A historical perspective on modern economics
December 27, 2017 | 2:40 PM
by Mohammed Mahfoodh Al Ardhi Al Ardhi
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Towards the end of the 19th century, Norwegian-American economist and sociologist Thorstein Veblen unleashed his theory on the relationship between economic and social structures.

He used the term ‘conspicuous consumption’ to refer to the phenomenon of purchasing material goods in order to enhance one’s social status. Since Veblen’s theories connected economics with society, economists at the time dismissed them as conjecture, considering him a sociologist rather than an economist, while sociologists for their part, did the same - viewing him as an economist first.

The Great Depression that occurred towards the end of the 1920s testified to this state of alienation between socially productive forces and the actual tools of production. Individuals no longer felt as though they were part of the economy, society did not have ownership of production tools and economic institutions. What this meant was that citizens were not inclined to take on the responsibility of improving the economy and working towards growth.

Over a century has passed since Veblen put forth his radical and forward-thinking theories. In the intervening decades, scholars have increasingly addressed the fact that a sound economy enhances society and vice versa.

The history of economics includes scholars’ readings of both positive and negative trends and outcomes that could potentially shape the future. The practical outcomes of these readings were, for the most part, determined by how economists, politicians and decision-makers used them in their given contexts.

A notable example that comes to mind is of Nouriel Roubini, an American economist, who raised his voice during an IMF meeting in New York in September 2006 to warn of an impending economic crisis.

He outlined the possibility of a major recession in the U.S. economy that would be caused by the collapse of the real estate market, followed by a steep decline in oil prices. Roubini cautioned that these developments would lead to a massive economic recession years later and paralyze the central hubs of the global economy.

Roubini’s predictions generated a strong reaction from the IMF meeting’s attendees, many of whom labelled his claims as exaggerated and overly pessimistic. Consequently, his insights were not taken seriously until the global financial crisis struck in 2008 – accurately validating Roubini’s warnings.

Interestingly, Roubini was not the only scholar who foretold that an economic crisis comparable to the Great Depression of the 1920s was unfolding – Gerald Celente, a well-known trend forecaster, shared his concerns and views.

History is meant to aid us in drawing conclusions based on our experiences. If knowledge is the driving force of all human activity and impels the evolution of the human race, then experience is the source of knowledge and science, irrespective of whether it produces positive results or not.

Where would we be now if the predictions of Roubini and his colleagues, or the theories of Veblen had been dealt with differently? What if these theories had been taken into keen consideration and discussed threadbare among the decision makers who held the reins of the economy? It is hard to fathom any specific scenarios, but the global economy could have potentially been in a far more robust state than it is in today.

The predictions and readings of economists are based on a careful analysis of all economic and social factors that constitute the economic ecosystem. Like other social and human sciences, economics is a discipline that depends on the measurement, convergence and analysis of historical events. Ignoring the economic experience garnered from the past means that we remain forever on the threshold of the future - without the necessary guidance that can lead us to a prosperous tomorrow.

Interestingly, today we witness an increasing level of importance being accorded to scholarly predictions and warnings. Leaders have improved their ability to recognize trends and patterns. This will in turn surely help strengthen their planning for the future and allow them to tackle causes rather than sit back and wait to counter the consequences.

Whether individual or collective, any act or initiative is invariably motivated by an anticipation of its results. Sound forecasts can only be made based on experience and knowledge within their historical context.

Considering that our present is the result of our past, the future is taking shape at this very moment, calling on us to assume our responsibilities in defining the direction of events that will lead us to a secure and prosperous future. It is now time to listen and act.

*The author is the Executive Chairman of Investcorp, the Chairman of Bank Sohar and an International Advisor to the Brookings Institution

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