DRI-221 for week of 12-8-13: What’s (Still) Wrong with Economics?

An Access Advertising EconBrief:

What’s (Still) Wrong with Economics?

Taking stock is an end-of-year tradition. This space devotes the remainder of the year to explaining the value of economics, so it’s fitting and proper to don a hair shirt and break out the penance whips as 2013 fades into the distance. What’s wrong with economics? Why doesn’t its productivity justify its title of queen of the social sciences – and what could be done about that?

This omnibus indictment demands an orderly presentation, organized by subject area.

Teaching: Although the motto of the Econometric Society is “science is measurement,” a better operational definition is “science is knowing what the hell you’re talking about.” On that score, economics has a lot to answer for. A science is only as good as its practitioners, who regurgitate what they are taught. Teaching is the first place to lay blame for the shortcomings of economics as a science.

In the past, economics has seldom been taught at the secondary level. That is changing, but only slowly. The subject is so difficult to master and absorption is such an osmotic process that an early start would vastly improve results. It would also force an improvement in the standard mode of teaching.

At the college level, economics is taught by teaching the same formal theory that Ph. D. students are required to master. Granted, college freshmen begin at the most basic level using far simpler tools, but they learn the same techniques. As the successful business economist Leif Olsen (among others) has pointed out, the tacit premise of college economics instruction is that all students will go on to study for their doctorate in the subject.

That is absurd. It forces textbooks to concentrate on force-feeding students bits (or chunks) of technique, supposedly to insure that all students are exposed to the tools and reasoning used by working economists. The use of the word “exposed” in this context should call to mind a disreputable man clothed only in a raincoat, accosting impressionable females in a public park. That captures both the thoroughness and duration of the exposure to each technical refinement, as well as the depth of understanding and relative appeal to the emotions and intellect on the part of the students.

What is needed here is textbooks and teachers that cover much less ground but do it much more thoroughly. Only a tiny fraction of students seek, let alone obtain, the Ph. D. The rest need to grasp the basic logic behind supply and demand, opportunity cost and the role of markets in coordinating the dispersed knowledge of humanity. This requires intensive study of basics – something that would also benefit today’s eventual doctoral candidates, many of whom never learn those basics. The only textbook serving this need that comes quickly to mind is The Economic Way of Thinking, by the late Paul Heyne.

In addition to the benefits accruing to undergraduate education, other advantages would follow from this superior approach. As it now stands, graduate students in economics are hamstrung by the subject’s austere formalism. The mathematical approach is now so rigorous at the highest levels of economics that the subject bears a stronger resemblance to engineering or physics than to the political economy practiced by classical economists in the 18th and 19th centuries. If this so-called rigor added value in form of precision to the practice of economics, it would be worth its cost in pain and hardship.

Alas, it doesn’t. Even worse, graduate students have to spend so much time grappling with mathematics that they lack the time to absorb the basic elements underlying the mathematics. Often, the mathematical models must eliminate the basic elements in order make the mathematics tractable. We are then left with the anomaly of an economic theory that must truncate or amputate its economic content in order to satisfy certain abstract scientific criteria. This obsession with formalism has substituted bad science for good economics – the worst kind of tradeoff.

The reader might wonder who benefits from the status quo, since beneficiaries have not been evident in the telling thus far. The current system creates a narrow road to academic success for career economists. They must fight their way through the undergraduate curriculum, then labor as part-time teachers and research assistants while taking their own graduate courses. Writing the Ph. D. dissertation can take years, after which they have a short time (usually six years) in which to write publishable research and get it placed in the small number of peer-reviewed economics journals. If they succeed in all this, they may end up with tenure at an American university. This will entitle them to job security and opportunity for advancement and a sizable income. If they fail – well, there’s always the private sector, where a small number of economists attain comparable career success. It is the survivors of this process, the tenured faculty at major American colleges and universities, who benefit from the system as it exists.

Perhaps this privileged few are an extraordinarily productive lot? Well, there are a tiny handful of the professoriate who produce research output that might reasonably be classed as valuable. Most articles published in professional journals, though, are virtually worthless. Nobody would pay any significant money to sponsor them directly. That’s not all. In addition to the arid mathematics employed by the theoretical research, there is also the statistical technique used to generate empirical articles. For several decades, the primary desideratum in statistical economics has been to obtain “statistically significant” results between the variable(s) in the economic model and the variable we are trying to understand. If questioned about this, the average person would probably define this criterion as “a large enough effect or impact to be worth measuring, or large enough to make us think what we are measuring has an important influence on what we are studying.”

Wrong! “Statistical significance” is a term of art that means something else – something that is more qualitative than quantitative. Essentially, it means that there is a likelihood that the relationship between the model variable(s) and the variable of interest is not due to random chance but is, rather, systematic. Another way of putting it would be to say that statistical significance answers a binary, “yes-no” question instead of the question we are usually most interested in. The big question, the one we most want the answer to, is usually a “how much” question. How much influence does one variable have on another; how great is the importance of one variable on another? The question answered by statistical significance is interesting and useful, but it is not the one we care about the most. Yet it is almost the only one the social sciences have cared about for decades. And, believe it or not, it is apparent that many economists do not even realize the mistake in emphasis they have been making.

Yet it is not the small number of beneficiaries or even their ghastly mistakes that indicts the current system. Rather, it is economic theory itself, which insists that people benefit from consumption rather than production. It is consumers of economics – students and the general public – who should be reaping rewards. The benefits earned by tenured professors are not bad if they are earned by providing comparable benefits to consumers rather than merely reaping monopoly profits from an exclusionary process. But students are lowest on the totem pole on any major university campus. Tenured faculty members teach as little as possible, usually only two courses per semester. Teaching is little rewarded and often poorly done by tenured and non-tenured faculty alike. Academic lore is filled with stories of award-winning teachers who neglected research for teaching and were dumped by their university in spite of their teaching accomplishments.

The late Nobel laureate James Buchanan characterized the position of academic economists today to “a kind of dole;” that is, they are living off the taxpayer rather than earning their keep. Administrators are fellow beneficiaries of the system, although they are pilot fish riding the backs of all academicians, not merely economists.

The Public: Consumers of economics include not merely those who study the subject in school but also the general public. Economists advise businesses on various subjects, including the past, present and future level of economic activity overall and within specific sectors, industries and businesses. They provide expert witness services in forensics by estimating business valuation, damage and loss in litigation, by representing the various parties in regulatory proceedings and particularly in antitrust litigation. Economists are the second-most numerous profession in government employment, behind lawyers.

For some seventy years, economists have played an important role in the making of economic policy. One might expect that economists would play the most important role; who is qualified to decide economic policy if not economists? In fact, modern governments place politicians and bureaucrats ahead of everybody when it comes to policymaking regardless of expertise. This has created a situation in which we were better off with no economic policy at all than with an economic policy run by non-economists. Still, the recent efforts of professional economists do not paint the profession in a favorable light, either.

The problem with public perception of economics and economists is that they have come to regard economics as synonymous with “macroeconomics;” that is, with forecasting and policymaking aimed at economic statistical aggregates like employment, gross domestic product and interest rates in the plural. This is the unfortunate byproduct of the Keynesian Revolution that overtook economics in the 1930s and reigned supreme until the late 1970s. The overarching Keynesian premise was that only such an aggregative focus could cure the recurrent recessions and depressions that Keynesians ascribed to the inherent instability and even stagnation of a private economy left to its own devices.

It is ironic that every premise on which Keynes based his conclusions was subsequently rejected by the four decades of extensive and intensive research devoted to the subject. It is even more ironic that the conclusion reached by the profession was that attention needed to be focused on developing “microfoundations of macroeconomics,” since it was the very notion of microeconomics that Keynes rejected in the first place. And the crowning irony was that, while Keynes ideas filtered down into the textbook teaching of economics and even into media presentation of economic news and concepts to the general public, the rejection of Keynesian economics never reached the news media or the general public. Textbooks were revised (eventually), but without the fanfare that accompanied the “Keynesian Revolution.”

So it was that when the financial crisis of 2008 and ensuing Great Recession of 2009 reacquainted America with economic depression, Keynesian economists could reemerge from the subterranean depths of intellectual isolation like zombies from a George Romero movie without triggering screams of horror from the public. Only those with very long memories and a healthy quotient of temerity stood up to ask why discredited economic policies had suddenly acquired cachet.

When the Nobel Foundation began awarding quasi-Nobel prizes for economics in the late 1960s, a good deal of grumbling was heard in the ranks of the hard sciences. Economics wasn’t a real science, they maintained stubbornly. A real science is cumulative; it creates a body of knowledge that grows larger over time owing to its revealed truth and demonstrated value in application. Economics just recycles the same ideas, they scoffed, which go in and out of fashion like women’s hemlines rather than being proved or disproved.

From today’s vantage point, we can see more than just a grain of truth in their disparagement – more like a boulder, in fact. What macroeconomist Alan Blinder referred to in a journal article as “the death and life of Keynesian economics” is a perfect case in point. Keynesian economics did not arise because it was a superior theory – research proved its theoretical inferiority. Not only that, it took decades to settle the point, which doesn’t exactly constitute a testimonial to the value of the subject or the lucidity of its doctrines. Keynesian economics did not triumph in the arena of practical application; that is, countries did not eliminate recessions and depressions using Keynesian policies, thereby proving their worth. Just the opposite; after decades of pinning his hopes on Keynesian economics, the British Labor Party leader James Cavenaugh renounced it in a celebrated denunciation in the mid-1970s.

No, Keynesian economics made a comeback because it was politically useful to the Obama administration. It enabled them to spend vast amounts of money and direct the spending to political supporters on the pretext that they were “stimulating the economy.” If economics had to justify its existence by pointing to the results of “economic policy,” economists would be thrown out into the street and forbidden to practice their craft.

In the early 1960s, Time Magazine put John Maynard Keynes on its cover and proclaimed the death of the business cycle. This obituary proved to be premature. Like Icarus, economists tried to fly too high. Their wings melted by the solar heat, the profession is now in freefall, putting up a bold front and proclaiming “so far, so good” as they plummet to Earth. The only remedy for this hubris is to straightforwardly admit that economics is not a hard, quantitatively predictive science in the mold of the natural sciences. Its fundamental insights are not quantitative at all but they are absolutely vital to our well-being. When combined with such other social sciences as law and political science, economics can explain patterns of human behavior involving choice. It can unlock the key to human progress by making the knowledge sequestered in billions of individual brains accessible in useful form for the mutual benefit of all. Thanks to economics, billions of people can live who would die without its insights. These benefits are anything but trivial.

Economics can even ameliorate the hardships imposed by the business cycle, as long as we do not expect too much and can resign ourselves to occasional recessions of limited length and severity. In this regard, success can be likened to hitting home runs in baseball. Trying to hit home runs by swinging too hard usually doesn’t work; making solid contact is the key to hitting homers. Many great home-run hitters, including Hank Aaron and Ernie Banks, were not large, powerful men who swung for the fences. They were wiry, muscular hitters who hit solid line drives. The economic analogue of this philosophy is to allow free markets to work and relative prices to govern the allocation of resources rather than trying to use government spending, taxes and money creation as a bludgeon to hammer the efforts of markets into a politically acceptable shape.

Remedies: In thinking about ways to right its wrongs, economics should take its own advice and fall back on free markets. Rather than trying to administratively reshape the academic status quo and tenure-based faculty system, for example, economists should simply support privatization of education. This is simply taking current professional support of tuition vouchers and charter schools to the next logical level. Tenure is a protected academic monopoly, unlikely to survive in a free private market. If it does, this will mean that it has unsuspected virtues; so much the better, then.

Recent decades have seen the rise of applied popular economics books written to bring economics to the masses. The best-known and most popular of these, Freakonomics, is among the least useful – but it is better than nothing. Better works have been submitted by economists like Steven Landsburg (The Armchair Economist) and David Friedman. Their worthy efforts have helped to turn the tide by correcting misapprehensions and redirecting focus away from macroeconomics. This is another good example of reform from within the profession that does not require economists to sacrifice their own well-being.

Perhaps the one missing link in economics today is leadership. Revolutions in scientific theory and practice are typically effected by individuals at the head of scientific movements. In economics, these have included men like Adam Smith, David Ricardo, Karl Marx, the Austrian economists of the 19th century, Alfred Marshall, Keynes and Milton Friedman. Today there is a leadership vacuum in the profession; nobody with the intellectual stature of Friedman remains to take the lead in reforming economics.

Given the woes of economics and economic theory, a new candidate seems unlikely to come riding over the horizon. It may be that economists will have to prop up an intellectual giant of the past to ride like El Cid against the ancient foes of ignorance, apathy, prejudice and vested interest. There is one outstanding candidate, the man who saved the 20th century in life and whose wide-ranging thought and multi-disciplinary theory is alone capable of midwiving a new sustainable economics of the future. That would be F.A. Hayek. Recent stirrings within the profession suggest a growing acknowledgment that Hayek’s economics have been too long neglected and explain the crisis, recession and current stagnation far better than anything offered by Keynes or his followers. There is no better body of work to serve as a model for what is wrong with economics and how to correct it than his.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s