Using Economics
Up & Down (just like the subject that studies it)
In Stumbling on Happiness, we learnt that people too often overrate the enjoyment of a particular activity they are about to engage in because their imagination leaves out vital details that they would eventually come to regret not conjuring. Somehow, people seem to suffer from the same sort of expectations for economists. While economists have by and large prescribed policies to help in economic recovery, to regulate growth so that business cycles are as smooth as we can manage, they are in no way clairvoyants who concocted models that predict future crises. Interestingly, because of how divided economists are in their opinions, some people will ultimately get blamed during particular crises for failing to see them ahead of everyone else (absence of crises that are expected sometimes also produces the same problem).
In last month's Briefing on the state of Economics, Robert Lucas and Robert Barro were singled out as perpetuating mistakes and producing errors in the field of macroeconomics. Paul Krugman was once again quoted for his fears that most macroeconomics of the past 30 years was “spectacularly useless at best, and positively harmful at worst”. This sort of stuff happens now and then, economists are famously at odds with each other on a huge array of issues.
Professor Robert Lucas wrote in a later issue of The Economist his defence of economists and macroeconomics. It is just a little disappointing that the economist himself would call 'economics' a dismal science although the title could well be the work of The Economist.
In the same Briefing, there was also another critique on finance, which Professor Lucas responded to as well. Efficient Market Hypothesis was discussed at length but at the end of the day, we all know that the market's efficiency is different when looking at different time scales. In an instant, the market might not have incorporated all the information in that very same moment but would soon be corrected - sometimes it takes longer, other times it is faster. I'm trying to introduce Mandelbrot's view of the stock market right here. It is by and large efficient but when you examine the market at a highly magnified time scale, observing every transaction, every thought that goes through investors' minds, there would be mistakes here and there. On certain occasions, there's over-correction of a bubble leading to exaggerated price falls - which essentially mean long periods of 'informational-inefficiency'.
All these intellectual discussions and debates are great for students of economics, and the best part? We don't actually have to take sides (though it's not exactly good when you have to advise any governments in the future; Harry Truman famously exclaimed he needed 'one-handed economists'). It is heartening to note that The Economist concluded their article on the state of economics with the observation that it is often through crises that the potential of the subject balloons and the field takes huge strides of advances.
