The New York Time's house conservative columnist David Brooks muses today on the lessons that economists and the rest of us can take from the recent economic crisis. Brooks notes:
Economists and financiers spent decades building ever more sophisticated models to anticipate market behavior, yet these models did not predict the financial crisis as it approached. In fact, cutting-edge financial models contributed to it by getting behavior so wrong — helping to wipe out $50 trillion in global wealth and causing untold human suffering.
Now that the highly mathematicized and modeled version of economics has so signally failed, Brooks argues that the field of economics' pretensions to being a "science" are overblown. Brooks observes:
In The Wall Street Journal, Russ Roberts of George Mason University wondered why economics is even considered a science. Real sciences make progress. But in economics, old thinkers cycle in and out of fashion. In real sciences, evidence solves problems. Roberts asked his colleagues if they could think of any econometric study so well done that it had definitively settled a dispute. Nobody could think of one.
As all too often happens, the modelers began to believe what the outputs from their models rather than what the real world was trying to tell them. Brooks concludes:
One gets the sense, at least from the outside, that the intellectual energy is no longer with the economists who construct abstract and elaborate models. Instead, the field seems to be moving in a humanist direction. Many economists are now trying to absorb lessons learned by psychologists, neuroscientists and sociologists.
Although Brooks mentions economist Friedrich Hayek in passing, he would find that the intellectual tradition of Austrian economics offers some insights into the causes of the recent crisis. Austrian economics has long eschewed the false precision of mathematical models in favor of a multi-dimensional humanistic approach. What is Austrian economics? Turning to Wikipedia (the online encyclopedia that arises from the sort of spontaneous institutional order described and favored by Austrian school economists) one finds it defined as…
… a non-mainstream school of economic thought that emphasizes the spontaneous organizing power of the price mechanism or price system. Austrians hold that the complexity of human behavior makes mathematical modeling of the evolving market extremely difficult (or undecidable) and advocate a laissez faire approach to the economy. Austrian School economists advocate the strict enforcement of voluntary contractual agreements between economic agents, and hold that commercial transactions should be subject to the smallest possible imposition of forces they consider to be coercive (in particular the smallest possible amount of government intervention). …
Austrian economists contend that testability in economics is virtually impossible since it relies on human actors who cannot be placed in a lab setting without altering their would-be actions. Mainstream economists are generally critical of methodologies used by modern Austrian economics.
For an informative and very entertaining (at least it is for economics geeks) lesson in the distinction between Keynesian and Hayekian theories of the business cycle, I highly recommend Russ Robert's "Fear the Boom and Bust" rap anthem (YouTube).