The discipline of economics is less a science than the theology of this new religion, and its God, the market, has become a vicious circle of ever increasing production and consumption by pretending to offer a secular salvation
— David R. Loy, A Buddhist History of the West
The role of economists in modern human societies has become greatly clarified since the financial crisis of 2008. I fear that in the past I have not been sufficiently forthright about macro-economic theory (in all its elaborate variations) and its practitioners. I am going to correct that oversight today.
Zachary Karabell, an economist I criticized in my Letter To God, assures us that the 'laws of economics' do not exist. However confused he is about other things, we can only agree with Zachary on this one. Here is what has become clear since 2008.
Economists serve as a secular clergy.
The religion they serve is economic and social Progress, sometimes called humanism. Progress is always conflated with growth in the economics sphere.
- Economists are ordained when they obtain a degree in economics, after common sense has been beaten out of them.
Although their main function appears to be "analysis" of the current and future situation according to the non-existent laws of economics, their primary role is cheerleading.
Economists are congenital optimists, as their religion requires.
As mere clergymen, economists do not dictate policy; that job is left to politicians, who can pick and choose among often contradictory macro-economic theories (models) to rationalize whatever it is they want to do.
I trust this is sufficiently clear, but some of you will require additional details. Some of you may find it useful to compare the role of economists in modern societies to the role of bishops and priests in the medieval Catholic church of Europe, although economists are not hierarchically arranged nor is there a Pope. I have in mind Keynesians of all stripes (= medieval Catholics) although there are other minor sects (for example, Austrians).
Let us begin with a quote from Paul Samuelson's The End Of Macro Magic.
The International Monetary Fund recently held a conference that should concern most people despite its arcane subject — “Rethinking Macro Policy II.” Macroeconomics is the study of the entire economy, as opposed to the examination of individual markets (“microeconomics”). The question is how much “macro” policies can produce and protect prosperity. Before the 2008-09 financial crisis, there was great confidence that they could. Now, with 38 million unemployed in Europe and the United States — and recoveries that are feeble or nonexistent — macroeconomics is in disarray and disrepute...
... Still, the subsequent record is disheartening. The economic models that didn’t predict the crisis have also repeatedly overstated the recovery. The tendency is to blame errors on one-time events — say, in 2011, the Japanese tsunami, the Greek bailout and the divisive congressional debate over the debt ceiling. But the larger cause seems to be the models themselves, which reflect spending patterns and behavior by households and businesses since World War II.
Straightforwardly, we note that macro-economics is in a state of "disarray and disrepute" and economic models which did not predict the crisis have repeatedly overstated the recovery because clergy of the religion of Progress can not have anything other than an optimistic view of the future. We observe without fear of contradiction that economists always predict that the economy will grow, regardless of the poor quality of that "growth" for those who allegedly benefit from it. GDP "growth" can be accomplished in many ways.
Even when economists are "pessimistic" in the short-term, meaning that some of them believe GDP growth may slow for a few quarters, they are always optimistic about the longer run. Thus they may predict lukewarm growth of 1-2% in the current quarter, and perhaps the next, but later (for example, next year, or in 4 years) the pace of growth will pick up, likely exceeding 3%. I call this cheerleading. A common variant states that if only we do this or that, the economy will grow and grow again without limit.
You needn't take my word about these statements. Observations of how economists see the world will confirm them again and again. You might look at my recent Sunday reprint This Time Really Is Different to see an example of economic "pessimism".
Therefore, it is not possible for economists to predict any crisis, nor is it possible for them to predict bad outcomes in the aftermath of a crisis. The optimism inherent in the religion of Progress precludes it.
If you've absorbed the significance of these simple statements, you may now also understand that to say that economists are "right" or "wrong" about this or that is simply nonsense because, necessarily, their many errors all go in one direction (rebuffed optimism). And when we combine this inescapable bias with the acknowledged fact that the laws of economics do not exist, we can clearly see that economists form a secular clergy whose primary function is cheerleading.
There is much, much more I could say about this, but I will defer those remarks to later posts. Suffice it to say that Ben Bernanke's "Great Moderation" has now been shown to be a multi-decade delusion, which should not surprise us in any way.
It seems that humans require a religion in all circumstances, even when invisible, all-powerful entities are not part of it.
I will finish up with a quote from Milton Friedman which was the subject of a recent article called The Con In Economics. Steve Keen quoted this passage in his book Debunking Economics.
In so far as a theory can be said to have assumptions at all, in so far as their realism can be judged independently of the validity of predictions, the relation between the significance of a theory and the realism of its assumptions is almost the opposite of that suggested by the view under criticism. Truly important and significant hypotheses will be found to have assumptions that are wildly inaccurate descriptive representations of reality and, in general, the more significant the theory, the more unrealistic the assumptions.
The more significant the theory, the more unrealistic its assumptions. Precisely.
And on that splendid note, I will end this post.