Re: "After Economics, What?"

["John Gelles" <jjgelles@xxxxxxxx>]

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From: Harry Veeder <veed0001@xxxxxxxxxxxxxxxx>
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Subject: "After Economics, What?"



"After Economics, What?" by Amitai Etzioni  June 24, 1999


On the web at:


http://www.intellectualcapital.com/issues/issue251/item5501.asp


>From the article:


"By the end of June the Feds will decide whether to raise interest rates in
order to slow down the economy, said to be overheating, or let prosperity
continue to rage. Most Fed watchers expect rates to be increased because our
central bank is one of the few places economists are still routinely heeded.


The dismal science


Many companies think they no longer need economists. Banks such as Bank
America and Wells Fargo, for instance, are reducing the number of economists
from their payrolls, or eliminating their jobs altogether. Investors
increasingly are shifting their money into index-tracking funds, thus
avoiding managers who heed economists and their "orthodox" opinions.


Even in the halls of government, economists no longer hold sway as they once
did. The White House National Economic Council is headed by Gene Sperling, a
politically minded, loyal aide of the president, rather than an academic
economist.


Are economists reading the charts wrong?


While the International Monetary Fund (IMF) still draws heavily on academic
economists, especially on Stanley Fischer from Massachusetts Institute of
Technology, many observers say the IMF contributed to the recent worldwide
financial crisis by insisting that distressed countries curtail public
expenditure and raise interest rates. The World Bank, arguably the largest
concentration of economists in the world, is still deeply influenced by
academic economists, such as Joseph Stiglitz from Stanford, and is clearly
floundering.


Neoclassical economics, which until recently dominated private and public
policy-making, has long been criticized by some of the best minds of our
age,
including Herbert Simon, Oscar Lewis, Albert O. Hiersman and Amartya Sen.


These critics have pointed out that economics is based on faulty assumptions
about human nature (assumed to be self-centered) and our ability to reason
(assumed to be high). Its mathematical gloss has been proven to be elegant
and parsimonious, but often not empirical. And the tendency of economists to
ignore social infrastructure such as private property laws, limited
liability
and the spirit of capitalism repeatedly has been highlighted.


All this did not prevent economics from arguably reaching its heyday during
the Reagan-Thatcher years. The influence of economics in the 1980s was
enormous, not because of some new and powerful demonstration of its
scientific validity, but because of the conservative, laissez-faire
philosophy on which neoclassical economics is based. This philosophy
(less-kind souls call it an ideology) helped legitimize the conservative
agenda of the 1980s. In turn, economics won respect because dominant public
policies seemed to be congruent with its theories.


The end of theory


The 1990s, by contrast, could be viewed as a series of grand experiments
that
have blown away long-held economic nostrums. First, Jeffrey Sachs et al.
argued that the former Soviet republics should "jump" into capitalism rather
than pursue a more gradual transformation. The transition, economists
argued,
could be accomplished in two years.


The simplistic theory behind this reasoning was that Russians were not
different from Westerners. Given the chance, they also would seek to
maximize
personal satisfaction with a life rich in the consumption of goods and
services.


Left free to their own devices, Russians would build profit-maximizing
corporations. Government controls, according to this theory, were the only
forces holding them back. Hence, once property was transferred to private
hands and deregulation and an opening to international markets set in, all
of
which could be achieved in short order, the former Soviet republics would
become happy, capitalist democracies.


The real result, however, was a severe and prolonged decline in the standard
of living, thriving corruption and enormous western bailouts, which have
been
largely wasted or stolen. Capitalism, and the advice of economists, have
been
given a black eye.


The American economy has conspired to sink one major economic theorem after
another. The first torpedo sunk the theory that when unemployment, currently
at a low 4.3%, falls below the so-called "natural" rate of 6%, the United
States will face accelerating inflation in wages, and then prices. The
second
debunked theory said that when the economy grows at a real rate exceeding
2.5%, it creates dangerous inflationary pressures.


American economists did no better in predicting or explaining the effects of
the rising value of financial assets on people's behavior, or on economic
growth and inflation. (In the last 13 years, the wealth effect was first
taken for granted, then discarded, and now is back in vogue.) Predictions
about the effects of low savings rates, and theories about how they might be
raised, have fared even worse. Economists are coming out of the woodwork
with
ad hoc theories, arguing that we have a new, technology-driven kind of
economy, which is highly productive and therefore subject to a whole new set
of rules. But one must wonder if by the time these new rules are formulated,
the American miracle will have gone the way of all economic miracles.


What kind of science?


Our experience with economics is part of a much more encompassing lesson: We
pay dearly for arrogance. As individuals and as societies, we do not have
the
tools that allow us to manage our future. Our love affair with rationalism,
part of the infatuation with the Enlightenment, has waned in other areas,
especially since the advent of nuclear weapons. So we must face reality in
the field of economics as well. If anything, our ability to manage the
economy is lesser than our control over nature.


Greater humility would lead to greater pragmatism and expand our tolerance
for experimentation. For instance, I doubt if anyone knows what would happen
if the European Central Bank stopped looking in the rear mirror for signs of
hyper-inflation and, instead, cut interest rates again. Fortunately, there
are signs that the ECB has been more willing to experiment with lower rates,
and this should be welcomed.


Equally important is the growing recognition that economic change and
management cannot be disassociated from the legal, social, civic and
educational fabric of society. The need for a broad cultural and
institutional approach is obvious in the former Soviet Union. Elsewhere,
Argentina may be reaching the political limits of its tolerance for IMF
economics. Malaysia is experimenting with the introduction of capital
controls.


There is also the question of what we value most. Should the ultimate goal
of
our economic system, the one we prescribe for the rest of the world, be to
work American hours, to reduce the welfare state to an American level
(including canceling national health insurance), and to spend little time
with our families, friends and communities? And to what extent does the
United States experience presume that other countries will continue to sell
low-cost goods and provide low-cost labor? If all countries became
mini-Americas, none of them (including the United States) would be able to
glow as the United States has for the last few years.


These are questions Third Way governments are struggling with. The answers
are unlikely to come from economists or any other social scientist.
Attentive
citizens and public leaders will all have to participate in feeling our way
forward."




"After Economics, What?" by Amitai Etzioni
IntellectualCapital.com   June 24, 1999


Amitai is a professor at George Washington University in Washington D.C.
He can be reached at etzioni@xxxxxxxx