It is apparent that the economics is going through tough days. The problem is not only that there were few economists that foreseen the global crisis. Of course this alone is quite important. After all, we are talking about a discipline that falls short in estimating the future. But there are also other problems.
The main reason that brought trouble on the world is that the will of financial markets to take extreme risks was not regulated, supervised or controlled. It is not that this arose as a result of a 'fault'; it relies directly on a certain 'ideology': an ideology arguing that free market forces can solve all problems. In this context, ever increasing risks (which were later on understood to be extreme) were born in the period toward the crisis. These institutions did not make their calculations successfully. It is impossible that a bureaucrat working in a regulation and supervision agency calculates the risks better than the person who took those risks. Therefore, regulation and supervision are unnecessary tasks.
What is frightening is that even after all the trouble we got into, the regulation and supervision efforts against the unregulated and unsupervised section of the financial sector (shadow banking) might most likely be objected to. It is probable that the political powers attempting such efforts will be facing a big attrition campaign.
Other examples of the 'interestingness' of economics can also be given. For instance, according to a school of thought, whatever the rate of unemployment in market economies is, that rate represents equilibrium. To put it differently, unemployment rates which jumped high due to the global crisis in fact represent a state of equilibrium. Therefore, there is no need for the government to take a step to reduce unemployment rate. Moreover, policies directed to this end are not only unnecessary but also harmful.
Such approaches found wide areas of practice. There is no doubt that the main reason why the IMF faced serious criticisms was its uniformist approach. When a developing economy got into a crisis and knocked the IMF's door, the prescription offered was generally 'fiscal and monetary discipline'. Additionally, IMF recently started to ask deep structural reforms. However, state of play can differ among different economies. For instance, the economic program appropriate for Turkey in the post-2001 period was in fact the classical uniformist program of the IMF. And that program was implemented eventually. But that program would not work at the end of 2008 and the beginning of 2009 as there existed a fundamental difference: in the post-2001 period the main source of vulnerability was high public deficit and public debt. But this was not the case in 2008.
IMF must have accepted that the uniformist approach was a mistake that it has been voiced on any occasion since the end of 2008 that the Fund 'has changed now'. Wandering around in Fund's website is enough to note this. Anyway, our concern is not the IMF now.
Recently an important institute was established in Hungary. The short introduction letter was titled by Nobel-Prized economists Akerlof and Stiglitz: "Let a hundred flowers blossom". Financial support to the institute is provided by Soros. They call others to provide support as well. There are famous economists among the founders of the institution. They call economists from all segments of the political scale to discuss freely, research and give products. The purpose is to go beyond uniform models and give voice to different ways of thinking, models and theories. The institute is called 'Institute/Initiative of New Economic Though -INET'. I recommend you to read the introduction letter by Akerlof and Stiglitz. (http://www.project-syndicate.org/).
This commentary was published in Radikal daily on 02.11.2009
