IF ECONOMISTS REFORMED THEMSELVES
Posted by hkarner - 16. Juli 2016
Source: The Economist
A LESS DISMAL SCIENCE
Reforming economists’ tools, temperament and training could help to mitigate, if not to prevent, the next crisis. BASHING economists is scarcely out of fashion.
They are accused of being blinkered by mathematical models, of overestimating their predictive powers and churning out narrow-minded graduates. Some folk see them, rather than bankers, as the real villains behind the global financial crisis, asking, as Queen Elizabeth is said to have done at the London School of Economics, why no one had seen the credit crunch coming.
John Maynard Keynes once said that “if economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.” How could they achieve that? Through a strong dose of what they (and this newspaper) often prescribe for others: structural reforms.
To start with, that means tackling what Paul Romer, an economist at the Stern School of Business in New York, calls the profession’s “mathiness”. The mountain of algebra in economic research is supposedly meant for clarification and rigour, but is too often deployed for obfuscation. Used responsibly, maths lends useful structure to economists’ thinking, and weeds out sloppiness. But there needs to be a purge of maths-for-maths’-sake.
Related to mathiness is model-mania. Economists are good at reducing a complicated world to a few assumptions, then adding bells and whistles to make their models more realistic. But problems arise when they mistake the map for the territory. In 2008, on the eve of the financial crisis, Olivier Blanchard, then chief economist of the IMF, published a paper celebrating the convergence of thought within macroeconomics.
Unfortunately, some key assumptions behind that consensus turned out to be wrong. It is now clear that different models of asset bubbles and banking crises would have better prepared policymakers for the Armageddon that ensued.
So economists should treat consensus with suspicion, and remain open to the idea that there might be more than one explanation of what they can see. Financial stability could represent policy success, for example, or it could mean that regulators are becoming complacent and hidden pressures are building. In future, big data and new “machine-learning” techniques could help test the relative power of competing theories. With a better sense of what is influencing behaviour in the economy, economists might become less blinkered by their own theory, and better able to foresee the next crisis.
Meanwhile, they would be wise to repeat (daily) the words: “My model is a model, not the model.”
New technology points to another desirable reform: the need for better numbers to work with.
The main gauge used to measure the size and progress of the economy, GDP, was designed for a different era, and looks increasingly flawed for a modern world of services, apps and bots.
Economists have work to do to improve these basic tools of their trade.
Their tendency to look down on other social sciences is ripe for change, too (one study showed that articles in the American Economic Review cite the top 25 political-science journals one-fifth as often as articles in the American Political Science Review cite the top 25 economics journals). Some of their most influential research—in behavioural economics, for example, which fuses psychology and economics—has come about when they are willing to mix with others. Economists should get out more and mingle with historians and sociologists.
All this needs to start with the way economists are trained—a final area for reform. Today, graduate economists undergo “maths camp” before being bombarded with lectures. Too little focus is on getting real-world experience: visiting job centres, meeting entrepreneurs, spending time at a central bank or the national statistical agencies. Such work experience would increase the chances of theory being tied to practice. Exams would test critical reflection (for example, awareness of where the results a student is “proving” might not hold true) as much as algebraic prowess.
Hedgehogs v foxes
Economists face two competing criticisms. Either they are lambasted for their arrogance or accused of being unwilling to draw firm conclusions (in exasperation at the hedging of his economic adviser, President Harry Truman requested a one-handed economist). Dani Rodrik of Harvard University, drawing on an idea from Isaiah Berlin, splits economists into two camps:
hedgehogs and foxes. Hedgehogs take a single idea and apply it to every problem they come across.
Foxes have no grand vision but lots of seemingly contradictory views, as they tailor their conclusions to the situation. More foxlike behaviour will not by itself prevent the next crisis; politicians anyway will still be making the decisions. But it could help policymakers be better prepared.