In memory of Dr. Andreas Höfert

When economists take sides

Maybe you’ve heard the old joke that economics is the only field in which two people can receive a Nobel Prize for saying exactly the opposite thing. It seems to have some truth given the fact that the 1974 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was awarded to both Swedish Social-Democrat Gunnar Myrdal and British-Austrian Libertarian Friedrich August von Hayek. Recently we been seeing another round of mixed messages from economists in both the US and Europe.

More than 170 prominent German economists wrote an open letter to Chancellor Angela Merkel back in July, as we discussed here, under the leadership of Professor Hans-Werner Sinn of the Munich Institute for Economic Research (ifo). The letter denounced the European methods of tackling the crisis, and concluded very forcefully that “the taxpayers, retirees and savers in the so-far solid countries of Europe must not be made liable for backing the debts [of the weak countries], particularly since gigantic losses are foreseeable from financing the southern countries’ inflationary economic bubbles.” Other German economists responded to the letter with an equally hefty and prominent reply, taking the opposite side and explaining that a euro break-up would present unbearable costs for Germany. Which of the two sides is right?

It was US economists’ turn to take sides in the US presidential elections at the end of August, with 500 of them – a number that has since increased to almost 700 – from prestigious faculties and including six Nobel prize winners to sign the following: “We enthusiastically endorse Governor Mitt Romney’s economic plan to create jobs and restore economic growth while returning America to its tradition of economic freedom. The plan is based on proven principles: a more contained and less intrusive federal government, a greater reliance on the private sector, a broad expansion of opportunity without government favors for special interests, and respect for the rule of law including the decision-making authority of states and localities.” Needless to say, this statement was immediately challenged by other US economists, also including some Nobel prize winners, most prominently Paul Krugman, backing the Democrats. Again, which of the two sides is right?

Economics is supposed to be a social science. It is supposed to be a science about choices. And this has garnered it a reputation as a “dismal science” because all choices entail certain costs. Those costs can be explicit, but they can also be less obvious, for example the costs of foregoing one opportunity in order to pursue another. One aspect of an economist’s work is to figure out the economic costs of various options and point toward the optimal choice – usually the one which bear the least costs.

Let’s look back at both questions: Should Germany leave the euro or not? Who should run the US for the next four years? We need to be honest enough to acknowledge that in both cases, an economic cost analysis is far too complex to be feasible. Moreover, even if it could be done, it would not do justice to many of the other non-economic consequences that each choice would entail. All the economic expertise in the world cannot produce a comprehensive, qualified judgment on these matters.

Does that mean that economists should just keep quiet? No. Like everyone in democratic societies, economists have the right to express their political beliefs. They equally have the right to endorse one of the two presidential candidates. However, they should be upfront about the fact that they are not doing this as expert economists but as ordinary citizens entitled to state and defend their political opinions.

Without such disclosures, the economists’ profession will continue to suffer from the perception among the broader public that for each economist saying one thing, there another economist affirming the exact opposite.