29 Jul 2009

Useful Economics

The Economist's cover article ("What went wrong with economics") discusses the failure of macro and financial economics in the recent financial crisis, but they caution against throwing the baby out with the bathwater:
In its crudest form—the idea that economics as a whole is discredited—the current backlash has gone far too far. If ignorance allowed investors and politicians to exaggerate the virtues of economics, it now blinds them to its benefits. Economics is less a slavish creed than a prism through which to understand the world. It is a broad canon, stretching from theories to explain how prices are determined to how economies grow. Much of that body of knowledge has no link to the financial crisis and remains as useful as ever.

[snip]

These important caveats, however, should not obscure the fact that two central parts of the discipline—macroeconomics and financial economics—are now, rightly, being severely re-examined (see article, article). There are three main critiques: that macro and financial economists helped cause the crisis, that they failed to spot it, and that they have no idea how to fix it.
Since I am a environmental/resource economist who uses behavioral and institutional tools to do my analysis, I am not only unthreatened by the failure of macro/financial, but I am also (relatively) better off. "We" didn't make the mistakes that the macro/financial guys did.

(I am NOT happy that they did, since I am poorer as a result!)

Bottom Line: Economics has many useful tools, but none should be used blindly.