Academic economists behind the curve in current situation

Economists from academic departments are behind the curve when it comes to their classroom treatment of the current economic crisis, according to an article in today’s NY Times. Most mainstream economics departments are still in the grips of the free market ideology, despite the failures of said approach to predict the current crisis. More problematic is the near exclusion of Keynesianism as a legitimate object of study in most of the elite graduate economics programs around the country. Keynes is virtually absent from the curricula of economics departments, despite serving as the theoretical underpinnings of the Obama administration’s stimulus package.

The Freakonomics blog also quotes at length a paper that criticizes the economics profession, dominated by neo-classical or free market thinking, with completely missing the current financial mess:

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.

According to the last article, the problem with the economics profession is its search for elegance (in model building) at the expense of empirical validation. A large reason for the financial sector’s problems, indeed, is the use of sophisticated mathematical models that had little to do with reality.

DeLong and the Nature of Economics

I thought DeLong’s observations about the nature of economics especially vis-a-vis the current crisis is worth sharing:

Justin Fox Is Still Perplexed

He wonders:

Brad DeLong tutors me on fiscal stimulus :: The Curious Capitalist – TIME.com: I guess what continues to perplex me at least a little is how lacking in the customary rigor of modern academic economics the arguments for stimulus are. It’s basically just, We ran gigantic budget deficits during World War II and the economy got better. That’s the kind of argument I would make, not the kind of argument I’d expect from the chair of the Political Economy of Industrial Societies major at the University of California Berkeley. It’s just all so seat-of-the-pants. But it’s better to be approximately right than precisely wrong, I guess…

“Lacking in the customary rigor…” Justin could mean either of two things:

1. Rigorous economics should produce tightly-estimated conclusions based on statistical sieving of mountains of data, like: when Safeway cuts grocery prices by 1%, its sales rise by 1.456%.
2. Rigorous economics should involve lots of theoretical equations with sigmas and rhos and betas in them.

With respect to the first possibility, Justin’s expectations are just too high. We cannot build models up from precisely-known microfoundations–we are not chemists who can calculate how molecules should behave because we know how the electrons and the nucleons that make them up do behave. We don’t have that many past examples of large-scale fiscal stimulus programs, and so we do the best that we can–and to be up-front about the partial and uncertain state of our knowledge is part of doing the best that we can.

With respect to the second possibility–well yes, I could make a bunch of arguments with lots of theoretical equations with sigmas and rhos and betas in them, but once again these theoretical equations would not rest on any solid microfoundations. Chemistry theory is built on top of physics theory. But economic theory–it is just a bunch of people looking at historical episodes and saying: “it looks like this is what happened a bunch of times in the past; let’s build a model of it.” Economic theory is crystalized history. But when the historical episodes out of which theory is being crystalized are as rare and as scarce as they are in the case of large-scale fiscal stimulus programs, why crystalize? Why not just take the history raw?

- KC