Economists’ ivory tower isolation is not an option

Economics is the subject of substantial controversy in Germany of late, with many articulate and emphatic appeals for the academic subject to do more for the cause of ethics.

Throughout much of the rest of the academic world there have also been calls for the study of economics to be extended and revised quite considerably in terms of social responsibility. There is much criticism of excessive reliance on neoliberalism and rigid mathematical models.

The recent financial crisis has, of course, highlighted often dubious behaviour in the world of business, and some of this is attributed to traditional and still prevailing approaches to related subjects at universities. In my own career, I have also noticed these trends.

Even as a student in South Africa, I and my classmates were very much aware of the narrow vistas of economic theory. The elegant mathematics and diagrams we used were obviously more of an intellectual exercise with an indirect, rather than direct, bearing on the real world. In fact, emphasis on practical application was relegated to specialised courses for advanced students.

For the mass of undergraduates in particular, there was far too much emphasis on rote learning of theory and far too little on reflecting critically on what was really happening out there in the economy and to people rather than processes. The textbooks we used did contain “boxes” detailing practical applications, but they were always rather peripheral and secondary to the ever-present and dominant theory. Examinations invariably demanded the rather mindless presentation of one complicated but value-free theory after another.

I have never forgotten our economics professor back then explaining to me, then a junior lecturer, that he liked this field because one could remain firmly in the ivory tower. To be a business administration academic, he admitted, one needed real-world experience and would be obliged to keep one’s knowledge up to date, and that was neither what he had nor what he wanted.

Not surprisingly, the Süddeutsche Zeitung, a Munich-based newspaper, reports that the financial crisis has now “arrived at the business sciences”. The excessively “unchained markets” of the crisis necessitate serious revision of the theoretically appealing anti-government, anti-regulation view of the world that has been so pervasive for so long in university thinking and teaching. When their help was most needed, academic economists arguably failed to deliver, bickering over ideologies rather than providing useful advice.

Frank Riedel, professor of mathematics and economics at Bielefeld University, has criticised academic economists for claiming that the markets always work best on their own. “A fatal error”, he calls it, and laments the use of models that assume away or exclude aspects of economic reality and behaviour that would enable crises to be predicted with greater accuracy.

The German Nobel prizewinning economist Reinhard Selten has made the point that the job of economists is to understand what is going on in the world. And “if psychological aspects are important, we must include them”.

Indeed, the mathematicised world of neoclassical economics and rational beings must take into account the fact that there are many people out there who are greedy, dishonest and manipulative, and others who are not sufficiently well informed to be “rational”, economically speaking.