The Economist's Decline
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The reputation gained by economists has been a remarkable feat of PR; a branding job like no other. Quite how it developed remains a mystery, some inexplicable sleight-of-hand. Its consequence, however, is far easier to discern: in the minds of many, economics came to be thought of as a science. Removed from its rough prediction roots, it became a discipline of watertight theory, with a methodology capable of unearthing indisputable truths.
Economists, so the story goes, had successfully grasped the essence of human behaviour: rational, and, therefore, highly predictable. With this discovery, an age-old question whose answer for millennia had eluded humanity was finally laid to rest. Where philosophers, psychologists, and sociologists had failed, economists had struck gold. They had cracked it. As a result, imperfect theories - as economic theories inherently are - started to be treated as laws of nature, like facts, and confidence among economists erred towards hubris. A sense of exclusivity pervaded the field, an unspoken agreement that outsiders were unwelcome, and their contributions unneeded. Economists preferred to work in isolation, adding to what they saw as a body of incrementally growing objective knowledge. When called upon, politicians typically assimilated their prescriptions - who were they to contest it? - and a docile public simply stood by, watching on in ignorant bliss.
How could it be any other way? To the untrained, the language of economists is enough to render any growth-guaranteeing model incomprehensible. Indeed, the extent that their work is misunderstood is shocking - Brits were famously unable to distinguish debt from deficit despite enduring waves of austerity justified, in part, by both. Thus, for much of their legitimacy economists have relied upon blind faith, an investment the masses have, for a long time, been more than happy to make. It’s basically a science after all!
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A discipline in crisis
In the last 10 years, however, things have changed, and in this era defined by populist, anti-establishment politics, economists’ time in the sun looks to be drawing to a close - for the time being at least. Reliance on their theories is withering, and general trust in their practice has waned. Politicians, clearly, have distanced themselves from economic aides. Gone are the days when leaders swore allegiance to economists. Margaret Thatcher’s fawning over Milton Friedman or Bill Clinton’s exaltation of Joseph Steglitz now feel like distant memories. And it’s difficult to imagine Trump invoking the spirit of Robert Lucas Jr. any time soon. To the contrary, much of his policy has been at odds with mainstream economic wisdom - his trade war with China, for instance, widely condemned. Although Trump’s particular ambivalence towards economists is indicative of his own capricious nature, it's also aligned with a general breakdown of trust that has swept society.
2008 Financial Crisis
Much can be traced back to the global financial crisis, which left the profession reeling, dealing its reputation an almighty blow. As professor Franklin Allen recalls of economists of the time, ‘it’s not just that they missed it, they positively denied it would happen’ - the banks, consensus dictated, were simply ‘too big to fail’. Following the crash, economists were expected to take centre stage and steer the global economy towards recovery - that was their job. On that front, though, they also failed. The recovery - itself a generous term given the context - has been sluggish and uneven, the Economic Policy Institute calling it ‘the slowest in recent history’. And meanwhile, poverty levels across much of the Western world have been rising.
Orthodoxy had long dictated that job creation solves poverty, the dictum to this day forming the basis of many an economist’s outlook. If jobs can be made, things will be okay. Post-recession developments on both sides of the Atlantic, however, have seen this one-time pillar of economic thought gutted of its credibility. The UK city of Sheffield provides an illustrative example. Deindustrialised in the 80s and 90s and then hit hard by the recession, Sheffield was subject to a typical prescription for economic revival: redevelopment of the city centre and an expansion of its university that together were designed to stimulate job creation. Superficially at least, the initiative worked as intended: as of 2018 unemployment was down 50% compared to the 1990s. Statistics like these, though, serve only to mask how little has changed. Indeed, despite more people working, in many parts of the city the exact same social problems persist. The issue is no longer finding a job; it’s finding a job that pays enough to live on, and they, by all accounts, are in short supply. As a result, in-work poverty across Britain has skyrocketed, working families often unable to put food on the table, forcing food banks to make up the shortfall. Data suggests that this trend, far from exclusive to Sheffield, is replicated across the EU, workers in poverty ‘rising steadily since the financial crisis’, according to one Financial Times article.
In America the same development is underway, food stamps reaching record levels while employment statistics soar. GDP may be rising but wages have stagnated. Currently in the US over half the households classified as living in poverty contain now at least one working adult. Back in the UK, real wages have actually fallen against a backdrop of slow but steady growth. Across the continent, ‘the lost decade’ - a phrase originally used to refer to Japan’s period of stagnation in the 1990s - is frequently invoked, in an illustration of the widespread nature of the phenomenon. In truth, the decoupling of growth and wage gain has baffled economists, many finding it difficult to comprehend the disintegration of one of their founding myths.
‘An upturn is coming…’
Offering little in the way of remedy, they instead continue to insist that with unemployment falling, the tightening of the labour market will eventually lead to a corresponding rise in wages. While there is fairly widespread consensus supporting this, the economy of Australia encourages scepticism. Sheltered from the recession and approaching 30 consecutive years of productivity growth, its wage growth at the end of 2018 was barely 2%. The upturn is yet to happen. For those experiencing an extended period of wage stagnation, or even decline, constant promises of a just-round-the-corner increase mean little. They are no distraction from the grim realities of life getting harder.
To make matters worse, in the few instances where wage growth has been recorded, it’s generally been unevenly spread. Studies of OECD members have shown that when growth occurs, the wage increases of the top 1% typically far exceed that of the median worker. This is consistently supported by statistics from across the developed world, which uniformly show that inequality, in both wealth and income, is deepening - a trend described by UNCTAD Secretary-General Mukhisa Kituyi as a ‘significant obstacle to translating economic growth into inclusive prosperity’. Recent research has even suggested that in certain areas IMF prescriptions have actually exacerbated inequality, the same IMF that boasts its staff are among the ‘best and the brightest’, and has solidified its reputation as ‘an organisation that solves problems’.
A glimmer of hope?
In many ways, the loss of faith in economists is really not surprising. Their record, quite simply, is a bad one. On the big questions, they have, for over a decade now, given few answers. A culture of overconfidence led to the 2008 crash, and since then the profession’s reputation, like many economies around the world, has been in tatters. Sidelined by politicians and mistrusted by the masses, economists' stock is somewhere close to an all-time low.
There is, at least, some sign rehabilitation may be underway. Most notably, a growing number of outsiders have been welcomed into the field, in an overdue tempering of its more exclusive tendencies. The inclusion of historians, psychologists, and sociologists, among others, has afforded economics a methodological dexterity it previously lacked, broadening its scope. Greater interdisciplinary dialogue has also overseen a return of humility, as theories and models previously sacrosanct have been better scrutinised, refined, and sometimes debunked. However, in response to many of the biggest challenges (inequality, stagnant wages, etc.) the discipline remains wanting. Its orthodoxies have been undermined, but are yet to be replaced, and it’s crying out for fresh ideas. Perhaps the saddest thing, though, is that this has been the case for some time.
- Economics Books
Book Review: “Booms and Depressions”
The 1932 book "Booms and Depressions" by Irving Fisher, along with his 1933 Econometrica paper "The Debt-Deflation theory of Great Depression" earmarked the start of a new era for modern macroeconomics and financial literature. This article reviews the book in light of the current economic and financial scenario.