My politics are pretty left-wing in that the legislation I would like to see enacted is very left-wing by any standard. Higher taxes. Reform of the U.S. Senate and Federal Reserve system. Shrinkage of the financial sector. Transforming the banking sector into a public utility.
Recently, however there were a couple of things on which my opinions were moderate. I believe I went with the safer option because failure would have meant disaster. A year after Lehman collapsed, I was for Bernanke's renomination. Six months after Lehman declared bankruptcy, I was against nationalizing the banks and I thought Geithner's* stress tests were worthwhile no matter how lenient they were.
Maybe going the risky route would have been better, but we'll never know. It's like with TARP. Yes it was horribly unfair, but in my opinion better than risking 30 percent unemployment. Again, maybe it's just that I've gotten older and less reckless.
Mark Thoma directs us to this speech by Bernanke.
Although economists have much to learn from this crisis, as I will discuss, I think that calls for a radical reworking of the field go too far. In particular, it seems to me that current critiques of economics sometimes conflate three overlapping yet separate enterprises, which, for the purposes of my remarks today, I will call economic science, economic engineering, and economic management. Economic science concerns itself primarily with theoretical and empirical generalizations about the behavior of individuals, institutions, markets, and national economies. Most academic research falls in this category. Economic engineering is about the design and analysis of frameworks for achieving specific economic objectives. Examples of such frameworks are the risk-management systems of financial institutions and the financial regulatory systems of the United States and other countries. Economic management involves the operation of economic frameworks in real time--for example, in the private sector, the management of complex financial institutions or, in the public sector, the day-to-day supervision of those institutions.
As you may have already guessed, my terminology is intended to invoke a loose analogy with science and engineering. Underpinning any practical scientific or engineering endeavor, such as a moon shot, a heart transplant, or the construction of a skyscraper are: first, fundamental scientific knowledge; second, principles of design and engineering, derived from experience and the application of fundamental knowledge; and third, the management of the particular endeavor, often including the coordination of the efforts of many people in a complex enterprise while dealing with myriad uncertainties. Success in any practical undertaking requires all three components. For example, the fight to control AIDS requires scientific knowledge about the causes and mechanisms of the disease (the scientific component), the development of medical technologies and public health strategies (the engineering applications), and the implementation of those technologies and strategies in specific communities and for individual patients (the management aspect). Twenty years ago, AIDS mortality rates mostly reflected gaps in scientific understanding and in the design of drugs and treatment technologies; today, the problem is more likely to be a lack of funding or trained personnel to carry out programs or to apply treatments.
With that taxonomy in hand, I would argue that the recent financial crisis was more a failure of economic engineering and economic management than of what I have called economic science....------------------------------
*Atrios's nickname for Geithner was "Timmeh." I thought this was lame.
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