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

April 13, 2018
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
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.

Research on the likely effects on UK obesity rates of the sugar tax on soft drinks by Rachel Griffith and two of her colleagues at the Institute for Fiscal Studies.

A much-praised paper by Dave Donaldson, an economist at MIT, identifying from a painstakingly created dataset the way that 19thcentury railroads in colonial India substantially increased incomes in newly connected districts, and thus providing surprisingly rare evidence of the benefits of investing in transport infrastructure.

These are typical. Most of modern economics is like this: empirical testing, often using new sources of data, addressing questions of immediate importance and relevance to policymakers, citizens and businesses.

Economists are not in thrall to neoclassical economics and they certainly do not neglect the role of technology. Economics does not require that people be rational, calculating automatons. It very often has people interacting with each other rather than acting as atomistic individuals, despite Reed’s charge. As a matter of course, it assumes there is a fog of uncertainty, and that different people know different things: that there are asymmetries of information.

Economists know that few markets are perfectly competitive and many—including me—specialise in studying markets where some firms have a lot of market power, customers may make choices that cost them more than necessary, and disequilibrium is the norm. There is nothing in economics that means we cannot take into account the ambiguous effects of changes such as an increase in pay or a higher tax rate. On the contrary, a lot of the empirical work we do involves trying to estimate the relative importance of things like this.

Among all the academic economists I know and read, many think the use and allocation of resources is best done by markets but understand that markets are shaped by government policy and that there is no such thing as the abstract “free” market. I literally can’t think of a single one for whom the “tenets of neoclassicism shape their day-to-day work,” as Reed puts it in his article. As for the charge that economics is guilty of a “neglect of technology,” this mystifies me as an economist—among many—currently researching technological change.

Yes, the subject is mathematical. It is not possible to do applied statistical estimation without writing things down as equations. Our models are written with mathematical notation as a shorthand and to enforce logical consistency, just as historians use models—"the causes of the First World War”—but write them out with lots of words.

It is both bizarre and frustrating to read over and over again the same absurd claims about economics. The caricature presumes that practitioners pass their careers in the discipline without ever being troubled by another thought after their first-year undergraduate course. Critiques of this kind are like looking at an introductory physics textbook and condemning physics for ignoring friction.

Reed’s recent version in Prospect features almost every one of the “Eighteen Signs you’re reading bad criticism of economics” that were so witheringly dealt with in this blog post by the Canadian economist Chris Auld. In his call to tear up the economics textbooks, Reed also fails to address any of the substantive points raised a recent Prospect article (“Dismal Ignorance of the Dismal Science”) by a distinguished group of applied economists at the Institute for Fiscal Studies.

It would not have been quite so lamentable if he had taken note of some of the points raised on a blog by Jason Collins, the behavioural economist, titled “Six signs you’re reading good criticism of economics.” Collins states that there are important differences between the economics done by researchers and the economics used in the political world to advocate preferred policies, and that good economic appraisals show a clear understanding that economics is not the same as what is “good for business.” Reed falls short on both counts.

Of course, there are things to criticise about the discipline. Top of my list of criticisms is the lack of social diversity in the profession, especially in academic research. It’s too white, male and posh—and there’s an arrogant culture that goes with that make-up. A social science that does not reflect society in its own composition will not ask the questions it should, or even collect the relevant data.

Almost everybody agrees that macroeconomics—which looks at growth, inflation, interest rates and the economy as a whole—is in a troubled state. But this area is a minority field: contrary to popular belief the great majority of economists don’t study it. This is why the Economic and Social Science Research Council has funded the Rebuilding Macroeconomics Network, to encourage some fresh approaches.

But macroeconomics is inherently hard because there is very little data. There is only a handful of key variables, all linked to each other and changing only slowly, the outcome of multiple possible causes in a complex system, and with little opportunity for doing experiments. It will never be able to predict a crisis with a high degree of confidence.

Economics also needs to be less embarrassed when talking about value judgments. We know that economic decisions are not value-free. Most economists, though, and especially those working on areas relevant to public policy, take care to separate technical or empirical judgments from the more value-laden aspects. The profession took this turn under the influence of Lionel Robbins’s 1932 essay “The Nature and Significance of Economic Science.”  As I’ve argued here though, this attempt at rigid separation fails, and we should acknowledge more readily that decisions about policy choices cannot just be technocratic.

Finally, some recent work has emphasised weaknesses in the empirical techniques used in economics. The usual method used by economists to identify cause and effect is not as good as we might hope—there is need for care and caution in empirical statistical work of any kind. The culture of economics sometimes means that too many economists are a little too cavalier about the inferences they draw. Another way you might put this is to agree that more professional humility is in order.

The professional bodies are addressing these challenges, including the lack of diversity in the discipline. The major journals now require researchers to provide data so their results can be replicated. The CORE Economics curriculum, a new global economic syllabus, is being adopted by a growing number of universities in the UK and worldwide, so the economics taught to first-year undergraduates encompasses history, theoretical disputes, power relations and strategic interaction. It would be nice if change happened faster, but it is time to put to rest an account of economics so far from the truth that it does not even deserve the label of caricature.

Read Howard Reed's case for a new economics.