Smash the models

aksaroya —  11 February 2013 — 1 Comment

By Peter Williams, accountant and journalist

Despite economists’ failure to explain why the ‘zombie economy’ has not hit employment as hard as we feared, they appeared to have escaped censure. It’s time they rose to the challenge.

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For most accountants, the new year starts by looking backwards – be it in practice, auditing accounts, or in industry and commerce preparing year-end figures. It could be a sober review this year: some businesses may have prospered but most will have tottered along, held back by a zombie economy that appears unable to drag itself down the recovery path toward growth.

Except, as we were told during 2012, things could have been a lot worse: the past five years have seen the poorest growth performance by the UK economy since the 1920s, except in one crucial respect. Thank goodness that, to date, there has been no Great Depression-level of unemployment. Indeed, to the astonishment of economists, employment has risen since 2009, with jobs growth in the private sector making up for losses in the public sector.

According to economists’ models, there should have been as much as an 8% fall in UK jobs in the past five years. That would have presumably seen the streets filled with angry demonstrators, the likes of which we have seen elsewhere in Europe. Yet employment has stayed more or less the same.

Unable to see how their models are failing, economists have given this the snappy title of the ‘productivity puzzle’. Tentative and unconvincing explanations have been suggested to justify the models’ veracity: the accuracy of the figures, particularly GDP, has been questioned; and economists have also suggested that companies are hanging onto workers either in the hope of an upturn, or because it seems too much bother to sack people, especially as they are not demanding huge wage rises.

The productivity puzzle is a symptom of a larger problem: there appears to be no coherent explanation as to what is likely to happen in the economy. If the banking industry and the regulators are having to reform and reinvent themselves following the global financial crisis, then so should the economists.

Human beings believe in progress: we look at our world and see astonishingly rapid change in, for instance, medicine or digital technology. But it is unclear whether we have made similar progress in our economies. While we have berated bankers, regulators and politicians for the fine mess in which we have found ourselves, economists seem to have escaped any real censure.

Most professions have a healthy streak of people who challenge widely held assumptions. The accountancy profession has heard such lone voices over the past decades; pains though they can be, they keep the rest of us true to ourselves. THe only gainsayer to have emerged from the economist ranks is the US’s Paul Krugman, who accuses his peers of not wanting to get at the truth. He suggests his profession knows less than it did 40 years ago, and talks of a ‘dark age of macroeconomics’ in which 80-year-old fallacies are repeated as profound insights.

In an age where deference is dead, we are usually willing to challenge those who should know more than us. Yet we seem to be accepting the same old arguments from economists who appear unable or unwilling to rise to the challenge of a new age. The economy is too important to be left to the economists. It is time to smash the old models and find a better way.

This post first appeared in Accounting and Business, UK edition, January 2013


One response to Smash the models


    Aw, this was a really nice post. In idea I would like to put in writing like this additionally taking time and actual effort to make a very good article but what can I say I procrastinate alot and by no means seem to get something done

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