HILSENRATH’S TAKE In his Nobel Prize lecture 40 years ago titled “The Pretense of Knowledge,” Friedrich A. von Hayek lectured his field about the problems of rising unemployment and inflation to which it had contributed. Having observed a connection between increased economic output and reduced unemployment, economists advised more output to bring unemployment down. But the stimulus they advised backfired, in the form of 1970s inflation and unemployment that wouldn’t fall. “As a profession,” he said, “we have made a mess of things.” With another Nobel being announced Monday, it’s worth reviewing Mr. Hayek’s complaint. His central grievance was the field’s long-running infatuation with scientific method and certitude. It was an impossible and misleading task for economists, he said. In their “vain search for quantitative and numerical constants,” Mr. Hayek argued, economists were constantly overlooking essential facts and misunderstanding the complexity of the social mechanisms under their microscopes. A “pretense of knowledge,” in turn, made policy makers and their economic advisers prone to social engineering and government intervention into market mechanisms that were poorly understood or manipulated. A generation later it was in part a certitude about the workings of market mechanisms that led the field astray in the 2000s. This was most aptly captured when Lawrence Summers, the celebrated economist and former U.S. Treasury Secretary, in 2005 lectured University of Chicago Business School economist Raghuram Rajan at a Federal Reserve conference in Jackson Hole, Wyo. Mr. Rajan doubted the received wisdom of the financial market’s ability to police itself, an argument Mr. Summers called Luddite. It turned out that much that was thought to be known about financial markets was in fact widely misunderstood. And much that was overlooked – such as the vulnerability of the economy to a banking shock — was done so because it hadn’t been observed of late. Today we see certitude from economists on the left who are sure the economy needs more stimulus, and from the right among those sure the stimulus already applied will end in disaster. What economics needed before this crisis – and perhaps again now — is some humility about what was known and what economists could achieve. - By Jon Hilsenrath
Posted on: Tue, 14 Oct 2014 14:20:08 +0000
Trending Topics
Recently Viewed Topics
© 2015