Interview with Paul De Grauwe
Kovanoa, Lukas, The New Presence: The Prague Journal of Central European Affairs
"I do not believe that all the blame rests on Clinton's administration. But the basis for this crisis was not laid by Bush--rather, it was laid by previous US Democratic administrations, which promoted the deregulation of the banking system," says Paul de Grauwe, Professor of Economics at the University of Leuven, foremost world economist and ideological founding father of the Eurozone.
One can view the financial crisis as a failure in market efficiency and human rationality. Asides from reforming the financial system, would you propose to reform textbook economics?
Yes. We have gone a little too far with our presumptions and the models that we have developed from them. That was a mistake. We need to look at other perspectives from other disciplines, such as psychology. We need to understand that people have only a limited capacity to act rationally. It is not true that the complexity of the world is universally understood; no one is fully informed, nor can anyone precisely predict the future. Markets are not efficient; prices do not always reflect real value. But this is precisely what is mistaken because people do not actually understand the markets and tend to be excessively optimistic at times.
Did this happen because economics became too closely aligned with math and physics, and too many economists developed models filled with equations that in the end reflected something far from reality?
Economists are really intoxicated with the technical and mathematical aspect of economics. And it is precisely their reliance on the idea of individual rationality and efficient markets that enables them to develop such beautiful mathematical models. Many people--especially young scientists--just love these models. I am surprised about how many young economists take these models as a given. It is all an act of faith. They do not even bother to subject them to empirical observation to determine whether they actually correspond with reality. We who reject these models appear to be dropouts to them because they look at economics as a belief rather than a science.
In your opinion, what then is the correct approach to economics? Verbal Economics?
No, no. We must indeed use math. It is a tool that enables us to express ourselves more precisely. Words alone are oft en inaccurate or misleading. It is difficult to test verbal definitions; it is a lot easier to test mathematical definitions. We cannot, however, fall into the trap or succumb to the idea of mathematical precision and use math excessively. Qualitative and historical analyses are important. What cannot be described in numbers, cannot, as we are seeing now, be considered uninteresting. Equations are simply unsuitable for many subjects. Let's not forget that the social sciences (and economics is such a science) are much more complex then natural sciences. While it may sound rather paradoxical, take for example, astronomy. Anyone could state that astronomy is very complex. This is true. On the other hand, predicting people's behavior is so much more complicated than predicting the movement of stars.
So math is a good servant, but a mean master?
Are you an advocate for an interdisciplinary approach to economics--an approach that would connect economics with other science subjects other then math?
Yes I am. We can learn a lot from psychology and other subjects. In the past, economists were too arrogant. They considered other science disciplines as irrelevant. They were proud of the tools invented by economics to understand the world around us. I think that now it is evident that this feeling of superiority was unfounded. I am very influenced in this respect by the work of Portuguese neurologist Antonio Damasio who explains that emotions and rationality are in reality very closely connected. This connection is so powerful that people who lose their ability to experience emotions--for example due to brain damage--do not only lose the ability to love or be scared, but also the ability to make rational decisions. …