Ever wondered what is the job of economists? What are their duties?
The dictionary definition of an economist is someone who is “an expert in economics“. And economics is in turn defined as “the branch of knowledge concerned with the production, consumption, and transfer of wealth”.
There you go, simple, there’s your question answered in just two dictionary definitions.
Well, at least it seems that way. That’s until you ask what the purpose is of an economist and having all that economic knowledge.
An expert in medicine can save peoples’ lives. An expert on computers can fix your computer. An expert in accounting can file your tax returns. Even an expert at lying can sell second hand cars.
But what about a well-paid expert in the broad subject of economics, what can they do?
Going back to the dictionary definition of economics, they should know how to best allocate wealth. And they should also know how to best prevent problems or crises from occurring in the world economy, right?
Wrong, and I bet that answer doesn’t surprise you.
All you have to do is see the state of the global economy – or remember the pain of the most recent financial crisis – to come to the conclusion that economists don’t seem to make much use of their knowledge.
So then who is paying them and giving them legitimacy? The answer to this question is where the problem lies, which can be summed up in three words: conflict of interest.
The easiest way to understand why this is such a problem is to ask yourself a question …
Lets say you were paid a six-figure salary by an institution whose survival (and your salary) depends on you agreeing with what they do. Would you even bother to do the research that could bring them down?
This question is not an exaggeration of the position of most economists. They are usually employed by banks or financial institutions who pay them big salaries to give some public legitimacy to what their employers do to make money.
What about for those who work in universities or the government, surely they have the incentive to do what is best for society?
Respected academic economists make only a fraction of their money from what the university pays them. Most of their earnings come from giving speeches for or representing the same financial institutions that the others work for.
And in a booming economy where a government is earning lots of tax money, is it really in their interest to stop earning so much money by sorting out some problems – like a housing bubble. Remember that most developed governments are only in power for around four years.
But surely economics is such a complex and broad subject that no one could predict something like a financial crisis.
Wrong again. In fact, several years before the financial crisis, many people without a background in economics could see damning evidence that the US housing bubble would burst with the subsequent devastating consequences.
The evidence they uncovered with a bit of research was damning. It was so convincing, in fact, that they risked their well paid careers as respected investors, as well as vast amounts of their own money on betting that there would be a crisis.
The investors (who included John Paulson and Michael Burry amongst several others) eventually made billions from their bet.
This was not down to luck. The fact is that with the right incentives, a dose of logic, and some research, non-economists beat the ‘experts’ at their own game.
The – now extremely wealthy – investors didn’t just make money when the crisis occurred. They also tried to warn anyone who would listen beforehand.
Unsurprisingly their siren calls fell on deaf ears. It was simply easier for those who could’ve stopped a crisis occurring (banks, governments…) to make money from a housing boom than to care about the eventual consequences.
Economists simply agreed with their paymasters. You shouldn’t blame them though, it’s only human nature to want to be paid well and survive in your industry.
So what does an economist do? Survive.
Written by: Harold Schick