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1 L’Économie Politique: Just before the crisis, the dominant economic theory was telling us that crises were a thing of the past and that financial bubbles were impossible. How did we get here?

2 François Bourguignon: We got here because the theory underlying those conclusions was faulty. It was based most notably on the key assumption of “rational expectations.” This is an extremely challenging and somewhat implausible theory because it means that economic stakeholders have the ability to imagine what might happen in the future. They have to assign a probability to different events and anticipate how each one will play out in every possible state in the world, with each one governed by the same type of reasoning. It is unlikely that the world functions in such a way.

3 Also, well before the 2007 crisis, some theorists had shown that, even using this assumption, once we “rationally” anticipate the actions of others, there may be several possible states of the economy, several “equilibriums.” How can we assume, therefore, that everyone is organized according to one, and only one, of these equilibriums, and that all economic activities converge in order for this one equilibrium to be achieved? If that is not the case, if there are differences in expectations, then the theory cannot tell us anything about the behavior of these markets and their stability. Bubbles can burst as a result of exogenous events or financial disasters that are impossible to predict. Rational expectations actually constitute all the more accurate approximations because the economy doesn’t change much. Whenever there is a systemic change, no matter how big or small the shake-up, this approximation does not work. Economic theory has little to say on that yet.

4 They have known about all these weaknesses since at least the early 1970s. How is it that this has not led to a rethinking of the main approach?

5 FB: The stabilization of the global economic situation that was observed from the early 1980s—falling inflation, few sustainably significant movements in growth and so on—has led many economists to believe that, while they do exist, these theoretical weaknesses were not significant since, ultimately, we saw few major macroeconomic and financial fluctuations. While debates surrounding the dominant theory showed that major crises were within the realms of possibility, empirical observation led to an underestimation of the possibility of significant slippage. The observed stability has somehow been considered an a posteriori justification of the choice of assumptions, like that of rational expectations, and therefore also of their conclusions as to the efficiency of the markets, the need for deregulation, etc.

6 When we saw what was unearthed in the Inside Job documentary and in Laurent Mauduit’s investigation, [1] might we not say that some economists also had a vested interest, including a personal interest for some, to defend these ideas?

7 FB: I think there was mostly a collective interest, more for financial intermediaries than for economists, in supporting discourse that justified their effectiveness, their ability to properly run the economy, to allocate available financial resources efficiently at the global level, etc.

8 But why have economists agreed to intellectually validate these ideas?

9 FB: They did not all necessarily realize the implications of the underlying simple theoretical model and its weaknesses. Some of them were living in a kind of theoretical bubble, without considering all of its properties. The theory dictated that, based on certain assumptions, which they did not seek to question, the financial markets were efficient and should be free to act as they pleased. This seemed to be the case since everything appeared to be working well, and it became the prevailing discourse.

10 I do not think that these people acted in bad faith any more than I think they were taking orders from traders to reproduce this discourse. It’s not the same as the tobacco industry paying scientists to develop scientific research to show that cigarettes are harmless! The finance industry did not “buy” the economic community so that there would be a cover-up of certain things.

11 In fact, some had warned, well before the crash, that a market downturn was inevitable. When I was chief economist at the World Bank, we had already highlighted the fact late in 2006 that the US housing bubble had burst, and that a major correction in the global economy was to be expected. But we had not anticipated the correction would be as brutal as it was, because we did not realize it was operating in a completely deregulated financial world.

12 I met Alan Greenspan shortly before he left the US Federal Reserve in early 2006. He stressed the fact that the financial markets would probably not be as stable in the decade to come as they had been during his tenure over the previous decade. That was an exceptional period in his view. He didn’t show any obvious signs of concern regarding the situation though.

13 Some people, like Joseph Stiglitz and Paul Krugman, attach importance to the role played by the ideological choices made by economists. What do you think?

14 FB: I think it’s a little more complicated than that. Certainly there is an element of ideology in the way some people practice economics. This is a response to ignorance. When people don’t understand how things work or when the reality is extremely complex, they tend to oversimplify it and to gloss over it with preconceived ideas by way of explanation. These may be absolute virtues of free markets for some, or control by the state for others. To justifiably denounce an overly ideological discourse, you would have to be able to state and explain how the economy and finance actually work compared with overly simplistic models. In the same way that physicists cannot explain the entire universe, it is not certain that such knowledge exists. Knowledge often stops at a level of complexity too low to reject ideology, especially when it serves certain interests, economic as well as political. We would like economics to be a science, with single and irrefutable answers, but that is not the case.

15 Alan Kirman put forward a suggestion on this point: “We have been trapped by the old ambition of economists to develop a scientific theory of economics.” [2] Should we recognize the fact that economics is not a science that describes objective laws?

16 FB: Economics is not a science insofar as it cannot provide universal and objective laws explaining how economies functions at any point in space and time. In addition, economic behaviors change as societies change; they are not fixed. To some extent, just understanding economic mechanisms can serve to change them. This is a phenomenon not often found in the natural sciences.

17 But economics is perhaps a little more scientific than the humanities and social sciences inasmuch as it is possible, based on a few clearly stated hypotheses, to explain a number of complex phenomena thanks to a sophisticated analytical process that combines mathematics and statistics. Of course, as we already mentioned, these hypotheses need to be realistic.

18 Bearing that in mind, what makes a good economist today?

19 FB: A good economist is someone who has a general understanding of economic systems in all their complexity. They will also have understood that there are few universal rules—and hence few ideologies—in the way economic policy is conducted, because it depends a lot on specific circumstances. The challenge is to communicate on these two levels. Any dismantling of the complexity of economic systems usually takes place within the confines of sophisticated articles in scientific journals. Entering into the debate on economic policy requires a more simplistic approach, in mainstream books or discourse. Few economists can do both. Stiglitz is one of them. He has the ability to combine high-level discussions with colleagues and the publications and presentations on his work, which some describe as simplistic, but which try to influence the course of events.

20 Why is it that only those who publish these academic articles have their work recognized by the profession?

21 FB: To arrive at a comprehensive understanding of economic systems, you have to first go through the effort of gaining an in-depth understanding of isolated mechanisms. This approach, which is the lifeblood of specialist publications, guarantees the essential comprehensiveness of both necessary reflection and economic research. Without this initial effort, it is difficult to take into account what others are doing and what they are contributing, and thus reach a comprehensive understanding of the economic world.

22 It is nevertheless regrettable that the careers of economists are now marked by relatively narrow specializations, with less global perspective. To advance professionally, young researchers must show an ability to formulate new ideas, and it is easier to innovate on a specific topic. One can only hope that, over time, they will expand their scope of thought.

23 Has the crisis changed anything in economic thinking?

24 FB: I don’t get that impression, at the moment. The issues existed before the crisis; that just made them more acute. In some cases, there is no need to develop new analyses to know what to do. With respect to the eurozone crisis, for example, we know what needs to be done at the economic level: pooling of debt, a more EU-oriented fiscal policy, etc. This has to be achieved at the political level. For those working on the behavior of banks and financial markets, however, it is certain that the crisis calls for better understanding of what happened and to provide more effective forms of regulation.

25 People like Joseph Stiglitz and David Colander actually suggest that economists improve their models. But when I asked Colander how long it would take to build a model able to account for our crisis, he said a hundred and fifty years!

26 FB: It’s hard to say. As soon as we move away from the rational expectations hypothesis, which is clearly unsatisfactory in the financial markets, there is no longer a simple representation of the interactions between those involved. Maybe someone will quickly offer a great idea for doing without it, or maybe we will have to wait a hundred and fifty years! At PSE, Roger Guesnerie put together a global network of researchers on this topic. Will they provide operational solutions? How long will it take them? I have no idea.

27 Some people, like Barry Eichengreen, say that we need to abandon these general theoretical considerations to focus on empirical work and get the databases to “do the talking.”

28 FB: I am radically opposed to this type of “data mining.” Without a theoretical framework, this approach teaches us nothing about how to control the economic system. In addition, using data that is set in the past only tells us about the past without explaining the future! We must be able to anticipate the failures or junctions of our economic systems and manage the consequences.

29 For George Akerlof and Robert Shiller, the future of economic thinking lies in experimental economics in the laboratory and in behavioral economics, which focuses on the multiple psychological determinants of the economic players.

30 FB: Economics affects psychology and now neurosciences. It’s fascinating. Note that that part of the brain that responds to a certain type of situation, however, is not what is most important. The most important thing is to show the rationality of the economic agents is more limited or complex than that suggested by economists’ models. But that’s when the problems start, because there are an infinite number of ways not to be “economically rational.” Experimental economics is trying to help us by examining whether, within this infinite number, it is possible to retain some ways of behaving and not others. Will there be constants in behavior? I don’t know. For now, this is mostly a question of laboratory experiments, but the economy does not take place in a laboratory!

31 Shortly before he passed away, Paul Samuelson advocated more work in the field of economic history. Others called for approaching political science, sociology, etc. Does the future of economics lie in multidisciplinary approaches?

32 FB: In recent years, economics has experienced an increasingly open and welcome approach toward other social sciences. Luckily, it is no longer a question of everything from marriage to suicide being explained by the behavior of the homo economicus, but rather about being open to psychology, sociology, history, etc. This more open approach can only be beneficial. On the one hand, the analytical apparatus of the economists is often more solid than the ones available to other social scientists. On the other hand, other disciplines have accumulated factual knowledge that economists are lacking.

33 We can learn a lot from historians, for example. When some economists, such as Daron Acemo?lu, build models that aim to explain the long-term developments of societies through institutional change, they try to validate them by referring to history, but they very often rely on a highly simplistic view of that history. The work of historians is therefore essential to say, “Hang on a minute, it didn’t happen like that.” We now have an open dialogue, a quality dialogue, with other social sciences. But I don’t see economists completely abandoning the assumption of a certain rationality of agents. They would lose the analytical tool which they use to try and understand the world.

34 After all these investigations, how do you prioritize as Director of PSE?

35 FB: We try to do everything! We’re working on deepening the existing paradigms, on the construction of alternative paradigms, and more open of an approach to other social sciences, all at the same time. The school does not favor a particular type of subject or approach. Instead, there is a wide variety of work in progress. There is also the belief that the complexity of the phenomena studied requires the utmost humility from researchers.


  • [1]
    Inside Job, a documentary by Charles Ferguson. Laurent Mauduit, Les Imposteurs de l’économie (Paris: Jean-Claude Gawsewitch, 2012).
  • [2]
    “La théorie économique dans la crise,” Revue économique 63, no. 3 (2012): 421–36.
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