John Rapley – How the Great Recession Destroyed Our Faith in Economists

Image: Speaking to the Pluralist Society of Philipps Universität, Marburg

‘Suppose your loved one died on the operating table,’ I said to the audience, ‘and that afterwards the surgeon came out beaming to announce “Medical science triumphs again! The surgery we were taught in medical school would have saved your beloved’s life. If only I’d attended class that day.”‘

That’s sort of the point made by Paul Krugman in a recent article on the current state of macroeconomics. Satisfied that the world economy is back in good shape ten years after the greatest financial crash in history – a crash for which much of the general public held the economics profession at least partly responsible – he says the actual theories developed before the crisis worked fine; it’s just that economists weren’t paying attention to the data that would have warned them a crisis was coming. You know that saying ‘You had one job’?

I was speaking last night to a gathering of Marburg University’s Pluralist Economics Society. Ten years after the 2008 Crash and start of the Great Recession, a wave of reflection has begun as economists look back and consider how things have changed. The pluralist economic movement sprang up at the same time as the 2011 Occupy movement. Like Occupy, it was driven by young people – in this case, students who wanted to change the economics curriculum. Looking back, have they had the sort of revolutionary impact that young economists drawn to the new ideas of John Maynard Keynes did in the Great Depression?

The fact that economists missed the red flags in the data ten years agon wasn’t accidental. In my recent book, I argue that it was inherent in the way economics had evolved over the previous few decades. A half-century ago, under the influence of scholars like Milton Friedman and Robert Lucas, economics began moving away from applied work towards pure theory. Data-work ended up being a lot of cut-and-pasting in large spreadhseets by scholars who often had only a vague sense of what the data they were using actually meant, let alone how it was obtained. Nobody felt the need to change this approach because it seemed to work so well. As Robert Lucas declared in 2003, as the housing bom was underway, ‘macroeconomics has succeeded: the central problem of depression-prevention has been solved.’

Then along came the Great Crash. Previous economic crises – the Great Depression, the stagflation of the 1970s – led to the emergence of new schools. This time around, though, the landscape of economics has remained surprisingly steady. Partly that’s because, as Krugman acknowledges in his article, this time around the crisis appeared to be less severe. Since economists had digested the lessons of the Great Depression, goes the reasoning, astute and timely action kept the economy from sinking too far. Instead of a Great Depression, we suffered a comparatively short-lived Great Recession.

Hearing economists claim credit for the management of the Great Crash reminds me of a workmate I once had who’d skive the day away before reappearing at just the moment the supervisor showed up to laud the team’s good work. For, as John Kay argued in a celebrated 2011 article, the policy decisions taken after the Crash, and that helped stave off a Depression, were largely pragmatic, owing little to theory.

Still, let’s take Krugman’s claim at face-value and assume, for the sake of argument, that economists were the heroes of the Great Crash. After all, Ben Bernanke is an economist, so even if he was winging it during his headship of the US Federal Reserve, his training proved vital. Even at that, though, Krugman’s claim only works if you define success as the absence of failure. Ten years after the Great Crash, our recovery has been so slow compared to that which followed the 1929 Crash, that we’ll end up relatively worse off in just a few more years. Moreover, the 1929 Crash was indiscriminate, and wiped out everyone from millionaires to farmers. The widely-shared pain that resulted helped forge a broadly-shared consensus for change, which ultimately yielded the New Deal.

In contrast, the bailouts and easy money that followed the 2008 Crash not only preserved the wealth of the super-rich, but made them even richer. Since then, the tepid recovery has depressed real wage gains for the majority. Far from a consensus for change, Western societies have become deeply divided. They got FDR, we got Trump. If that’s your idea of success, don’t be surprised that many people say you can have it.

We have to give credit where credit is due. As many economists protest, this is actually an exciting time in their field. There is a ferment of new ideas in the seminar rooms. The problem is, the public aren’t hearing it, and the defensiveness of some economists in the face of public criticism suggests they just don’t get the public anger. Before the Crash, economists were our gurus, men like Alan Greenspan lionised for their ‘shaman-like’ ability to move global markets. Economists then basked in this glory – and a few monetised it pretty effectively too.

The Great Crash shattered that faith. Hearing that everything is fine is hardly going to restore anyone’s faith – because for many people, things most definitely are not fine. As I and some colleagues argued in an open letter this week, the kind of complacency creeping back into the profession, and to which Krugman gives voice, is unwarranted. The public are still angry, and the revolt against the ‘experts’ won’t abate until the economics fraternity accepts the legitimacy of the public’s concern.