The dismal science is bereft of good ideas
By Luke Johnson
Published: June 7 2011 22:43 | Last updated: June 7 2011 22:43
I fail to see the point of professional economists. They purport to know about trade and finance, about markets and credit, but I struggle to identify the actual benefits of all their expensive advice and esoteric debates.
For example, they really should be able to provide the answers we need about job creation, but where are they? How are new jobs created, by whom and under what conditions? Countries such as Spain are crippled with 40 per cent youth unemployment: what pragmatic solutions do the economists offer to this disaster?
The only response I know to this nightmare is to encourage entrepreneurs to start new companies. Such bold individuals cannot rely on arcane economics papers, obscure formulas or dry speeches, delivered by academics who prefer theory over practice. Instead, entrepreneurs embrace clever inventions and vigorous execution.
The fact that most economics textbooks barely mention entrepreneurs – and when they do they miss the point – shows that most “dismal scientists” are out of touch and unversed in the real workings of marketplaces.
I sat on a panel at an entrepreneur summit recently with Britain’s minister for business, Vince Cable – a full-time economist before he became a politician. He delivered a speech during which he made much of a fact that was so obviously wrong that it was simply embarrassing: he stated that 90 per cent of the angel investing in Britain takes place in Scotland – suggesting England should learn from Scots’ prowess. Unlike the minister or his speechwriter, I am involved in angel investing, so I know what a foolish error this was. It makes me despair that we are led by such men, with researchers who are so amateurish.
Or take Paul Krugman, the Nobel laureate and Princeton professor who pontificates in the New York Times. His gloomy prognostications and obsession with slamming the Republicans mean he offers nothing by way of useful advice to those of us who actually run a business.
And the most dangerous economist of modern times is surely Alan Greenspan, the former head of US Federal Reserve who cheered America over a cliff.
No doubt most economists believe that policymakers, financiers and entrepreneurs should listen better to their forecasts and ideas. Yet where were the widespread predictions of the credit crisis? How many called the US housing bust correctly? Armies of brilliant economists were paid magnificent salaries by all the banks that almost destroyed the west. Did none of these geniuses warn their master? Instead, they produced flawed models that encouraged stupidity. Most impressive business managers ignore the volumes of statistics churned out by economists: they know that what matters is not how the market in general is doing, but if your customers are happy and your margins are sufficient.
One of the more extraordinary aspects of the discipline of economics is that a surprising proportion of practitioners is employed by the state. They pronounce on capitalism for a living, yet do not participate in the world of private enterprise, its underlying engine. This means they have a distorted perspective on how business actually functions.
Give me the company of artisans who create tangible things, like the bakers and chefs with whom I work in my restaurant companies. They might lack some of the rhetorical finesse of the economics commentators we read or hear through the media – but their practical skills are of vastly greater value to society than the pseudo-science espoused by Krugman et al. As John Maynard Keynes said: “If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.”
The best move for the world’s economists would be to each start their own business. Then they would experience at first hand the challenges of capitalism on the front line. And for those who couldn’t cope with such a brave step, perhaps they could turn to philosophy, and teach us all how to lead more moral lives. I’m sure that would be more useful than what they do now.
The writer runs Risk Capital Partners, a private equity firm, and is chairman of the Royal Society of Arts
Copyright The Financial Times Limited 2011.