Tuesday, April 21, 2009

What Good Is Economics?

The Lehmann Letter ©

The April 27 issue of BusinessWeek carries a story with the provocative title, What Good Are Economists Anyway? http://www.businessweek.com/magazine/content/09_17/b4128026997269.htm?chan=top+news_top+news+index+-+temp_dialogue+with+readers

It’s written in BusinessWeek’s folksy style and, perhaps, should have had the title: What Good Is Economics Anyway? But there it is, nonetheless, a devastating critique of the profession’s inability to deal with current events. Worse yet, it is also a devastating critique of the profession’s inability to put current events in a meaningful historical context. Because of that economists don’t even have the right tools to make their analysis, let alone the ability to conduct the analysis.

It’s as if you asked a fundamentalist preacher to explain natural selection. Or asked an Aristotelian astronomer, who believed the earth was at the center of the universe, to explain our heliocentric solar system. He couldn’t do it. Not because he was not smart enough, but because he had been trained to see things in a way that precluded him from arriving at the answer.

Economics is a static, timeless analysis, not a historical analysis. Economics tries to emulate physics in an attempt to achieve theoretical rigor. Unfortunately, economic events unfold over historical time, altering institutional parameters and thereby confounding simplistic analysis. That’s why consumer sentiment often provides a more accurate forecast than professional economists.

© 2009 Michael B. Lehmann

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