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The September 2 edition of The New York Times carried a front-page article by columnist and Nobel Laureate Paul Krugman, about “how did economists get it so wrong?”. The article was the ‘most read’, #1, according to www.nyt.com
But — in what way did economists get it wrong? In two ways. One, they failed to foresee the global financial and economic collapse that began in 2007, and accelerated almost exactly a year ago, when Lehman Brothers collapsed;  and two, after the collapse, they had no clue, and absolutely no consensus, on what to do about it. Politicians and leaders like President Obama had to improvise, and made many many errors in their ‘stimulus packages’ and ‘bailout packages’. Seven Nobel Laureates were asked what to do, and, as the Bible says, “ran off in seven different directions”.

What was the problem? Krugman says: Economists abandoned Keynesian thinking, which denies that people are always rational, capital markets are always efficient, and free open unregulated markets always are optimal. It is time they returned to Keynes, he recommends.

So here’s what I think economists have to do. First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.

I have a different view.

I am writing this in a hotel room in Nottingham, UK, where we have brought some 31 Israeli high-tech managers from five companies, on a best-practices (and ‘next-practices’) benchmarking trip, to London, Derby, Birmingham, and Manchester. This is the 37th such trip for TIM and its managers. The goal: Visit great companies, and learn from great leaders how they manage, then adopt and adapt what they tell us. We are visiting LandRover, Rolls Royce, British Petroleum, British Telecom, British Airways, Manchester United football team, and others. We are in the 3rd day of our 6-day trip and have learned enormously already.

Economists failed, because they sat in their offices and crunched numbers rather than spent their time in the field observing real people, real companies and real markets. If they had,  if they had seen what is truly going on, in housing, sub prime mortgages, derivatives, options, etc., they would not have been as sanguine. They might have built theories that hold water. 

So economists: how did economics go wrong? By seeking truth in the wrong place (under the lamp-post, goes the tale,  instead of in the dark corners where economists dropped the coin, or the ball…). Seek truth in the real world. Leave your office. Do your research on site, where the economy unfolds. THEN return home and recount what you saw, and build your theories based on it.

“Elegance”, MIT economist and Nobel Laureate Paul Samuelson has said, “is for tailors”. Economics’ elegant mathematical theories were beautiful and useless. Let’s deal instead with the messy real world, and try to understand it. I admit that I am an economist. I share my discipline’s faults. I believed the numbers told the story. They don’t. In fact, they often lie. I discovered this only after beginning to teach managers and hence to understand their world, the real world of economics and business. 

We at TIM are happy to lead a benchmarking tour for economists who wish to seek truth the right way — in reality.

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Blog entries written by Prof. Shlomo Maital

Shlomo Maital
September 2009
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