What’s wrong with economics? Part 3: Economics and its public perception

Economics as a cock fight

In August last year, Raghuram Rajan, the current Head of the Indian Central Bank and previous Professor of Finance in Chicago, wrote an article that had attracted considerable attention about the “paranoid style” of economic debates. He gave the hurtful, personal comments the Nobel Prize laureate Paul Krugman had made about Ken Rogoff and Carmen Reinhart as an example; they were criticized for serious statistical errors found in an article they had authored, which had previously been seen as ground-breaking.

Raghuram Rajan is right. In particular economists who receive extensive public attention, such as Paul Krugman, come over increasingly as paranoid egocentrics. This also applies to his rival, Rogoff, who likes to wallow in self-pity and portray himself as a victim of a conspiracy to the general public. This may possibly be due to the mechanisms of the media industry, which only pays attention to those that scream “scandal” the loudest. This will be explained in more detail in the following section. When economists resort to making a racket to attract publicity, they ultimately damage the reputation of their science and its representatives. This is a particular shame with regard to Paul Krugman, the mind behind numerous important and innovative insights.

The bickering among economists about economic policies has proved to be particularly annoying with regard to recent issues, such as the Euro crisis. Free-market and Keynesian economists fought fiercely about who had the right therapy. Each of them claimed to have the recipe for success, which was different to all of the others. And they always portrayed those that did not share their opinions as complete idiots. And no one really took a deeper look into the country-specific factors causing the crises, which may have led to a more nuanced view.

Throughout all of this, they all seem to have lost sight of what good economic policy is all about – confidence in the future. Investors’ and consumers’ faith in the future is crucial for economic development. Without the right degree of confidence, people do not invest productively and reduce consumption. Too much confidence, on the other hand, is just as harmful as too little. Excessive optimism tempts people into spending too much and becoming heavily indebted; just as too much pessimism results in an ongoing depression.

The core principle of liberal economic policy – ranging from Adam Smith through to Hayek – is that the state fosters confidence by providing a stable framework within which the citizens can freely pursue their economic activities. Hayek, in particular, described the outcome of a situation in which the state builds too much confidence, by for example implementing a slack monetary policy. The core principle of Keynesian interventionist economic policy is that the state rebuilds trust by intervening when the market fails, i.e. when it does not achieve optimal results alone. In my opinion, these fundamental principles do not really contradict each other, because they clearly refer to different aspects of economic problems. The liberals focus on how optimum results are achieved when the conditions for a free-market economy are fulfilled; the interventionists focus on what needs to be done when the preconditions for success for free markets are violated. Why do they talk so furiously at cross purposes?

Unfortunately, warring economists do not do anything to help build trust. Nevertheless the battle between the supporters of the two camps continues to rage fiercely. This might be related to two factors:

• Both factions easily fall prey to special interest groups pursuing their own agendas. Free-market economists are always supported by companies that enjoy competitive advantages, even if sometimes these advantages have been the result of uncompetitive behaviour in the past. Bureaucrats, on the other hand, are very interested in intervening even if intervention does not improve the overall outcome. They like to use the economy as an excuse for unnecessary government intervention. Unfortunately economists are frequently exploited to suit the interests of others.
• The supporters of the two factions have a distorted perception regarding the advantages and disadvantages of their respective concepts. In addition, they forget that economic statements are only ever valid when they are related to specific assumptions. However, an economist is not really credible if he insists that his fraction does not only provide solutions for specific situations but has the magic cure for all the problems in the world.

If these rows among economists have achieved anything it all, it is that there is even less trust in the future than before. While the reasons for the decline of economics mentioned in the first paragraphs can be seen as a lack of scientific efficiency, the bickering is positively dangerous – both for the economy and for society. Because if economics is no longer taken seriously, nobody will take any notice of it when it is right, which could easily result in damage.

Economy as a “mise en scène” by the media

Up until now I may have given the impression that there has been no progress in economics recently. But that is far too simplistic. In recent years, there have been a multitude of interesting developments in economic sciences, but these have gone unnoticed by many. These are thanks to a minority of economists that have left the mainstream and do not play by the rules of the scientific establishment. Parallel to the monotonous fodder published in top journals, there are many remarkable research results. You just have to look very hard to find them.

In addition, the media interest focuses almost exclusively on the “warring economists”, who strive to generate publicity with their extreme statements. This of course has a very negative impact, with a distorted picture being presented to the general public. In a media society, the battle to remain in the public eye results in news coverage becoming increasingly unbalanced, as journalists are constantly on the look-out for a storyline with shock value. Very serious-looking experts making unsettling forecasts fit the bill particularly well. Economists such as “Dr Doom” Nouriel Roubini, who like to paint disaster scenarios, are particularly popular. Scientists who criticise their colleagues or politicians in an inappropriate tone also receive broad media attention, for example Paul Krugman’s statements about Ken Rogoff and Carmen Reinhart mentioned previously in this article.

It is a shame, but not surprising, that the general public sees economists as a bunch of venomous know-alls and certainly not as respectable scientists. Any economist who is prepared to become the accomplice of the sensationalist media industry should think very carefully about what he is doing.

To be continued tomorrow.