Wednesday, 7 October 2009

Why (Irish) economists' eyes are smiling

James Wickham: There’s a curious paradox about economists in Ireland today. In the middle of the financial crisis, the public standing of economists is higher than ever before. This is odd, because in most countries the claim of economists to any special knowledge about the economy (or anything else) is subject to extensive criticism. Inside and outside the profession, there are calls for greater ‘modesty’. Furthermore, many ‘eccentric’ or ‘heterodox’ economists have long claimed that conventional academic economics has become essentially a branch of applied mathematics. Today their views are being given a wider audience than before. Readers of this blog will be aware of such developments, but they have had no impact in Ireland. Why?

Surely the answer lies in the national specificity of the Irish crisis. While the government claims that what has happened here is just part of a global crisis, this is of course nonsense. The global crisis – or more accurately, the crisis of Anglo-Saxon capitalism - has been exacerbated by our own construction and housing asset boom. And here I think - though I would like to check this - most Irish economists did point out that we were in a speculative bubble and many did call on the government to try to restrain it. However, I suspect that on a more general scale Irish economists were as guilty as their international colleagues. Even at home, how many called for tighter regulation of the banks? And abroad, how many pointed out the dangers of unregulated financial markets?


Paul Hunt said...

The Economist ( provides a good summary of the key features of this debate - though with its own slant. The focus - quite rightly in my opinion - is on markets in assets and securities. It contrasts the arm's-length, impersonal A-S market system with the "relationship" finance that tends to dominate in continental Europe and retains a strong hold in developing economies - particularly in East Asia, despite the continuing inroads, up to now, of the A-S model.

The A-S model gained ascendancy among economists because its workings appeared to demonstrate the Efficient Markets Hypothesis and its impersonality allowed it to be "mathematicised". And those who profitted enormously from it were prepared to fund political and academic support for it.

Ireland had the worst of all possible worlds. It had cosy relationship domestic banking, access to the short-term international liquidity recycled within the A-S system and the A-S political and intellectual support for minimal regulation.

Yes, it is possible that the, relatively, few Irish economists who specialise in banking, finance and financial economics - and associated macroeconomic issues - were swayed by the ascendancy of the A-S model, but it is unfair to berate them for the totally wrong-headed economic policies pursued for the last 10-12 years. Contrary to popular impressions, irish economists have minimimal traction or participation in the policy-making process. Occasionally, individual economists are extracted to address difficult and pressing problems (e.g., Colm McCarthy (twice) and Alan Ahearne), but these are the exceptions that prove the rule. The Dail does not have the authority, resources or (possibly) the capability to scrutinise economic policy proposals drafted by department officials. Therefore officials (most of whom have little formal economic training) will present only the very minimum that is required. Therefore economists have minimal formal impact on the formulation of scrutiny of economic policy proposals. They can, of course, comment, but if their views conflict with the official "group-think" they will be dismissed summarily - as happened with the "Gang of 20" or "46" who publicly criticised NAMA.

Major changes are required in democratic governance, the calibre of public representatives and the formulation and scrutiny of economic policy. There is no political will to effect these changes, so until then, perhaps, we should ease off on the economists.

Kevin Denny, UCD said...

The vast majority of academic economists do not work on banking/finance so cannot be expected to have an informed opinion & to get involved in debates on the matter. Even people working in financial economics would not necessarily be familiar with the regulatory framework here. I do not feel guilty in the slightest.

Martin O'Dea said...

Information technology is changing fundamentally all possible social interactions and so constructs arising from these interactions. Paul Hunt calls for changes to the democratic machine and this is not to big an ask at this juncture. Citizens should have access to as much information on political, economic and social theories/policies and possibilities as possible via appropriate fora.

Government should provide access to law making and deicision making across the political process via internet sites taht might well be provided by inermediate publicly supported information bodies. Perhaps one could log a query with their representative or a minsiterial function and then be able to 'follow' that query as it progresses through the system inculding any votes that might arise relating to the issue etc. and their results and the effort that the representative has taken.

Bodies that review best practice in economics and other areas of advice including areas such as health and education and so on should also be available through associated websites and other telecommunication modes with proposals from different perspectives being aired.

In other words this ongoing techno-revolution allows the opportunity for politics to stop beng afraid of people. Luckily for us all the vast majority of people are by any objective measurement decent who wish for very similar priorities. When their careers veer into hierarchies of self-interest then they are much more likely to err; but if, in fact, we can become more democratic and the athenian version via technology empowered interaction then this can only be good.

It is essential then that those with the leading educations and qualifications in these important fields such as economics on this site are ready to inform and empower more people than ever before. The days of leaving it up to the boys in the dail seem very much under threat

Damian said...

Kevin, your point about the vast majority of economists not working on banking/finance issues and so not having an informed opinion is interesting. I would have to point out that non-economist colleagues with varying backgrounds from development studies, economics, international politics, geography etc., have over the past years, in both their teaching and research, been perfectly capable of expressing opinions and conducting informed debates. There are after all few parts of the economy that finance does not impact upon.

I would also be very surprised if those working on financial systems did not understand the intricacies of regulatory systems. Their level of understanding would after all be crucial to the assumptions that underpin all economic models. If what you say is true, then perhaps the criticisms of the last decade of financial economics are worse than initially thought.

The point about individual guilt seems neither here nor there in the current climate. As professionals (not just paid researchers in ivory towers) academic economists have a duty to articulate and stimulate good quality debate on economic principles and thier application to public policy.