CRISIS OF ECONOMICS or ECONOMIC CRISIS?
Why the global economy needs new economic thinking.
If you talk to one hundred people, one hundred and two are going to tell you that the global economy is highly imbalance and surely unsafe for all its inhabitants. Yet, when you ask them to give reasons why they see it so and think so, you can be sure of no straight answers. Why? Is it because the economic challenges of the twenty century are enormous? Or so complex? Or just because, there is lack of accurate information regarding the global economy? Well, some of us do and some of us don#;]'t. In general, I guess what I am trying to say is that, people have come to perceived that there is something fundamentally wrong with the global economy 'economics and economists'. At the end, that perception can matter more than the truth…you might have had the chance to study the intricacies of economics and finance, or to be on the other side where all the information you feed on is secondary? Whichever way that you are looking, the world is seen through veils of theories and assumptions. And in this way, our observations and interpretations are inextricably bound together. This also has implications for the study of economics and all its related applications; in particular, it highlights the need to uncover the assumptions that are brought to economic inquiry of everyday living.
The biggest bankruptcy in US history (The last days of Lehman Brothers)
The crush that hit the world in 2008, led to a global financial crises that has still stayed with us. One of the major occurrence that was identified to have contributed to the 2008 global financial crises was the collapse of one of Wall Street's largest investment bank, 'LEHMAN BROTHERS'. At exactly 1:45 am, on September 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy that became the biggest in the history of bankruptcy in US. Lehman Brothers was then the fourth largest investment bank in the US (behind Goldman Sachs, Morgan Stanley, and Merrill Lynch) doing business in investment banking, equity and fixed-income sales and trading, research, investment management, private equity and private banking.
Perhaps the mystery of the world is not that it became the biggest bankruptcy in the US history, but the more fundamental question of why and how it happened. This is because, the developments which followed triggered the 2008 global financial and economic crises.
2008 global financial crises
The global financial crises that started in 2008, led over 30 million people into unemployment and triggered economic meltdown across many countries of the world —Asia, to Africa, Europe and America, all felt the heat of the collapse of the global economy. It was revealed that easy lending of the mortgage market (subprime loans) across US, more specifically at Wall Street linking to London, Paris, Dubai, China, Iceland etc., coupled with low bank regulations were some of the underlining factors that triggered the global economic crises. During the real estate boom within this period, essentially anyone could qualify for a loan, even knowingly to those on fixed income, while the market too is adjustable to changes from time to time.
Crisis of economics?
Shady deals characterize the financial sector, with fraudulent practices as well. All these gross cancerous materials, injected into the financial sector of the world went undetected. That was how bad it was. The crisis of 2008 revealed to the world that the economics and financial professions are not fulfilling their responsibility to bring expertise to bear for the betterment of the human condition. This led to severe damage to the credibility of economic expertise and the sole relevance of the whole economics discipline. In simple terms, the relevance of economics and the contributions of economists to the global economy has been brought under intense scrutiny within the last decade than even when the discipline was first established centuries ago. There now exist a lot of global imbalances which economics and economists have failed to interpret, foresee, and forecast.
Profoundly, it is evident that the global economy is now very complex and complicated. Simplicity is not a luxury especially when one comes to terms with the current intense scrutiny that economics is going through. It is very obvious that economics cannot be understood or wholly stay relevant based on narrow assumptions. Perhaps a harder interrogation would reveal a broader assumptions to help the discipline stay more relevant.
New economic thinking needed
Why are people skeptical about the current economic thinking? Why does the global economy need new paradigm? The economics profession is a bit off - course, hence the need to open the debate and re-establish the relevance of the economics profession. What is the new economic thinking approach? The new paradigm, hard questions, thorough interrogations, debating assumptions and theories of economic thinking, like the invisible hand theory, perfect market model etc.
'Properly conceived, economics requires an eclectic approach that uses many models (not just one), that draws on different strands of knowledge, and that is rooted in acute and careful observation and understanding of institutional context. The demand for such an approach is not, as sometimes interpreted, an attack on the use of mathematics in economics: mathematics is an indispensable tool, although the belief that analysis is relevant only if it lends itself to such expression is absurd. Nor does this view require a comprehensive rejection of mainstream economic traditions. What is wrong is not the use of rational choice models, which are often helpful, but exclusive reliance on them', said John Kay, Columnist, Financial Times.
The new economic thinking to me, requires more intellectual rigor and interdisciplinary approach to the subject of economics. It demands the same standards of scrutiny as the economics of old. The economics of old was relevant and stayed true to be a medium of stability to the global economy. Economists were hailed for their intellectual breakthroughs, and more particularly, for bridging the gap between what they theorizing and practicing at the same time.
In particular, I am proud to associate myself with an organization whose mandate amongst others, is to support and promote innovative thinking. Therefore at the Young Professional Economists Network (YPEN), we believe that a broader and respectful conversation is more nourishing than branded affronts hiding behind pretense and armour. Economic ideas matter —and economics is even going to be more relevant in the next decades ahead…to be continued
Paul Frimpong, Ch.E., Chartered Economist and the founder of Young Professional Economists Network (YPEN), He is also a fellow of the Bastiat Ghana Institute.
Tel: +233 -241 229 548