CAMBRIDGE - As the world economy tumbles off the edge of a precipice, critics of the economics profession are raising questions about its complicity in the current crisis. Rightly so: economists have plenty to answer for.
It was economists who legitimized and popularized the view that unfettered finance was a boon to society. They spoke with near unanimity when it came to the "dangers of government over-regulation." Their technical expertise - or what seemed like it at the time gave them a privileged position as opinion makers, as well as access to the corridors of power.
Very few among them (notable exceptions including Nouriel Roubini and Robert Shiller) raised alarm bells about the crisis to come. Perhaps worse still, the profession has failed to provide helpful guidance in steering the world economy out of its current mess. On Keynesian fiscal stimulus, economists' views range from "absolutely essential" to "ineffective and harmful."
Dani Rodrik, Professor of Political Economy at Harvard University’s John F. Kennedy School of Government, is the first recipient of the Social Science Research Council’s Albert O. Hirschman Prize. His latest book is One Economics, Many Recipes: Globalization, Institutions, and Economic Growth. So is economics in need of a major shake-up? Should we burn our existing textbooks and rewrite them from scratch?
Actually, no. Without recourse to the economist's toolkit, we cannot even begin to make sense of the current crisis.
Why, for example, did China's decision to accumulate foreign reserves result in a mortgage lender in Ohio taking excessive risks? If your answer does not use elements from behavioral economics, agency theory, information economics, and international economics, among others, it is likely to remain seriously incomplete.
The fault lies not with economics, but with economists. The problem is that economists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful.
They forgot that there were many other models that led in radically different directions. Hubris creates blind spots. If anything needs fixing, it is the sociology of the profession. The textbooks at least those used in advanced courses - are fine.
Non-economists tend to think of economics as a discipline that idolizes markets and a narrow concept of (allocative) efficiency. If the only economics course you take is the typical introductory survey, or if you are a journalist asking an economist for a quick opinion on a policy issue, that is indeed what you will encounter. But take a few more economics courses, or spend some time in advanced seminar rooms, and you will get a different picture.
Labor economists focus not only on how trade unions can distort markets, but also how, under certain conditions, they can enhance productivity. Trade economists study the implications of globalization on inequality within and across countries. Finance theorists have written reams on the consequences of the failure of the "efficient markets" hypothesis. Open-economy macroeconomists examine the instabilities of international finance. Advanced training in economics requires learning about market failures in detail, and about the myriad ways in which governments can help markets work better.
Macroeconomics may be the only applied field within economics in which more training puts greater distance between the specialist and the real world, owing to its reliance on highly unrealistic models that sacrifice relevance to technical rigor. Sadly, in view of today's needs, macroeconomists have made little progress on policy since John Maynard Keynes explained how economies could get stuck in unemployment due to deficient aggregate demand. Some, like Brad DeLong and Paul Krugman, would say that the field has actually regressed.
Economics is really a toolkit with multiple models - each a different, stylized representation of some aspect of reality. One's skill as an economist depends on the ability to pick and choose the right model for the situation.
Economics' richness has not been reflected in public debate because economists have taken far too much license. Instead of presenting menus of options and listing the relevant trade-offs - which is what economics is about - economists have too often conveyed their own social and political preferences. Instead of being analysts, they have been ideologues, favoring one set of social arrangements over others.
Furthermore, economists have been reluctant to share their intellectual doubts with the public, lest they "empower the barbarians." No economist can be entirely sure that his preferred model is correct. But when he and others advocate it to the exclusion of alternatives, they end up communicating a vastly exaggerated degree of confidence about what course of action is required.
Paradoxically, then, the current disarray within the profession is perhaps a better reflection of the profession's true value added than its previous misleading consensus. Economics can at best clarify the choices for policy makers; it cannot make those choices for them.
When economists disagree, the world gets exposed to legitimate differences of views on how the economy operates. It is when they agree too much that the public should beware.
Dani Rodrik, Professor of Political Economy at Harvard University's John F. Kennedy School of Government, is the first recipient of the Social Science Research Council's Albert O. Hirschman Prize. His latest book is One Economics, Many Recipes: Globalization, Institutions, and Economic Growth.
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The Unbearable Lightness of Being an economist
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Its about Oligarchy
Kent Welton, author
Cap-Com, The Economics Of Balance
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Advanced Textbooks OK, but the Principles course is Sick
The textbooks -- at least those used in advanced courses -- are fine.
Non-economists tend to think of economics as a discipline that idolizes markets and a narrow concept of (allocative) efficiency. ... But ... spend some time in advanced seminar rooms, and you will get a different picture. ..
Ah, here's a disconnect where economists in the profession are culpable. Yes, the advanced texts and course are OK. But we also teach the principles courses - 101 & 102, micro & macro. Look at the principles texts and the typical principles course as taught. It bears no resemblance to the advanced seminars. Instead, the typical principles text & course is where all these non-economists got the idea that markets should be idealized and that efficiency and private property are the end-all & be-all. 97% of the people who take Principles courses never take anything past that. Of those that do, they'll just take money & banking and learn how financial innovation is cool and The Fed can fix anything.
We need to re-think what we do in Principles.
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The pseudoscience is finally being seen for what it is
The reputation and value of any trade rests, in the end, on its practitioners. By Rodrik's own admission, the shamen doing economics have shot themselves in the foot at EVERY opportunity. Why should anyone give the economics trade any more respect than we give alchemists or phrenologists?
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Maybe that's the bit you need to work on, then. You say we shouldn't blame "economics" but this would seem to be the field's fundamental flaw. Economists frequently give the impression that they value their models more than actual reality. If you don't know which model is correct, you need to go out and look at what actually happens in the world, and fix your model. Until you do that your models are just piles of political crap.
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