New horizons: economics in the 21st century

Economists’ stock plummeted with the financial crash. The authors of a new book suggest that reading novels could sharpen their insights, while four academics consider how the field might need to change

July 6, 2017

Economists could be far more effective if they read more novels.

That is the striking claim of a new book by literary critic Gary Saul Morson and economist Morton Schapiro, Cents and Sensibility: What Economics Can Learn from the Humanities. Although both authors value the insights of economics, particularly at the micro level, they believe something has gone radically wrong with the discipline in its insistence on its scientific status and its reluctance to take into account other perspectives.

They came to this conclusion from opposite directions. When Schapiro, who is now president and professor of economics at Northwestern University, left graduate school in 1979, he “had completely bought in to the view that ‘getting the prices right’ [is] almost always the best economic policy”, he says in the book. Fellow economists were “thrilled” when international pressure led the Egyptian government in 1981 to reduce its “interference in domestic markets” by lowering subsidies on bread. Yet the policy led to people dying in protest riots, and increased the risk of widespread malnutrition.

The book also cites the notorious 1991 leaked memo by Lawrence Summers , then chief economist at the World Bank, suggesting that the institution should be encouraging the migration of “dirty industries” to less developed countries, since “the measurement of the costs of health-impairing pollution depends on the forgone earnings from increased morbidity and mortality. From this point of view, a given amount of health-impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages.” That Summers described his “economic logic” as “impeccable” surely says something about the limitations of his assumptions, Schapiro suggests.

Meanwhile, Morson – who is Lawrence B. Dumas professor of the arts and humanities at Northwestern, as well as professor of Slavic languages and literatures there – spent a year in the mid-1990s at the Center for Advanced Studies in the Behavioral Sciences at Stanford University . As “one of the token humanists among many social scientists”, he became baffled by the dominance of rational choice theory among economists and political scientists. Surely, he writes in Cents and Sensibility, “no one could really believe that people always acted in accordance with what they considered to be their best advantage. Could anyone with the slightest familiarity with people – or with the least introspective ability – imagine that they never act self-destructively or against what they regard as their best interests? Psychiatrists and novelists would be out of business if that were so.”

In reflecting on his experiences, Morson concluded that literary studies and the social sciences represent two distinct cultures, not only in that they believe different things but also in that “neither can believe the other believes what it says it believes”.

 

So what can a book devoted to bridging the gap hope to achieve? Most economists, Schapiro tells Times Higher Education, operate from the arrogant assumption that “other fields create questions, but we have all the answers”. He deplores “the naiveté within my profession. Some economists haven’t read not just novels, but psychology, sociology and anthropology. It would be great if literature got cited in economics journals, but, in the meantime, the humanistic or qualitative social sciences would be a nice first step. Most of the ‘policy implications’ at the end of journal articles are nonsense, because they have nothing to do with the real world.”

This is a relatively familiar criticism of academic economics, but why might reading novels be the best antidote? Morson and Schapiro suggest three principal reasons.

The first is that cultural differences are not just minor details but integral to who people are: something that is instantly obvious if one reads novels set in other countries, but which economists tend to skate over. The danger, explains Morson, is that “you build a model based on what you know best – your own language, culture and politics – and it will work really well in the circumstances it was designed for. [But] the further you get from that paradigm case, the worse it will work…I have seen economists offering policy guidance about Putin who were totally unaware of the legal and cultural norms in Russia – it was clear that something would go haywire.” Vast numbers of failed development projects teach a similar lesson, the book adds.

The second issue, as Schapiro puts it, is that “economists are not conscious of ethical questions, because they are not trained that way”. One of the examples explored in the book relates to “enrolment management” in higher education. American universities now do detailed analyses to predict “yield”, or the likelihood that an applicant offered a place will actually take it up. Factors such as race and geographical origins have an influence on this, but something that proves a surprisingly strong predictor is whether a potential student went on a campus tour.

Since such information is recorded, universities are faced with a clear dilemma: should they reduce their fees for an applicant who is less likely to take up a place while offering no discount to someone almost certain to enrol anyway?

A hard-nosed economic analysis would suggest, in effect, that universities should charge as much as they can get away with. Schapiro agrees that it is right, in allocating “merit aid” for exceptional talent, to avoid “throwing away money that you can spend on shrinking class sizes, paying the faculty more or funding lower-income students”. But he thinks it would be a “disgrace” to take the same approach to “need-based aid”, which is supposed to be calculated on the basis of what the family can afford.

Morson goes even further, claiming that “whether you took a tour and signed the guest book shouldn’t make a difference” to any financial aid package. Furthermore, he feels that universities that behave like “used car dealers” are betraying their identity: academics and administrators “typically assume we have a special role in the culture and that our opinion matters because we are enlightened”, he says. “If that’s the case, it presumes [we] are behaving differently from businessmen. So either give up that pretension or live up to it.”

The third reason that economists should read novels relates to what Morson and Schapiro call “narrativism”. This is the idea that economists need to take stories seriously because, as the book puts it, “human lives do not just unfold in a purely predictable fashion the way that Mars orbits the Sun”.

This is again illustrated by an example from higher education policy. Research in the US has shown that the most talented pupils from low socioeconomic backgrounds rarely go to universities suited to their abilities, and many fail to go to college at all. While economic models can throw some light on this, Morson and Schapiro argue that we will understand the phenomenon – and how to address it – much better if we look at the stories of the pupils’ lives. Research by economists Caroline Hoxby and Sarah Turner, for example, indicates that pupils’ educational choices are influenced by the assumptions they grow up with. Some avoid applying to liberal arts colleges because they don’t see themselves as “liberal”, or because they think “liberal arts is for people who aren’t good at maths”, according to the researchers’ 2015 working paper for the National Bureau of Economic Research, “ What High-Achieving Low-Income Students Know About College ”. Others believe that “the state’s flagship university” is characterised by “too much party and not enough academics”. Clearly, economic constraints and incentives are not the only factors at play.

Developing this point, Morson and Schapiro draw a parallel with the 19th-century novels about young men from the provinces trying to make their way in the big city. This makes a kind of sense, but are they seriously suggesting that university administrators should go and read Balzac or Dickens if they want to widen access most effectively?

Morson responds that it’s not about reading particular novels but “the habit of thinking you get from reading great literature, the skills you get, the kinds of questions that you are likely to ask about people and ethical issues”.

Schapiro points out that almost one-fifth of students at Northwestern are eligible for Pell Grants: the government grants distributed on the basis of need. “There is an issue of the tough transitions for people from lower-income families into elite institutions,” he says. “Reading those novels – where the hero feels like a fish out of water, doesn’t know which fork to use, has the wrong provincial accent – does really help me anticipate how poorer students will respond.

“Taking those novels seriously helps you anticipate why there is a disconnect. We do a much better job in elite higher education in recruiting these students than in having them feel part of the community. Nobody explains that better than Jane Austen.”

Gary Saul Morson and Morton Schapiro’s Cents and Sensibility: What Economics Can Learn from the Humanities was recently published by Princeton University Press.

 

In reality, the methods of economic research are very much grounded in the study of the existing world

Criticism is essential to the advancement of knowledge in any discipline but only productive when based on an accurate assessment of the content of that discipline. Unfortunately, criticism of academic economics in public discourse commonly amounts to screaming at straw men.

Often, critics conflate economics and politics . They assert that mainstream academic economics furthers the cause of the radical right wing, particularly market fundamentalism: the belief that “ unrestrained self-interest automatically enhances the common good ”, as one critic put it.

In fact, mainstream economic theory emphatically demonstrates that this belief is wrong. The theory of perfect competition , to which critics point, gives conditions under which unfettered markets yield one desirable property called Pareto efficiency . But these conditions do not hold in the real world, as every economist knows, and market failure – that is, the failure of markets to achieve an efficient outcome – is commonly taught even at the Economics 101 level.

Indeed, much of mainstream economic theory is concerned with the myriad ways in which markets fail, including, but not limited to, externalities , issues related to information and uncertainty , monopoly and cognitive limitations and biases . Even if we fancifully ignore all these issues, mainstream theory still does not support laissez-faire politics, as the perfectly competitive market outcome may produce a horribly unequal distribution of income. That mainstream economics is not the enemy of progressive politics is illustrated by the fact that mainstream economists tend to skew left in their personal political beliefs.

But I fall into a trap by even discussing the political beliefs of economists, because it may lend credibility to critics’ contention that economic research consists largely of waxing eloquent on political philosophy, obfuscating political ideology with arcane mathematics devoid of real-world relevance. In reality, the methods of economic research are very much grounded in the study of the existing world.

A recent paper by Massachusetts Institute of Technology economist Josh Angrist and colleagues, for example, documents the evolution of methods in more than 130,000 papers published in 80 prominent economics journals since 1980. The paper finds that about 60 per cent of current research in these journals is empirical, not including papers devoted to advancing empirical methods (another 7 per cent). Most of this research is concerned with quantitative policy evaluation: the use of statistical evidence to evaluate the real-world effects of public policies.

Other studies documenting methods in a handful of top economics journals demonstrate that the proportion of theory articles peaked in the 1970s at just over 60 per cent, falling to less than 30 per cent by 2011. Papers exploiting controlled experiments rose from zero in the 1960s to about 8 per cent by the same year.

Pointing out the prominence of empirical work in economics should not be understood as undermining the importance of theory: good science, including good economics, combines theory and evidence. Nor should empirical work be misconstrued as forecasting, particularly macroeconomic forecasting. It is now boilerplate for critics to cite the profession’s failure to forecast the 2008 financial crisis as obvious evidence that mainstream economics is deeply flawed, but this claim is largely misguided . Economists don’t claim to be able to make unconditional forecasts of future states of a system as complex as the macroeconomy, and the vast majority of economic research – even of the 15 per cent that is macroeconomic research – doesn’t have anything to do with making such forecasts.

Before launching their assaults, the critics should get up to date on the topics, methods and results of actual economic research. They should read influential economists such as 
Raj Chetty (policy evaluation), Janet Currie (health and well-being, particularly children’s), Sir Angus Deaton (poverty and health), 
Dave Donaldson (empirical international trade), Esther Duflo (poverty alleviation), James Heckman (labour and human development), Emmanuel Saez (income inequality) and Chris Sims (macroeconometrics).

Criticism of economics that relegates the field to ivory tower political philosophy or failed “weather” forecasting is not just misguided, it is anti-intellectual and dangerous. Modern economists offer important, empirically based insights into policy that improves the human condition .

Chris Auld is an associate professor of economics at the University of Victoria, Canada.

Since society and the economy are inextricably linked, economists cannot afford to isolate themselves if they want to be listened to

The global financial crisis of 2008 should be a dim and distant memory. Instead, almost 10 years on, we’re still on the rocks. In the UK, productivity and wages have flatlined. In the eurozone, unemployment has been above 9 per cent since 2009 . Throughout the West, economic growth has slowed, and concerns about inequality have become deeper. But just as the need for economists is greater than ever, their popularity has plunged.

From the 1930s to the 1960s, academic economists were in their heyday. The diagnosis of the causes of the 1929 Great Depression was straightforward: capitalism had failed. Free markets needed to be kept in check by a rapid expansion of the state. This created a demand for policy advice on everything from interest rates to welfare and social policy interventions. By 1965, the British economist John Maynard Keynes had made it to the front cover of TimeMagazine.

Despite the similarities with 1929, it has not been so easy to blame capitalism this time around. After all, government spending already runs at about 
40 per cent of Western economies’ entire output. Finding the solution to our economic ills therefore requires us to go beyond ideological divides of the past, and economists have not yet reached anything like a consensus. But they do at least agree that retreating from the rest of the world will only make things worse; history is very clear that barriers to trade and to people only restrict long-term economic growth.

Unfortunately, on both sides of the Atlantic, the public have voted for barriers nevertheless. According to Conservative Cabinet minister Michael Gove, they’ve simply “had enough of experts”. That doesn’t necessarily imply they completely distrust economists’ predictions. Instead, it suggests to me that they place value on things that economists simply don’t consider.

The two major forces that drive the economy forward over the longer term, globalisation and technology, can have significant social consequences. Take the hot potato of immigration. According to the British Social Attitude Survey , about half of people who think it is good for the economy still want it reduced, largely because of concerns about its effect on things like social cohesion and national identity.

It might seem that these effects can be left to sociologists to consider, but since society and the economy are inextricably linked, economists cannot afford to isolate themselves if they want to be listened to. By failing to recognise the public’s concerns, economists have missed the opportunity to make the case for a free and open society.

There was a time when economists such as Adam Smith and Karl Marx did indeed think about the economy in the round. However, since the mid-20th-century carve-up of the social sciences, economics has adopted an isolationist and imperialistic stance towards other subjects, marking itself out as more “scientific” and imposing an “economic” viewpoint on everything from sociology to history, while refusing to learn anything in return. The economy is acknowledged to affect society but the reverse causality is denied.

Worryingly, a survey of American economics professors conducted by Neil Gross and Solon Simmons on the eve of the financial crisis revealed that the majority see little benefit to interdisciplinary work. And ask any economics student and they will no doubt tell you that the social, historical and political option papers command far less “respect” than theory and maths.

But being less isolationist doesn’t have to mean economists completely disposing of their more individual-centred approach; it simply means acknowledging the tension between the individual and society. That requires reading Durkheim, Freud and Veblen as well as Friedman.

Isolationism and imperialism do not work well in the real world, and so how could they possibly work well in academia? If economists continue to isolate themselves, they shouldn’t be surprised if economies do likewise.

Victoria Bateman is fellow and director of studies in economics, Gonville and Caius College, Cambridge.

 

Critical students are normally repelled from the subject; only the compliant ones go on to be professors

At the beginning of the millennium, economics was triumphant. George W. Bush’s economic adviser, Ed Lazear, published a paper entitled “Economic Imperialism”, in which he argued that economics was the only true social science, and could and should supplant its academic neighbours. Three years later, Nobel laureate Robert Lucas said in his presidential address to the American Economic Association that “macroeconomics…has succeeded: its central problem of depression prevention has been solved”.

Then the global financial crisis hit in late 2007, catching leading economists and policy bodies completely by surprise. A decade later, economics is a divided and lost discipline. Some economists, like ex-Bank of England Monetary Policy Committee member David Miles, excuse the failure to anticipate the crisis on the grounds that this was caused by an unpredictable random shock. “Any criticism of economics that rests on its failure to predict the crisis is no more plausible than the idea that statistical theory needs to be rewritten because mathematicians have a poor record at predicting winning lottery ticket numbers,” he wrote in the Financial Times earlier this year.

But others, like Narayana Kocherlakota, president of the Minneapolis Federal Reserve from 2009 to 2015, argue that both the crisis and the slow recovery from it show that economics is in crisis. This is because, as he put it in a note written last year , economists “simply do not have a settled successful theory of the macroeconomy”. Echoing the demands of the “ Rethinking Economics ” student movement that began at the University of Manchester, Kocherlakota called for a plurality of approaches to the subject to be developed. Pretending that everything is OK with economics, he said, is “choking off paths for understanding the macroeconomy”.

I firmly agree: economics is in need of serious change. But this is unlikely to come from within the academic discipline itself. After all, the 2008 crisis merely exposed flaws in the dominant approach that critics like me have been pointing out for decades: its treatment of capitalism as inherently stable, and its adoption of models of the economy that ignore the existence of banks, debt and money. Mainstream economists have recently started to tack a financial sector on to their models, but these still start from the presumption that the economy is inherently stable.

In a way, economists are just being human. As Max Planck found out in the late 19th century when trying to persuade fellow physicists to accept quantum mechanics, it’s near impossible for someone raised in a given intellectual framework to adopt a radically different one, even if it is manifestly better at explaining reality. “Science”, Planck lamented, “progresses one funeral at a time.”

Funerals alone aren’t enough in economics, however, because the academic discipline is uniquely shielded from the real world. Without controlled experiments that can flatly contradict a superficially appealing theory, it continues to promulgate its beliefs, regardless of its manifest real-world failures. Critical students are normally repelled from the subject; only the compliant ones go on to be professors (with some notable exceptions).

In the 21st century, it is no longer necessary to make 19th-century assumptions about equilibrium, or to ignore money when modelling the economy. Models of the economy that avoid such failings – in particular, those built by the late Cambridge economist Wynne Godley, or those informed by Hyman Minsky’s “financial instability hypothesis” – warned that a crisis was inevitable, simply by showing that trends in private sector indebtedness were unsustainable.

There is a vibrant community of non-mainstream economists continuing Minsky’s and Godley’s work, but they labour at low-ranked universities with very limited research funding because the mainstream economists who dominate the more prestigious institutions still disparage rival approaches. Change will have to come from outside academia, since central banks, treasuries and businesses cannot afford the luxury of following fantasy theories of the real world.

Steve Keen is professor of economics at Kingston University.

 

Economists are overly influential in the design of government policy. It would be better if psychologists and quantitative sociologists were given a greater role

I accept that academic economists can be tiresome. Some are narrow-minded, know little about other disciplines, claim too much, look down on other kinds of social science researchers and get paid salaries that are high enough to be annoying. I am sorry about all of this. However, whether critics realise it or not, most of the complaints about the subject of economics are made by people who – regrettably but perhaps inevitably – know little about the modern discipline.

The most vociferous grumblings come from middle-aged men and women who learned a smattering of economics at university. But the five decades of academia that I have lived through have seen the subject improve enormously, from one largely churning out mathematical exercises without data into one whose major journals are dominated by empirical work and experimental evidence. In that sense, economics is growing up – even though it has hundreds of years to go before it will be mature.

One common criticism is that economics lacks a plausible model of human behaviour. This is outdated and now mostly false. It is true that economics lacks a perfect model of human action, but perfection is not a sensible hope. The predominant model in today’s economics is one that assumes human self-interest leavened with emotions and errors, such as envy and short-sightedness. If you don’t believe me, look up the literature on the ultimatum game and the economics of happiness – neither of which was taught to undergraduates 30 years ago. Economists have been forced to face up to humanness.

Another common criticism is that economic causality is too multifaceted to be studied in isolation and boiled down to mathematical laws. This touches on deep issues and is important enough to be kept in any scholar’s mind, but is largely inaccurate. Those who make this charge do not realise that modern economics seminars are obsessed with ways to establish causality. The risk is not so much that it is falsely inferred as that it is dismissed unless it comes from randomised trials. Occasionally, I have to remind young economists that the most valuable discovery in public health, the statistical link between smoking and cancer risk, was made by the late Richard Doll using simple but careful observation of the world.

As for mathematical laws, the job of economists (and, indeed, other kinds of scientific investigations) is to discover such laws. If you are against that principle, you are against modern science.

Another criticism is that economics has become too powerful, intruding into all facets of life, thereby impoverishing us with its narrow vision of human worth. Here, I am in agreement. Economists are overly influential in the design of government policy. It would be better if psychologists and quantitative sociologists were given a greater role because they know a lot, yet have not been brainwashed by their PhD training into thinking that money and GDP make up 80 per cent of human happiness.

In recent years, academic economists have been learning a great deal from these disciplines – and they have been learning a smaller amount from us. But there remains a long way to go, especially in the corridors of power. When I was young, I taught for some years on the politics, philosophy, economics (PPE) course at Oxford, and I see many of my old undergraduates speaking cogently on television. Yet I think it might have been better for them, and for the UK, if their course had been called something such as economics and behavioural science.

When Michael Gove infamously said, during the Brexit campaign, that the UK public had “had enough of experts”, it was in the context of economists’ warnings about the impact that leaving the European Union would have on the UK economy. I can understand Gove’s frustration. TV-style economists are prone to hubris and, quite naturally, the media do their best to draw extreme opinions out of people. Plus, like seismologists, we are bad at forecasting the immediate future. But I doubt that Gove would like an amateur to fly the plane on his next international trip, or to do his dental fillings.

That said, if he would like to save some money on root canal surgery, I do have amateur friends who tell me they are up to the job.

Andrew Oswald is professor of economics and behavioural science at the University of Warwick.

 

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