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Pragmatic Politicians Are Right to be Wary of Some Economists' Advice

merkel at nobel laureat meeting
Until economists can come to terms with social realities, they will continue to have a hard time offering politically relevant advice to the Germany's Angela Merkel.
  • Why it matters

    Why it matters

    Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble remain skeptical of basing policies on economists’ views, because they don’t account for “real world” experiences such as involuntary unemployment and income inequality.

  • Facts

    Facts

    • Ms. Merkel called out the nation’s economists, pointedly asking that they acknowledge that errors and uncertainties are part and parcel of their profession.
    • Economists are viewed as obstacles to the governing process, though they still have significant power to influence central banks and the European Union.
    • Issues such as social welfare programs, which are popular among voters, are at odds with the overall philosophy of most economists.
  • Audio

    Audio

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A couple of weeks ago at a meeting of Nobel Prize laureates in Lindau, a major Bavarian town on the eastern side of Lake Constance, German Chancellor Angela Merkel called on economists to make “more honest” policy advice and admit that mistakes and uncertainties are a regular part of their trade.

That’s not a promising start for economists seeking a louder voice on more economic policy evaluation commissions. The Association for Social Policy, the largest economists’ association representing a majority of German-speaking economists, is holding its annual meeting this year in Hamburg with the motto, “Evidence-based Economic Policy.”

Throughout the meeting, top experts will advocate for an evaluation culture that makes “the evaluation of policy measures a normal routine and provides sufficient funds for it.”

But to convince the skeptical chancellor and her equally skeptical finance minister, Wolfgang Schäuble, the association must find a response to Ms. Merkel’s contention that economists pay too much attention to economically rational criteria and too little to the messy business of politics, where majorities must be organized and responsibilities shouldered.

It’s an old conflict. Even Helmut Kohl, Germany’s chancellor from 1982 to 1998, said, “I want to win elections and not the Ludwig Erhard Prize,” referring to an economics prize awarded annually.

Convincing politicians won’t be easy. The prevailing perception of economists is that they are obstacles. This view is so deeply integrated in the theoretical construct of modern economics that changing it is extremely difficult. It’s no coincidence that this overwhelming perception and its consequences have survived the financial crisis almost unscathed, despite criticism from within their own ranks.

One of the luminaries of the field, the Harvard University macroeconomist Gregory Mankiw, describes it this way in his textbook: “Economic theory is populated by special creatures, sometimes answering to the name homo economicus.” This species maximizes its own self-interests, according to their own firmly defined preferences and independent of their fellow human beings, Mr. Mankiw says.

They are rational and know the probability of everything that can happen in the future. Thus, they assume there is a functioning market for everything, regardless of whether it’s today, tomorrow or the distant future. This way they can envision perfect competition in all markets and a state of equilibrium in the economy.

It becomes difficult, however, when real world markets don’t function in the perfect manner economists embrace. When there is involuntary unemployment, for example, it doesn’t make people happy, but rather oppresses and scares them, yet economists make no provision for these kinds of developments.

The value of a good job and its effect on workers can’t be found in the textbooks used by economists. Instead, their models view unemployed people as happy about having time off, with the only problem a loss in production since the labor market is not making enough manpower available.

This is also reflected in the macroeconomic models dominating professional journals and deeply influencing the economic policies of the central banks and the European Union. There is no room for involuntary unemployment in these models, since there is only a representative budget that chooses its optimal labor supply in hours according to prevailing prices.

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