Recently, Fareed Zakaria set off the Economics profession by asking “Is This the End of Economics?”.  Soon thereafter, Larry Summers sought to defend the profession in a column “Has Economics Failed Us?  Hardly”.  Recognizing Summers’ defense was grossly inadequate, Brad DeLong offered up “Yes, there are individual economists worth paying respect to, but is Economics worth paying respect to?”.  As the title suggests, the answer is No!

It will come as no surprise to regular readers that Zakaria points to the failure of the Economics profession to see the Great Financial Crisis coming as the moment when the profession fell off its perch that it was and is able to provide meaningful insights to help understand the modern world.

The Economics profession still cannot answer the Queen’s Question of why it didn’t see the crisis coming.  It can however trot out a series of excuses for its failure.  Mr. Summers offered up one.

Many critics of economics hold out the failure of the economics profession to predict the financial crisis as an indictment.  This argument fails to acknowledge a central idea taught in every basic finance course. Market breaks are inherently unpredictable because one that was predicted would have already occurred as everyone moved to sell.

I appreciate Mr. Summers use of a weak straw man argument to defend Economics and throw the entire finance profession under the bus.  Of course, if the best he has is this straw man argument it shows just how pitiful the state of the Economics and Finance profession truly are.  Mr. Summers is saying the professions have nothing to offer on why financial crises occur or how to prevent them in the future.  If they did, Mr. Summers would be saying here is how we predict when they are likely to occur.

By the way, the fact the Economics and Finance professions have this problem doesn’t mean everyone does.  Using the Information Matrix it is easy to predict when a financial crisis is likely to occur (I know because I publicly did so).  You simply have to look at the size of the opaque sectors of the global financial system.  In 2008, you would have seen we had reached critical mass.  As soon as Wall Street’s valuation stories about these sectors was called into doubt, we were going to have the acute phase of a financial crisis.

Clearly Professor DeLong sensed Mr. Summers column wasn’t much of a defense.  So Professor DeLong tried the different strategy of reframing the question.

And so let me try once again to say what needs to be said, for I do have to admit that, contrary to what Larry maintains, Fareed Zakaria does have a point when he says that “events have hammered… nails into the coffin of traditional economics” and that, while the question mark at the end is important, it is time to speak of “the end of economics?”. Yes, there are very many good economists worth listening to. But does economics as a whole have any claim to authority, or is it better for outsiders’ first reaction to be to dismiss its claims as some combination of ideology on the one hand and obsequious toadying to political masters on the other?

Yes, it is better for your first reaction to be to dismiss any Economists’ claims as some combination of ideology on the one hand and obsequious toadying to political masters on the other.

No, Economics as a whole does not have any claim to authority.  As Mr. Summers showed, the Economics profession does not have any understanding of when a financial crisis is likely.  If its theories can’t do this, why exactly should we trust any policy advice they give on how to respond to or prevent a financial crisis?  We shouldn’t.