Winner of the New Statesman SPERI Prize in Political Economy 2016

Wednesday, 2 May 2018

Why was economics so insular?


Noah Smith has a good piece on what seems like the never ending stream of popular articles in the UK slagging off economics (or economists). Here I outlined three potential reasons for this epidemic: people do not understand unconditional macro forecasts, politicians from the right do not like economists spoiling their pet schemes (e.g. Brexit), and many heterodox economists from the left wage endless war against the mainstream. All these complaints get airtime when the economy is bad.

The UK economy, right now, is perhaps in a worse state than at any time in the last eighty years. As John Lewis shows in this Bank blog, productivity growth has perhaps never been as bad as it is now: we have to go back to before 1800 to find anything comparable.


The natural reaction when the economy is bad is to criticise economists. That was what happened after the Global Financial Crisis, with some justification. But what is happening in the UK right now is mainly a result of first austerity and then Brexit. As I explained in detail in my earlier post, if we had followed the advice of mainstream economics austerity and Brexit would not have happened. [1] I have as yet not read a single critique of economics that has pointed that fact out, which if you think about it is extraordinary.

There is a little more to say about why economics is an easy target. Historically it has been very insular, and in this respect quite unlike other social sciences. I have already discussed the paper by Haldane and Turrell in the OXREP Rebuilding Macroeconomic Theory volume on Agent Based Models, but I did not have space to show an interesting chart from the introduction to that paper.


It tracks citations in papers to those in other disciplines. Until around 2000, there was no doubt which was the most insular discipline: economics. This is no surprise to me and I suspect most social scientists.

The paper does not explore the reasons why economics is so self-referential: their aim is simply to suggest that it needs to look to other disciplines to see what methods they use. Here I want to sketch why I think mainstream economics (and here the qualification mainstream is required) is so insular.

I once gave a lecture course on the methodology of economics, and in one lecture I used a large blackboard to describe how nearly all economics can be derived from the basic axioms of rational choice. For example the modern macroeconomics of consumption is just the choice between buying apples or pears transformed to the choice between consumption at different times. In that sense economic theory is like an immense tree, where every branch deductively builds on this core. Sometimes large branches grow by adding new elements, like asymmetric information, which then becomes part of the tree and can be used by other branches. This deductive tree of economic theory did not grow all by itself: its growth was and is influenced by the real world problems it wanted to address.

In using the idea of explaining decisions by optimising welfare under constraints economists have created a whole series of widely applicable tools. Economists naturally think about opportunity costs, adverse selection, moral hazard, incentives etc. There is something distinctive about thinking like an economist. To say, as Tom Clark does here, that sometimes this is just formalising common knowledge may be true (see also Cahal Moran here), but in many cases it is not. Try persuading someone who has invested in what is now a sub-optimal project about sunk costs.

This body of theory includes the neoclassical economics that heterodox economists and others love to hate, but it also includes game theory that has applications well beyond economics, and more. In my first year of studying economics I was told in some lectures that this whole endeavour was a huge ideologically driven misstep, but I began to see it differently after reading this famous 1963 paper by Arrow. It shows why (asymmetric) uncertainty in the health service means that the standard competitive model just cannot work for medical care. That may be obvious to us in the UK but it appears otherwise to many in the US. To be fair Clark also acknowledges that this economic theory has produced positive successes: he mentions auction theory but there are many more.

As to ideology, if you want an effective critique of neoliberalism you have to use economics (see, for example Colin Crouch’s book on neoliberalism or this by Dani Rodrik). So many critiques of economics use a kind of bastardised version that insists that workers are always paid their marginal products that the political right also employs. But monopoly and monopsony power are also part of the deductive tree. A paper I like to refer to in this context is by Piketty, Saez and Stantcheva (discussed here) which uses a simple bargaining model to show how cutting the top rate of tax can increase pre-tax CEO pay.

There is nothing like this deductive tree in other social sciences, and I think it at least partly explains why economics used to be so insular. As non-economists academics seemed to add little to building on this theory, there seemed little point in collaborating or even citing them. But, from the point of view of other disciplines, it was worse than that. Economics could also be imperialistic. Its methods, both theoretical and empirical, could be applied to other fields (with varying degrees of success): here is David Hendry applying his econometric methods to climate change, for example. So not only did economists not talk much to other social sciences, they trod on toes as well.

But although there may still be important branches to be added [2], the limitations of what you can do with a few axioms about rational choice have led in recent years to economics becoming much more empirical, and much less tied to this deductive theory. (See the article by Noah Smith which began this post. Unfortunately in my view an exception to this trend so far is macroeconomics.). We can see this in the citations data above, and the most obvious manifestation is behavioural economics. But a more immediate example of a data rather than theory based idea is the gravity model in international trade, which lies at the heart of why Brexit is such a bad idea. It is irony indeed that just at the point at which we have all these articles attacking economics, a large number of people who believe the UK is committing a large act of self harm are seeing the virtue of just one small part of what economists do.

Having said all this, I think there is an unfortunate hangover from this insularity. As a discipline economics shows little interest in communicating its core knowledge to others [3]. This can be true both within academia and with the outside world. Within academia publishing in top economics journals still has far higher status than top journals in other disciplines. When it comes to policy and the public, there is a belief among many that when either requires our wisdom, they will seek out the best of us for advice. In part this epidemic of articles about the failings of economics reflects this communication failure. More importantly, both Brexit and Trump should be a wake up call that economists as a collective has to get better at communicating the core insights of economics.

[1] There are of course more underlying problems behind the UK productivity crisis beyond the negative shocks of austerity and Brexit. But economists overwhelmingly argue for more R&D spending and more public investment. In short if you want someone to blame for why the UK economy is currently in such a dire state, blame those who have ignored the advice of economists.

[2] Most of the good criticisms that I see of economics amount to requests to add to the tree. But economics is so rich that most things are possible. In part (but only in part) what is done follows the money: you will find it relatively easy to get money for work on free trade compared to work on rent seeking. To blame economists for that is just bad economics. As economists found out after the financial crisis, they had many tools to understand what had happened, but had just not applied them before the crisis.   

[3] I say as a discipline because I mean economists as a collective, not as individuals. There is no equivalent institutional infrastructure in economics to that built by the hard sciences. Of course many individual economists do their best, but there are also others who ignore the consensus to plug their own personal ideas or to further some political or ideological cause.






17 comments:

  1. As I understand it, biology is similar to economics in using math, modelling, statistics and the idea of equilibrium. It also has “natural selection” as its unifying theme. Yet it seems biologists cite other disciplines more frequently than economists (per the chart).

    Maybe the insularity reflects ideology vs methodology. Specifically, the ideology of “revealed preferences” which assumes that our choices necessarily reflect only self regarding preferences. Just speculating.

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  2. "if we had followed the advice of mainstream economics austerity and Brexit would not have happened." We did follow the advice of mainstream economists. They had cap-doffing reputations and a complete inability to work a spreadsheet.

    "I once gave a lecture course on the methodology of economics, and in one lecture I used a large blackboard to describe how nearly all economics can be derived from the basic axioms of rational choice." Ah... *There's* your problem.

    "Try persuading someone who has invested in what is now a sub-optimal project about sunk costs." Yes, precisely. See your problem above. I still hope you'll start afresh though Professor.

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    1. Almost every mainstream economist argued against austerity and brexit. The "difference of opinion" is akin to that concerning climate change. They very much were not listened to.

      Delete
    2. An economically and logically incoherent comment, displaying a misunderstanding and ignorance of the points raised in the article, matched only by a vagueness typical of so many clueless online trolls these days who provide no details and fail to evidence or substantiate any of their vacuous claims.
      Disagreeing and arguing against the content is fine and welcome with coherent arguments, but don’t embarrass yourself by displaying such troll-like behaviour and ignorance with the sort vacuous, pointless comments above which just wastes everyone’s time.

      Delete
    3. Apologies for the flippancy, but it's not trolling to point out that if your understanding of economics is based on a particular picture of human nature, and that picture of human nature is wrong, then that calls into question the understanding of economics. Economics as a field was largely humiliated in the aftermath of the Brexit vote, because consumers behaved as they said they would behave, not how economistic visions of humanoid lifeforms predicted they would behave. Economists need to come to terms with that far better than they seem to have so far.

      Delete
  3. Right winger: "Footnote #3 could never happen; how Silly!"
    George Mason University: "Hold my beer.

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  4. Simon, I reckon you're familiar with the "Communicating Economics" initiative, but in case you're not: https://www.communicatingeconomics.com. I'm sure they'd be delighted about a guest post or a video interview, etc. on how, in your view "economists as a collective [can] get better at communicating the core insights of economics."

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  5. A couple of thoughts (largely from a place of agreement):

    1) I'm just a nobody but my main message to economists since before the Great Financial Crisis has been that they need to make sorting out their relationship with policy formation their number one priority. (And alongside that, there's a desperate need to sort out how "consensus" is dealt with - the Reinhart/Rogoff contribution to Austerity was a sad example of this problem.) Until there's a healthier relationship with policy, there is unlikely to be a healthier relationship with the public at large (including academics from other disciplines.)

    2) A great example of the insularity is that there are decades of work on system dynamics, systems analysis and (later) complex systems that have had very little interest from economists. (Kien above also notes biology as a good area for crossover.) I think this makes people from every field think of economists as intellectually incurious and thus suspicious of their quality control.

    3) I don't actually believe economics is an outlier amongst disciplines in terms of internal problems with organisational politics, ossified assumptions etc. (Or indeed in their defensiveness about the expertise of other disciplines about these problems.) Physicists, historians, anthropologists - we're all bad about this.

    But - economists talk about policies that literally destroy the lives of everyday people in very visible ways. (e.g. austerity, Brexit) so the flaws will get more attention. Further, if we think of the era since the 80s, economists have pretended to outsize influence over policy and politicians and to taking credit for the good times. #notAllEconomists, you might say - and you'd be right, but enough to put the reputation of the discipline into the mud when things go wrong.

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    Replies
    1. "Further, if we think of the era since the 80s, economists have pretended to outsize influence over policy and politicians and to taking credit for the good times. #notAllEconomists, you might say - and you'd be right, but enough to put the reputation of the discipline into the mud when things go wrong."

      Very true. During the Great Moderation, economists boasted that the economy was growing and stable thanks to the new "modern and sophisticated" models of
      macro- economics. Of course the people they were fooling the most were themselves, but it served a certain political agenda very well. During this time deep problems were building up in capitalist economies and societies which of course were not in these models, and probably can never properly be in a model.

      Like many others, I do not think the economics profession is worthy of respect until it has really done some serious soul-searching and methodological rethink.

      NK.

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  6. Economists pushing what James Kwak calls 101ism - often via well funded think tanks - have been anything but "insular" since the 1970s. Hence public perception of 101ism as mainstream. And "insular" is too kind a word for the failure of other economists to counter that. "Spineless" might be nearer the mark (with notable exceptions like our blogger).

    And I'm afraid even our blogger exhibits symptoms out the out-of-touchness of the profession as whole. Disparate bargaining power is a bedrock economic fact of life for most folks, and it just ain't good enough to say it's acknowledged in some obscure branch of "the deductive tree".

    Like MPs trying to justify their expenses, they just don't get it.

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  7. "As a discipline economics shows little interest in communicating its core knowledge to others [3]."

    Is there any evidence for this? My impression as natural scientist is the reverse. The media are full of (people claiming to be) economists.

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  8. I did a PHD almost 20 years ago, and I had real doubts at the time about the value of what I was doing. Not in terms of it getting me a job - there it certainly had value. But in terms of what economic theory tells us about the world - and what it has done to the world.

    After many years reflection and following the criticisms and defenders - in the end my basic criticism of the profession is that it values maths and computer programming (as opposed to widely and deeply informed analysis - including knowledge which is not quantitative or amenable to mathematical expression) far too highly. This is linked to the fact that economics is really, not about the economy per se, but is really a methodology. This is fundamentally behind all its problems - including its insularity.

    NK.

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  9. Why is economics a total scientific failure?
    Comment on Simon Wren-Lewis on ‘Why was economics so insular?’

    Simon Wren-Lewis wonders about “what seems like the never ending stream of popular articles in the UK slagging off economics (or economists).” And he comes up with this explanation: “Here I outlined three potential reasons for this epidemic: people do not understand unconditional macro forecasts, politicians from the right do not like economists spoiling their pet schemes (e.g. Brexit), and many heterodox economists from the left wage endless war against the mainstream. All these complaints get airtime when the economy is bad.”

    The explanation why there is an “epidemic” of critique boils down to three points:
    • “The natural reaction when the economy is bad is to criticise economists.”
    • “… economics is an easy target. Historically it has been very insular.”
    • “There is something distinctive about thinking like an economist” which people apparently do not understand/appreciate.

    This leads to the solution: “… economists as a collective has to get better at communicating the core insights of economics.”

    This argumentation is beside the point and shows that economists have entirely lost sight of what science is all about. No, not communication is the problem but content, or what Simon Wren-Lewis calls “the core insights of economics”.#1

    The problem is that there are none: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

    Economists do not have the true theory.

    Simon Wren-Lewis gives a correct description of methodology: “… nearly all economics can be derived from the basic axioms of rational choice. For example the modern macroeconomics of consumption is just the choice between buying apples or pears transformed to the choice between consumption at different times. In that sense economic theory is like an immense tree, where every branch deductively builds on this core.”

    The core of standard economics is given with this verbalized set of axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

    The orthodox hardcore contain three NONENTITIES: (i) constrained optimization (HC2), (ii) rational expectations (HC4), (iii) equilibrium (HC5). Every theory/model that contains just one NONENTITY is a priori false. And when the axioms are false the whole analytical superstructure is false.

    See part 2

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  10. Part 2

    There is nothing wrong with economic methodology except the lack of “certain, true, and primary“ (Aristotle) premises: “They’re doing everything right. The form is perfect. ... But it doesn’t work. ... So I call these things cargo cult science because they follow all the apparent precepts and forms of scientific investigation, but they’re missing something essential.” (Feynman)

    Because of the NONENTITIES in the axioms, standard economics is indefensible.#2

    The good luck of Orthodoxy has been that it NEVER faced an effective critique of Heterodoxy: “The enemies, on the other hand, have proved curiously ineffective and they have very often aimed their arrows at the wrong targets.” (Hahn)

    So, Orthodoxy is a scientific failure but traditional Heterodoxy has not been one iota better.#3, #4, #5 What is needed is NOT the repetitive silly critique of Heterodoxy but a paradigm shift: “The moral of the story is simply this: it takes a new theory, and not just the destructive exposure of assumptions or the collection of new facts, to beat an old theory.” (Blaug)

    Orthodoxy has failed, no doubt,#6 but Heterodoxy has failed to develop a superior alternative. As a result, what we have is permanant stagnation at the proto-scientific level.#7 Heterodoxy attacks with silly arguments and Orthodoxy defends itself with silly arguments.

    The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the pivotal concept of the subject matter ― profit ― wrong.#8 With the pluralism of provably false theories economics sits squarely at the proto-scientific level.

    Egmont Kakarot-Handtke

    #1 Economics: communication without content
    https://axecorg.blogspot.de/2018/02/economics-communication-without-content.html

    #2 Economics: Defending the indefensible
    https://axecorg.blogspot.de/2017/12/economics-defending-indefensible.html

    #3 Silly criticism of economics: 11 signs that you are the imbecile
    https://axecorg.blogspot.de/2017/12/silly-critique-of-economics-11-signs.html

    #4 The stupidity of Heterodoxy is the life insurance of Orthodoxy
    http://axecorg.blogspot.de/2017/04/the-stupidity-of-heterodoxy-is-life.html

    #5 How Heterodoxy keeps the Naked-Emperor-Zombie alive
    https://axecorg.blogspot.de/2016/01/how-heterodoxy-keeps-naked-emperor.html

    #6 Overreach: Economists have their fingers in every pie except real economics
    https://axecorg.blogspot.de/2018/04/overreach-economists-have-their-fingers.html

    #7 Secular intellectual stagnation
    https://axecorg.blogspot.de/2015/08/secular-intellectual-stagnation.html

    #8 Profit: after 200+ years still elusive
    https://axecorg.blogspot.de/2018/04/profit-after-200-years-still-elusive.html

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  11. .
    Great article but I wonder, tangenitally, about the productivity bit.

    It seems as though there is a clear consensus that without productivity growth there cannot be significant GDP growth. At the same time, there seems to be no consensus on what causes productivity growth.

    Is that about right?

    Perhaps the above is a bit backward.

    Perhaps productivity growth is like evolution. Sometimes a fortuitous event will spur it along, like say the desktop computer. Other times it may be that productivity growth is the result, not the cause, of greater GDP growth - as greater competition for people and other resources forces them to deploy more efficiently.

    Are there any definitive sources on those questions?

    Thank you.

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  12. I have to take exception to the claim that heterodox economists are waging a war against the mainstream. May be true for some but heterodox economists have been engaging in serious intellectual criticism since (at least) the Cambridge capital controversies. In my corner (macro), I can't see Steve Marglin, Lance Taylor, or Duncan Foley in any other light. We have also constructed our own alternative frameworks and models that are routinely ignored, dismissed and summarily rejected (literally, in the case of top journals) by the mainstream even (especially?) when they outperform the regnant dogmas. One of the main reasons I read this blog is that it stands out by actually engaging with heterodox economists.

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  13. Simon, have you really read much economic sociology? Let's see how insular you are.

    ReplyDelete

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