Missing Links

Economist Class

Practitioners of the 'dismal science' should stop sneering at their academic cousins in the social sciences -- and start learning from them.

In 1849, the Scottish essayist Thomas Carlyle labeled economics the "dismal science." Two centuries later, contemporary practitioners still study dismal choices: Higher prices or fewer jobs? Spend or save? They have also become a smug lot.

Economists take pride in the sophisticated statistical techniques on which they rely to analyze phenomena such as growth, inflation, unemployment, trade, and even the long-term effects of abortion on crime rates. Many are convinced that their methods are more rigorous than those of all other social sciences and dismiss research that does not rest on quantitative methods as little more than "storytelling" or, worse, "glorified journalism." Anthropologists, some economists jest, believe that the plural of anecdote is "data."

A survey published in the Journal of Economic Perspectives found that 77 percent of the doctoral candidates in the leading departments in the United States believe that "economics is the most scientific of the social sciences." It turns out, however, that this certitude does not stem from how well they regard their own discipline but rather from their contempt for the other social sciences. Although they were nearly unanimous about the relative superiority of their profession, only 9 percent of the respondents were convinced that economists agree on fundamental issues.

And they are right. Economists today are still grappling with basic questions for which they have no answers. Much more than fodder for academic squabbles, this uncertainty often has serious consequences. When economists err in theory, people suffer in practice. Fernando Henrique Cardoso, Brazil's former president, recalls that in the midst of his country's financial crisis, he received calls from experts at the International Monetary Fund, several Nobel laureates in economics, and other superstars in the economics firmament. Each offered different advice, and each sounded convinced that his or her recommendation was the only correct one. A distinguished sociologist, Cardoso managed to employ his considerable talents and experience to steer Brazil out of the crisis, ignoring the recommendations of several celebrity economists -- some of whom had even urged him to adopt a fixed exchange-rate regime just like the one that Argentina's recent crash has now discredited.

"We do not really know what causes economic growth," admits François Bourguignon, the chief economist at the World Bank. "We do have a good sense of what are the main obstacles to growth and what are the conditions without which an economy can't grow. But we are far less sure about what are the other ingredients needed to create and sustain growth."

This bewilderment doesn't just appear when economists confront the devilish problems of the developing world. Plenty of what goes on in the rich world also baffles them. I recently asked a well-regarded economist on Wall Street what puzzled her these days. "Interest rates," she said. "They should be higher." Sure enough, economic theory predicts that today's long-term interest rates -- the rates for mortgages or bonds that will be paid years from now -- should be higher and heading upward because of an expanding U.S. economy and exploding fiscal and trade deficits. But the financial markets just won't cooperate: Long-term interest rates have remained low and are actually heading down. Before retiring in January, U.S. Federal Reserve Chairman Alan Greenspan described these trends as "a conundrum." Robert Samuelson, a Washington Post columnist, surveyed the explanations that economists offer to explain this anomaly and found that they are all flawed. In his view, the experts' inability to explain something so fundamental "attests to our economic ignorance."

Nor do economists have a convincing explanation for the value of the U.S. dollar. For more than a decade, economists have maintained that the dollar was too expensive and its devaluation was unavoidable. As predicted, the dollar plummeted 39 percent between 2002 and 2004. An inescapable effect of the economic equivalent of the law of gravity, explained the experts. In a country with a huge and growing trade deficit, out-of-control government budgets, a war expected to cost $1 trillion, and high energy prices, the currency's value will inevitably tumble. Except that it didn't tumble for long: The dollar's decline was so fleeting that economics textbooks didn't have time to register the change. The dollar recovered quickly, climbing 14 percent in 2005.

Surveying which economies had the best prospects for success, Harvard professor Richard B. Freeman concluded that in predicting superior performance, "luck seems as key as economic policies."

A science that relies on luck to explain the fate of billions of people is a dismal science indeed. True, other social sciences aren't in much better shape, but economists would still be well advised to trade in their intellectual haughtiness for a more humble disposition. Albert O. Hirschman, a superbly original economist, borrowed freely from other disciplines and aptly titled one of his books Essays in Trespassing. We need more trespassers. Fortunately, a few of today's economists are beginning to hurdle professional fences and mine neurology, psychology, sociology, and political science to enrich their analysis.

To be sure, most of these attempts at boundary crossing won't yield much of value, and they render economists vulnerable to charges of consorting with the methodologically impure. But given the dismal condition of the dismal science, intellectual trespassing is a risk worth taking.

Missing Links

The Most Dangerous Deficit

Why the supply and demand for global public goods could kill you.

In 1970, the world recorded 78 major natural disasters, which affected about 80 million people and inflicted roughly $10 billion in economic damage. By 2004, the number of major disasters worldwide had climbed to 384, claiming 200 million victims. The economic cost jumped five-fold, to $50 billion. The final numbers for 2005 will be even worse.

One reason for the enormous growth in disasters is that many of the catastrophes that are now well documented would have gone unrecorded in the past. But, even when one accounts for earlier underreporting, the number of floods, hurricanes, typhoons, mudslides, and other natural disasters has grown exponentially in the past three decades. Worse, the disasters now regularly claim more victims and cost more to clean up than they did a generation ago. The world is not only more populated, but more people are living in dense urban corridors or poorly built shantytowns. No wonder that, according to the Red Cross, the number of people forced to move because of environmental disasters now exceeds those forced to do so by war.

Meanwhile, the budgets of the international organizations charged with providing disaster relief and reconstruction have not kept up with demand. The World Bank, a major source of money and technical assistance for reconstruction and development projects, is lending less now than it did 10 years ago. The budget for the United Nations High Commission on Refugees has grown 62 percent since 1990. That may seem generous, but it is a pittance when you consider that, by 2010, 50 million people are expected to be displaced by environmental causes alone. For its part, the overall U.N. budget has only increased a meager 26 percent during the past 15 years. It's no surprise, then, that a recent report concluded that the U.N. headquarters building suffers from "unacceptable deterioration, building and fire code deficiencies, deficiencies in modern security requirements and standards and environmental problems."

There are many explanations for this dangerous imbalance, but an important one is the very nature of public goods. Public goods are those whose use or enjoyment by one person doesn't prevent the use or enjoyment by another. (Think of traffic lights, or the efforts to prevent an avian flu pandemic.) Better international policing, health safeguards, or rescue efforts are some of the most obvious examples of the provision of global public goods. The supply of these precious commodities -- even when delivered by national governments within their borders -- is problematic. When the public goods in question can only be "produced" through the joint efforts of many countries or by organizations such as the United Nations, the difficulties of balancing supply and demand are even greater.

The problem is rooted in economics. Once a public good is produced, it is impossible for those who created it to restrict -- or profit from -- its use. (You are probably benefiting, at no direct cost to you, from an international regulatory system that makes money transfers safer, cheaper, and faster.) That is why it is so hard to produce public goods in the first place -- only governments and other public institutions can supply them. It also explains why the demand for public goods tends to outstrip supply. In any market, prices go up when demand exceeds supply. In the market for global public goods, when supply falls behind demand, the result is not price inflation but insecurity and instability for all.

Yes, many problems -- financial crises, pollution, criminal networks, and terrorism, to name a few -- are rooted in some countries more than others. But these problems are increasingly spilling across borders and will spread even further unless several -- often many -- countries work together. The United States, Europe, and Japan weren't able to duck the consequences of the SARS virus in 2003 -- nor will they be spared an avian flu epidemic -- by simply protecting their own borders. Their fortunes are inextricably tied to how well China, Vietnam, and other Asian countries control their next deadly outbreak. Indeed, experts fear that the organizational, financial, and medical capabilities now in place to combat an avian flu epidemic are woefully inadequate, despite the fact that governments are clearly worried and raising their budgets to address this threat.

The global economic imbalances associated with America's budget and trade deficits, China's exchange rate, or Europe's slow growth may eventually cause job losses, reduced income, and more poverty. Those are bad outcomes. But they pale in comparison to the consequences of the imbalance between the supply and demand of global public goods. That is an imbalance that every year kills thousands of people and will increasingly hit closer to all our homes. Everywhere.