Critics of Economics Are Dwelling in the Past

(Bloomberg View) -- In last July, writer and researcher John Rapley penned an article in the British newspaper the Guardian entitled “How Economics Became a Religion.” This followed on the heels of shorter but equally acerbic critiques by Simon Jenkins in the Guardian and Jeremy Warner in the Telegraph, earlier that year. In 2015, the Guardian published an article by Joris Luyendijk called “Don’t let the Nobel prize fool you. Economics is not a science,” while Liam Halligan had a similar piece in the Telegraph in 2013.

Annoyed with how standardized -- and how inaccurate -- this type of broadside had become, I wrote a response. I listed some mathematical econ theories that had enjoyed great predictive success in the real world, demonstrated that economics has become a much more empirically grounded discipline and showed evidence that economists were mostly not cheerleaders for unregulated markets.

But the broadsides keep coming from across the pond. In the forthcoming May 2018 issue of Prospect magazine, think-tank director Howard Reed published an article with the headline “Rip it up and start again: the case for a new economics.” Reed’s critique follows the by-now-standard pattern I described in my earlier rebuttal, almost to a T. He begins by castigating economists for missing the 2008 financial crisis. He alleges that social science can never attain the precision of natural sciences like physics. He lists common theoretical assumptions that seem unrealistic. He denounces economics for enabling right-wing, laissez-faire policies. And he concludes with a call for embracing a new idea -- in this case, a “deconomics” that looks more like sociology or anthropology.

As usual, the basic attacks have an element of truth. Macroeconomics definitely tended to ignore the financial sector before the crisis, and downplayed the possibility of a long recession. Unrealistic assumptions are common­ in many models, especially in macroeconomics. And for decades, writers, policy advisers, and think-tankers successfully promoted a libertarian caricature of economics with relatively little pushback from academia.

But by now these failings are well-known. The problem with Reed’s critique, like so many of the others listed above, is that it leaves out much of the story. Auction theory, random-utility models, matching theory, gravity-trade models, and some other mathematical theories have enjoyed enormous quantitative predictive success, sometimes using the neoclassical assumptions of utility maximization and rational action that Reed derides. Economists tend to lean to the left politically, at least in the U.S., and tend to favor interventionist policies over free-market nostrums in a variety of contexts.

Many of Reed’s allegations seem out of date. For example, he alleges that economists still “worship” at the “temple” of classic models like the general equilibrium theory pioneered by Kenneth Arrow and Gerard Debreu. Although this model -- which assumes that each buyer and seller is too small to affect the overall market -- remains influential, many theorists now prefer to work with game theory. Unlike the old neoclassical theories, game theory concerns strategic interaction between different people. It can encompass things like wage bargaining, fraud and lots of other things that neoclassical equilibrium glosses over or leaves out.  And in game theory, free markets full of rational actors can easily, even regularly, lead to inefficient outcomes that require government intervention.

Or take Reed’s allegation that consumer theory -- a staple of introductory economics courses -- often “says nothing at all.” Yet a version of consumer theory called random-utility discrete-choice modeling -- which adds in a bit of randomness to the basic model -- is very useful and powerfully predictive for all sorts of real-world applications, from transportation planning to marketing to disaster planning and more. These models are now being superseded by various forms of machine learning, but their successful employment for decades puts the lie to the idea that consumer theory was a useless exercise.

A third mistake comes when Reed asserts that “Power relations in the labour market go unexamined.” This ignores several recent high-profile papers that have illustrated how concentrated labor markets pay lower wages, implying that power relations are very important to the equation. Meanwhile, economists have been theorizing about such power relations for decades, and the most popular type of labor market models now include a crucial element of wage bargaining.

These are just a few examples where Reed mischaracterizes the state of the profession. On an even more basic level, Reed and the host of other critics bashing economics in British magazines and newspapers seem to fundamentally misunderstand what modern economists do for a living.

The idea seems to be that economists mainly engage in a deductive enterprise, dispensing high theory from Olympian mounts of authority. This may have been an accurate stereotype at one point, but these days it bears little resemblance to reality: most economists are out combing through mountains of data, straining to glean facts about how the world really works. Economists study gender relations in the workplace, racial gaps, changes in labor contracts, early childhood education, minimum-wage policy, regional opportunity gaps, automation and the future of jobs, and a vast array of other highly important, immediately relevant topics. Sometimes they use theory to help them understand these phenomena, but usually the core work is empirical analysis of hard data.

In other words, the standard British-magazine critique of the economics profession isn’t just tiresome, and it isn’t just wrong in the particulars -- its entire vision of what economics needs to become is distorted by a warped picture of what the profession is today. It is attacking a caricature that ceased to be accurate many years ago, if it ever was. And by attacking this outdated caricature, these critiques are doing a disservice not just to laypeople, but to more serious critics who understand the real challenges that the profession does face.

So the by-now-formulaic anti-econ broadside should disappear from the pages of British newspapers. But will it? I see that the Economist is running a series of articles on the “shortcomings” of the  profession. Let’s hope it does a better job than its peers.

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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