Economic Science Discredited: A French View
She’s known mainly for being ultra-polite and proper, God bless her, but even Queen Elizabeth II reached the point at the end of last year when she couldn’t restrain herself anymore from asking, while visiting the London School of Economics, “How could no one have foreseen it?” “It,” of course, was the catastrophic banking/financial breakdown that had come to its terrifying climax the previous September – almost one year ago now – and plunged most of the world into grave economic troubles, her own sovereign realm definitely not excepted.
Putting Her Majesty’s query in another form, How did economists get it so wrong? Or, if you like: What were they thinking? Whichever way it is stated, the issue is no doubt a complicated one, not to mention rather embarrassing for that profession of economists from which one might still assume that the best answers might ultimately come. And by now they are coming: the previous two hyper-links, in fact, take you directly to major pieces on the evident failure of modern economics by Paul Krugman (in the New York Times Magazine) and by Francis Fukuyama (together with Seth Colby).
But all of that is in English and so readily accessible. (Well, you’re going to have to subscribe to The American Interest if you want to read all of the Fukuyama/Colby piece, but the Krugman is all there and is really a “must-read.”) For our EuroSavant purposes, let’s consider instead an analysis piece just out in the French newspaper-of-record Le Monde by editor-in-chief Frédéric Lemaître: The crisis puts back into question economists’ knowledge and status.
Lemaître is, I confess, the source of the engaging Queen Elizabeth anecdote, although his brief commentary here does shed rather less light on the issue than does Fukuyama (I can only assume) and, certainly, Krugman. Mostly he grasps here the opportunity to kick the economics profession while it is down – but he’s French, after all, one of those cheese-eating surrender-monkeys! He mentions the founding of the Nobel Prize for Economics in 1968 – actually the “prize of the Bank of Sweden in economic science in memory of Alfred Nobel.” He notes that “for two centuries they [economists] have tried to convince us that their discipline is as serious as physics or chemistry.” And he quotes economists like Prof. Pascal Salin, of the Université Paris-Dauphine, from his 2008 book Economics does not lie*:”Economics is a science; its object is to distinguish between good and bad policies.” And “The creation of complex financial markets has led to true economic progress. This financial sophistication has facilitated the global spreading of risks, thereby permitting the greater taking of risk, which amplified innovation.”
Alright, but Lemaître does also have some actual positive contributions to make. He offers a handy list of important questions – “important” at least in the light of recent events – that the economists somehow never got around to:
When is a bank really “too big to fail”? When does it risk the financial system as a whole? What is the optimal remuneration for a trader? Is it logical that, in Western countries, just about half of the profits of big international companies are realized by financial institutions which don’t really create wealth, in the strict sense of the word? Can markets regulate themselves, or are they intrinsically unstable?
And why did they never get around to these questions? Lemaître also takes a crack at that, although mainly by quoting from Fukuyama, to the effect that economists and financial experts have in recent years been rather too busy earning the big bucks on Wall Street helping banks and hedge funds figure out how to earn even more money to have time to deal with theoretical matters such as those. Significantly, he makes clear that he views this as true even within a French context, i.e. also with regard to the most prominent French economists and economic advisory bodies.
* Readers should be advised that I was unable to find any mention of that book from Prof. Salin – French title: L’économie ne ment pas – on Amazon.fr, nor on his French Wikipedia page.
