Economics 10{whatever}

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By Peter Radford

I have been less vexed about economics recently precisely because I have been focused on other, and more urgent, topics. The politics of our age are wondrously absorbing, if not a little disturbing. In any case I do try to keep an eye on what economists are up to. In that endeavor I came across a short article by Diane Coyle on the website “Project Syndicate”. If you want to know what is occupying the establishment it’s a good place to visit periodically.

And Professor Coyle is decidedly establishment.

Her article is couched as a book review/discussion of what ails economics. In it she attempts to refute the notion that economics is lost in a desert of its own making, as I and many others would suggest, but rather, she argues, it is vibrant and rapidly modernizing. She tries to persuade us that critics, like me, just don’t get what’s going own at the frontier of the discipline. There are, apparently, a load of breakthrough ideas some of which might make it into the textbooks sometime in the future.

Great.

But not great enough.

Two paragraphs towards the end of her article illustrate the issues:

Behavioral psychology, complexity theory, agent based modeling and the like, along with historical narratives, and emphasis on institutions, methods such as randomized control trials and now big data and AI, are by no means a coherent new mainstream. It takes time to change curricula, and institutional inertia makes new approaches too risky and difficult for young economists seeking academic jobs and promotions.

What do we make of this?

On its face Coyle seems to be telling us that lots of exciting things are going on. After all throughout the article she is hinting at the new work people such as Andrew Lo are doing. Lo is the author of one of the books she reviews and she clearly is an advocate of his work. But, she tells us, he has been striving away at his non-mainstream efforts since 1986. Presumably that is most, if not all, his academic life. He is one of the people, Coyle lets us know, trying to incorporate advances in the human sciences into economics. He has, presumably, failed so far. After all not much of the modern economics curriculum is built on the kind of psychology and evolutionary theory Lo specializes in. By not much I mean really little. As in if you squint really really hard you might see a vague trace of it.

This is, of course, not Lo’s fault, but for Coyle to swat aside the critics by reference to a body of work that still sits resolutely outside the mainstream doesn’t bolster her argument. It weakens it.

Yes behavioral psychology is being taken on board in economics. Its about time. It is decades late. But the textbooks don’t yet reflect the change. They are firmly stuck in the past. Nor, in Coyle’s own words, is the profession apparently keen on updating itself. In her own words: it is difficult, if not impossible, for new ideas to form the basis of activity for young economists bent on climbing the professional ladder. Inertia seems to get in the way.

Doesn’t it always?

Perhaps in a generation or two we might finally purge the extraordinarily simple and naive version of psychology that still dominates economics. It was included not as an effort to understand human activity and its motivations, but to make analysis tractable. It was a prop for other ideas that needed to be given a footing. It wasn’t a result of serious study beyond that of the mid to late 1800’s when a description of utility and so on was deemed useful during the so-called “marginal revolution”. It was an afterthought, in other words, to a need to make economics appear more scientific. As psychology is has always been absurd, but economists aren’t psychologists, so they adopted absurdity with brio and dash in the service of their broader agenda.

Coyle goes on …

Practicing economists outside universities do not keep up with the research frontier — although even here, useful tools such as behavioral economics, complexity theory, market design, and network theory are making significant inroads. Still, the economics taught in university departments, practiced in financial firms, and applied by policymakers remains heavily reliant on old-fashioned reductionist rational-choice models.

Exactly, Professor Coyle. Exactly.

But what do you mean?

The first sentence implies that those of us out here in the real world are behind the times. This is something I would contest strongly. My experience is that the ideas mentioned in that first sentence are more likely to be thought about and tested outside a university than inside. At least in terms of a broad definition of economics. The business strategy world is steeped in them. It has been for a while now. I realize that economists still see business theory as a stepchild of economics not worth spending time on, but there’s some real action out there. And that action is having a direct impact on the economy. After all it is practical.

Then the second sentence appears as a non-sequitor. Having, fairly directly, disparaged non-university economics as being distant from the cutting edge, Professor Coyle then goes on to suggest that university departments too remain heavily reliant on old fashioned models. Worse still, policymakers are way behind too.

So where is the cutting edge?

Somewhere other than most universities. And certainly not in places like the Federal reserve Board, the World Bank, of the International Monetary Fund all of which are staffed to the gunnels with economists. Out of date very one of them.

Now, I don’t want to be unfair: Coyle has a point. There is lots of good stuff going on. It’s just that, as Lo’s career illustrates, it takes ages, if not generations, for it to appear in the mainstream.

So: if you are a student wanting to be on the cutting edge and you want to understand the economy — the real one and not the oddity that economists study — get out and about. Go study somewhere where the new ideas are being absorbed more rapidly. Or, alternatively, go locate other disciplines where those ideas are already old hat. You can then study the economy through the lens of contemporary thought without having to wait for the stodgy world of economics to catch up.

The odds are that it won’t.

From: pp.2-3 of WEA Commentaries 7(3), June 2017
https://www.worldeconomicsassociation.org/files/Issue7-3.pdf

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