A decade after the acute phase of the Great Financial Crisis it is time to ask “is the Economics we have better than nothing?”.  The answer is “it depends”.

What does the answer depend on?  Whether we are talking about macro or micro economics.  If we are talking about macro economics, then the answer to the question is “No, nothing is better”.  If we are talking about micro economics, then the answer to the question is “Yes, the Economics we have is better”.

Maurice Obstfeld, director of the IMF’s Research Department, wrote a follow-up piece for the Financial Times in response to its previously published debate on the question “Has Economics Failed”.  His piece, titled The Public Demands Too Much, demonstrates why nothing is better than the macro economics we have.

Pity the economist. Share prices have recovered from the dismal levels of the financial crisis — with some credit due to the rescue and rebuilding efforts economists recommended. But the stock of economists remains in the tank.

This is an amazing statement.  Mr. Obstfeld equates higher share prices to good policy recommendations.  While higher share prices are good for Wall Street and the 1%, it is far from clear this is beneficial to the real economy and the 99%.  After all, the higher share prices he credits to economists resulted in a massive increase in inequality.

Unfortunately for Mr. Obstfeld, there was an alternative to listening to and following the economists’ recommendations.  We could have used the financial system as it is designed and implemented the Swedish Model.  Yes, following this model’s policies  would have been bad for banks as they were forced to write off the debt that cannot be repaid in the financial system.  Yes, this model’s policies would have been bad for bankers who were held responsible for their misbehavior.  On the other hand, like Iceland, we would have dramatically less debt outstanding, a self-sustaining recovery and far less inequality.

This alternative response to the financial crisis provides a vivid illustration of why nothing is better than the macro economics we have.

Politicians these days scorn “experts” and encourage voters to ignore them…

I know macro economists have anointed themselves “experts”, but is this really true?  A further examination of their track record shows this isn’t true.  For example,

Economic forecasting is widely derided as useless — or worse.

Economic forecasting confirmed it is useless or worse when the acute phase of the Great Financial Crisis hit in 2008.  Even the Queen of England noted the macro economic forecasts missed it when she asked why no one saw the crisis coming.

Macro economists tried to hide their failure to forecast the crisis in their letter responding to the Queen.  The letter is a masterpiece in misdirection.

The Queen didn’t ask why they hadn’t seen the exact form, timing, extent and severity of the crisis.  She asked why macro economists weren’t warning the chances of a crisis were increasing and what could be done so we could have avoided it.

Macro economists weren’t warning because their models didn’t include real world entities like banks.  Even if they had included these entities, it would still not have helped them predict the crisis.

Crises like the Great Financial Crisis happen when there is opacity and their models don’t have a factor for the level of opacity in the global financial system.  Financial crises emerge from the Information Matrix’s Blind Betting quadrant when the valuation story Wall Street tells about opaque securities is called into doubt.  Investors know to “run” and get their money back.

I have lost count of the number of times I have been asked by a journalist: “Why should we believe anything you say, when the you were wrong about ___?”

The journalists are right.  They shouldn’t believe anything a macro economist has to say.  This was made obvious to everyone, including the Queen, in 2008.  It should have resulted in a) journalists not wasting their time calling macro economists and b) macro economists having zero input into the policy response to the crisis.

Both of these would have been an improvement over what happened (see above for negative consequences of following macro economists’ policy recommendations).

As Paul Krugman discovered, there weren’t any positive consequences from following the macro economists’ recommendations.  It was the automatic stabilizer programs put in place during the 1930s that prevented another Great Depression and not the macro economists’ policy recommendations.

In fact, until macro economics can explain where financial crises come from and how to prevent them, there is no reason for anyone to trust the answers offered by macro economists.

Economics is far from an exact science. Who would expect to predict global outcomes that depend on the individual actions of about 5bn working-age individuals, not to mention the intervention of natural and man-made disasters?

This defense is even more reason nothing is better than the macro economics we have.

At the same time, however, economics provides essential tools for understanding, and to some degree shaping, those events.

The problem arises in the shaping of these outcomes.  If you cannot predict what the outcome will be, why should you have any say in or influence over shaping events?

Furthermore, macro economics doesn’t have the right tools for understanding events like the Great Financial Crisis.  In the absence of the Information Matrix, macro economics doesn’t have any explanation for why our financial system is designed the way it is (hint: it uses transparency to maximize transactions occurring in the Perfect Information quadrant).  In the absence of the Information Matrix, macro economists don’t have an explanation for the form the crisis took when it erupted (hint: it spread across the opacity fault line in the global financial system as the stories supporting the valuation of Blind Betting quadrant securities was called into doubt).