The abstract of a recent paper by Colander, Föllmer, Haas, Goldberg, Juselius, Kirman, and Sloth:
The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.
The authors call it a “systemic failure of the economics profession.” Krugman calls it “equilibrium decadence,” but rightly reserves his scolding for the macro tribe.
The claim is that academic macroeconomists have become mired in a particularly fruitless equilibrium, in which each is engaged in the search for ever-greater levels of formal elegance, at the expense of empirical relevance. There’s definitely something to this.
Today’s macroeconomists write for other macroeconomists. If you aren’t using the right tools, you aren’t part of the club. And so yesterday’s approach becomes tomorrow’s approach. Echoing Yogi Berra‘s famous dictate, each time macroeconomists came to a fork in the road, we took it. It doesn’t take a radical to suggest that perhaps trying the road less traveled might have led somewhere more interesting.
Despite this observation, I don’t share the gloom of the naysayers, but my optimism comes from looking beyond macro. As a whole, the economics profession has become more empirically grounded. New large datasets offer the prospect of truly understanding individual behavior in a way that paying lip service to “micro-founded models” doesn’t. Many are engaged in the tricky business of writing more psychologically grounded models that are closely tied to real human behavior. Computational advances allow us now to take differences in people, and how they respond, far more seriously. The absence of available data doesn’t necessarily require more complex theory; we are also learning how better to measure the objects we model.
Now all of this good work won’t mean anything unless it starts to impact the macro tribe; and countless corridor discussions overhead at this year’s annual meetings of the American Economic Association suggest that, finally, the rest of the profession is paying attention, and they are demanding more of their macro brethren.
Formally elegant but empirically irrelevant macroeconomists had a much harder time getting hired this year. Curriculum committees are also paying attention, looking to see classes that speak to real economic issues. Economists beyond the macro tribe are paying greater attention, and they aren’t willing to support the intellectually insolvent.
It may be too early to say that the new macro is already taking shape, but I’m willing to bet there’s going to be a renewed emphasis on imperfect and sticky information; rigorous analysis of micro datasets; plausible approaches to empirical identification; and — I hope — a belief that data, rather than op-ed debates can resolve the big debates. Institutions matter; political economy matters too. Behavior can be imperfect, markets can fail, and the unexpected does, in fact, occasionally happen. Today’s problems are both too real and too big to make ignoring the real world a sustainable equilibrium.
Update: Click through for related commentary from Willem Buiter, Mark Thoma, and Brad DeLong.
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1- We are always in equilibrium. If you don’t believe it, then we must forget 50-ish years of research.
2- Who does complete information macro? All models on search (labor and money), Industrial Organization (to cite two) make use of more complex tools that try to capture the complexity of human behavior.
3- People respond to incentives. If you want to blame the “macro people” about the recession, then you must also blame top journal editors. They should accept more “general interest biased” research. Nobody will care about issues that don’t get them tenure. Cite me 1 job market paper for Phd at Chicago dealing with economic measurement in the past 20 years.
4- It’s easy to blame the young researchers when you have a tenure and is from a top department.
5- Cience is about the truth, but would you be willing to change your approach?
From a game-theory-not-related-to-the-real-world guy.
F the economists, listen to the artists.
I just loved the phrase. “intellectually insolvent”.
Kevin, not to wander too far off-topic, but the entire point of this post is that economics is re-connecting to empirical reality and discarding naive notions like rational expectations. Climatology is completely different: while researchers may differ on the interpretation of data, these data have been central from the beginning.
I am constantly amazed at the lack of outrage in the general public. Reckless criminal incompetence in Congress, Wall Street and university economics departments have brought the nation to the edge of disaster. Count me as a nihilist on this one – fire or imprison them all and start over.
yes I agree partically… but when I studies econometics my professor always reminded us that these models only have limited value for prediction. I was dazzled that in the “real world” people were using them and taking the output of this model as reliable.
‘I found if you copy that blurb, and replace “environmental science” with “economics” it is just as interesting.’
Um, how about no.
The statement…”We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets(read environment). The environmental science profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public…” would be false.
No they have not. They openly talk about the different problems and errors which may affect thier models. Their models are also based on empirical evidence backed up by scientific theory. The IPCC have been convinced since 1990 that climate change has been happening and has been man made.
However, debate has become increasingly difficult and shrill (as I assume this is what you are basing your argument on) because in the large part those opposed to their models base their arguments on ideology not criticism of these models.
Hence climate scientists have has to ramp up the rhetoric to conveince peoples. The models have flaws yes. However, to concentrate on these while arguing for a radical change to our economic system risks undermining their work and opens their words to deliberate misinterpretation.
There we go. How to people always manage to bring any debates back to Climate Change or Evolution, or compare someone to Hitler? sheesh!
The teleology of academia in most disciplines has been moving towards increasing erudition, at the expense of relevance and even reality. If your mom can understand and benefit from what you’ve written, then it does your career no good. If your prose is dense and impenetrable, and your topic is arcane, then it must be brilliant. The emperor has no clothes.
Perhaps econ professors should function more like medical school professors, who actually have to treat real, live human beings as part of their duties. Perhaps the university shouldn’t actually pay their econ profs, but put their compensation into funds and stocks that the prof chooses, with a vesting period of one year. How’s that for incentivization?