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December 13, 2009 / Lukasz Cerazy

The Economist

The so called credit crunch of 2008 made it obvious that neither supporters of Keynes, Friedman, nor inflation targeting monetarists could prevent a recession spreading across the globe. As the crisis took front page the public turned to find the ones responsible for it. This would imply partly blaming themselves for taking up unrealistically large loans and overvaluation of assets such as stocks or property value. Nonetheless the system was at fault too: very loose monetary policies, technocracy in the banking sector, lack of comprehensive risk analysis, misguidance by rating agencies and misunderstanding of systemic risk were all significant factors in the USA from where the crisis spread. Criticism turned towards policy-makers, bankers and economists alike. Some of the criticism is justifiable as certain models, ways of governance or practices need to be reviewed or new ones developed.

Economists do make suppositions to build models and theories where these assumptions are not applicable in all cases. However, claiming that they never get it right, crises an inevitability and implying that the science is irrelevant, is not the way forward! Only by a better understanding of economics can society hope to create suitable economies, policies and governance. Economics has been and will always be a social science to the contrary of what modern day Business Schools try to vend it as. It is, however, a discipline that hasn’t been acknowledged on its own for as long as medicine, theology, sciences or any other of the classical teachings. Economics sprang out from Philosophy and Cambridge University was the first institute to establish a course in Economics in 1903 separate from the Moral Sciences. Adam Smith, seen by many as the founder of modern economic thought actually never studied or gave any lectures in economics because it did not exist. Economics describe how social interactions create trade, economic rent, future contracts, inflation and can therefore never be classified as a subcategory of management or business. Economists analyse what the inputs and outcomes from business are, not the other way round. Economics should, nevertheless, not be viewed as a science that does not have implications on business or have great utility in its application in the modern market place. That is exactly where it has been gaining its claim for implementation.

The present environment is, however, quite different from the times when Keynes walked the halls of Cambridge University or Friedman lectured at the University of Chicago. In fact the world economy has become increasingly interconnected, mainly via trade, and international monetary and social integration and therefore changed the science and its implications. It has made further specialisation imperative and many sub-divisions have arisen as a consequence. Behavioural economics is one of those newer branches that is increasingly interesting for it application as it is concerned with the emotional factors the take place in most economic decisions. It analyses human behaviour and as market actors do not always make rational decisions it encompasses market failure. It is a science that is developing swiftly as the understanding and application of economics is increasingly clear. The tedious research, econometric analysis and economic modelling rarely make the front page. On the other hand when unemployment, inflation or a recession hits it is high on the public agenda. Understanding of economics and careful governance has played significant roles in the social development over the past century and has remarkable lifted living standards, improved education and healthcare. The economist should therefore not be underestimated.

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