Economics – An Apology

Mainstream economics has shaped modern policymaking, but its failures and ideological divides reveal deeper systemic flaws.

Mainstream economics, it has often been claimed, has faltered badly in recent years and requires a thorough overhaul. It is true that most economists failed to anticipate the financial crises of 2007-2008 and, as a result, did not issue warnings. Queen Elizabeth underscored this shortcoming when she posed a blunt question to a distinguished – and visibly stunned – group of economists she had summoned: Why did none of you see this coming?

The Queen’s question invites two possible responses.

First, economists were never intended to be clairvoyants. It would be unreasonable to fault geologists for failing to predict every volcanic eruption or earthquake. We would not abandon geology as an academic discipline on those grounds. Should economics not be afforded the same understanding?

While it is true that economists are not expected to predict the future with certainty, many – particularly those employed in banks and government – make forecasts as a matter of routine. The bubble that burst in 2007-2008 was so conspicuously inflated, and the conduct of many bankers so egregious, that economists – and others – should have raised the alarm. Edward M. Gramlich, a Federal Reserve Governor from 1997 to 2005, was among the few who did, but his warnings were ignored. Too many others chose to look the other way, aligning themselves with the excesses of the banking sector. The failure, therefore, was not so much one of economics as a discipline, but rather of mentality – a lack of civil courage.

Keynes

Over the course of time, economics has done considerable good, equipping governments with effective tools to stimulate faltering economies through fiscal and monetary expansion, and to curb inflation through fiscal and monetary restraint. When confronted with the inadequacy of classical economic doctrine to address persistent unemployment during the 1930s, John Maynard Keynes developed his General Theory. His work explained how the global economy could be lifted out of the Great Depression. Although Keynes’s ideas fell out of favour in certain academic circles in the 1970s, they were revived in response to the 2007-2008 crisis, prompting an unprecedented expansion of the money supply. As a result – consistent with textbook economics – the crisis led to a recession rather than a full-blown depression, which would have been far more painful.

Few other intellectual breakthroughs have had such a profound impact on people’s lives – comparable, perhaps, to the advent of antibiotics or electricity. That said, the judicial response to the financial crisis was far less impressive than the economic response. Few bankers were held to account in the United States or Europe – with Iceland proving a rare exception.

Economics has yielded other valuable insights. It has highlighted the benefits of trade and the detrimental effects of tariffs, oligarchies and monopolies, all of which can reduce efficiency, drive up prices and limit consumer choice. These findings share a common thread: free competition – when paired with responsibility and a reasonable degree of equality – tends to raise living standards and hold down prices.

Why equality? Because trade is unambiguously beneficial only if its gains are reasonably equitably distributed. Economic welfare and social justice must be considered in tandem. To assess a nation’s economic success, it is insufficient to know its average income per person; it is also necessary to understand how income and wealth are distributed. Evaluating a nation’s economic health solely on average income would be akin to judging an asset purely by its return, without considering the associated risk.

Despite this, questions of justice have long been excluded from mainstream economics – though this may finally be changing. Rising inequality since the 1980s has opened the eyes of more economists to the need to incorporate considerations of fairness. No philosopher or psychologist would find this development surprising.

Complexity and Ideology

Economics is more complex than rocket science. The behaviour of celestial bodies is, so to speak, mechanical and predictable. Human behaviour is not. Isaac Newton himself acknowledged this: “I can calculate the motion of heavenly bodies, but not the madness of people.”

One challenge faced by economists – unlike, say, physicists – is that some are not always careful to distinguish between economics and politics. Keynes’s General Theory remains controversial to this day, partly because those who oppose government intervention on ideological grounds resist theories demonstrating how such intervention can be beneficial and prevent crises.

Of course, lower taxes or reduced interest rates can often achieve similar results to increased government spending. Nonetheless, these ideological tensions influenced the United States Congress’s response to the 2007-2008 crisis, resulting in a smaller increase in government spending than many experts deemed advisable. Consequently, the recovery was slower than it might have been. However, the modest stimulus may also have curbed inflation.

Regardless, some economists and politicians ideologically opposed to government intervention sometimes exaggerate concerns about public debt – motivated less by legitimate fears of future debt burdens than by a general aversion to government itself.

Political differences aside, economists are divided on some fundamental issues. Some still insist on building their models around the always rational homo economicus – a figure who thinks and acts with machine-like precision. Others, informed by behavioural economics, acknowledge human decision-making imperfections. They cite, among other findings, that many people believe more murders are committed in Detroit than in the entire state of Michigan – an obvious impossibility.

Do economists disagree more than physicists about the core principles of their field? Hardly. Physicists argue over whether classical mechanics and quantum mechanics require a unified theory, just as economists debate whether macroeconomics must be explicitly derived from microeconomics. Physicists continue to grapple with string theory, which posits that the smallest particles are not points but one-dimensional strings. Nonetheless, physics remains enormously useful – just ask Siri.

Returning to the political dimension, nearly all economists agree that tariffs are harmful in most cases. Tariffs tend to be a blunt tool, with better alternatives often available to achieve the same goals with fewer adverse effects. Guided by reason and evidence, economists from across the political spectrum have largely persuaded policymakers. As a result, global average tariffs fell from eight percent in 2002 to four percent in 2021.

President Trump began his second term by announcing steep tariff increases on imports from allies and adversaries alike – seemingly oblivious to the widespread damage this is likely to cause, especially as other nations retaliate. This is precisely what happened after President Herbert Hoover signed the Smoot-Hawley Tariff Act into law in 1930. In the wake of the Great Depression, global trade contracted by two-thirds within three years, deepening the downturn.

Perhaps no one within President Trump’s inner circle understands this history – or, if they do, they remain silent. Why? This is not just about economics. It is about mentality. It is about courage.