In defence of the economists

Our field is not perfect. But the idea that it is so tainted we must "rip it up and start again" isn't just pessimistic—it is based on inaccuracies

by Diane Coyle / April 13, 2018 / Leave a comment

John Hills, Director of the Centre for Analysis of Social Exclusion, London School of Economics and Political Science, gives a lecture on household income at DG EMPL. Photo: Flickr/DG EMPL

Do the “tenets of neoclassicism” shape our day-to-day work as economists, as Howard Reed puts it in his ill-informed diatribe for Prospect? No—they do not.

These are some of the research papers in economics that I’ve read recently. One by Cameron Hepburn, an economist at Oxford, on policies to encourage environmentally-beneficial innovation. A study by other Oxford economists and engineers on how to design contracts to enable the growth of a peer-to-peer market for matching small-scale energy generation with demand.

A working paper by Boston University, Harvard, and MIT economists, documenting a shift in the character of AI patents in the US from the automation of existing activities to general purpose deep learning. And two studies—one by economists at the OECD and one by university researchers—considering the effects of technology on jobs, both the likely effects in future across OECD countries and the pattern in the US in the 2000s.

Some work by my former colleague at the University of Manchester, Abhishek Chakravarty, on the way tenancy reform in West Bengal had the unintended consequence of increasing families’ preference for sons and substantially increasing the survival advantage sons already had over daughters.

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Comments

Howard R.
April 14, 2018 at 19:44
Many thanks for this critique of my article, Diane. I'd just like to address a few points you make: - my point isn't that there is no work being done by mainstream economists on any useful or policy-relevant topics (which would plainly be false) or that economists never relax or alter the basic assumptions to make them better fit reality (which would also be false). Rather, I'm asking: if the basic neoclassical assumptions are such a bad description of reality, why start with them in the first place? Why do we teach undergraduates (and indeed masters students) all this tendentious theory if we're going to sling it out later? It's largely a wasted effort. Of course I agree that models need to be a simplification of reality but there's a difference between a simplification and a travesty or a distortion. This is why I think the "tube map" analogy in the recent Prospect piece by the IFS economists didn't stand up to scrutiny (as I explained in my piece). - on technology, I agree that mainstream economics does analyse technological change - I just think that it would do so more effectively if technological progress were at the centre of theoretical economics rather than an add-on. - on mathematics in economic modelling, I have no problem with it. - I accept that huge strides have been made in econometrics and the availability of empirical data over the past half-century or so. A lot of these techniques are just as valid in other social sciences as in economics (and would continue to be useful in whatever replaces current economic theory at some point down the line). - Many thanks for the link to the blog post by Chris Auld - my reading of it was somewhat different to yours: I thought it was for the most part a handy pocket guide to 15 or 16 of the most powerful criticisms of economics (there were a couple of duds in there as well, I admit). - On lack of social diversity in the profession I agree with you and that's another important criticism of economics which in retrospect, I should certainly have mentioned in the article. - On most of the other points I think we basically agree: economists need to acknowledge value judgements more, macroeconomics is in a troubled state (although in some ways one could argue this reflects well on macroeconomics compared to microeconomics, because at least macro has the self-awareness to realise it is in difficulties, whereas micro doesn't. CORE is certainly a step - indeed, several steps - in the right direction. But in my view needs to go further. Best, Howard
Tomasz Wysocki
April 16, 2018 at 20:34
I did a degree in Economics at Adam Smith's alma matter and if I could turn back the time I would have chosen a different degree, most likely engineering, precisely because of the arguments presented by Howard Reed. There are some useful concepts and models developed by the discipline, for example I found game theory quite revealing, but most of the theory is pretty useless as it is built on absurd assumptions and myths which have been proven false. Clearly some simplifications are useful, but it is not the case for economics. Let's take an example from economics 101: the evolution of money. Once you actually look at the facts, the theory presented in economic textbooks, i.e. barter to coinage to bank credit, is totally false as there does not exist a single example in the history of human kind to suggest such progression. Actually, the reverse is true with credit being the primordial money (I highly recommend Debt: First 5,000 by an excellent anthropologist David Graeber). Why insist on presenting this theory? I guess it is politically motivated as it depicts the banks as the pinnacle of economic evolution. Also, there is no excuse for the profession to have ignored the financial crisis of 2008 which brought down the entire world economy to a halt. I believe economists failed to recognize the massive imbalances building up in the credit system due to the widespread use of unrealistic macroeconomic models based on absurd assumptions as opposed to lack of data. It was pretty obvious that mortgaging up millions of jobless Americans in order to game Basel rules for bank capital ratios would lead to a disaster. Many people said said it and many got rich by shorting the market. What's worse, the lessons have not been learnt. The imbalances have not been corrected, the issues have been swept under the carpet by inflating new asset classes out of proportion (tech stock, government bonds mostly) in order to stave off inevitable collapse of all the unsustainable liabilities. You really do not need to be a genius or have a PhD in economics to notice things are out of whack and the system is not sustainable. I find the argument that there is no data available pretty silly. I now work as finance director for a major multinational and have a lot of contact with people who live and breathe finance. The only people who are oblivious are mainstream economists locked in Ivory Towers with their macroeconomic models. I guess it is hard to break away from the group think and there must be plenty of actors in economics who are more than willing to give an intellectual front to massive transfers of wealth while also benefiting tremendously. However, those transfers are not productive and the consequences are likely to destroy the fabric of society so I think it is in the interest of the profession to take people such as Howard Reed or Steven Keen more seriously.
David G.
April 16, 2018 at 22:18
Dear Howard and Diane, I enjoyed both Howard's article and its rejoinder by Diane. As a non-economist (my academic background is in history), a few points stand out. Firstly, many of the criticisms made by Howard seem to be statements of the blindingly obvious, and it is reassuringly clear that intelligent economists are aware that, for instance, cultural and social assumptions, power relations and institutions impinge on the economy, such as in terms of what different individuals value or demand, the choices they make, and how economic actors respond to given conditions or policies. Secondly, this doesn't mean there is no value in economics attempting to describe and then model how particular conjunctures of circumstances and values actually do interact as a 'system', so long as it is recognised that it may not be possible to generalise or replicate the results from one society or set of conditions to others that are different. Thirdly, to any historian the phenomenon known as 'economic growth' stands out as a singular phenomenon requiring explanation. And fourthly, it is also fairly obvious that technological innovation cannot be neatly and abstractly mathematically modelled as a function of inputs and outputs, proceeding as it does on ingenuity and inspiration, as well as being a function of intangible factors like savvy marketing- the most "rational", 'economical' or "efficient" solution may not be adopted (e.g. betamax vs VHS; willingness to pay more for designer labels). The fifth point is that - as a historian - it seems to me that teaching past approaches to economics when introducing undergrads to the subject has a value in itself as a means of understanding how the discipline has evolved and (hopefully) improved, in order to teach methods, and to get students thinking critically about problems and approaches. This is why the history of science and historiography are useful respectively to science students and to history students. And economic history is an intrinsic part of most economics because the discipline has to proceed empirically by observation of past events, rather than through controlled lab experiments. One thing that I would have liked both your articles to grapple with in more detail is whether and if so, how, the growth in computing power, AI and the rise of 'big data' may transform the discipline. Like the weather and the human brain, the economy is a complex system formed of individual component obeying laws of physics. One might think that with suitably refined coding it would be possible to deduce patterns that would have eluded previous researchers. Are we still a long way from that?
Michael Joffe
April 17, 2018 at 01:00
I agree that Howard Reed’s attack on economics contains some errors. This is a pity, because much economic theory does need to be replaced, to bring it in line with the evidence that we have – there is a lot of good evidence now in economics. This reply to Reed makes some good points about the good empirical work that many academic (and other) economists do in important policy-related areas. But in distancing herself from neoclassical theory, or at least from many of its features, Diane Coyle misses a crucial point: the evidence is not being systematically used to generate new theory that aligns with the real world better than old-fashioned schematic textbook economics does. This is important, because it leaves the bad theory in place. There is an important task to be done: to create economic theory that is based on evidence, and therefore has a systematic relationship with the real world, as is done in natural sciences like biology – see https://www.tandfonline.com/doi/pdf/10.1080/23322039.2017.1280983. At the moment, the link from evidence into theory is not working, except in a few isolated cases. There needs to be a concerted effort to rectify this situation – “evidence-based economics”. People tend to come up with all sorts of reasons why it cannot be done, usually based on old philosophy of physics that does not even provide a half-decent account of the way that the natural sciences work. But doing evidence-based economics is not as hard as it sounds - see https://evidence-based-economics.org/ for some examples.
Tomasz Wysocki
April 18, 2018 at 04:55
I just stumbled upon James Galbraith's diagnosis of what he thought was wrong with the economic profession which I found amusing and opportune given my previous comment (it has been stuck in the moderation process for over two days and does not show): "Leading active members of today's economic profession... have formed themselves into a kind of Politburo for correct economic thinking. As a general rule- as one might generally expect from a getlemen's club- this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen... No one looses face, in this club, for having been wrong. No one is dis-invited from presenting papers at later annual meetings. And still less is anyone from the outside invited in". I have no doubt there are many great thinkers in the profession (I am encouraged listening to some economists on INET), but it seems impossible for them to find voice and make any meaningful impact. Meanwhile, the Economics banner is being carried by the same mainstream and Wall Street expert cliques who were proven wrong time and time again. I agree with Howard and really do not see the dicipline being able to reform itself from within while being in schackles of intitutionalized ideological groupthink without a major shock and a reboot.
A H
April 23, 2018 at 14:42
I would be interested to know Diane Coyle's answer to the question: 'What is economics - as an academic discipline or profession?' And, just as important: 'What is "the economy"? Are we trying to understand real evolving institutionalised social-cultural-political forms or are we merely creating a world of 'theory' consisting of 'laws' which explain the operation of 'economies' everywhere from Sweden to India, Japan to Franc, Saudi Arabia to the UK?