Why Economists should not be blamed

By: Bikal Dhungel

Since the financial crisis of 2007/2008, everybody have turned to be a kind of Economist. For the several years following, even until today, the news are filled with things related to finance, economics, crisis, recessions, depressions etc. A large majority also believe that Economists are responsible for the crisis. In a public lecture in the London School of Economics, Queen Elizabeth II asked the panel “ Why didnt you know the crisis coming ? “. This looks like a simple question but yet a tough one. Why didnt the economists see the crisis coming actually ? What do they study in the university and does it make sense to study economics if the crisis come and hit the society and economists look and see and are helpless about it ?

But wait, are all doctors healthy ? Do all designers live in perfectly designed homes ? Are all marriage counsellors happily married ? The answer is no and this complex thing called a government is not only filled with economists. Actually Economists only contain a tiny fraction of the government. Most politicians also turn to be a lawyer with no training in economics. They also tend to focus less on efficiency as the economists do, which can also be good in some sense but when things go wrong, the blame should not be faced by Economists alone. I will give few example about important times in history when economists knew what is going to happen but still the mainstream politics rejected it and only realised this when it was too late.

Ludwig von Mises, in his book called 'Socialism' which he wrote in 1922, predicted the fall of Soviet Communism. (Source: Mises Institute ) Mises's prediction of the fall was based on the lack of information that a country cannot have from its market. This means, the central planning would not know what to produce and how much to produce. The most efficient way of doing this is to let the market do itself though the invisible hand of Adam Smith. The problem of this calculation and central planning would lead to the fall of socialism/communism. Infact, this happened in many parts of the world in the coming days. China, having embraced the communist system has now completely rejected the idea and took free market policy which resulted in double digit growth for more than 3 decades which brought over 600 million people out of poverty. China is the most successful story of economic development in human history and this was made possible by free market system and not by planned economy within communism.

But listening to Ludwig von Mises was far from reality.

During the same time, another pioneer of Economics or to be more exact, Keynesianism was the British economist John Maynard Keynes. Keynes told that a limited government intervention in the economy would help to solve the crisis or in other words, a limited government intervention is necessary. Most social-market economies of the European Union like Germany or Scandinavian Countries today run mostly on Keynesian policies.

After World War I ended in 1918, in the Treaty of Versaillies, the allied powers, Britain, France etc imposed reparation charges on Germany which had to pay for their damage. Keynes published a book called “ The Economic consequences of the Peace “ presenting the account of payments Germany should pay. He wrote that Germany was told to pay more than it caused damage or it was not fair. This would radicalise Germany in the future and can even invite another world war. Critics blamed Keynes for being a supporter of Germany. The wall street crash of 1929 indeed radicalised Germany and gave birth to Adolf Hitler who had plans to create a 1000 year lasting German Empire and regain the territories it lost after World War II. Hitler was democratically elected the Chancellor of Germany in 1933 and the war began in 1939 when Germany invaded Poland. It is still unknown what would have happened without such a high war repairing payments imposed on Germany but this has surely radicalised the German people.

Third example is more recent, the crisis of 2007/2008. Friedrich Hayek from the Austrian School of Economics wrote in the sixties that deregulation is dangerous. If we deregulate the financial sector providing easy credits to the people, the rate of borrowing will increase and borrowing might take place without a collateral. This can also lead to borrowing for the sake of speculation. Hayek pointed out that the borrowing bubble will increase and finally burst causing the financial crisis that will eventually lead to economical crisis. What happened before 2007 was the same. Since the decade before, the financial industry was deregulated and borrowing was easier. At the same time, few significant banks acted unethically meaning borrowing to people without security who then failed to pay back their debts. The crisis was mainly brought by the housing market of the US. Banks like Northern Rock, Goldman Sachs etc default and the crisis hit in the large scale. What happened after that was the politicians campaigning for regulation of financial industry which they achieved in some degree and today another crisis due to the same reason is unlikely. The crisis was again foreseen by an economist almost 50 years ago.

Moreover, the financial industry is responsible for the crisis who acted unethically. So, blaming the economists for the mess is not logical. A close cooperation between the policy makers and economists would lead to a stable society.