Recovering Austrian Economics
January 19, 2012 By 23 Comments
by Harry Veryser
An economist is someone who sees something happen in practice and wonders if it would work in theory. —Ronald Reagan
Does economics have any real value?
That blunt question has been voiced with greater frequency in recent years. After all, mainstream economics, with its cherished theories and complex mathematical models, failed to predict or to prescribe adequate remedies for the economic meltdown that began in 2007. These failures led liberal columnist Paul Krugman, the 2008 winner of the Nobel Prize in economics, to call the previous thirty years of macroeconomics “spectacularly useless at best, and positively harmful at worst.” Similarly, Willem Buiter of the London School of Economics described the past three decades of macroeconomics training at American and British universities as a “costly waste of time.”[1]
It’s not just macroeconomics that has been called into question. Financial economics was another key culprit in the crisis. The Economist observes: “Convenience, not conviction, often dictates the choices economists make. Convenience, however, is addictive. Economists can become seduced by their models, fooling themselves that what the model leaves out does not matter.” Wall Street fell in love with “the quants,”[2] the math whizzes who devised new investment technologies to slice, dice, and repackage all sorts of different asset classes. Wedded to its mathematical models, mainstream economics became “a poor guide to the origins of the financial crisis, and left its followers unprepared for the symptoms.”[3]
Investment wizard Warren Buffett put it even more succinctly: “Beware of geeks bearing formulas.”[4]
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