Economic crisis and the failure of economics

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Economic crisis and the failure of economics

If all economists were laid end to end, they would not reach a conclusion.

George Bernard Shaw

Apart for a very few simple scientific aspect of economics, such as let's say the negative economic effects of high unemployment on the economy, economists from different economic schools of thought disagree more often than not.
Economics, as a profession, is being seen increasingly darker and irrelevant. Some have even suggested that the economy depends on economists as much as the weather on weather forecasters, though the latter cannot create storms in the way a central banker or a Finance Minister can 'upset' the economy.
Economics as a science is in crisis, though few if any economists dare mention this in public. The perception is that of a higher level debate among the two historically dominating paradigms of economic thought, namely that of the Neoclassical and Keynesian economics. Policy makers and economists alike, tribalisticaly join one of the two dominating economic departments, namely New Classical and Keynesians, ignoring other important economists who nowadays are outmoded or simply ignored, explains M. Desai.
'One of the important consequences of this crisis', said J. Stiglitz in 2010 event at the LSE, 'is to make us rethink of our ideas of economics; about how economies work'.
He also predicted that the crisis would be with us for quite sometime. Both in the US, in the UK and recently in the EU the consensus seems to be that the way out of the crisis is through quantitative easing (QE). I will not try to explain QE, and I guess there are thousands of online resources for that, but let's just say that it is a monetary strategy to increase the money supply in the market, by using a central bank to buy government bonds, as well as commercial bank and private sector assets.
... and you are tossing trillions of dollars at the system that keeps the banks alive, and unemployment keeps on being there, and everybody says 'we are on the road to recovery...' road to recovery? What are you talking about?

Hernando de Soto

After almost eight years into the crisis and at best a fragile recovery in the US and UK, while nowhere in the horizon for the EU, and the economists still debate whether a Neoclassical or a Keynesian approach is the best way forward. It is some kind of religiously-like economic belief is blinding them from the truth that you cannot solve new problems using old techniques. In the same time, hysteresis has taken root in many labour markets in economic crisis, further deepening unemployment and thus the economic recovery process. Steven Keen argues that one of the problems is that neoclassical economists do not understand neoclassical economics and they fail to understand the limitations of their own models.

It was clear to me that the cure would not come from a repetition of the old policies of borrowing and reflation... To find a solution to the crisis we need to explore the "underworld", as Keynes described it, the world where economists who had gone out of fashion lived.

M. Desai

Desai argues in his book 'Hubris' that there are two visions of economic systems, the static system of equilibriums, and the dynamic disequilibrium system. These two have coexisted in economics for a long time; the former has triumphed in the academia, while the latter lives on in the marketplace and in the imagination of political movements.
Though initially unrelated, there is something that R. Schiller puts forward in his latest version of 'Irrational Exuberance' book. He hints that efficient market theory, though limitedly correct, on some occasions does find empirical support to its arguments and that maybe the use of both finance and economics needs to be considered to find solutions to many of the modern problems. Isn't it surprising that words such as 'imagination' and 'belief' are used in economic context, which is a subject many think close related to mathematics and quantitative research? Maybe the popularity of behavioural economics in offering solutions to problems can be explained via the shift that M. Desai mentions.
Economics today is roughly where astronomy was before the invention of the telescope.

Foreign Policy Magazine

Can it be that the failure of economics to provide answers to modern problems is caused by this tribalisticaly tendency of economists to belong to one group of thought or the other that makes them discard both 'good' and 'bad' of the other group or groups? Can the solution be a simple rethinking of economics as one, focusing on the best techniques from all branches rather than on the differences among them.

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