Why Economic Science Could Not Predict The Global Financial Crisis

Modern economics has become intensely mathematical in nature. To pursue economics as an undergraduate or graduate programme of study today requires significant mathematical skills.
The real world, however, is composed of people and of social systems.
In order to make people, culture and institutions fit in to mathematical equations, economists make assumption, many or most of which are simply not true.
Accordingly, various branches of alternative (“heterodox”) economic thinking have developed, where those economists take seriously aspects of reality neglected by mainstream mathematical economics such as consumer psychology, or economic and social institutions.
One such heterodox economist is Professor Geoffrey Hodgson, who works in the area of recognising the importance of social and economic institutions.
Professor Hodgson recently forwarded the below email making important points about the nature of the economics profession and the need to educate economists more broadly.
At a time when we are questioning the nature of our economic and financial assumptions this is an extremely important message to take on board. We need to think differently – and more realistically – about the economic system which is fundamentally by its nature a social system.
The full text of Professor Hodgson’s message follows. Let’s make sure it’s heard – because economics needs to be understood more broadly and more correctly than the mathematically focused economics typically taught in University Undergraduate and MBA courses.

“Mathematical technique should not dominate real-world substance.”

During a visit to the London School of Economics in November 2008, the Queen asked why few economists had foreseen the credit crunch. Dated 22 July 2009, she received an answer from Professors Tim Besley and Peter Hennessy. This was widely quoted in the British press.

Ten leading British economists – including academics from top universities, three Academicians of the Academy of Social Sciences, academic journal editors, a former member of the Monopolies and Mergers Commission and the Chief Economic Advisor the Greater London Authority – have responded by writing their own response to the Queen. They note that the letter by Professors Besley and Hennessy fails to consider any deficiency in the training of economists themselves.

Following similar complaints by Nobel Laureates Ronald Coase, Wassily Leontief and Milton Friedman, the ten economists argue that economists has become largely transformed into a branch of applied mathematics, with little contact with the real world. The letter by Professors Besley and Hennessy does not consider how the preference for mathematical technique over real-world substance diverted many economists from looking at the whole picture.

The ten economists uphold that the narrow training of economists – which concentrates on mathematical techniques and the building of empirically uncontrolled formal models – has been a major reason for the failure of the economics profession to give adequate warnings of the economic crises in 2007 and 2008.

The ten signatories also point out that while Professors Besley and Hennessy complain that economists have become overly ‘charmed by the market’, they mention neither the highly questionable belief in universal ‘rationality’ nor the ‘efficient markets hypothesis’, which are both widely taught and promoted by mainstream economists.

The ten economists call for a broader training of economists, involving allied disciplines such as psychology and economic history, as well as mathematics.

For more information please contact:

Professor Geoffrey M. Hodgson

www.geoffrey-hodgson.info

The Business School, University of Hertfordshire, Hatfield, Hertfordshire AL10 9AB

Sorry, comments are closed for this post.

Why Economic Science Could Not Predict The Global Financial Crisis

Modern economics has become intensely mathematical in nature. To pursue economics as an undergraduate or graduate programme of study today requires significant mathematical skills.
The real world, however, is composed of people and of social systems.
In order to make people, culture and institutions fit in to mathematical equations, economists make assumption, many or most of which are simply not true.
Accordingly, various branches of alternative (“heterodox”) economic thinking have developed, where those economists take seriously aspects of reality neglected by mainstream mathematical economics such as consumer psychology, or economic and social institutions.
One such heterodox economist is Professor Geoffrey Hodgson, who works in the area of recognising the importance of social and economic institutions.
Professor Hodgson recently forwarded the below email making important points about the nature of the economics profession and the need to educate economists more broadly.
At a time when we are questioning the nature of our economic and financial assumptions this is an extremely important message to take on board. We need to think differently – and more realistically – about the economic system which is fundamentally by its nature a social system.
The full text of Professor Hodgson’s message follows. Let’s make sure it’s heard – because economics needs to be understood more broadly and more correctly than the mathematically focused economics typically taught in University Undergraduate and MBA courses.

“Mathematical technique should not dominate real-world substance.”

During a visit to the London School of Economics in November 2008, the Queen asked why few economists had foreseen the credit crunch. Dated 22 July 2009, she received an answer from Professors Tim Besley and Peter Hennessy. This was widely quoted in the British press.

Ten leading British economists – including academics from top universities, three Academicians of the Academy of Social Sciences, academic journal editors, a former member of the Monopolies and Mergers Commission and the Chief Economic Advisor the Greater London Authority – have responded by writing their own response to the Queen. They note that the letter by Professors Besley and Hennessy fails to consider any deficiency in the training of economists themselves.

Following similar complaints by Nobel Laureates Ronald Coase, Wassily Leontief and Milton Friedman, the ten economists argue that economists has become largely transformed into a branch of applied mathematics, with little contact with the real world. The letter by Professors Besley and Hennessy does not consider how the preference for mathematical technique over real-world substance diverted many economists from looking at the whole picture.

The ten economists uphold that the narrow training of economists – which concentrates on mathematical techniques and the building of empirically uncontrolled formal models – has been a major reason for the failure of the economics profession to give adequate warnings of the economic crises in 2007 and 2008.

The ten signatories also point out that while Professors Besley and Hennessy complain that economists have become overly ‘charmed by the market’, they mention neither the highly questionable belief in universal ‘rationality’ nor the ‘efficient markets hypothesis’, which are both widely taught and promoted by mainstream economists.

The ten economists call for a broader training of economists, involving allied disciplines such as psychology and economic history, as well as mathematics.

For more information please contact:

Professor Geoffrey M. Hodgson

www.geoffrey-hodgson.info

The Business School, University of Hertfordshire, Hatfield, Hertfordshire AL10 9AB

Sorry, comments are closed for this post.