Defending the dismal science
How economists beat the crisis
by Miroslav Singer in Prague
Wed 21 Jun 2017
In public debates I am continually asked – in my capacity as a practising economist and former central bank governor – whether economics as a science has failed. People are quick to cite how most economists did not foresee the source or severity of the 2008 financial crisis. But recent normalisation of the world economy makes it easier to argue No. Although the West in the last decade faced the worst economic crisis since the 1930s, the dismal science was essential for implementing appropriate macroeconomic policies to avoid the gravest consequences.
The failure to forecast the crisis led to enormous costs. The upset struck the financial systems of most developed economies. This caused widespread distrust of free market doctrines and government officials. Anti-establishment politicians are attracting large number of votes. However, global free trade was mostly unharmed, and mainstream political parties are addressing the electorate's concerns through new policies. The situation could have been much worse. In 2017, nine years after the start of the recession, the global economy is returning to sustainable equilibrium.
Compare this to what followed the 1929 great depression. Nine years later, in 1938, Adolf Hitler's power was rising to unprecedented levels. Austria, already under authoritarian rule since 1934, was annexed by Germany. The second world war began in September the following year. Many democracies were fatally undermined by the political consequences of massive unemployment, which in some economies peaked at one-third of the workforce. For those lucky enough to have jobs, wages for falling.
Deficient macroeconomic policies in the 1930s forced much of the population to queue for stale bread and thin soup. Many states shifted to protectionism and price-fixing, and created monopolies in key industries. The consequences of overly tight macroeconomic policies after the great depression were a great deal higher than those of policies pursued by central banks over the last nine years.
The dismal science may not have improved its forecasting record, but it has performed better in moderating the consequences of its failures. The troubles of the 1930s and subsequent war should make us reflect. When discussing the value of economics as a science following the 2008 crisis, one should keep in mind, nine years later, what the alternative could have been.
Miroslav Singer is former Governor of the Czech National Bank and a Member of the OMFIF Advisory Board. He is Director of Institutional Affairs and Chief Economist at Generali CEE Holding.
Tell a friend