The Banking Executive, Issue 155, November 2021

Can Economics Keep Up? command of the subject to give a lecture without embarrassment, even to a lay audience. Not so with eco- nomics. Generally speaking, the av- erage layperson cannot easily tell the difference between good and bad economics, owing not least to the discipline’s broad range of content and disparate methodologies. Economics has the virtue of accom- modating those immersed in abstruse mathematics and axiomatic methods (Léon Walras, John Nash, and Ken- neth Arrow) alongside those who delve into the world’s problems with- out recourse to symbols (Adam Smith, Thomas Schelling, and Gun- nar Myrdal). But such a vast canvas tends to leave room for erroneous brushstrokes. And in deeply uncer- tain times like the present, when the world is being convulsed by the COVID-19 pandemic, climate change, and the digital revolution, it is easy to understand why many lay readers would grow exasperated with pronouncements from “econo- mists.” How can the non-expert sep- arate the wheat from the chaff? This sense of disquiet should prompt introspection within the discipline. Even if the criticism is unjustified, a little self-examination cannot hurt. Indeed, I would argue that many mainstream economists fail to appre- ciate that apprehending reality and crafting sound policy cannot be purely a matter of data and empiri- cism. However carefully we collect, organize, and analyze our data, the insights we gain must be used in conjunction with common sense and intuition. By the same token, someone who views his own forecasts as expres- sions of pure science is as dangerous as someone who is guided by super- stition. There is no way to predict with certainty what will happen to- morrow. When speaking about the future, we have no other choice but to use our intuition to decide when we can extrapolate from past data and when we cannot. We hope that we as a species have evolved an in- tuition that is at least somewhat reli- able. An additional problem is that the necessary mix of hard science and intuition or judgment tends to differ across economic specialties. In some branches, such as auction design, economics is close to engineering, whereas in the areas of monetary and fiscal policy, it is heavily reliant on perception and judgment. When out- siders extrapolate from one branch’s performance to make inferences about another branch, errors can quickly pile up. Beyond these philosophical matters, economic theory also demands a fresh look. To be sure, the rise of data-based scholarship (through big data or randomized control trials) is hugely important. We need data to help spot hidden patterns if for no other reason than to bolster our intu- ition. Still, the growing propensity to treat these findings as universally dis- positive is worrying. Economics would not be the valu- able and exciting discipline that it is today were it not for big theoretical insights like Smith’s seminal insight that order can emerge organically without the need for direction from prime ministers or the state (Leviathan). “It is not from the benev- olence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own in- terest,” Smith famously observed. But a caveat is in order here. While Smith’s seminal observation was that the “invisible hand” can deliver order, the neoliberal view that the in- visible hand always does so is a trav- esty. One does not have to read more theory to understand this; Franz Kafka’s The Trial offers chilling depic- tions of how evil can be perpetrated without a perpetrator. Another reason to return to theory now is that the ground is shifting be- neath our feet. Mainstream econom- ics has always relied on both explicit and implicit assumptions. For exam- ple, textbooks tell us that the effi- ciency of trade and exchange depends on individual preferences satisfying diminishing marginal util- ity, technology being convex, and so on. But they do not bother to men- tion that people also need to be able to communicate. That condition is taken for granted, as are many be- havioral norms that are crucial for a market’s proper functioning. ISSUE 155 NOVEMBER 2021 the BANKING EXECUTIVE 31