In January 2018, the Oxford Review of Economic Policy published an issue edited by David Vines and Samuel Wills, dedicated to the project of rebuilding macroeconomic theory. We covered some of the project in a previous blog review, here. The issue features contributions by Olivier Blanchard, Simon Wren-Lewis, Joseph Stiglitz, Paul Krugman, Ricardo Reis and many others. It triggered a debate that keeps going, and we cover new contributions.
Martin Sandbu has argued that economics can be more open, without losing rigour. The overall DSGE approach could be liberated enough to allow for a large range of different assumptions about microeconomic behaviour and the macro relationships that they give rise to. That pluralism will inevitably give rise to much disagreement about which micro assumptions are ad hoc and which are well-founded. But pluralism integrated within a common framework is preferable to “pluralism by juxtaposition”, where fundamentally different methodological approaches do not attempt to engage with one another at all.
Martin Wolf writes in the FT that the tests for economics are whether its adepts understand what might go wrong in the economy and how to put it right. When the financial crisis that hit in 2007 caught the profession almost completely unawares, it failed the first of these tests. It did better on the second, but nevertheless it needs rebuilding.
The analysis of fundamental macroeconomic theory suggests substantial ignorance of how our economies work. We may never understand how such complex systems actually function. This does not mean that attempting to improve understanding is a foolish exercise. But it is arguably more vital in practice to focus on two other tasks. The first is how to make the body economic more resistant to the consequences of manias and panics. The second is how to restore it to health as quickly as possible. On both counts, we need to think more and do more.
Ferdinando Giugliano argues that we should push back against fake economics. The criticisms that academics have been facing since the crisis have also opened the door to alternative economic views that have little or no academic grounding. Many of the economists who peddle highly unconventional theories get away with almost no scrutiny. The discipline is much more open to a variety of views than its critics concede, but that means subjecting them to a degree of rigour that most of these dissenters aren’t prepared for.
The media can play a better role in distinguishing between economic theories which have been tried and tested, and speculations with little academic grounding. However, mainstream economists must do much more to defend their profession in the public debate too. They should be much clearer about what academic theories can and cannot say and, most importantly, mainstream economists should continue to improve their discipline so as to regain the trust of the public.
Peter Doyle also disagrees with Martin Wolf. He thinks that the rebuilding efforts that Wolf applauds have, even a decade later, yielded no substantial change to the state of knowledge of the profession nor shed any substantive new light on the genesis of the crisis. The problem illuminated by the crisis is – according to Doyle – not that the science has to be rebuilt. Professionals using it properly, albeit only a few of them, called the underlying risks well ahead of time, but were dismissed as fringe types. Instead, the problem was, and still is, how the science is used by those who are most eminent in the global arena.
The core issue is that such globally eminent economists are so because they are so close to G20 policymakers – employed, sponsored,favored, and/or conferenced by them – and it is the collective policy failures of those same G20 policymakers which precipitate crises. The lesson is that at a global level, at least some of the eminent have to be formally and permanently distanced from the G20 politicians.
Lajor Bokros answers Martin Wolf on the FT, arguing that we should not blame science if politicians don’t learn. The biggest mistake is probably that mainstream macroeconomics does not clearly acknowledge that crises are absolutely inevitable. The question, therefore, is not how to prevent crises but more modestly: how to slow down the accumulation of investment bubbles fuelled by unsustainable growth of credit and debt, and how to mitigate the negative economic, financial and social consequences after the outbreak of the crisis. That is where governments have an important role to play in the capitalist market economy and that is where many governments failed miserably a decade ago.
The Financial Times hosts an ongoing debate on the subject, that started off from a discussion between Tom Clark and Chris Giles. Tom Clark thinks economics has failed, and that much of economists’ work is in truth just social arithmetic in which economic reasoning merely colours (or on occasion distorts) the interpretation. Contemporary economics understands the world as a series of deviations from a far-fetched vision of omnipresent and flawless markets. The old paradigm still frames policy prescriptions – but in a world of flux, where fortunes are shaped by dynamic processes such as invention and war, economics is led astray by a hankering for stable equilibria.
Chris Giles thinks economics has not failed and that, as long as you do not expectsoothsaying, it is remarkably successful. Economics is fundamentally a study of how the world works and how to make it a better place. Good economists do not claim to be able to predict the future or answer all questions with precision, but they can use a variety of tools, data and theories to provide insight and improve our understanding. Economics is learning from errors, although there is a lot of bad economics out there: random thinking, both by orthodox economists sticking rigidly to one school of thought and self-styled heterodox voices doing exactly the same, but with another set of rigid theories.
Many morethen contributed to the FT debate. Diane Coyle argues that the profession suffers from its lack of diversity; Gavin Jackson thinks that insights are not properly translated for the public; Mariana Mazzucato argues that the definition of “value” should be reconsidered; Maurice Obstfeld thinks that the public may be demanding too much; Tony Yates posits that critics should read more because, however well intended, generalised attacks on a discipline that are not based on familiarity are pointless; Tim Hardford answers by adapting Monty Python’s ‘criticism’ of the Romans (“What have they ever done for us?”) in the face of generalised attacks on the economics discipline.
The Economist’s Free Exchange blog has a series of three critical arguments. One argues that many results in microeconomics are shaky, and that in light of the fact that economics enjoys greater influence over policy than other social sciences, being alert to the shortcomings of published research need not lead to nihilism – but it is wise to be sceptical about any single result.
Another article argues that economists understand little about the causes of growth, although the economics of growth should be central to the discipline, in light of the effect that growth can have on people’s living standards. The questions it poses are objectively hard, and the answers rest more in history and politics than in elegant mathematics, but until economists can give better answers in this area, they won’t have not earned the right to confidence.
The last piece argues that economists also lack a proper understanding of business cycles, and that macroeconomics must get to grips with its epistemological woes if it hopes to maintain its influence and limit the damage done by the next crisis.
Howard Reed thinks we should rip economics up and start again, with “de-conomics”. First, we need to accept that there is no such thing as “value-free” analysis of the economy. Second, the analysis needs to be based around how human beings actually operate – rather than how neoclassicism asserts that a “rational economic person (or firm)” should operate. Third, we need to put the good life centre-stage, rather than prioritising the areas that are most amenable to analysis via late-19th century linear mathematics. Technological progress and power relationships between firms, workers and governments need to be at the heart of economic discourse and research. Finally, economics needs to be pluralistic. For the last half-century neoclassical economics has been gradually colonising other social science disciplines such as sociology and political science. It is high time this process reversed itself so that there was two-way traffic and a mutually beneficial learning exchange between disciplines.
Noah Smith has a fierce twitter rebuttal of the Economist’s take as well as a piece answering Reed, in which he argues that most critics of economics are stuck in the past. The basic attacks have an element of truth, but by now the failings that they highlight are well-known. Many allegations seem out of date. For example, Reed alleges that economists still “worship” at the “temple” of classic models like the general equilibrium theory pioneered by Kenneth Arrow and Gerard Debreu, and that consumer theory often “says nothing at all”.
Smith thinks that Reed mischaracterises the state of the profession and seems to fundamentally misunderstand what modern economists do for a living. The idea seems to be that economists mainly engage in a deductive enterprise, dispensing high theory from Olympian mounts of authority, but most economists are out combing through mountains of data, straining to glean facts about how the world really works. The standard British-magazine critique of the economics profession isn’t just tiresome, and it isn’t just wrong in the particulars; its entire vision of what economics needs to become is distorted by a warped picture of what the profession is today.
Simon Wren-Lewis puts forwards three reasons for the never ending stream of criticism that Noah Smith identifies, but argues that economics is an easy target also because historically it has been very insular, and in this respect quite unlike other social sciences. Wren-Lewis thinks this is due to the fact that nearly all economics can be derived from the basic axioms of rational choice, whereas there is nothing like this deductive tree in other social sciences. The limitations of what can be done with a few axioms about rational choice have led in recent years to economics becoming much more empirical, and much less tied to this deductive theory, but there is an unfortunate hangover from this insularity. As a discipline, economics shows little interest in communicating its core knowledge to others, both within academia and with the outside world. In part this epidemic of articles about the failings of economics reflects this communication failure. More importantly, both Brexit and Trump should be a wake up call that economists as a collective has to get better at communicating the core insights of economics.