Economists claim to offer salvation but the tenets of economics need reforming before we can be saved
Economics is sometimes like a religion in that its adherents keep the faith irrespective of evidence to the contrary. The global financial crisis has tested the conviction of many economists but few seem ready to renounce their previous beliefs. This might seem strange with a discipline that aims to be more like a science but there are factors which mean economics relies more on faith than on facts. Considering the positions of power held by economists, we can only hope that the moment of revelation is not too far off.
In Markets We Trust
Economics claims to offer a path to the Promised Land. The role of God is assumed by the concept of the invisible hand which prophesies that markets will bring about the most favourable outcomes in terms of output and prices. One of the most sacred beliefs in economics is that we must defer to the invisible hand as much as possible. Economists help this along, with central banks keeping down inflation while governments open up their economies to global markets. This ushered in over two decades of unprecedented economic progress until financial turmoil struck like a plague in 2008.
Yet, despite the economic Armageddon that followed, economists have remained stubbornly tied to the same creed. The response to the financial crisis has relied on the traditional tonic of lower interest rates with newer orthodoxy calling for the use of quantitative easing when conventional measures did not work. Central banks have stuck with these policies despite the resulting growing distortions in the financial markets which would be anathema for economists in normal times.
Believing in false idols
One element which makes economics more like a religion and less like a science is that it is difficult to prove when someone is wrong. Scientific theories can be tested by experiments carried out in laboratories or similar places where the conditions can be kept in check. Economic hypotheses cannot be proven in such controlled environments. The sheer volume of transactions by consumers and firms means that there may be any number of reasons behind a certain outcome. The impossibility of isolating specific cause and effect relationships means that truths in economics can only be subjective.
This means that economists can piously hold onto their previous ideas on how the economy works despite any evidence to the contrary. Economists tend to become wedded to their ideas as they hone them over many years in long careers in academia. Any newcomers to economic are also indoctrinated into the existing dogma with little scope for breaking out of the mould. The current generation of economics students have risen up in arms against being taught theories that have little relevance to economic events.
One of the more old-fashioned ideas that economists cling to is a fear of inflation. The full range of tools for monetary stimulus has not been available as central banks have been adamant that inflation should not be allowed to get out of control. This stems from psychological scars in the minds of economists due to damage done by inflation in a bygone era (the 1970s). Europe has suffered the most under this economic fanaticism and has had to deal with the added difficulties of the Eurozone crisis with few policy options available.
It is not a coincidence that the global economy and economic theory are both stagnating at the same time – economic deliverance for us all may depend on a second coming of economics in a more practical form.