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Why Are So Many Economists So Unable to Help With the Ongoing Economic Crisis? Understanding What the Economics Profession Rewards and Penalizes

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Economists can be a frustrating breed.  We seem to have a special, secret set of insights about one of the most important sets of public policy topics facing the country and the world.  We promise to bring theory and empiricism together to help show politicians and the public how to make better decisions.  Yet we never seem to fulfill that promise.  We appear to bicker endlessly, and we were famously unable to predict the financial crisis that led to the Great Recession and the cruel pain of the ongoing, excruciatingly slow recovery.

Why are economists unable (or unwilling) to reach a clear set of prescriptions for the economy?  And why are so many economists at odds with each other over the causes and solutions to seemingly every economic problem?  The answers have to do with the way economists are trained, and with the expectations that Ph.D.-granting Economics departments place on their students and their professors.  It turns out that our economists are very good at doing what they are trained to do—but what they are trained to do is not very helpful to the rest of the world.

The Promise of Economics Training: Studying Important and Interesting Issues in a Systematic Way

Anyone who has thought about America’s economic problems cannot help but wish that there were clear, uncontroversial answers to help return us to prosperity.  While morally weighted questions of fairness pervade discussions of tax policy, Social Security reform, and other important economic topics, it feels as though there ought to be a way to fix the economy that is ideologically neutral.  Automotive mechanics can fix cars that are broken, and surgeons can replace defective body parts, so why is it not possible for economists simply to fix the economy?

An incomplete answer to that question is that the economy is complicated, and the state of economic knowledge is still rather primitive.  We might be able to look forward to a day when economists will have figured out the solutions that currently elude us—although I should emphasize that I sincerely doubt that we will ever reach that day. Currently, however, economic “science” is—at best—where dentistry was fifty years ago.

That, however, is not an insult to economists.  The field has only existed in anything resembling its current form for about two centuries, and only in the last eighty years or so have economists had the necessary data with which to begin to analyze the economy with any rigor.  Being incapable of answering our most pressing economic questions might just be a matter of the relative youth of the profession, and of the difficulty of the problems that it must try to answer.

In light of those limitations, moreover, it is impressive how much progress has been made in economics since the Great Depression.  After World War II, there were no major crises in developed economies until a few years ago, and even that crisis did not erupt into a full-blown global meltdown.  And that was not merely good luck, but instead the calculated result of good policy choices by the Federal Reserve and the Bush and Obama administrations—choices that were guided by economists.

The Irony of Economics: The Incentives for Those Seeking Economics Training Do Not Reward Learning to Actually Understand the Economy

Notwithstanding the advances in economic knowledge that we have made, over the course of decades and centuries, however, it remains true that too many economists have little or nothing useful to say about the world around them.  Why, readers may wonder, are these people credentialed economists, rather than failed dropouts from economics programs?  And why are these very economists the people who are training future generations of economists?

The bottom line is actually quite simple: Modern, cutting-edge training in economics has very little to do with understanding the world, and everything to do with mastering “technique” that is untethered to reality.  Success for economics students is based not on demonstrating the ability to generate insights about the actual economy, but rather on the ability to impress other economists with one’s technical skills—such as skills in devising and manipulating abstract models, or in following the latest fad in statistical research.

These techniques are extremely difficult and time-consuming to master, because the economics profession in the post-World War II period earned its prestigious place in academia—proudly proclaiming itself the “queen of the social sciences”—by emphasizing high-level mathematics.  Students who majored in Economics in college are often at a disadvantage when they get to graduate school in Economics, where they find themselves competing with students who majored in Mathematics, Physics, or Engineering.

To be sure, some important insights in economics have been made possible by the use of advanced mathematics.  The problem, though, is that math has too often become the end in itself, rather than the means to an end.  While many top-flight economists will admit as much, it seems that no one is willing or able to turn around the group-think that has turned most Economics departments into outposts for de facto abstract mathematicians.

None of this, of course, means that there are no economists who understand the economy.  As I noted above, the world would almost surely have descended into a second Great Depression in 2008, were it not for the heroic work of people like Fed Chairman Ben Bernanke.

The fact that economics training is so thoroughly divorced from reality does, however, mean that excellent economists like Bernanke, Paul Krugman, and others are able to understand real-world problems almost by happenstance.  That is, while all economists are trained to perform certain technical tasks, it is sheer coincidence when an economist successfully turns those technical skills toward solving real-world problems.  Those special few excellent economists surely use many of the skills and insights that they learned in graduate school (and after), but they could have been just as successful as economists without ever being able—or even inclined—to think insightfully about real-world problems in useful ways.

Similarly, economists are not trained to be good teachers.  Some economists happen to be good at teaching students, but nothing in the world of graduate training in economics or after is set up to encourage or reward good teaching.  In fact, many incentives are set up to affirmatively discourage good teaching.  (I am not kidding.  Many a graduate student in Economics has been told not to become known as a good teacher—lest he or she, as a consequence, be thought unserious as an economist.)

Economists often describe themselves as engaged in studying how self-interested people respond to incentives.  Sadly, if we look at economics itself from this perspective—a viewpoint focusing on incentives and the force they exert—it is clear that economists have made themselves largely useless (or useful only by happenstance) by setting up incentives that push young economists to make narrow, self-interested decisions not to spend their time understanding the way real economies work.  The incentives were unmistakable, and the young economists responded in a predictable way.

While this indictment might seem extreme—because there are definitely plenty of well-motivated, smart economists out there—the broad situation truly is as I have described it.  Economists have precious little professional incentive to be “practical” or “policy-oriented,” and it shows.

The Unlearning of Important Lessons: The Professional Turn Away From Using Policy to Solve Economic Problems

The problem, however, goes far beyond the perverse incentives that push economists to focus only on abstract conversations with other economists who are equally distracted from concrete empirical realities.  There is a set of central economic insights that truly have stood the test of time, and that have contributed to the marked increase in economic prosperity we have seen in the years since John Maynard Keynes revolutionized the field.

Yet those insights have been under assault from a large cadre of economists who have used the abstract theorizing that I have described above to spin fantasy-based theories of how the economy works.  Those economists lend credentialed support to politicians who propose policies that would make matters worse, by having the government engage in so-called “expansionary austerity” (which I critiqued in a Verdict column in December 2011), and other damaging policies.

The economists who know better are genuinely flummoxed by their colleagues who misapply or misunderstand economic theories.  Paul Krugman, for example, has commented extensively on his blog (and occasionally in his op-ed columns for The New York Times) about economists who brazenly ignore and mischaracterize established economic concepts.

Earlier this week, for example, Krugman ended a blog post by asking the following question:  “At a basic level, this is all kind of terrifying.  If top financial officials and credentialed economists can’t even avoid getting confused about [a very basic economic concept], what hope is there for rational policy discussion?”

Krugman is right to be both frustrated and worried.  The policy mistakes that have prevented us from putting millions of unemployed Americans back to work were avoidable.  The economists (like Krugman) who happened to have both the “chops” to do well as academic economists, and the insight to diagnose economic problems, said so loud and clear when those policies were being debated.  Yet the policy debate continues to be degraded by those economists who, for example, blame unemployment on people’s supposed refusal to look for work—even as the economy continues to generate barely enough new jobs to absorb the increase in the country’s population, leaving fifteen million people unemployed or underemployed, no matter how hard they look for the jobs that still do not exist.

Even the Best Economists Have a Blind Spot, Believing That Their Own Success Validates the Usefulness of Economics Training

Even the rightly-praised Professor Krugman and others like him, however, are in many ways victims of their own success.  They were wildly successful as economics graduate students, and they saw immediate success as young economists.  They were given good jobs in top Economics departments, and many were rewarded with prestigious prizes.

Even those prizes, however, are awarded not for any great insight into how to solve economic problems, but rather for an economist’s ability to “play the game” of modern economic research.  Krugman’s own work, while containing interesting applications, resulted in his winning the two top prizes available to economists because of his theories’ technical sophistication, not because his theories convinced economists to think about the real world in different ways.

To the top economists, therefore, it is nearly impossible to understand how their fellow superstars could be so far off base.  They all studied the same things, and they all checked the same boxes on their resumes.  Now that it is obvious that their common training did not actually discipline the thinking of those who choose political expediency over intellectual integrity, the cognitive dissonance is nearly impossible to process.

This dissonance has, moreover, been going on for some time.  In the 1980s, the late Paul Samuelson, one of the greatest economists of the post-World War II era, noted the emergence of graduate students and young professors who cared more about being clever (in the way that would impress other graduate students and young professors) than about actually understanding the real economy.

Samuelson (who was more responsible than anyone for the turn within economics toward high-level mathematics) once recounted a conversation with a young professor who confidently asserted that people will save money to offset any spending by the government, salting away their money for the day when they will have to pay higher taxes.  Finding this preposterous (as, indeed, it is), Samuelson admitted that he always assumed that graduate study in Economics would drive students crazy, but that he and his senior colleagues always assumed that such flights of fancy would end once students had been able to regain their senses.  That was no longer true, and Samuelson was rightly worried.

As we now see, things have only gotten worse in the decades since Samuelson saw the initial consequences of what he had helped to set in motion.  The better economists apparently continue to believe that it is possible for their profession to provide perverse incentives, to push their best students to value form over substance, and to fail to discipline those who engage in wholly dishonest analysis—and yet to still somehow produce young scholars who happen to have the Herculean strength to overcome all of those incentives and become the kind of economists who can truly serve society well.

That is fondly to be hoped, but the evidence shows that the merit of our good, and even our excellent, economists is more a matter of luck than design.  Society is paying the price for an economics profession that long ago turned away from its core mission, rewarding equally those who honestly evaluate economic problems with integrity and accuracy, and those who ignore or distort reality for their own ideological ends.  We should be happy that we have the good economists that we do have, but we should not continue to be surprised that there are so many bad ones.  As economics itself could tell us, as long as we provide incentives to the bad ones, we will have to tolerate them, too—even in an economic climate where we need good and great economists more than ever.

Neil H. BuchananNeil H. Buchanan, a Justia columnist, is an economist and legal scholar, a Professor of Law at The George Washington University, and a Senior Fellow at the Taxation Law and Policy Research Institute, Monash University (Melbourne, Australia). He blogs at DorfonLaw.org, and he is the author of The Debt Ceiling Disasters: How the Republicans Created an Unnecessary Constitutional Crisis and How the Democrats Can Fight Back.
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  • Ted Harvatin

    Three economists fall into the bottom of a deep well.  The first one says, it’s too steep to climb out of here. The second one says, we are say far down nobody will hear our cries for the help. The third one says, we can get out of here. First, assume a ladder.

  • http://www.facebook.com/BrandyMMiller1975 Brandy Miller

    IMHO part of the reason that economists cannot and rarely do successfully integrate their training into something realistic and practical is that economics isn’t just about math and money.  At the core of it, it’s about psychology – how people think and how they are likely to behave in a given situation.  If you do not take the human factor and place it in your equation, you are going to be off base in every practical sense.  Furthermore, I think that many of them have idealogies which prevent them from examining possible factors and possible correlations between factor x and result y.  An example of this is the correlation between population reduction and economic collapse, which I have yet to see any economist give serious attention to examining.  It isn’t the third world countries right now who are experiencing the greatest burdens in the global economy crunch – it’s your first world countries who have sacrificed the future gain which comes from population increase and are now suffering a resultant economic crisis.

  • http://www.facebook.com/people/Barbara-Louize/100002343239181 Barbara Louize

    Why have no “good” or “great”economists noticed that getting millions of people back to work is obviously impossible because there are no jobs for them in the USA, because those jobs have been off-shored  by gigantic corporations looking to increase profits by finding employees who will work for lower and lower wages.  Conservatives, if they admit to that reality, blame the off-shoring on “Big Labor.”  Others, unafraid to actually confront reality, blame off-shoring on Greed.  The USA cannot have a national economy based not on Manufacturing but on Finance and Service, if millions of Americans are unemployed or woking for a lot less than they used to. People without money left over after housing and food bills cannot participate  in a Finance economy, and can also not pay for any kind of Service.   

    And it is not possible to “fix” the economy without considering ideology.  The US economy is based in capitalism, and addressing the faults of capitalism  is an ideological no-no.

    Basing one’s view of an economy on how well the rich and those angling to become rich are doing is foolish, if not intellectually criminal.  Even ignoring the truth that all non-richUSA citizens are human beings who inherently deserve to live in a society which does not of necessity impoverish them to make the rich richer, it is insane to hope an economy based on making profit by selling things will get better when most people do not have enough money to buy anything.

    Although it was nice to see a “real” economist admit that the education of economists is based on fantasy and has no connection to the real world.  

  • http://www.facebook.com/people/Barbara-Louize/100002343239181 Barbara Louize

    I don’t expect my comment to be approved.  Discussing the relationship of the rich to the economy, or using the word “capitalism” is forbidden in discussions of the U.S. Economy, I know.    And I didn’t even use the words “socialism,” or “Karl Marx,” or “theft.”  Write me at my email address, if you have the courage:  kkhadee@Gmail.com, but I honestly don’t think you will.

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  • Edward Tomchin

     What’s so hard about figuring the recession out?  It started politically when Clinton and Bush began deregulating the banks and banking industry, which created a real estate boom by making mortgages to anyone they could drag in off the streets whether they could make the payments or not.

    As the prices of homes rose astronomically more banks were acquiring mortgages that weighed heavily on their balance sheets, so to remove these liabilities, first the investment banks then the depository banks started to package good and bad mortgages into investment vehicles and resell them to large investors who repackaged them into other investment vehicles.

    Then some creative bankers started using little known tools such as Credit Default Swaps and Collateralized Debt Obligations to remove the liability further from their balance sheets.  As the CDSs and CDOs began to grow in popularity, the also were repackaged and sold as further investments.

    This kept going until the original assets — the real estate underlying the mortgages, CDSs and CDOs — was leveraged so far out (some estimate as much as 8,000%) that the liabilities involved were astronomically greater than the underlying assets.

    Then Adam Smith’s invisible hand slapped this house of cards hard and it came tumbling down in 2008 and most banks rupted and were in turn bailed out (except for Lehman which was hung out to dry as a lesson) by the government putting the entire country into a mountain of debt it will take us decades to dig our way out from under.

    This miasma of debt and failure had spread throughout the developed world and was abused even further by the Euro nations so that, even now as the U.S. is beginning to climb back out of the hole, there is the chance that some European nations will go bankrupt and drag the entire western world back into an even bigger hole.  Some are even betting on it, looking to make money on the failure of the West’s economies, though I have to wonder what they will do with all that money in an economy that no longer exists.

    But we have not gone over that cliff yet and may not if we understand some basic principles of human greed and motivation.  Greed, renamed profits, can work in wondrous manners to grow new wealth in innovative ways — IF we can learn to rein it in at a moderate and sane level of growth.  Our thirty year experiment in fiat currency and digital economics can be highly productive of new wealth as long as the leveraging is kept within sane boundaries.

    We have learned a valuable lesson in economics from this recession.  We have learned exactly how far we can leverage hard assets before they become toxic to the economy.  If we can keep to those boundaries, we can continue to grow at a remarkable rate and, with the addition of another three billion producers and consumers to the global economy, we just may eliminate poverty before the end of this century.

  • http://www.facebook.com/michael.hoexter Michael Hoexter

    Well diagnosed, Prof. Buchanan!! 

  • Anonymous

    Like you, I was frustrated with the deluge of different explanations of what we did wrong and when, the contradictory systemic (macro) recommendations, and the absence of  any clear plan.

    Then Alpert, Hockett and Roubini did exactly what I felt was needed.

    And the world shrugged.

  • http://isomorphismes.tumblr.com isomorphisms

    It sounds like you just think people who disagree with you are being “theoretical” or “abstract”.

    Plenty of abstract work does serve a purpose; and there is plenty of empirically-driven discussion of both “established” and new economic theories. For example the minimum wage, you need to have models that explain why it’s good or bad, and there are econometric studies that estimate the impacts of min-wage changes.

    _______

    My only problem with the economics profession is that most of them have worked 99%+ in academia. Few have started a business or traded. This results in poor intuition.

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  • Anonymous

    Could it be that economists (or anyone else for that matter) cannot solve the economic problems of the country because the problems are intrinsically “unsolvable”?  By this I mean they are unsolvable as one single solution applicable to all constituencies, all economic and geopolitical environments, and a solution capable of  lasting in perpetuity.  It may just be that the real world demands many solutions, and the solution favored by one economist may be the antithesis of the solution proposed by another, while perfectly applicable to the demographic it intends to affect .  It may be that solutions are needed in a stream of short term fixes, to be serially implemented with modifications in each derived from the tangible experiences of the prior solution.  A “learning model” rather than a didactic model.

    From another perspective, maybe the problem is not that economists are not acting intelligently in addressing the economy, it may be that the public perception and their evaluation of the activity is incapable of rationalizing the proposed solutions in the light of the real world dynamics.  i.e. wanting a “one size fits all solution” and wanting it NOW!  Any person offering such an answer to the problems must certainly be feared as a charlatan and his claims very carefully scrutinized before investing in his proposal.

 

Access this column at http://j.st/ZpxU