Economics often cares more about logical rigour than reality, this must changeby Diane Coyle / July 15, 2013 / Leave a comment
Economics needs to change. Many academic and professional economists have been re-evaluating the subject since 2008, reflecting a widespread view within the economics profession that the financial crisis and its aftermath underlined its serious shortcomings. Employers say they can hire economics graduates who are technically able and can manipulate models, but that these graduates are wholly unable to apply what they have learnt in any real world context, have no practical data skills and are unaware of context or recent economic history. Changes must therefore be made to the way economics is taught, applied and developed.
Economics often cares more about logical rigour than reality, despite the increasingly desperate attempts by reality to get economists to pay attention. We put models, attempts to make sense of the world by including only relevant detail, at the heart of our methodology. A good model is a powerful tool for analysis and prediction. However, economists who accommodate reality into their models, for example by using rules of thumb with no micro-foundations, will often have their models dismissed by their peers. Models which are built on supposedly rigorous micro-foundations are flawed too since such models are lacking in sufficient real-world evidence. Nonetheless, these models are the ones used for practical applications.
So economists need to rely less on models alone. We need to supplement the analysis far more with narrative approaches, both from economic history and from other social sciences such as anthropology and sociology. A combination of models, field experiments, narrative accounts of the cultural context and history relevant to the experiment could add up to a genuinely powerful approach to economics. Economists must realize that evidence can consist of much more than data or statistics. Evidence does not even have to be quantifiable. Some things of value are not only non-monetary but wholly unquantifiable, such as freedom or citizenship. We economists should concentrate on our comparative advantage in analysis and empirical measurement, but we should also be prepared to supplement it with narrative and an acknowledgement of the unquantifiable.
The problem is that too many economists are just not very good at the kind of empirical work we should be doing. One frequent mistake made by economists is to test hypotheses against a specific counterfactual or alternative hypothesis. Even when they do explicitly consider them, many economists will fall into the trap of comparing a policy with a completely unrealistic alternative. There…