The World Bank has got itself a new ‘ish’ chief economist, and he is making waves that could turn the economics world upside down – maybe it will even turn the world upside down.
The British Economist, John Maynard Keynes once said that economists and political philosophers are more important than is generally realised. He said; “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
The snag with all this is that over the last two or three decades the economic profession has got silly.
They have this tendency to make assumptions to ensure their economic models hold together, but don’t tend to test their assumptions. And the craziest assumption of the lot is to assume that us, that’s you me and the bloke who lives next door – and indeed everyone else – are rational. Our species, is what some call Homo economicus.
So for example, we have perfect expectations. So what happens if the government spends more? Clever old you, me, the bloke next door, and indeed everyone else, thinks “ahh, that means taxes will go up in the future, and so I will save more in preparation for higher taxes.” As a result, any form of fiscal stimulus is cancelled out by higher savings.
A more recent idea comes from the behaviourists, they look at our psychology, at our evolution, look at such heuristics as confirmation bias, or group compliance, and say Homo sapiens are irrational. And the whole foundation upon which modern day economic thinking is based, does in fact sit on sand.
Paul Romer seems to agree with the behaviourists.
Recently, Mr Romer said; “When the person who says something that seems wrong is a revered leader of a group...there is a price to be paid for disagreeing with openly. This price is lower for me because I am no longer an academic. I am a practitioner, by which I mean that I want to put useful knowledge to work. I care little about whether I ever publish again in leading economics journals or receive any professional honour because neither will be of much help in putting useful insights to work.”
He has also said that he “rejects pseudoscientific nonsense that survives in an academic bubble.”
So does that mean that, in a few years from now, mad men in authority who dispel their frenzy after hearing voices in the air, will actually start making sense?