Has the financial crisis ruined economics? Not only did economists fail to predict it, nobody seems to have a clue how to right the ship. Unemployment went up despite hundreds of billions of dollars of stimulus spending. Tinkering with interest rates and the money supply hasn't worked, either. The dismal science now has a dismal reputation. But economics itself isn't to blame. Economists are.
Everybody knows that economists are terrible at predicting the future. If the price of pencils goes up, people buy less of them. If the price goes down, more. Economists can predict that much. But they can't say by how much. That would require a depth of knowledge known only to the divine.
They would have to know to the shape and the slope of hundreds of millions of ever-changing individual demand curves for pencils at any given moment. The elasticity of demand for the same. They need the same information for competing products, like pens. Nobody has that kind of information. Nobody can predict the future.
Many economists pretend otherwise. They revel in seeing themselves on the TV and in print. They preach to all, "I have the answer!" They are liars. As with most liars, they get caught. And people stop listening.
And no wonder people stopped listening. Economists have overstepped their bounds. They are arrogant.
People are right to ignore such glory-seekers. But they should still listen to economics. The insights of even basic supply and demand are invaluable.
Prices, for example, are one of the fundamental drivers of human behavior. Economics teaches us that prices aren't just money. They are also time, effort, and hassle and more. From rush-hour commuting to Black Friday to the theory of natural selection, the economic way of thinking helps us understand our world as no other discipline can.
Let's go back to our humble friend, the pencil. They're cheap. They're everywhere. But nobody knows how to make one. It is mentally and physically impossible. Think that through for a minute.
You would have to chop and cut the wood yourself. If you use an axe, you'd have to mine, smelt, and process the iron ore in the blade. And make the tools to do so. You'd have to find rubber trees to make the eraser — hopefully you happen to live in a tropical climate. You'd have to extract and process the rubber yourself, and make all the tools for that yourself.
Then you'd need to mine and mold the aluminum for the little bit that holds the eraser to the shaft. And you'd need to know how to make yellow paint, and have access to all the ingredients. And how to make the paintbrush you need to apply it. Then there's the matter of finding graphite for the pencil lead…
You get the point — even the everyday is way beyond the capacities of any individual. It takes thousands of specialists coming together from all around the world just to make a simple, cheap little thing you can buy at any convenience store for less than a dollar.
Insights like that are why I became an economist.
Now apply the pencil lesson to the economy at large. Computers, tires, books, clothing, banking, insurance — no wonder nobody can get a handle on the ebbs and flows of the global economy. It's impossible!
I think that's the source of economics' diminished prestige. Anybody with any sense knows how complicated the world economy is. But the human mind has limits. So does economics.
Too many economists have pretended those limits away. To go on the TV and say "I know how to fix the financial crisis" is the ultimate act of hubris.
It's also a way to look good and feel good in the short run; that's why people do it. But events will prove the snake-oil salesman wrong soon enough. No wonder economics has such a bad reputation these days.
Any economist saying he understands global business cycles when he can't even understand the pencil poking out of his breast pocket is a charlatan. But the discipline he dishonors is as beautiful as poetry.
Don't listen to economists. Do listen to economics.