A Theory of Economists

When I was growing up, my mother had a passion for crosswords. She would periodically (as a last resort) call for "the yellow book", her crossword dictionary, in search of words to fit the clues. I was fascinated by many of the categories in the yellow book, in particular lists of collective nouns. Two that I still remember are "a parliament of owls" and "an unkindness of ravens". Since then, I periodically amuse myself by inventing collective nouns, hence the title of this post.

Economists have suffered a bad press recently, for good reasons, not least of which is their reluctance to admit their widespread inability to foresee the current financial crisis. A friend recently loaned me Nassim Tayeb's book, Fooled by Randomness, in which this brilliantly entertaining scholar mocks numerous sacred cows of post-modern life, including the pseudo-science of economics, and lays the foundations for his subsequent development of the "Black Swan" theory (which describes the unforeseen and improbable event - or set of events - that lead to major change).

The real problem facing economists now is loss of credibility. The great Economics project of the last 40 years, in which clever people have allowed themselves to become convinced that economics is a science capable of accurately predicting economic behaviour on the basis of rationality and market efficiency, is at risk. As John Kay put it recently in the Financial Times "that people respond rationally to incentives, and that market prices incorporate information about the world, are not terrible assumptions. But they are not universal truths either. Much of what creates profit opportunities and causes instability in the global economy results from the failure of these assumptions. Herd behaviour, asset mispricing and grossly imperfect information have led us to where we are today." Business people know this: indeed, they rely on it, as human irrationality and information asymmetry are the prime generators of profitable activity. Yet this basic common sense seems to have eluded professional economists.

In Nassim's words "My major hobby is teasing people who take themselves and the quality of their knowledge too seriously and those who don’t have the guts to sometimes say: 'I don’t know...." This attitude won't make him many friends, but it will satisfy his intellectual integrity.