Economists have come to rival even journalists and politicians in lack of public esteem. That might be partly because so many economists seem as interested in journalism and politics as in advancing their science. But thereâ€™s also a deeper problem: Far from advancing,
the science of economics has been going backwards.
Economists tend to be either practitioners or theorists. Practitioners on Wall Street, in central banks, and in government aim to say where the economy is headed and offer advice on how to improve its trajectory. Academics in universities and business schools spin the theories that guide the practitioners.
The trouble is, too many theorists â€” especially in the mainstream of the discipline â€” have drifted far from the real world. Their ambition has been to build mathematically elegant and internally consistent models of the economy, even if that requires wholly unrealistic assumptions. Granted, just as maps have to simplify complex terrain, theoretical models must ignore aspects of reality to be any use. But thereâ€™s a line between simplification and gross distortion, and modern macroeconomics has crossed it.
Before the 2008 financial crisis, for example, the standard models more or less ignored finance. No banks, no indebtedness, no leverage. As a result, they couldnâ€™t make sense of the worst global recession since the 1930s. They also typically asserted that fiscal stimulus had little or no effect on consumer spending, which follows from the modelâ€™s mathematically convenient assumptions. If President Barack Obama and Congress had applied such thinking in 2009, the recession would have been much worse. Fortunately, policy was guided not by modern macro but by old-fashioned Keynesianism, long since abandoned by the academy.
Given such spectacular failures, youâ€™d think the profession would have gone back to the drawing board. It hasnâ€™t. True, some tweaks have been attempted, and some scholars have done valuable work on the history of crises, the role of household debt, the drivers of inequality, and much else. But the error at the core of modern macroeconomics â€” that mathematical consistency matters more than empirical relevance â€” prevails. Just glance through the leading academic journals. Or maybe take our word for it.
Reviving economics as a science will require economists to act more like scientists. If models are refuted by the observable world, toss them out. Rely on experiments, data and replication to test theories and understand how people and companies really behave. Editors of the most prestigious (career-advancing) journals should open their pages to research that challenges the standard theories, even if it doesnâ€™t yet point to encompassing new alternatives.
Practitioners can help by being more discerning. Whenever an economist says â€œin our model,â€ beware. Demand to know what assumptions the model makes, and question those assumptions as severely as the theorists test for valid inference â€” because valid inference from bogus assumptions is useless. Where possible, and in the same spirit, pay closest attention to empirical and historical research.
In just about every branch of science, theoretical research has been crucial to achieving breakthroughs. In macroeconomics, it has held progress back. To stop the discipline fading into irrelevance, this will have to change. Who knows? If it does, economists might finally start getting some respect. â€”Bloomberg