Friday, July 13, 2012

The Policy Relevance Of Economics

My old boss, Radzuan Halim, on why economics remains relevant (The Edge; excerpt):

Re-appreciating economics

THE economics profession has been much criticised, maligned and parodied in recent years over its failure to predict the US mortgage-cum-economic crisis of 2008/09 and the ongoing Greek-euro crisis. Two reasons have been suggested for the failure. First is the economics methodology itself, which is based on the "rationality of man" assumption and its over-mathematisation — the takeover by quantitative-types not grounded in empirical reality and historical perspective.

Second, the profession has become so riddled with ideology that it determines an economist's findings and prescriptions…

…Of course, economics is by no means the only profession to be caught up in ideological partisanship and posturing…

…With respect to methodology, many economists do acknowledge the weakness of excessively quantitative approaches and have sought improved methods…

…Given the controversies and perceived weaknesses in the profession and methodology, my view is that present-day economics still offers good and sometimes, extremely good, approaches to the study of man's economic, social and political problems. Basic economic concepts and tools provide powerful, insightful analysis of situations, causes and policy prescriptions. By the same token, the absence or neglect of basic economic tools in analysing economic situations could lead to stagnation, deterioration and crisis, such as the situation found in present-day Greece and many other countries…

It’s a fairly long essay, with some good points and a few (from my point of view) bad ones – governments are not like households. But on the whole it offers a defense for using economic concepts and ideas to evaluate policy and in public discourse. Not a bad read, considering he’s not an economist.


  1. The mortgage crisis stemmed form issues relating to an unregulated finance industry chasing commissions on selling toxic mortgage backed securities combined with idiotic rating agencies who amazingly thought rednecks and burger flippers with million dollar mortgages were triple AAA rated! Now of course the bailouts have ensured the private too big to fail debt is now public debt. Id like to see more economists give us insights into how the worlds chronic debt problem can be solved without us all going 'mad max'. At the moment the solution to too much debt is surprisingly issuing and rolling over more debt. This can't end well.

    1. 1. Reduce leverage ratios (proposed under Basle III), preferably to pre-2004 levels.

      2. Limit collateral chains (shadow banking). Allowing this makes no sense to me at all - keep money creation within the banking system where it belongs and where everybody can keep an eye on it.

      3. Tax financial transactions (Tobin tax, as proposed in Europe, but opposed in the US).

      4. Rethink universal banking (bring back Glass-Steagal?).

      5. Limit concentration of derivatives exposure (the AIG problem) and penalise OTC markets - everything should go through an organised market and clearing house.

      6. Raise marginal tax rates, particularly on capital gains (reduces incentives for widening wage inequalities; also limits speculation). More equal societies have less debt problems, because low income earners have less need to borrow to maintain living standards.