Economics would be more useful if our expectations were more modest By Timothy Garton Ash February 5, 2016 – The Globe and Mail

The Guardian recently asked nine economists has spent half a century trying to expose this whether we’re heading for another global fallacy.) financial crash, and of course, they gave nine Modern macroeconomics also “largely ignored different answers. Yet we still turn to the operations of the financial system and in economists as if they were physicists, armed particular the role of banks.” with scientific predictions about the behaviour of the body economic. We consumers of Market fundamentalism understood itself as the economics, and economists themselves, need to diametric opposite of the communist command be more realistic about what economics can do. economy, but in fact made the same cardinal More modesty will produce better results. mistake: to believe that a rational model could encompass, predict and optimize the dynamic Following the great crash that began nearly a complexity of collective human behaviour. decade ago, there has been some soul-searching about what economics got wrong. The self- Large parts of academic economics fell prey to criticism should have been more far-reaching, what has been called “physics envy.” Like both in academia and banking, but it’s there if some other areas of social science, they aspired you look for it. In particular, the thinkers to the status, certainty and predictability of loosely clustered around George Soros’s physics. I have long thought that this one- Institute for New Economic Thinking have dimensional hubris was fed by the fact that produced a telling account of what went wrong. economics, alone among the social sciences, has a Nobel Prize. Strictly speaking, it is not Adair Turner, who saw top-level economic one of the original Nobel Prizes. But everyone decision-making first-hand as head of Britain’s calls it the Nobel Prize in economics, and Financial Services Authority and now chairs economists have been ennobled by the special INET, gives a measured, cogent version of the nimbus it retains. critique in his book Between Debt and the Devil. Yes, leading academic economists Moreover, politicians and decision-makers challenged mathematical models of market listen to them in ways that they don’t, for perfection and, yes, financial markets may have example, listen to political scientists of the followed oversimplistic versions of those “rational choice” school that dominates many models. Nonetheless, he argues, “the dominant U.S. university departments. This may partly strain of academic economics and of policy- be because a politician who practised rational making orthodoxy” failed to see the crisis choice politics would soon be kicked out of coming, and actually contributed to it. office, whereas the public has had to pick up the bill for those who practised rational choice The key flaws were the “efficient market economics. hypothesis” and the “rational expectations hypothesis.” Too often, economists assumed This does not mean that we should not pay that market actors not only behave rationally attention to economists, nor that economics is but do so according to the same mental models unworthy of a Nobel Prize. It just means that deployed by economists. (Mr. Soros himself it’s not a hard science like physics. Done properly, it needs to take account of culture, history, geography, institutions, individual and Then there’s the conduct of major players in the group psychology. John Stuart Mill said that “a economy. I recently read a splendidly robust man is not likely to be a good economist if he lecture by veteran investor Charlie Munger, is nothing else,” and John Maynard Keynes Warren Buffett’s partner in Berkshire observed that an economist should be Hathaway, delivered in 2003, well before the “mathematician, historian, statesman and crash. “Berkshire’s whole record has been philosopher in some degree.” In another achieved without paying one ounce of attention remarkable formulation, Keynes wrote that to the efficient market theory in its hard form,” “economics is essentially a moral science.” he said, adding that the results of that efficient market doctrine in corporate finance “became Indeed, one could argue the Nobel Prize for even sillier than they were in the economics.” economics belongs somewhere midway His sage advice was to restore economics’ between those for physics, literature and peace. proper multidisciplinary character, not Economics is, at best, a multidimensional, overweighting what can be counted against the evidence-based craft, alert to all the influences unquantifiable, nor yielding to the craving for on human behaviour, at once ambitious in false precision, nor privileging theoretical scope and modest in its claims for what we can macroeconomics over the real-life ever predict in human affairs. microeconomics that helped guide Berkshire’s What should follow from this revised, new-old long-term investment decisions. understanding of the character and place of The rest of us should learn the same lesson. We economics? I don’t know enough about should ask of our economists, as of our doctors, university economics courses to say whether only what they can deliver. There is a scientific they need to adapt more, but I was struck by a component to medicine, larger than that in manifesto published a couple of years ago by economics, but medical studies themselves economics students at the University of indicate how much our health depends on other Manchester. This advocated an approach “that factors, especially psychological ones, and how begins with economic phenomena and then much is still unknown. Economists are like gives students a toolkit to evaluate how well doctors, only less so. different perspectives can explain it,” rather than mathematical models based on unrealistic Timothy Garton Ash is professor of European studies at assumptions. If economics is like other Oxford University and senior fellow at the Hoover Institution, Stanford University. disciplines, it probably changes more slowly than it should, because of the strong inertial effect of older faculty.