Stop letting economists off the hook

Since the beginning of the global financial crises in 2007, there have occurred numerous economic and financial crises around the globe, plunging often prosperous nations into hardship and even near bankruptcy.

These crises, typically generated by overlending by the financial sector and crashing housing bubbles, are often blamed upon two parties – governments and banks – with considerable justification.

There is, however, a third villain that bears primary responsibility for these disasters. While politicians, government bureaucrats, financiers, bankers and the real estate lobby have come under withering assault in the eyes of enraged publics, the economics profession has largely escaped the fury. Given the importance of this profession in structuring economic and financial policy, the lack of attention and accountability poses an interesting question as to why this is.

Governments rely upon the advice of economists to implement policies that will advance economies in the conventional terms of growth, stability and productivity, on matters from the important to the mundane. It is these experts, with a wealth of experience, who have the greatest influence on public policy.

It should be predictable that if a particular policy was successfully implemented and incurred the expected outcomes, then the economists in charge will have their careers advanced. If the opposite occurs, then it is expected that the economists responsible should be subject to severe penalties.

Unfortunately, recent outcomes have ensured the former, but not the latter. For instance, the largest bubbles in US history – dot-com and housing – were followed by sharp economic downturns. Both times, the overwhelming majority of economists missed and/or denied the existence of the bubbles.

The aftermath of the tech bubble was a recession, and the collapse of the housing bubble could well have resulted in another Great Depression if not for the record-breaking bailout of the financial system and continued deficit spending.

According to conventional economic theory that the majority of economists advocate (neoclassical economics), these assets bubbles should not be forming. Supposedly, the more market-oriented an economy becomes, through deregulation and privatisation, the more efficient it becomes at pricing assets, resources, goods, services and labour. Thus, there should be little to no bubble activity within a freer market economy. History, however, has revealed the opposite.

One would think that given the wide gulf between theory and reality, the economics profession should have performed some sort of self-assessment. Instead, they seem to have fervently congratulated one another for having saved economies.

There is, of course, some truth to this assertion: economies would likely have been worse off had the government not intervened and allowed the banks to collapse. Clearly, this is not the point being made – the point is that if economists were not asleep at the wheel, economies would not have been driven into a brick wall, requiring bailouts in the first place.

It is outrageous those economists in important policy-making and influential positions even keep their jobs. What comprises these positions is obvious: senior economists within the central bank, treasury, the financial regulator, commercial lenders, investment banks, and supranational organisations.

If a taxi driver was to crash while drunk driving, injuring passengers, they would be fired and can be charged by the authorities. A nurse that continually gives patients the wrong medicines, resulting in suffering or even death, will lose their job in short order. A cook that leaves the stove on after finishing work, burning down the restaurant, will predictably lose their job.

On the other hand, economists who are complicit in the collapse of multi-billion dollar corporations and trillion-dollar economies are still employed, often working in the highest levels of government, industry and academia, while unemployment, bankruptcies, and general misery blows out of all proportion among the public.

Given the extraordinary level of incompetence shown by these economists, one may ask why they are still employed. Surely the economics profession should be treated similarly to other professions: incompetence on the job should result in disciplinary measures and penalties.

One explanation can be found within economic theory itself. Economists believe that the prices of goods and services within an economy are determined by the impersonal forces of supply and demand; everything, that is, except for the supply and demand of economic theory itself.

The rich and powerful create strong demand for economic ideology that justifies their wealth and power. Thus, those economists who supply such ideology will be rewarded regardless of performance. This observation goes unheeded among economists for obvious reasons.

Another explanation is what has been satirically called "academic choice theory”, a play upon public choice theory that argues politicians will follow specific behaviours to maximise their own economic benefits.

Thus, wealth-maximising economists will serve monied interests in order to enrich themselves, regardless of the effects upon others. Within modern economies, the wealthy are increasingly invested in the financial rather than industrial sectors. Accordingly, economists seek to work at the behest of financial institutions: commercial lenders, investment banks, hedge funds, money management funds, etc. The owners and managers of these institutions, dedicated to maximising short-term profit and power, naturally seek that economists advocate theories and policies that empower them economically and politically.

Within the economics field, there exists a substantial literature on the capture of institutions: for instance, government capturing producers, or industry capturing government regulators, for the purpose of empowering the institutions performing the capturing. Less well-known is the capture of the economics profession, whether it is individual economists or entire schools and departments at universities.

Universities are often dependent on outside funding to keep their economics and business schools functioning. Corporate-friendly businesses, think-tanks and wealthy individuals will meet this need and provided the necessary funding. Although there may be no strings attached legally, the entire funding is an enormous string in itself. Crafting theories and policies that run counter to what the funders want to hear will not ingratiate them to the recipients.

The phrase "don't bite the hand that feeds you” is rather apt to this situation. The course of action to pursue, therefore, is to speak the words pleasing to the funders, which often means pro-corporate theories and policies.

Economic policy tends to run in a similar fashion, with a clique of leading economic thinkers chosen to reform policy in accordance with best practice – or so we are told. For those less burdened with such delusions, best practice means not what is in the best interests of the public, but rather what benefits the narrow sectors of concentrated private wealth and privilege that huddle behind the conservative nanny state, including the economists who are devising these policies.

As history has shown, these policies, primarily financialisation of the economy, have greatly harmed the public while enriching the fortunate few beyond avarice.

There is no natural law that says that the economic equivalents of Doctor Death should continue to devise policies that have shown to be detrimental. If other professions can be held accountable for poor job performance, why not economists?

Economists are fond of examining the role of incentives. Providing a set of penalties in the form of fines, loss of employment, and even imprisonment in the worst cases of financial and economic crisis, can provide economists the incentive to advocate policies based upon scientific theory of how the economy does function in the real world, rather than how it ought to work in a textbook.

Philip Soos is a Masters research student and employed researcher at Deakin University.

This story first appeared on The Conversation. Reproduced with permission.