James Buchanan has a new paper where he makes several points about economists and the GFC. While I agree with the notion that money should be neutral (as neutral as is possible anyway) I don’t agree with bringing back the Glass-Stegall laws or greater anti-trust for banks. Afterall the GFC impacted in the US and EU where very different banking regulation models are at work. But you don’t have to agree with his policy prescriptions to agree with his diagnosis of the problem.
The Keynesian-inspired separation of macroeconomics from microeconomics that took place in midcentury seemed to embody genuine scientific advance. The attention of many economists was shifted to measure the aggregate variables that seemed adequate to describe the macroecomy. The size of the gross product, the number of unemployed, the price level—these variables, and others, seemed intrinsically worth measuring, and especially rates of change over time. The whole corpus of macroeconomic modeling that came to be dominant in the years immediately following World War II seemed to offer new vistas for economists’ productive value to the general welfare.
Unfortunately, economists, generally, failed to understand that aggregate variables that may be measured with tolerable accuracy ex post may not be variables subject to control, directly or even indirectly. The fundamental misconception here lies in the understanding of what ‘the economy’ is. The ‘economic problem’ is not (despite Lionel Robbins) an engineering problem that may be defined simply as the allocation of scarce resources among alternative uses. The economy, in some inclusive definitional sense, is perhaps best described as an order that consists of an interlinked set of exchanges, simple and complex, from which outcomes emerge that may in some respects be meaningfully measured but that cannot be chosen, and thereby controlled, by concentrated decision takers.
The false conceptualization here is, of course, exemplified in the failure, both in theory and in practice, of the grand socialist experiments of the twentieth century. What remains missing, however, is a general recognition by economists themselves that their mind-set, when confronted with challenge, has not escaped from the engineering mentality. There has been little or no spillover from observation of events to the analysis by the putative scientists in the academies. It is not, therefore, surprising that the policy objectives and implementation are basically the same as those advanced by the Keynesians of midcentury.
Economists do not really understand what they are doing as they seem forced to make efforts to control aggregate variables that are not controllable in any direct sense. For example, the rate of employment (or unemployment) cannot readily be shifted by governmental mandate. At best, small and peripheral changes may be made while the emergent aggregate generated by the working of the large and complex economy remains stubbornly immune, or worse, to wrongly conceived reform efforts.
Readers familiar with the critiques of Hayek and Mises would recognise those arguments.