The financial crisis has killed the claim that economics deserves to be treated as a science. The measure of a science is its capacity to explain, predict, and prescribe. And most economists not only failed to anticipate the nature and evolution of the catastrophe, but their conflicting recommendations on how to stabilize the situation exposed the unreliability of their knowledge. As much as Wall Street and Main Street, the economics profession needs a bailout of its own.
Policy gyrations and faulty calls have revealed that economics itself is in crisis: The experts simply have no idea what to do. No less an expert than U.S. Federal Reserve Chairman Ben Bernanke repeatedly declared the worst was over, only to admit with chagrin much later that "I and others were mistaken early on in saying that the subprime crisis would be contained." As recently as mid-November, Bernanke told the U.S. Congress that he thought the measures that had been taken "appeared to stabilize the situation," a pronouncement that proved wrong almost as soon as it was made. The fault lies less with Bernanke for trying to calm the markets than with the accumulated body of economic knowledge that failed miserably to equip him and other policymakers with more reliable tools to anticipate and navigate the crisis.
So, along with banks and brokerages, mortgage holders and emerging markets, it's time to add another rescue effort to the list--for economics itself. This intellectual bailout will force economists to revise the models and methods unquestioned during the boom years. It will force them to produce new tools suited to a new era and reinvigorate their thinking by borrowing more intensively from other disciplines, such as psychology and political science.
Continuing to assume, for example, that corporations always behave as profit maximizers and dismissing the importance of the self-interested behavior of their unaccountable managers will become much harder after this crash. Prolonged good times encourage bad habits and complacency not only among corporations and consumers but also among economists. The crash will stimulate creativity and the new thinking that comes from recognition of failure; the years ahead are bound to replenish the intellectual capital on which economists base their influence.
Certainly, the intellectual failures and the policy mistakes that led to the Great Depression produced a surge of innovative economic thinking. Thanks to the insights of John Maynard Keynes and others, governments now know that battling a crisis with tight money, spending cuts, and trade barriers fuels the economic fires instead of dousing them. So, they've put in place humongous bailouts and even larger fiscal stimulus packages that we are all hoping will work. If they do, economists will earn back some of their tarnished reputation.
Regaining intellectual respectability will be sorely needed to reverse some of the bad policy ideas that are gaining currency in the present crisis. …