In Thursday’s Telegraph, Edmund Conway has a bash at the economics profession: “everyone is suffering” from the recession, he says, but “no one really foresaw precisely how this crisis would pan out.”
The international financial system is a complicated beast, with countless actors, complex causal relationships, and multiple external influences and so, as he himself recognises, to make exact predictions would be “akin to providing an accurate weather forecast for every week of the following year.” Nevertheless, despite his claims, there were those who did a pretty good job.
Peter Schiff, for example, not only predicted the housing crash in 2006:
Today’s home prices are completely unsustainable… What’s going to happen in 2007 is that… these sky-high real estate prices are going to come crashing back to earth.
But also the knock-on effects for the financial sector in 2007:
It’s not just sub-prime… This is going to be an enormous credit crunch… The fundamentals are not sound… The worst is yet to come. Stay away from the financials – they’re toxic.
And for the wider economy in 2008:
By November it’ll be obvious that we’re in a pretty big recession… it’s not going to be months, it’s going to be years.
Although in the minority, he was not alone. Economists across the world voiced similar concerns, but were ignored until too late. Almost all of them had one thing in common: they were followers of the Austrian Tradition, and inheritors of the ideas of F. A. Hayek.
Conway’s criticisms don’t properly apply to the profession as a whole, but rather to the prevailing economic orthodoxy, made up of those in comfy government posts and university seats, who happily sat back believing that there would be “no return to boom and bust” as the government blew up the housing bubble with easy credit.
Still, there’s a really interesting point here: the crisis has damaged the reputation of economics, but at the same time thrown it open to new ideas and the return of old ones. Ideas that lie on the periphery of the discipline can now move to the troubled centre. We can, in Conway’s words, “exhume once-sacrilegious figures such as John Maynard Keynes or Friedrich Hayek.” Given the Austrian School’s performance in predicting the current crisis, may I suggest we choose the latter?