If academic economists had report cards, their schedules would be cluttered with numerous parent-teacher conferences these days. Progress has gone from stellar to mediocre, and the lacking signs of future potential would be enough to rouse any worried observer’s attention.

The field hasn’t always been in such a slump. In fact, the beginning of time for modern economists showed evidence of better-than-honor-roll material. Powerhouses like Alfred Marshall (marginal utility), David Ricardo (comparative advantage), and Adam Smith (invisible hand) made extraordinary progress simply by sitting in their leather armchairs and talking about the way the world worked. The result was theories that were invaluable in helping solve the problems that the field was designed to solve: poverty, unemployment, inflation, and other woes of us inhabitants of a world with scarce resources. And for the first time social behaviors were predicted, quantified and explained in a manner that led to increased efficiencies and stability.

Great advances continued into the early- to mid- 1900s thanks to guys like Keynes (aggregate demand) and Friedman (link of money supply to inflation). Governments and central banks took these theories and incorporated them into policies, and the general public was affected as a result. Their taxes were collected in manners that were less intrusive to their preferences; interest rates were set more appropriately; and consumers had more access to overseas markets.

The cool thing about these achievements is that they had such a great impact that people with little training in economics still know about them today. Most people can explain that supply and demand affects price, and that printing more dollar bills will increase inflation. For a field with so many pocket protectors and so few marketing skills, that’s pretty impressive.

But what about recent breakthroughs? Can the average person name more than one or two phenomenal recent discoveries that impact or explain social behavior? Sure, we talk about the economy more often because the people are becoming more sophisticated as investors and have taken a greater interest in the field. But for many academics, the last 20 years have been a drought of economic revolution.

The key reason behind this drought is not that we’re getting dumber. Strangely, it’s that we’re getting too focused on how smart we are.

Certainly there is no shortage of economic research. PhDs have cranked out thousands of papers in the last two decades, but the difference is that their tone has changed. Logic is being replaced by sophistication, and simplicity has disappeared. The majority of recent papers are caked in hyper-technical models and mathematic jargon. Not only does this make reading them is as fun as reading IRS regulations, but it makes them miss the point.

As Michael Kitson stated in the latest issue of the Cambridge Journal of Economics,

“Many of us [economists] decided to study economics because we were interested in issues such as economic growth, unemployment, poverty, discrimination and social exclusion. And for much of the history of the discipline, economists grappled with explaining such phenomena and, hopefully, helped to improve the development of economic policy. But now the discipline is increasingly dominated by other concerns, such as mathematical rigour and econometric modeling.”

This is true. PhD candidates and academics today are pushed not to come up with solutions to the world’s problems, but rather, to use complicated mathematics to confirm hypotheses that have already been stated. A quick glance at one of the frontline articles in this month’s Journal of Applied Economics gives the general gist. The article is entitled “The commodity-currency view of the Australian dollar: A multivariate cointegration approach.” The following is its description:

“Using Australian quarterly data from the post-float period 1984:1-2003:1 and a partial system, we identify and estimate two cointegrating relations, one for the interest-rate differential and the other for the nominal exchange rate. Our estimate of the long-run elasticity of the exchange rate with respect to commodity prices is 0.939, which strongly supports the widely held view that the floating Australian dollar is a ‘commodity currency’. We also find that the PPP and UIP cannot be rejected so long as commodity prices are included in the cointegrating relations. Our model outperforms the random walk model in forecasting the exchange rate in the medium run.”

Notice that half the description is caveating which data make the authors’ model work (quarterly data, commodity prices are included, the model outperforms in the medium run). God knows the authors had more than one late night in the lab fiddling with different iterations of these before they got their model to spit out optimal results. More importantly, the merit of the paper’s goal is questionable. They say that the view that the currency was a commodity was already widely held, so what does this research really add? And how does one go about using this confirmation to make society’s lives better?

Michael Weinstein confirmed this sort of pattern while describing his interest in economics before becoming a journalist for the New York Times:

“[My] passion to learn economics, which was driven by a desire to understand the causes of poverty and the impact of technical change, was immediately quelled when on [my] first day as a graduate student at the Massachusetts Institute of Technology the professor announced that ‘all of economics is a subset of the theory of separating hyperplans’ (Weinstein, 2000).”

Could this approach be the reason why we are not coming up solutions to Africa’s poverty or better motivations for reducing pollution?

Or, even scarier… Without lots of tangible, useful results being produced from the collaboration of economists today, does the field just become a breeding ground for competition among number-savvy individuals? Does this have anything to do with the fact that economist-run institutions like the World Bank and the IMF are so hierarchical and internally competitive? And could it explain why economists are known for taking such an elitist attitude with respect to PhD programs and publications?

How long will this mentality survive before we decide to reupholster our ergonomic lab chairs back into leather?

Posted by Michelle Smith on November 28, 2005 03:08 AM