Nobel prize wining Economist, Robert Schiller is wondering why the general public hates economists so much, and attempts (poorly) to blame the public. He writes:
“One reason may be the perception that many economists were smugly promoting the ‘efficient markets hypothesis’—a view that seemed to rule out a collapse in asset prices. Believing that markets always know best, they dismissed warnings by a few mere mortals (including me) about overpricing of equities and housing. After both markets crashed spectacularly, the profession’s credibility took a direct hit.”
It’s simpler than that. It’s even simpler than what Janine Wedel from George Mason University suggests, that Economists are too vested in private interests. It goes back to Jevons and Walras and France in the 1870s.
In response to Marx’s critique on Political Economy (known as Das Kapital), a French guy named Walras came up with the idea that Economics follows a set of “natural laws,” and is more like biology than Political Science (or any other social science). Little has changed in the field of Economics since 1870. Sure, World War I and the Great Depression brought us John Maynard Keynes, who is still hotly debated on ideology, but even the “New Keynesians” like Stiglitz and Krugman want to turn human nature into a mathematical equation.
As philosopher Leo Buscaglia once mused, It’s human nature to poop our pants. What is the mathematical equation for pooping your pants? Is there an equilibrium price/wage mechanism, or an indifference curve for how often one should (or shouldn’t) poop their pants?
Take for example the income substitution effect. This is the mathematical idea that people will choose to work over going on vacation under certain conditions (like more money) with an “indifference curve” where they have no preference. It’s one of the most debunked theories in economics.
The labor force participation is at its lowest level since 1978, yet GDP is ever growing.
Somewhere in 2004, tens of millions of people decided to stop working. Was it because they were making so much money that they could choose a long vacation? Microeconomics says it is. Wages as a share of GDP haven’t grown since 1970.
Yet economists refuse to realize that human behavior, especially as it is exemplified in social institutions (like politics) is not a mathematical equation. Economists spend too much time ASSUMING human behavior, rather than STUDYING human behavior. And forecasting future crises is a matter of ASSUMPTION based on a statistical past. That’s why most economic forecast models aren’t very accurate.
The purpose of Economics as a social science (and it IS a social science, not a natural one) is to study human behavior as it relates to economic activity on social levels, as it was before Jevons and Walras. Economics is not supposed to be about assuming human behavior as a chemist assumes that water will be created when a couple of Hydrogen atoms bonds with an Oxygen atom. Human beings are more complicated than chemistry, or biology.
The fact is that workers have been working ever since it took work to cook meat over fire. Work is a social fact of our historical existence. The fact is that producers of goods and services never think about “optimal pricing” in trying to make MR=MC; they charge what they can get to maximize profits while minimizing variable cost (just ask Apple). The fact is that MPC (marginal propensity to consume) is driven by the availability of credit, not an increase in income. Yet these are the theories that mainstream economics has been pushing since Walras and Jevons in the 19th Century. They’ve forgotten that it’s human nature to poop your pants.
At the time of Walras, there was no “Economics” as a discipline; it was called “Political Economy,” because really smart people saw that economics and politics went hand in hand, as two social institutions that were interconnected, and driven by human social behavior. This school of thought had even made progress by the time Marx wrote about factory workers (without ever setting foot in a factory). While Marx was wrong about a worker revolution in 1848, he was at least attempting to study human social behavior.
Yes, Robert Schiller is right in thinking that the public is mad at economists, but whose fault is that? Economics has not had an original theory since the 1870s (Keynes’ General Theory in 1936 is still hotly debated in Academia, and its social implications largely ignored). Meanwhile, just since the 20th century, other social sciences such as Sociology, Political Science, Anthropology, and Psychology have made milestone strides in their contribution to knowledge.
The reason we don’t poop our pants is because of the social construct. It’s social forces from our social milieu that tells us that we should potty train our children. There’s nothing “natural” about NOT pooping our pants. The same applies to the bank(ers) that trashed the world economy in 2008; they were guided by social forces in their milieu that told them it was okay to sell bad mortgages to investors. As Stiglitz so eloquently put it, this recession was “man-made.” Economists are not exempt from social forces in their milieu either. Economists would poop their pants too if it was socially acceptable to do so; hence the current state of Economics, which is driven largely by ideology, instead of science. This explains Schiller suggestion that the role of the economist is to generate wealth, and not actually study anything like a real scientist. That’s why Robert Schiller can answer his own question by looking in the mirror, and then looking at some of his colleagues.