What went wrong with economics

And how the discipline should change to avoid the mistakes of the past

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Readers' comments


Ari Rose

@vinayaksathe: "hey did not manipulate their currencies to do that."

China is the world's third largest economy. It is America's largest trading partner. China, by definition, does not have a freely-fluctuating currency. The Chinese Central Bank requires every USD that enters the country to be "surrendered" to it (more on this process here). The Chinese Government sets the value of the Yuan based on its own internal considerations. If that's not currency manipulation, what is?


China and India needed exports of factory goods or software services to keep employment high for ensuring social stability. They did not manipulate their currencies to do that. Their exports were always against T-Bills.
US and Western World wanted cheap goods and services to ensure social stability. Apart from importing goods and services they gave impetus to local economy by creating sub-prime lending for housing.
If banks had not enough capital to back up their lending, Governments did not have reserves to back up T-Bills. Economics and theories are needed to explain the Resulting Credit Bubble.
If China decides to use its Dollar reserves to import goods for mass consumption, it will find that nobody else is manufacturing these goods in numbers and at acceptable prices.
There is no such thing as free lunch for ever.


History repeats itself and we deal with it from the narrow points of micro-economics, etc… Aristotle failed to see the change that was brewing in front of his eyes... He saw in the Greek self-centered republics the normal form of political organization at the very time when his close personal association with Alexander and Macedonian imperialism should have shown him that the City-State was doomed... The world was startled by the sudden and totally unexpected (but inevitable) collapse of Communism, so why can’t we see the also inevitable collapse of unbridled Capitalism?

Ari Rose

It is astonishing that an Economist article about what's "wrong with economics" fails to mention the Austrian School - whose proponents predicted the current crisis and the result of the current "rescue plan".

The article compares "politicians" to "economists" and thus assumes that economists are other-worldly and do not have any political affiliations and inclinations. In reality, most of the leading economists and "experts" are simply using the currency crisis to promote their existing political agendas, regardless of the facts.

And so, instead of realizing that the crisis was caused by artificial prices and artificial interest rates, we are told that more government and credit expansion is the solution and thus try to 'cure the evil by the very means which brought it about' (to quote Hayek's 1933 essay).

In reality, the market did not fail, since the market was never allowed to operate properly. It was thwarted by the actions of strong players, mainly (and namely) the Fed and the Chinese Central Bank, each for its own reasons. The Chinese are the main supplier of goods to the US. Since they manipulated their currency, those goods were not priced at market. The Fed controls the supply of money in the US economy. Since the Fed set artificially low interest rates (with assistance from the Chinese, who kept buying US T-bills), money was not priced at market. Then, you blame it on consumers for spending too much? All they did was buy when goods were cheap and borrow when money was cheap. They had no idea that prices were artificial. More on this here.

The economy is the Cosmos in which modern man lives. It is as mysterious to us as the universe was to our ancestors in the middle ages. Economics is the religion we accept as the explanation of this Cosmos, with economists serving as its priests. And so, at times like these, we run back to the economists, just like religious believers who followed the advice of priests ran back to them for more advice once the natural world failed to "behave" as they were promised. And the economists, just like the priests before them, are telling us it all happened since we did not follow their advice with ample diligence.


Economists are desperate to sex up their profession. All those fancy names and theories.

But the reality is, every financial bubble-and-bust since time began has been caused by debt.

Yes, debt.

Governments, companies and individuals borrow or lend too much.

The cycle just keeps repeating itself every 10 years or so.

Sometimes the simplest analysis is the most effective solution.


The problem is not about the science of economics, the problem is about who are chosen to practice this science. Often, finance and accounting practitioners (even engineers) with little knowledge of markets and economic fundamentals are assigned to the frontier to make important economic decisions. To give you some example, what a project value is? what should the price be? how should an organization react to competitor's action? In absence of knowledge of the fundamentals, these "practitioners" make assumptions in a way that can easily complete their models.

For example, we all care about risks. Economics tells us that the the fluctuation in (say) oil price stem from fluctuations in demand (consumption) as well as supply (production). When fluctuation in consumption itself cannot explain the fluctuation of oil price we know we should look at the supply side to understand the dynamics of this risk. What finance, accounting and engineering practitioners would do is, however, calculate the darn SIGMA and BETA without knowing the source of the risk.

By no means I'm trying to attack these disciplines, as I am from one of them originally. All that I am trying to convey here is that right thing is not being applied by right person with right attitude. Take that SIGMA and BETA example, people can still possibly extract much info out of it if they are used to complement economic fundamental analysis. The fact nonetheless is, less than 1% of the financiers, accountants and engineers have the knowledge or time for that, and hence leaving the good recipe of fundamentals in memories while provide all sorts of research reports that pretend to have such recipe inside.

For those who don't believe what I say, try to ask a financier or accountant: what drives the value of your organization? Many would say to you more funds or strategic dividend policy etc. while we know that only productivity is the key word. Financial manipulation simply doesn't matter.

Wapners PC

The two words that should trigger immediate scepticism: never and always. As in "home prices will never fall" or "markets will always reach equilibrium without need of regulation." An economist should never use either word in a sentence and be taken seriously.


Economics isn't the problem - it's the economists. The brains of too many economists have gone mushy. Many have become a weird kind of social "scientist". That means they are confused, woolly minded and love to interfere in markets that are not broken.

The US housing market wasn't broken until politicians, social engineers and woolly minded economists decide to distort it by forcing increased home ownership. This brilliant social policy made "home owners" of people who did not have the resources to buy their own home. After about 20 years of concerted effort, this merry band (in cahoots with sketchy financial institutions) managed to break the US housing market and pop the bubble they had laboured so mightily to create.

Economics isn't perfect by any means. Nonetheless Economics is a force for liberation, not destruction. Hats off to the smart people who mis-used Economics to turn the entire US into a lunatic asylum.

Paranoid Android

Economics, like genetics, is neutral; it's up to the ignorant, willfully malfeasant, foolish, and greedy to misuse ideas to justify their excesses. Of course, there is no such thing as a free market, and there never was, not on a national scale anyway, and since economics is a social science, the biases and emotions of its proponents influence their conclusions. Reality has a liberal bias, as does science, but economics is plastic and can be moved in any direction, willy-nilly to make an argument that effects billions of people. Most people on Earth who laugh bitterly that the free market works. Maybe readers of the Economist benefit, but not most Humans, even here in the USA, where a hamburger, fries, and shake can still be gotten for under $5.00, but the medical problems resulting from that diet will drive most of the country into bankruptcy (and I know of what I speak).

An Observer

Economists were enablers of deregulation, because it fit their ideology. They didn't question this, on the contrary they cheered all the way. Conveniently, the economic "consensus" was in-line with the wall street interests.


There's nothing wrong with the Economics since - it predicts correctly the general state of an economy at some time in the future. Of course, it is not the job of Economics to predict historical events (wars, revolutions, natural disasters etc) that also impact en economy.

The problem are the corrupt or incompetent economists who help create false models and thus predictions that serve the interests of the few - Greenspan, for ex. I don't argue from analogy but, for the feeling of it, an economist is like a physicist (sic!) who can create nuclear devices for a tyrant or cheap energy for the poor.


You can't bank on bankers, politicians, macro- and micro-economists, can you? The mess, we are in, has been growing slowly for decades and there was nobody but nobody strong enough to shout, whistle, protest - "over my dead body" among politicians, economists, pundits. And that's sad because in consequense of that the very ordinary people pay the price with unemployment, foreclosures, lack of credit, bankruptcies etc.

Jean Michel

Here is the lead for the new theory. It is theory of national output and growth. And it is a theory from the point of view of a country.
Starting from the basic components, which are the stock of inputs, the production and the market, we move on to the determination of national output of a country. Most theories tell you that the output of a country is a function of land, labour and capital. Some add technology to it. Nevertheless, they all assume that the more you are capable of producing, the higher is the level of national output, which is not true.

The output of a country (or national output) depends on two factors: the national production capacity and the demand for the products produced by the country. However, it is not, as Keynes said, determined by the point where the two components are equal to each other. The national output is the lower of the two components.

For example, let us say that in a given year, the production system of a country can produce 20 billion dollars of products and the demand for these products is 18 billion dollars, then the national output is 18 billion dollars. On the other hand, if the national production capacity is 30 billion dollars and the demand is 35 billion dollars, the national output would be 30 billion dollars.
And if the two quantities are equal, then the national output is equal to both.
So, as you can see, the national output is determined by the two factors but it is not always equal to one of them or to both.
Furthermore, if the national production capacity is less than the demand, the national production capacity and the output will increase, but if the national production capacity is more than the demand, the national production capacity will not increase and the national output will increase if the demand increases.

Smack MacDougal

Oh how you amuse, learningengineer.

I enjoyed your clumsy misuse of the rhetorical ploy of ad hominem.

Too bad you suffer from weak reading comprehension skills. Otherwise you would have seen where I propose a thorough study of monopolization strategy as well oligopoly and cartel formation.

In the USA, as long as corporate entities have natural person status, individuals shall suffer.

State-licensed monopolies, oligopolies and other cartels stand as a bane against individuals, everywhere.


Blaming the crisis on CRA or subprime lending is flat out wrong: there simply were not enough subprime borrowers to cause a catastrophe of this magnitude. For that, you needed greed-induced leverage, a complete lack of ethics, and a set of parasitic financial institutions.

As was noted in April, 2008:


You also need a compliant (non functioning) regulatory apparatus, something warned about in 1998:

"“The nature of financial market activities is such that significant dislocations can and do occur quickly, with great force. These dislocations strike across institutional lines. That is, they affect both banks and securities firms. The financial institution regulatory structure is not in place to effectively evaluate these risks, however. Given this, the public is at risk.” WILLIAM MICHAEL CUNNINGHAM, UNITED STATES COURT OF APPEALS (CASE NUMBER 98-1459). OCTOBER, 1998.

Adam Smith said as much in The Wealth of Nations:



"But besides all the bad effects to the country in general, which have already been mentioned as necessarily resulting from a high rate of profit; there is one more fatal, perhaps, than all of these put together, but which, if we may judge from experience, is inseparably connected with it. The high rate of profit seems everywhere to destroy that parsimony which in other circumstances is natural to the character of the merchant. When profits are high, that sober virtue seems superfluous, and expensive luxury to suit better the affluence of his situation. But the owners of the great mercantile capitals are necessarily the leaders and conductors of the whole industry of every nation, and their example has a much greater influence upon the manner of the whole industrious part of it than that of any other order of men. If his employer is attentive and parsimonious, the workman is very likely to be so too; but if the master is dissolute and disorderly, the servant who shapes his work according to the pattern which his master prescribes to him, will shape his life too according to the example which he sets him.

It is thus that the single advantage which the monopoly procures to a single order of men, is in many different ways hurtful to the general interests of the country."


SEC Comments. Page 6: "Envy, hatred, and greed have flourished in certain capital market institutions, propelling ethical standards of behavior downward. Without meaningful reform, there is a small (but significant and growing) risk that our economic system will simply cease functioning." December 22, 2003.


SEC Comments. Page 2: "Together these practices threaten the integrity of securities markets. Individuals and market institutions with the power to safeguard the system, including investment analysts and rating agencies, have been compromised. Few efficient, effective and just safeguards are in place. Statistical models created by the firm show the probability of system-wide market failure has increased over the past eight years.

Investors and the public are at risk." February 6, 2006.

billion dollar ben

I just wanted to drop a quick message to give everyone a collective congrats.

So often these forums get filled by mindless, emotionally filled rants that are, for the most part, completely off topic.

The greater (correct) consensus is that economics should stop trying to be the positive science that it pretends to be and get back to what it's original use was before the engineers hijacked the discipline... giving insights into the way in which the economy effects our daily lives - whether that be socially, in business or in politics.


When I began grad school in 2005, some of my professors were talking about a housing bubble, and said current levels of US consumption is unsustainable -- at one point, we will have to pay all this back. I didn't exactly go to an elite university like Harvard, but yet my professors were aware of what was going on on Wall Street. Therefore, I don't think there is anything necessarily wrong with economics (or macroeconomics).

However, the economics professors at my school were boring, analytical and sat in offices without windows behind mounds of books. Just upstairs was the Finance school, churning out MBA's. The lecture rooms were immaculate, with donors name on plaques (the likes of Deloitte, Accenture, Citigroup, etc). Before I went to school, I did work for an investment bank (one of the two survivors), and I remember the attitude there, and reminded me that finance is totally different than economics.

Money definitely talks -- if you look like you have money (like the finance school), people like politicians, talking heads on the news, and the average investor thinks your smart...therefore you must have good genes...therefore, you are a great leader for the financial industry (and in politics as a consultant). And these people call themselves economists, because economics means you know eveything about the economy (when in reality, they are financial people with narrow tunnel vision, knowing only their jobs very well to make a lot of money). And then when a curb ball comes from left field, everyone's asking "what happened?" Firms that had good (and real) economics units, like Goldman (that termed "BRICs"), saw the curb ball and hedged against AIG.

I don't think this financial crisis was really a surprise (Goldman obviously knew). If you're really good at both economics and finance, then this would not have happened. Friends of mine who work for these banks knew something was up, but hey...they will have their bonuses and if they get laid off, they can go travelling to Europe and "reflect on themselves."

Go Go

"If readers of this publication seriously want to learn economics, I recommend you stop reading the Economist and start reading

It will be a real eye opener. They actually say crazy things like inflation is caused by printing money, that spending and borrowing your way out of a problem that was caused by too much spending and borrowing is a bad idea, and that when centralized powers manipulate the market and create artificially low prices, bubbles form." - JamesH11

Austrian School economists are like religious preachers promoting chastity. It's all about prevention with them. Should there actually be a problem, their sanctimonious admonitions will yield no solution. After The Great Depression they fell from favor. They couldn't provide solutions aside from repenting and entrusting yourself to the market.


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