Time for critics of economics critics to move on!

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By David Orrell

There is a growing trend for economists to write articles criticising the critics of economics. These articles follow a similar pattern. They start by saying that the criticisms are “both repetitive and increasingly misdirected” as economist Diane Coyle wrote, and might complain that they don’t want to hear one more time Queen Elizabeth’s question, on a 2008 visit to the London School of Economics: “Why did nobody see it coming?”

Economist Noah Smith – writing in a blanket critique of an extract from a 140,000 word book by John Rapley – agrees that “blanket critiques of the economics discipline have been standardized to the point where it’s pretty easy to predict how they’ll proceed.” Unlike the crisis then! “Economists will be castigated for their failure to foresee the Great Recession. Some unrealistic assumptions in mainstream macroeconomic models will be mentioned. Economists will be cast as priests of free-market ideology, whose shortcomings will be vigorously asserted.” And so on.

The articles criticising critics then tell critics it is time to adopt a “more constructive tone” and “focus on what is going right in the economics discipline” (Smith) because “only if today’s critics of economics pay more attention to what economists are actually doing will they be able to make a meaningful contribution to assessing the state of the discipline” (Coyle). If the critics being criticised are not economists, the articles often drive their point on tone home by implying that they don’t know what they are talking about, are attacking a straw man¹, or (not these authors, but a popular choice) are like climate change deniers (see also here and here).

Speaking as an early adopter of the Queen Elizabeth story (in my 2010 book Economyths, recently re-released in extended form), allow me to say that I agree completely with these critic critics. Yes, economists failed to predict the most significant economic event of their lifetimes. Yes, their models couldn’t have predicted it, even in principle, based as they were on the idea that markets are inherently self-stabilising. And yes, economists didn’t just fail to predict the crisis, they helped cause it, through their use of flawed risk models which gave a false sense of security.

But it is time for us critics to move on, and accentuate the positive. Only by doing so can we make a meaningful contribution. And as Smith points out, calls for “humility on the part of economists” are getting old (Tomáš Sedláček, Roman Chlupatý and I wrote Bescheidenheit – für eine neue Ökonomie five years ago). It’s like asking Donald Trump to admit that he once lost at something.

Of course, some people might say that it isn’t up to economists to tell everyone else when they should stop talking about economists’ role in the crisis, or bring up what the former head of the UK Treasury memorably called in 2016 their “monumental collective intellectual error.”

Some stick-in-the-muds note that “No one took any responsibility or blame for a forecasting failure that led to a policy disaster” and have called for a public inquiry into their role in the crisis. Instead of telling everyone else to move on, they argue, it is time for economists to own their mistakes and show some accountability. Well guess what, people – it’s not going to happen! And stop asking for a public apology. Let’s focus on what is going right and hand out some gold stars.

For example, there is the “data revolution” heralded by Smith. As he notes, “econ is paying a lot more attention to data these days.” Sure, economists are literally the last group of researchers on earth to have realised the usefulness of data. In physics the “data revolution” happened back when astronomers like Tycho Brahe pointed their telescopes at the sky and began to question the theories of Aristotle. But better late than never!

Though note it only really counts when you use data to falsify something important.² Oh, here’s a data point – all the orthodox theories failed during the crisis! But you knew that.

Or there is behavioral economics, which Coyle notes is “one of the most popular areas of the discipline now, among academics and students alike.” Critics again might note that progress in this area has been painfully slow and has had little real impact. Tweaks such as “hyperbolic discounting” are equivalent to ancient astronomers appending epicycles to their models to make them look slightly more realistic. But that rational economic man thing is so over – straw man walking.

Admittedly, there has been less progress on a few things. The equilibrium models used by policy makers, for example, still rely on the concept of equilibrium – and so have nothing to say on the cause or nature of financial crises. Risk models used by banks and other financial institutions still view markets as governed by the independent actions of rational economic man investors, and are more useful for hiding risk than for estimating it, as quant Paul Wilmott and I have argued.

As Paul Krugman noted in 2016, “we really don’t know how to model personal income distribution,” even though social inequality – along with financial instability – is one of the biggest economic issues of our time. Some insiders such as World Bank chief economist Paul Romer – who compared a chain of reasoning in the field of macroeconomics to “blah blah blah” – describe the area as “pseudo-science”. And economics education still concentrates almost solely on the discredited neoclassical approach, complete with rational economic man, according to the student authors of The Econocracy.

But these are details. As Coyle notes, some economists are finally getting to grips with ideas from areas such as “complexity theory, network theory, and agent-based modeling” which of course are exactly those areas that critics have long been suggesting they learn from.³

Or the UK’s Economic and Social Research Council recently let it be known that it is setting up a network of experts from different disciplines including “psychology, anthropology, sociology, neuroscience, economic history, political science, biology and physics,” whose task it will be to “revolutionise” the field of economics. Again, that is nice, since Economyths called in its final chapter for just such an intervention by non-economists back in 2010.

So, yes, it is time to celebrate the new dawn of economics! But critics of critics – do try to move on from the same criticisms, we’ve heard it all before, in fact for decades now.

Notes:

¹ Coyle for example clarified that she was writing about “the character of a particular kind of straw man critique.” The “straw man” defence, as discussed in this excerpt from Economyths, has been used by economists since at least the 1930s – and is very frustrating. Mainstream economists present a core portrayal of human behaviour which is frankly ridiculous in its simplicity, alter it slightly, and then when people criticise it, the economists say they are criticising a straw man! One investigation into a Canadian economics department said this tactic had there reached a stage where it could be described as “gaslighting [i.e. psychologically manipulating someone into doubting their own sanity].” And yes, we know about behavioural economics etc., but one reason it hasn’t had more impact is because its findings are rather inconvenient for models. In other words, the fact that economists have been deploying the same argument for so long probably says more about mainstream economics than it does about its critics.

² I would invite people who think there has been a real “data revolution” in economics to ponder the following two quotations. The first is economist Steven Levitt (of Freakonomics, and no stranger to data) discussing the problem that he couldn’t find a valid empirical example of a demand curve for his textbook, despite the fact that such curves are basic to neoclassical economics: “What I’d really say is that we completely and totally understand what a demand curve is, but we’ve never seen one. I don’t know if it’s fair to make physics comparisons, but you can imagine something like in the old days when the models had figured out something about protons and electrons, but we hadn’t actually figured out how to literally see an electron.” (My emphasis.)

The basic problem with demand curves comes down to identifiability of parameters, and yes some economists have tried to tackle it, but I’m not sure how economists can “know” what a demand curve looks like (and feature it in textbooks) without seeing one. It seems to me that if supply and demand are dynamic and interdependent then no such curve exists. (And no, it’s not like physics, unless perhaps you count supersymmetric string theory.) I would also argue that this belief in theory over data still permeates much of economics.

A similar conclusion is drawn in a recent paper by economist Richard Werner, who asks why – after so many decades – the process of money creation is still considered such a mystery. He notes that “the dispute can be settled through empirical evidence on the actual operations and accounting practices of banking.” In other words, by taking a look. “Surprisingly, in the observation period – from the mid-19th century until 2014 – no scientific empirical test had been reported in the peer reviewed journals.” (My emphasis.)

We’ll know economics is moving on as a scientific discipline when it actually uses data to falsify some of its key findings, including those concerning the most basic questions of all, namely how prices are determined, and how money is created. The reason I believe these have not been satisfactorily addressed by the mainstream is because their theory will fall apart without them. A completely new approach is needed. (And yes, I believe it’s coming – but the mainstream is not the place to look.)

³ So maybe the observation that economics was stuck in a reductionist paradigm and needed to learn from a complexity approach was not a straw man, as many mainstream economists called it.

From: pp.6-7 of WEA Commentaries 7(4), August 2017
https://www.worldeconomicsassociation.org/files/Issue7-4.pdf

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