Many of the points raised have equal validity today in our own markets.

    I would agree with Michael Hennigan that there appears to be little interest in significant reform in conservative Ireland.

    But more than that, I would argue that Economic theory in itself is no longer fit for purpose.

    It will always be limited. It cannot take account of corruption at the highest levels. Nor can it account for irrational behaviour.

    To put it bluntly, standard economic theory can never hope to explain how you and I behave.

    Leaving aside poor regulation. How else can we account for the fact that economists couldn’t foresee that bankers and traders would be making irrational bets with all our futures.

    Mainstream economics, as represented by the Chicago school, is so enmeshed with the principle of free markets. deregulation, free trade, trade liberalisation and less government, that it never even considered that it could all go wrong.

    The assumptions it created always suited the idea that market economies are perfect.

    Based on those infallible assumptions, it is not so difficult to understand why this crisis happened, and it has delivered a massive shock to their system.

    For the benefit of those who may have missed it In his testimony to congress in late 2008, in the wake of the Lehman Brothers collapse, Alan Greenspan declared himself “shocked” that markets had not worked as anticipated.
    “I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms,”

    As the Honohan-Caprio paper recognised 10 years ago, financial institutions will always be seeking ways to circumvent regulations to maximise their profits. They concluded that likewise, regulation would have to involve continuos evolultion.

    One final point. I believe that economics cannot address the “too big to fail ” scenario that is now playing out in countries around the globe.

    Without adequate regulation, we are in danger of creating such monsters here through Nama with our two biggest banks.

  18. This is an intrigueing debate which will continue long after we have got tired of discussing NAMA. Philip is to be applauded for instigating some soul searching among Irish economists.

    I have recently returned to take a masters in Economics having completed my primary degree 23 years ago. I was astounded by the way economics has become dominated by mathematics. Economics as a discipline used to use mathematics extensively as a tool for modelling and predicting future events. I believe this has entirely changed now and economics is fast becoming a branch of mathematics.

    Indeed in order to undertake a masters in Trinity, the passing of a rather advanced maths and stats course is a pre-requisite. Our colleges are teaching students a very narrow view of economics – a search for the perfect model through mathematic deduction. I believe we need to take a step back and teach students intuitively about economic theory. Graduates should be encouraged to expound and advance theories which may not necessarily be able to be mathematically proved.

    We need to stop turning out “ketchup” economists for the future and revert to a “discuss and contrast” method of teaching. We can then reclaim economics as a social science.

    As head of dept., I wonder what Philips thinking on where teaching should go is. Should behavioural economics become a larger part of degree courses and reduce the level of maths and stats required????? Perhaps you might let us know.

  19. @J Woodroofe

    Like I said, it is no longer fit for purpose. No mathematical equation can account for human behaviour.

    Given stringent regulation, with tough penalties for transgression, then yes, economists can go a long way to predicting a scenario of likely outcomes.

    Without that, there is little hope.

    I am sure there is a plethora of papers in the US re the de regulation of power, and the likely benefits to the industry and society as a whole.

    One word destroyed all those papers. Enron

  20. @Michael Harvey
    “Given stringent regulation, with tough penalties for transgression, then yes, economists can go a long way to predicting a scenario of likely outcomes.”
    What sort of penalties did you have in mind? Flogging, hanging, etc? A bit harsh on economists, don’t you think?

    Maybe not. They are a dangerous species, especially when they are bent on destroying international confidence in the Irish miracle economy by talking it down going forward.

    Personally, there are a few bank economists I’m looking forward to not getting a license to preach…

  21. @yoganmahew

    I could have made that point clearer. I meant reguklation within financial and corporate structures.

    Sorry about that, I have come down with a new flu variant…Namaitis

  22. Come now, I was purposfully misreading you for jocular effect; sadly FAIL.

    I shall wave a hand-written sign behind my head for the rest of the day in penance.

  23. @ Michael Harvey
    ‘Given stringent regulation, with tough penalties for transgression…’
    The puzzles associated with regulatory enforcement are one of the areas in which sociology and socio-legal studies in an institutionalist bent have as much to tell us as economics. There is first a descriptive and empirical finding that in many regulatory regimes across diverse countries, regulation is not stringently enforced. Secondly there is the question of how to explain this widespread phenomenon. A variety of explanations are put forward. A functionalist explanation suggests that many enforcement agencies find it more effective to use their (limited) enforcement capacity to seek to persuade regulatees to comply through education, advice and warnings and that escalated strategies, such as application of civil and criminal penalties and license revocation are reserved for persistent and or egregious wrong-doing. Another set of explanations focuses on the relationships between regulator and regulatee finding, variously, elements of capture by regulatee of regulator or over-identification by regulator with regulatee for a variety of reasons (not all bad) as the reasons for less stringent enforcement than that provided for in legislation. A third question is ‘does stringent enforcement deliver maximum compliance?’. Much of the research favours the escalatory approach discussed earlier (though it requres good knowledge on the regulator’s part and a willingness to intervene stringently when appropriate) as the most efficient way to regulate effectively. Excessive stringency is liable to counter-productive effectives (for example the generation of creative compliance). A step beyond the escalatory theory a metaregulatory approach suggests that compliance is likely to be stronger and less requiring of coercion where regulatees are encouraged to, and monitored in, the making and enforcement of their own norms. There are plenty of risks associated with such relatively high-trust strategies, but the potential pay-offs are thought to be make it worth investigating whether the conditions can be put in place such that metaregulation might be effective in steering the self-regulatory capacity of businesses and others. Calls for tougher regulation as a response to the financial crises are likely to make such metaregulation less politically attractive. Apparently tough (even if ineffective) interventions are favoured over more gentle (even if more effective (and efficient)) strategies.

  24. @Colin Scott

    I agree with many of your comments. What I am trying to point out is that without some form of regulatory regime in place that discourages corruption, even the very best of Economic thinking is devalued.

    The phenomenon you refer to can be summed up in one word…greed

    There can be no tougher penalty for being found guilty of corruption than execution, yet, such is the lure of untold riches that many Chinese officials face the firing squad every year.

  25. One more thought on stringent enforcement:
    As I cycled in today and observed many egregious breaches of the rules regulating the parking of vehicles on pavements and cycle lanes, I was reminded that another, institutionalist, explanation both of non-compliance with regulation and weak enforcement, is cultural, of the ‘this is how we have always done it’ variety. I think this hypothesis has considerable plausibility not only in Ireland, but in many countries, and over many different sectors, including financial markets.

  26. Academia, in any discipline, are generally consumed with counting angels on pinheads. I don’t mean that in a derogetory manner. That is what academics should be doing. It is difficult, when concetrating at the minutae of the cutting edge, to see the big picture for what it is worth.

    I think better to ask the question; Why did the discipline fail to have sufficient tools to explain the economic outcomes and hence identify potential or likely problems

    The answer to that question was – I will confine this comment to Irish issues – was it didn’t. Everything was there. And we didn’t need complex data analysis to do it.

    A small economy joining a large monettary area.
    Massive growth in money supply; ditto credit
    Extended and large real exchange rate appreciation.
    Massive oversupply

    I think the answer to the question and the more important issue is what were the human and personal behavioural traits, flaws etc. that led the majority of economists to ignore what they knew. In some cases it was conflict of interest, in other (as above) not seeing the wood for the trees, in other cases getting caught with the herd.

    People were calling this bubble from the turn of the millenium. It frustrates me, because I was one of those and was called a crank for around a decade. While others saw me as being wrong year after year, I only saw the same problems compounding and magnifying year after year.

    That is the lesson here. This shows the human behavioural failings we have.

    And it isn’t over yet, there is massive cognative disonance going on. Ireland’s economic policy is as bad as ever. Worse, there is a reversion to type.

    We are seeing a turn to industry policy, regional policy, more and more complex fiddling with the tax system designed to target outcomes, reversion to mercantilist behaviour, etc. etc. The list goes on.

    My concern is why the economics establishment of Ireland is addressing all these problems – which invariably require a stark confrontation with ingrained public beliefs. But it looks as though everyone wants to stay in their cultural comfort zone.

  27. The true problem here and in countries across the world is that economists are far too heavily influenced by their political views. Politics as we all know gives rise to passionately and strongly held views which, all too often, ignore the realities of life. Taking a particular political position often also means adopting a particular economic view of the world which you cling too even when the evidence of history shows that your view is clearly wrong.

  28. And still this month the Irish problem continues because it never got solved properly however drastic the cuts made in the last 2 years. The basic instability of the Irish economy provided by an overvalued currency will take a lot of fixing and Portugal will be able to hold hands with Ireland on the road to economic chaos.

  29. Ireland unfortunately is far from alone in its current struggle to climb back out of the financial mess it has managed to get itself into in the last few years. Unfortunately, the very strong influence from other European countries will have more to do with how quickly Ireland recovers than will anything that the Irish government itself does.

  30. Prof. Browne makes a fair point. The punt/Euro was all wrong as it was in Italy and Portugal. These currencies will need some serious remedial work and a lot of pain to get well again.

  31. I’m originally from Ireland and it’s been sad to see how much it has changed in such a short period of time. And it’s going to take more than the billions from their neighbours to get things back on track. The Irish people will also need to dig deep and above all never let the politicians forget. Sometimes I wish we were like the French and revolt every once in a while.

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