Economics has a democratic deficit. The notion that it is too complicated for normal people to understand has precluded conversations about how economic policy should work, and who it should serve. A drift towards micro rather than macroeconomic theories has shrouded the discipline in technical expertise, electing mathematic equations over difficult questions about common goods. Yet economists don’t have all the answers. Citizens can often be the best placed to speak truth to bad policy.
In his 2010 film Inside Job, the film director Charles Ferguson traces how many academic economists who advocated for deregulation and played powerful roles in shaping government policy failed to spot the impending financial crisis in 2008. Take Columbia economics professor Frederik Mishkin’s study of Iceland, for example.
The Icelandic Chamber of Commerce paid Mishkin to write a report examining how Iceland’s financial deregulation had fared. He pronounced the country’s financial institutions “excellent” and concluded it was financially stable. Just two years later, Iceland’s banking system sunk the country into billions of pounds of debt. If economists are paid large sums to consult for banks and advise governments but remain sealed off from citizens and civil society, they risk espousing policies that are deaf to impending crises and blind to the effects those may have on society.
Luigi Zingales, Professor of Finance at Chicago University, calls this danger “economists capture”, where conflicts of interest make economists beholden to the businesses that pay them to consult. As an economist, he says, it pays to be pro-business. Opportunities to do highly-paid consulting work are not equally distributed, and economists who cater to business interests “clearly have a larger set of opportunities”.
Fannie Mae and Freddie Mac, the two mortgage lenders that helped spark the USA’s financial crisis and were later fined for accounting fraud, commissioned many economists to write reports analysing their businesses in the early 2000s. Some went as far as to argue that the probability the companies lending practices could cause a shock in America’s financial system stood below one in three million. This isn’t just bad economics; it’s a delegation of ethical responsibility.
If these economists had spoken with citizens about their mortgages, would they have reached the same conclusions? Including views from the ground-up can help design better economic policy, and may help prevent catastrophe.
There are two ways to do this. First, citizens could play a broader role in crafting regulations. Including citizen representatives on regulatory boards would give them a say when economic systems aren’t working. While regulators often consult small business and consumer representatives, this could go further. Including citizens more holistically when drafting and evaluating regulations could openup a field that risks becoming skewed towards particular interests.
Most importantly, citizens should be economists too. One doesn’t need to know the empirics of collateralized debt obligations to understand that repackaging various low grade debts into a triple–rated challice is both deceptive and dangerous. Demystifying economics and teaching languages to express how the economy affects lives will empower people to call out bad policy and confront the fallacy that economists necessarily have the best answers. While they may tell us the discipline is too complicated for us to understand, an economy that listens to citizens is one worth fighting for.
Hettie O'Brien writes about political economies. She studied Philosophy and recently completed an MPhil at the University of Cambridge.