Amitai is a professor at George Washington University in Washington D.C. He can be reached at etzioni@gwu.edu.

By the end of June the Feds will decide whether to raise interest rates in order to slow down the economy, said to be overheating, or let prosperity continue to rage. Most Fed watchers expect rates to be increased because our central bank is one of the few places economists are still routinely heeded.

The dismal science

Many companies think they no longer need economists. Banks such as Bank America and Wells Fargo, for instance, are reducing the number of economists from their payrolls, or eliminating their jobs altogether. Investors increasingly are shifting their money into index-tracking funds, thus avoiding managers who heed economists and their "orthodox" opinions.

Even in the halls of government, economists no longer hold sway as they once did. The White House National Economic Council is headed by Gene Sperling, a politically minded, loyal aide of the president, rather than an academic economist.

Are economists reading the charts wrong?

While the International Monetary Fund (IMF) still draws heavily on academic economists, especially on Stanley Fischer from Massachusetts Institute of Technology, many observers say the IMF contributed to the recent worldwide financial crisis by insisting that distressed countries curtail public expenditure and raise interest rates. The World Bank, arguably the largest concentration of economists in the world, is still deeply influenced by academic economists, such as Joseph Stiglitz from Stanford, and is clearly floundering.

Neoclassical economics, which until recently dominated private and public policy-making, has long been criticized by some of the best minds of our age, including Herbert Simon, Oscar Lewis, Albert O. Hiersman and Amartya Sen.

These critics have pointed out that economics is based on faulty assumptions about human nature (assumed to be self-centered) and our ability to reason (assumed to be high). Its mathematical gloss has been proven to be elegant and parsimonious, but often not empirical. And the tendency of economists to ignore social infrastructure such as private property laws, limited liability and the spirit of capitalism repeatedly has been highlighted.

All this did not prevent economics from arguably reaching its heyday during the Reagan-Thatcher years. The influence of economics in the 1980s was enormous, not because of some new and powerful demonstration of its scientific validity, but because of the conservative, laissez-faire philosophy on which neoclassical economics is based. This philosophy (less-kind souls call it an ideology) helped legitimize the conservative agenda of the 1980s. In turn, economics won respect because dominant public policies seemed to be congruent with its theories.

The end of theory

The 1990s, by contrast, could be viewed as a series of grand experiments that have blown away long-held economic nostrums. First, Jeffrey Sachs et al. argued that the former Soviet republics should "jump" into capitalism rather than pursue a more gradual transformation. The transition, economists argued, could be accomplished in two years.

The simplistic theory behind this reasoning was that Russians were not different from Westerners. Given the chance, they also would seek to maximize personal satisfaction with a life rich in the consumption of goods and services.

Left free to their own devices, Russians would build profit-maximizing corporations. Government controls, according to this theory, were the only forces holding them back. Hence, once property was transferred to private hands and deregulation and an opening to international markets set in, all of which could be achieved in short order, the former Soviet republics would become happy, capitalist democracies.

The real result, however, was a severe and prolonged decline in the standard of living, thriving corruption and enormous western bailouts, which have been largely wasted or stolen. Capitalism, and the advice of economists, have been given a black eye.

The American economy has conspired to sink one major economic theorem after another. The first torpedo sunk the theory that when unemployment, currently at a low 4.3%, falls below the so-called "natural" rate of 6%, the United States will face accelerating inflation in wages, and then prices. The second debunked theory said that when the economy grows at a real rate exceeding 2.5%, it creates dangerous inflationary pressures.

American economists did no better in predicting or explaining the effects of the rising value of financial assets on people's behavior, or on economic growth and inflation. (In the last 13 years, the wealth effect was first taken for granted, then discarded, and now is back in vogue.) Predictions about the effects of low savings rates, and theories about how they might be raised, have fared even worse. Economists are coming out of the woodwork with ad hoc theories, arguing that we have a new, technology-driven kind of economy, which is highly productive and therefore subject to a whole new set of rules. But one must wonder if by the time these new rules are formulated, the American miracle will have gone the way of all economic miracles.

What kind of science?

Our experience with economics is part of a much more encompassing lesson: We pay dearly for arrogance. As individuals and as societies, we do not have the tools that allow us to manage our future. Our love affair with rationalism, part of the infatuation with the Enlightenment, has waned in other areas, especially since the advent of nuclear weapons. So we must face reality in the field of economics as well. If anything, our ability to manage the economy is lesser than our control over nature.

Greater humility would lead to greater pragmatism and expand our tolerance for experimentation. For instance, I doubt if anyone knows what would happen if the European Central Bank stopped looking in the rear mirror for signs of hyper-inflation and, instead, cut interest rates again. Fortunately, there are signs that the ECB has been more willing to experiment with lower rates, and this should be welcomed.

Equally important is the growing recognition that economic change and management cannot be disassociated from the legal, social, civic and educational fabric of society. The need for a broad cultural and institutional approach is obvious in the former Soviet Union. Elsewhere, Argentina may be reaching the political limits of its tolerance for IMF economics. Malaysia is experimenting with the introduction of capital controls.

There is also the question of what we value most. Should the ultimate goal of our economic system, the one we prescribe for the rest of the world, be to work American hours, to reduce the welfare state to an American level (including canceling national health insurance), and to spend little time with our families, friends and communities? And to what extent does the United States experience presume that other countries will continue to sell low-cost goods and provide low-cost labor? If all countries became mini-Americas, none of them (including the United States) would be able to glow as the United States has for the last few years.

These are questions Third Way governments are struggling with. The answers are unlikely to come from economists or any other social scientist. Attentive citizens and public leaders will all have to participate in feeling our way forward.