This particular article on the Economist caught my attention. It is about “what went wrong with Economics” and how the discipline should change to avoid the mistakes of the past (yeah! Right).
Well the author rightly points out that like the housing bubble, the economics bubble has also burst and has severely tarnished the reputation of Economics, particularly Macroeconomics. Like the author of this article, I also want to defend Economics, before we collectively rip it apart :-)
Frankly, I think Economics is one subject from which people have a lot of expectations. People expect it to be that magical something that can fix-it-all when it comes to markets. That is so wrong. Despite the use of so called scientific stuff like calculus, Economics is essentially a social science which can only study rational human behaviour.
Therefore, I have only one point in defence of my dear subject – that instead of blaming Economics we need to understand that Economics can only study rational behaviour and not whimsical transactions that people indulge in all day long. Unfortunately, people are not as smart as Economics assumes them to be.
I invest in an x-y-z stock not because I know about markets or that stock; but because I believe, on the basis of what I have heard, that this stock will do good. I go on spreading this word to others who do the same. And when this stock crashes I blame economics for my woes. Hello! Economics asks me to be rational, to judge things on the basis of information and not word of mouth.
This is exactly what happened with the current crisis. Despite living in the information era, hardly any investor cares to collect information.
Leave alone the capital market, even if it comes to our basic savings, we care a damn about where we are putting our money. We blindly go and put our money in some bank on the basis of some kaccha-pakka information. How many of us care to go through the balance sheet and portfolio of the bank where we put our money? How many people in the UK cared to know about the investments of the banks of Ireland, before putting their money in it? If it paid more interest than other banks, at least some one should have cared to understand its investments. Even the great Oxford university didn’t bother and lost 30 million pounds because of the foolish investment.
Any theoretical model of Economics flows from the underlining assumption that 'people know', when in reality 'people don’t know and people don’t care'! No science can study irrationality other than astrology, perhaps. So pappus of the world - its not Economics, but lack of common sense, irrationality & laziness that has doomed us.