Robert Skidelsky has a column in the Financial Times Thursday arguing that economics has gone off the track with its smothering embrace of mathematics and the presumption that it can predict the future. As always with Skidelsky, the eminent biographer of John Maynard Keynes (one of the great biographies in recent times), the argument is clear, convincing and nuanced. He particularly argues that macroeconomics with its broad sweep suffered the most egregious failures in the current crisis and should, through changes in university curriculums, be shifted away from a heavy math regimen and back, in a Keynesian way, toward politics, policy and philosophy. Microeconomics, with its much narrower set of preoccupations, is less of a problem.
All this may well be true: the problem, the diagnosis and the prescription. But will it ever happen? It's a little like the notion that Americans will now become incredibly thrifty and prudent, a psychological change driven, in theory, by the shocks of the past year. Americans will become thrifty if they are forced over a long period to save their pennies; otherwise, it's back to Vegas for the holidays. Why would economists surrender such a "power" so easily? Economics gets its large and defining role in our world through the shamanistic believe that prediction is possible; call this the Greenspan Effect. Despite the failures of the past, economists continue to forecast; and the media rakes those forecasts into a consensus, as if a range of economic opinions about the future could be bundled and securitized and thus left better off collectively than individually. University economic departments (not to say business schools) get their status and their large herds of students because of the notion of predictive power, which leads to powerful and high-paying jobs in places that also ritually "believe" in the power of predictability and pay quite liberally for it: Wall Street and Washington. We don't reject the possibility of prediction. Instead, we punish individual failure and search endlessly for the latest seer; call this the Roubinni Effect.
Economics gets its clout because it's the ultimately utilitarian academic discipline. And that utility stems from the pretense that it can see the future.
Economics, even macroeconomics, shorn of its predictive edge, is a less-than-sexy blend of sociology, anthropology and philosophy. Without predictive magic, economics truly resorts back to the "dismal science" of yore, though you have to lop off the science part. Indeed, this is larger than just economics. We live in a utilitarian world, but our belief in that utility is squirrelly. For a number of decades now it's been pretty clear empirically that the difficulties of beating the market over a long period of time was extremely high. And for nearly as many years, rational souls predicted that more and more investors would opt for low-cost indexing, drowning the activist segment of the market. And yet, in this period, when indexing has grown, we have also seen the massive explosion of trading on Wall Street and among the hedge funds. Every one of these traders believes, through greater leverage or more refined and complex tools, that he can beat the market and, in a sense, predict the future. Indeed, the greater and greater assumption of risk was undergirded by a belief that we could "control" the future more effectively than in the past. (Some will argue that "controlling" the future is a conspiratorial venture: That underestimates the sheer complexity and uncertainty of the material to be controlled over a period of time.) Risk management is thus a mathematized procedure for seeing into the future.
A highly developed economy like ours, with all its pretensions of rationality, lives off a belief in predictability. Politicians get elected for seeing the future; CEOs are increasingly recruited and paid vast sums not for being able to manage a massive corporate bureaucracy, but for providing a future-oriented pixie dust of strategy and insight. Managers wield capital asset pricing models and options-pricing models. Even financial journalists are expected, unlike nearly every other tribe of that eclectic profession, to accurately predict the future, particularly an apocalypse. Among all this, economists reign supreme, if only because they are judged by the larger world, which has less and less understanding of their technical apparatus, for their power to predict. Without it they are lost and we are lost with them. They will not give it up easily. We won't let them.
Robert Skidelsky's column in the Financial Times
Robert Teitelman is the editor in chief of The Deal.