Where's Economics When We Need It?
Economics aims to figure out what makes people better off and how we can have more of it. Given the number of excellent minds dedicated to this end, it's surprising how little of what they produce is actually of use to policy makers.
Governments, corporations and other bodies fund research in the applied sciences, from information technology to cell biology, engineering to agriculture, because they can use it to make money or solve problems. Macroeconomics, concerned as it is with the well-being of people, should be one of the most practically important areas of all.
So are the top journals in macroeconomics publishing useful work? Judging from a recent conference that included regulators from the U.S. Federal Reserve, the Bank of England, the International Monetary Fund and the Organization for Economic Cooperation and Development, the answer is not encouraging: Six years after a financial crisis that exposed fundamental flaws in the dominant economic theories and models, the profession has made little to no progress in correcting itself.
The policy makers said that top economics journals still aren't publishing research or providing tools that they can apply in their work. The dominant culture favors mathematically complex, intellectually stimulating theories over simpler, more useful ones. "We're in for a long siege," as one of them put it, "during which useful economics that really works will remain out of the top theoretical journals."
Try to imagine this happening in any other field of applied research. In chemistry, say, or plant-breeding science. What if the most useful ideas about new vaccines were kept out of immunology journals?
Why is macroeconomics different? One problem, researchers say, is that the senior economists who control the journals tend to shut out thinking that strays too far from an entrenched orthodoxy, which assumes that people act rationally and the economy always returns to a stable equilibrium. Original work is dismissed as being "ad hoc" or "lacking economic content." A cult of conformity trumps honest efforts at understanding the use of all methods available.
Policy makers said they'd like to see a "regime shift" in macroeconomics. They want a greater focus on history and the lessons to be learned from the crises of the past. They want more honesty and humility about what mathematical models can deliver, with more emphasis on uncertainty and on forecasts that realistically include a wide range of possible outcomes. They want a better understanding of risk and its diverse sources.
What they don't need are definitive claims about what policy makers should do. They'd also prefer less fascination with reconciling flawed theories about the aggregate economy with similarly flawed theories about how companies and individuals make decisions -- the sort of "microfoundations" work that has dominated economic methodology since the 1970s.
To that end, macroeconomists should learn to speak the languages of other fields, including sociology and psychology, as well as neuroscience and engineering. They should acknowledge that people aren't homogeneous profit-seeking agents. They should figure out how to include a rich, complex and realistic financial sector in their models.
It's patently absurd, one regulator noted, to think of finance as just some "frictions" that might, on the margin, modify the way the economy works. Dense financial ties link different parts of any modern economy, and they can turn small shocks into economy-killing disasters.
Some economists at the meeting defended the orthodox models, arguing that they are helpful for telling stories about how the economy works. Perhaps, but such stories are useful only if they tell us something true -- not if they perpetuate comfortable myths that blind us to real risks.
Policy makers want more plausible stories. Can the culture of economics deliver?
(Mark Buchanan, a physicist and the author of "Forecast: What Physics, Meteorology and the Natural Sciences Can Teach Us About Economics," is a Bloomberg View columnist.)
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