Economics

Traditional rankings of the least trustworthy professions always deliver the same result. Politicians, taxi drivers and journalists come out on top. However, in the wake of the financial crisis economists can no longer be far behind. At least jokes about hapless economists are not in short supply these days – which to economists is a clear indication that there must be a demand for such ridicule.

Milton Friedman once quipped that if you put the government in charge of the Sahara Desert, there would be a shortage of sand within five years. In the very same way, an interventionist and protectionist government can create a staple food shortage even in the most highly developed nation on the planet.

If there was one word to sum up the whole body of economic theory, it would have to be ‘incentives.’ People act on incentives. As William Stanley Jevons (1835–82), one of the founding fathers of neoclassical economics, put it, the whole economy is ‘a calculus of pleasure and pain.’ Greece is playing out a most macabre application of incentives.

Economists like us are not just funny people. We actually have a lot to say. And unlike politicians and engineers, economists don’t engage in daydreaming. We don’t do free lunches.

The Nobel Prize in economics left me somewhat puzzled. To be sure, the recipients Peter Diamond, Dale Mortensen, and Christopher Pissarides are all highly respected economists. In another sense, too, the choice of the three labour market specialists is hardly revolutionary. Though their models are elegant, what they are actually saying is very much common sense.

Economists should take the time to ask themselves what they can learn from the events of the past three years. If they were honest with themselves, they would conclude that many of them had been too optimistic about their ability to predict the future with certainty. They would have to confess that the world is too messy a place to be expressed in models of ‘general equilibrium’ or ‘perfect competition’.

There is nothing wrong with happiness, of course. In fact, it was the Americans and not the Bhutanese who first declared the pursuit of happiness a national goal. But it’s nevertheless a bit odd to present Bhutan as the role model for global happiness and well-being.

Economists should take the time to ask themselves what they can learn from the events of the past three years. If they were honest with themselves, they would come to the conclusion that many of them had been too optimistic about their abilities to predict the future with certainty. They would have to confess that the world is too messy a place to be expressed in models of ‘general equilibrium’ or ‘perfect competition.’