Friday, December 04, 2009

Economists and ideology: Lesson 2008

On september the 6th, the 2009 Nobel laureate in economics Paul Krugman, wrote on his column ( about two different economist groups. Those from the west (freshwaters),and those from the east (Saltywaters) .Both groups , have in common only the basic framework which the economics science is build upon: This is the economy is more often than expected out of its long run trend , and the problem is how to get it back again.-
One group (freshwater)felt self confident about the strength of their argument. Gerad Depreu (1983) ,had demostrated the mathematical foundations of free market economy,in such way that gave liberalism, not only a scientific foundation but also a superiority status .Besides , F von Hayek stated that social desorder is appropiate for a liberal project and its spontaneus order , and M Friedman,had stresed the consequences of inflation ,mainly its negative impact on the economic activity,all of these three big gave strong theoretical support to this approach :The government is part of the problem, instead of the solution” . Market are capable of self regulation, and they do not need any thing more than the proper incentives to get the maximum efficiency.-
The other group (saltywater), think that economics concern more with politics than efficiency.It deals more , with the process than the outcome (short run bias) ,such that it is not possible to avoid governmenet intervention to cope with natural disestabilization forces, arising from the nature of private markets .Keynes is the main inspiration for this approach,deeply rooted on the financial crisis of 1929-1933,and how Governmenet at that time might have solved the crisis, which by the way, it did not..-
So, as long as economists fixed their position, (market agaisnt the Government action), they lose the perspective to focus on the problem which economics deals with, and as a result they were unable to think about how to prevent the consequences of the financial bubble .(version 08).-
Prominent economists believed that prestige and reputacion by itself, would be enough to constraint bank manager risk taking behaviour .However bank managers, did not care too much about those issues, and the whole argument proved to be a failure.
Did the economy really fail to anticipate the global financial crash of 2008? .The fact of the matter, is that economics had instruments to anticipated the financial crash, but they were not considered to be good enough, as long as they were against the conventional wisdom , concerning efficient outcomes based on rational behaviour.Thus, the real failure was on the economist beliefs concerning markets performance, rather than a lacks of instruments. It was like a phisician who confusing symptons with the disease, trust more in a painkiller than in his own ability to judge by himself, the nature of the problem to be solved .Therefore , economics as a science , is in better shape after the crisis.-
N Roubini, and others economist, all said at some time where the global economy was headed to.Ideology ignored them. Therefore , the big failure has been on idelogies . Economics which did not learn from politics failed . We hope it will the last.-