First published in the Telegraph on 31 December 2009
After a night at the orgy, the ancient Romans would cure their hangovers by stuffing themselves with deep-fried canaries. The Greeks favoured frying up sheep’s lungs. For decades, we Britons have relied on bacon sandwiches to soak away the headache and nausea after a night out. But it was not until earlier this year that scientists at Newcastle University claimed to have pinpointed how fried meats cure hangovers by boosting the metabolism and creating amines which clear the head.
In much the same way, economics is a science which employs some of the world’s most intelligent people and most powerful computers in order to prove the bleeding obvious. When I first started writing about the subject, one excited academic told me to look into behavioural economics, which he described as the most “exciting and radical” of all the fields of economic research. Its most edgy, controversial finding? That people occasionally behave irrationally, driven by emotion rather than reason. Well, duh.
One of the real achievements of Paul Samuelson, the revered American economist who died earlier this month, was to put into mathematical form so much of what was rather obvious to the man in the street (for instance, the idea that people tend to buy what they prefer to buy).
But there was an unintended consequence to this: so much maths was injected into the discipline that economists became terrified of making assumptions that couldn’t be backed up by equations. This ascent to a lofty peak of geekery and abandonment of common sense helped precipitate the economic and financial crisis of the past few years.
Consider: in the run-up to the crash, there was no shortage of laymen pointing out that people often take out mortgages or overdrafts without thinking hard about the long-term consequences for their finances, and that investors are prone to over-excitement when the promise of easy money is dangled before them; but the economists, surrounded by their slide rules and spreadsheets, failed to listen.
They are listening now – as the wonks in the City scramble to justify their failure to see the crunch coming, they argue that the flaw lay not so much with economics per se, as with the fact that the discipline had failed to remain receptive to common sense. In short, it had disappeared up its own statistical fundament.
Is it a good enough excuse? Judging by the way the economic fraternity have been treated in the past year or so, you might think so. 2009 ought to have been the year that economists well and truly fell from grace. There is surely adequate ammunition to explode any remaining faith in their powers of prediction: the scale of the economic slump, the rise in unemployment, the fact that a small number of extremely rich people have been getting richer while the majority have suffered.
But bizarrely enough, it hasn’t happened. Sure, there has been plenty of muttering about economists’ shortcomings; the groans at their failed forecasts (for instance, the fact that house prices, far from falling by 10 per cent this year as predicted, have actually risen by around 3 per cent) are louder. But even today, in the shadow of the worst economic collapse since the Great Depression, we still listen obediently when they dispense their wisdom. The ratings agencies, which ought to have had the hardest fall from grace after famously deeming worthless “toxic” assets to be among the highest-grade investments, are still able to provoke panic by merely hinting that they are planning to downgrade a country’s debt. We continue to hang on the words of Nobel laureates and professors who entirely failed to see the crisis coming.
Why? We have surely not forgiven the sinners. Rather, in the confusion of economic collapse, and as the economists did themselves, we have lost trust in our common sense and are seeking refuge in apparent certainty. There is a deep-seated human instinct to seek out oracles, and in a world that is less religious than it once was, in an internet age characterised by a relentless blizzard of information, noise and data, we have become more reliant than ever before on “experts”: anyone with qualifications or distinctions which make them worthy of attention.
Yet, if there is one thing this crisis ought to have taught us, it is that those apparently “in the know”, and in power, often have just as little clue about what is going on as the rest of us. The public looked to the politicians; the politicians looked to the economists; the economists looked to their mathematical models. The upshot was the financial crisis.
Of course, an alternative explanation for our continued faith in economists could be that we have yet to feel the real pain of the recession. By lumping so much debt on to governments’ balance sheets, we have merely put the full effects of the crisis off for a bit. Perhaps, then, when countries start defaulting, our faith in the “experts” will be well and truly shattered. I think I prefer the first explanation.