Why Economics Must Get Broader Before It Gets Better


March 9, 2019

Why Economics Must Get Broader Before It Gets Better

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Even as the public’s skepticism toward their profession has grown, economists have continued to ignore increasingly obvious flaws in their analytical frameworks. A discipline long dominated by “high priests” must now adopt a more open mindset, or risk becoming irrelevant.

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L-R: Stigltz- Hayek- Sowell-Keynes- Sen-Schwartz-Sachs- Friedman

NEW YORK – The economics profession took a beating after most of its leading practitioners failed to predict the 2008 global financial crisis, and it has been struggling to recover ever since. Not only were the years following the crash marked by unusually low, unequal growth; now we are witnessing a growing list of economic and financial phenomena that economists cannot readily explain.

Like Queen Elizabeth II, who famously asked in November 2008 why nobody had seen the crisis coming, many citizens have grown increasingly skeptical of economists’ ability to explain and predict economic developments, let alone offer sound guidance to policymakers. Some surveys rank economists among the least trusted professionals (after politicians, of course, whose trust economists have also lost).

A solid economic training is no longer regarded as a must-have for candidates for top positions in finance ministries and central banks. This marginalization has further weakened economists’ ability to inform and influence decision-making on issues that relate directly to their expertise (or what they would call their comparative and absolute advantage).

The profession owes its deteriorating reputation largely to excessive reliance on its own self-imposed orthodoxies. With more openness to interdisciplinary approaches and the broader use of existing analytical tools, particularly those offered by behavioral science and game theory, mainstream economics could start to overcome its shortcomings.Three recent developments underscore the urgency of this challenge. In the 12 months between the World Economic Forum’s 2018 and 2019 in Davos, those in attendance went from celebrating a synchronized global growth pickup to worrying about a synchronized . Notwithstanding the , neither the extent nor the speed of the change in consensus seems warranted by economic and financial developments, which suggests that economists may have misdiagnosed the initial conditions.

A second area of concern is monetary policy. Professional economists still have not spoken up clearly enough about the challenges facing the US Federal Reserve’s communication strategy, despite the fact that even slight misfires, such as occurred in the fourth quarter of last year, can trigger severe bouts of financial instability that threaten growth. Instead, they have simply continued to embrace the contemporary view that greater Fed transparency is always a good thing.

We have come a long way since the era of former Fed Chair Alan Greenspan’s “Fedspeak” (or, as he put it, “mumbling with great incoherence”). But that raises a new problem: illusionary precision. The Fed now follows every policy meeting with a release of statements, minutes, transcripts, blue-dot plots, and a press conference, signaling to markets a level of sophistication that is scarcely realistic in a world of fluidity and heightened uncertainty.

Rather than simply going along with the view that more is better, economists should be urging the Fed to adopt an approach more like that of the Bank of England, which emphasizes scenario analyses and fan charts. Economists could also be doing more to inform – and perhaps even influence – the Fed’s ongoing review of its policy frameworks and communications strategy. After all, the economics literature on asymmetrical information suggests that greater input from economists outside of the Fed is both appropriate and necessary for ensuring an optimal policy outcome.

A third area of concern is the Sino-American trade conflict, which is more controversial, owing to its political nature. So far, the vast majority of economists have trotted out the conventional argument that tariffs (real or threatened) are always bad for everyone. In doing so, they have ignored work from their own profession showing how the promised benefits of trade, while substantial, can be undermined by market and institutional imperfections. Those who wanted to make a productive contribution to the debate should have taken a more nuanced approach, applying to distinguish between the “what” and the “how” of trade warfare.

These are just three recent examples of how economists have dropped the ball. In addition, economists are struggling to explain recent productivity developments, the implications of rising inequality, the impact of persistently negative interest rates in the euro-zone, the longer-term effects of other unconventional monetary policy measures (amplified by the European Central Bank’s latest policy pivot), and the sudden slowdown in European growth. They also failed to foresee the Brexit saga and the political explosion of anger and alienation across the West in general.

None of this is a huge surprise, given the profession’s embrace of simplistic theoretical assumptions and excessive reliance on mathematical techniques that prize elegance over real-world applicability. Mainstream economics has placed far too much analytical emphasis on the equilibrium condition, while largely ignoring the importance of transitions and tipping points, not to mention multiple-equilibria scenarios. And the profession has routinely failed to account adequately for financial links, behavioral-science insights, and rapidly evolving secular and structural forces such as technological innovation, climate change, and the rise of China.

All of this should tell economists that there is plenty of room for improvement, and that they need to expand the scope of their analysis to take into account human interactions, distributional effects, financial-economic feedback mechanisms, and technological change. But this cannot just be about devising new analytical models within the field; economists also must incorporate insights from other disciplines that the profession has overlooked.

A discipline long dominated by “high priests” must now adopt a more open mindset. That means acknowledging and addressing unconscious biases, not least by making a concerted effort to improve inclusion and diversity within the field. It also means focusing more on inter-disciplinary approaches and distributional effects, and less on the purity of mathematical models, average conditions, and just the belly of distributions. Such structural changes will require more and better intellectual and institutional “safe zones,” so that analytical disruptions can be managed and channeled in productive directions.

Without significant adjustments, mainstream economics will remain two steps behind changing realities on the ground, and economists will be risking a further loss of credibility and influence. In an era of concern about climate change, political upheavals, and technological disruption, the shortcomings of mainstream economics must be addressed posthaste.

 

  • Rick Puglisi  

 

  • Michael Public  
  • Mike Robinson  

 

5 thoughts on “Why Economics Must Get Broader Before It Gets Better

  1. Fallacies of economics theories founded on flawed hypothesis backed by statistical inferences as Science that’s inexact and massaged into formulas. Inclusiveness is not the issue, its the pretend economists namely monetarists who thinks money supplies is the only plausible solutions to what ails the world when money itself is the problem when its disconnect from REAL Production of Goods and Services.

  2. Economics like life has to be lived forward but only understood backwards. There are too many imponderable (man , nature , machine and the hidden hand) and eternal vigilance is required to keep the economy on even keel because economist cannot be taken to court on the basis of their assessments.

  3. The way I understand it, after having read the article by the writer (and mind you, I am neither an economist nor an expert in any field or subject), we could conclude that an economist could yet be wrong on the subject of which he is an expert in i.e. economics. But I find this difficult to comprehend because, to my mind, since an economist is an expert in his field i.e. economics, it meant that he would have acquired in-depth knowledge and had undergone intensive training in, as well as be adequately exposed to, matters concerning economics. On this basis alone, we could say with confidence that he could be relied upon by any layperson to be right on matters related to economics; and why shouldn’t this be the case anyway? But rather surprisingly, as I understand it, the writer says that this isn’t so – that the theory and knowledge upon which the economist base his choices is inadequate, and therefore his conclusions are but misconceptions of reality.

    Now, this is where things become interesting because, if I choose to apply the writer’s findings to everyday life’s problems, then inevitably, I could find myself in a bit of a conundrum. You see, if an expert could yet likely be wrong, but the chance of a layperson being wrong is many times more than the expert (because, in comparison with an expert, a layperson is perceived to lack knowledge), then both are likely to be wrong. And if both are likely to be wrong, how then does anybody go figuring out what is right? Or to put it another way, how does anybody go about figuring out solutions to his problems when everyone else – “experts” and “non-experts” alike – also hasn’t much of a clue?

    Just a thought to ponder.

    • Good question which requires a very long and complex answer — my suggestion is to read this book ” The Economics Anti-Textbook: A Critical Thinker’s Guide to Micro-Economics” by Rod Hill and Tony Myatt (published by Zed Books). Also take a look at the criticisms of mainstream neoclassical economics by Heterodox Economics. For example, the writings of the economist Ha Joon-Chang.

      Short answer — social sciences deal with human behaviour, and humans are complicated creatures who can respond to an identical situation in different ways. This places limitations on the “positivist” approach i.e. trying to find “laws” of social behaviour, and gives rise to many exceptions to the usual neoclassical economics propositions and assumptions. (Behavioural Economics is a promising area in neoclassical economics research).

      (Also, in real life it is difficult to separate out economics and politics e.g.
      rent-seeking behaviour where businesspeople lobby politicians for politically-created advantages in the “competitive market”. Economic specialists are like other human beings and range from the highly ideological like Peter Navarro and the Spanish Marxists who advise Maduro in Venezuela, to those who experience financial conflicts of interest and this slants their seemingly “objective” academic writings

      https://slate.com/business/2011/01/if-they-read-their-own-research-economists-might-disclose-conflicts-of-interest-more-often.html

      P.S. Some of the most interesting economists to me include Dean Baker, Joseph Stiglitz, Paul Krugman, Robert Reich, Amartya Sen …

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