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.