THE DEATH OF ORTHODOX ECONOMICS AND THE VALUE OF KNOWLEDGE

In my less charitable moments, I’ve often said that economics must be the only discipline where the practitioners believe that if there is a divergence between theory and the real world, it’s the real world that should be changed to conform to the theory rather than the other way around.

Well, here is a timely confession from Professor Willem Buiter, an eminent practitioner, that bears this out. In a blog posting unelegantly titled The Unfortunate Uselessness of Most State of the Art Academic Monetary Economics, he launches into the attack with all the subtlety of a flying brick:

The Monetary Policy Committee of the Bank of England I was privileged to be a ‘founder’ external member of during the years 1997-2000 contained, like its successor vintages of external and executive members, quite a strong representation of academic economists and other professional economists with serious technical training and backgrounds. This turned out to be a severe handicap when the central bank had to switch gears and change from being an inflation-targeting central bank under conditions of orderly financial markets to a financial stability-oriented central bank under conditions of widespread market illiquidity and funding illiquidity.  Indeed, the typical graduate macroeconomics and monetary economics training received at Anglo-American universities during the past 30 years or so, may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding.  It was a privately and socially costly waste of time and other resources.

Most mainstream macroeconomic theoretical innovations since the 1970s ... have turned out to be self-referential, inward-looking distractions at best.  Research tended to be motivated by the internal logic, intellectual sunk capital and esthetic puzzles of established research programmes  rather than by a powerful desire to understand how the economy works - let alone how the economy works during times of stress and financial instability.  So the economics profession was caught unprepared when the crisis struck.

Skip the technical parts if you don’t understand them, you’ll still benefit from the overall message. But do read the comments, which represent a wide range of responses, many quite interesting in their own right. Though most praise or support the writer, there are a few comments that take issue with the good professor. One of them quotes a joke that captures the insight with which I began this post: “An economist is someone who, having heard that something works in practice, then ripostes “Ah! But does it work in theory?””. Another – rather miffed by the attacks on Anglo-American orthodoxy, accuses him of hypocrisy:

What has Herr Buiter ever contributed, academic-wise, to a literature that can help us understand the current predicament? How have Professor Buiter's theories helped us forecast the recent disaster? His hypocrisy is revolting (check out his lecture notes for students and you'll see the sort of crap he was teaching).

To some extent all disciplines suffer from a tendency towards orthodoxy - a gradual blindness of vision and intellectual arteriosclerosis. But in the case of economics, the arrogance of power that has accompanied this blindness and unwillingness to change has ensured that it will take something of the scale of the current financial catastrophe to unseat the theory – and perhaps not even then. The only protection against this is to be humble enough to accept constructive criticisms, and the listen to serious dissenting voices.

I wonder what economics departments are thinking of teaching students, now that the emperor’s nakedness is so gobsmackingly obvious to the crowds. I keep encouraging my students bent on studying economics at university to take other social sciences (psychology, sociology or social anthropology) or a humanities (history, philosophy or literature) course to accompany their studies in economics. Dismayingly, I find that it is rare for even the brightest to seek connections between the different disciplines that they study, unless (as in the case of mathematics, perhaps) they have to. Touchingly (or perhaps cynically), they think that the same lucrative career paths are going to be open to them as they were before for economics graduates. My guess is that the hold of the orthodox economics on public life has been so pervasive that the deflation of the discipline is going to take a while. Meanwhile, prepare for a prolonged period of misery and economic distress as economists figure out that their discipline, while it may be passably good at explaining the past, is useless in dealing with the future.

This is in fact the message being purveyed by the iconoclastic Nassim Nicholas Taleb, who seems to have made it his vocation to take the pants off the economic profession. It's hard to dismiss a man who speaks several languages, has written three books, managed a hedge fund, is comfortable with using skills of mathematical modelling and philosophical argument, and, to top it all, seems to have reduced his opponents (academic economists) to incoherence or silence. The dissatisfaction with orthodox economics itself seems to be developing into an orthodoxy, but the recent catastrophe in macroeconomic management seems to have imparted  particular pungency to Taleb's message. His message is that economics has a terrible record of predicting the future, because most economic events happen in what he calls 'extremistan' (as opposed to 'mediocristan'), where single and often unprecedented events can often have catastrophic consequences. The standard practice of estimating probabilities of future events on the basis of past events is almost never a good idea in extremistan. It is therefore a good idea (says Taleb) to be an "empirical sceptic", not to rely too much on generalizations, but on trial and error based on experience and empirical evidence, and finally, not to take risks with possibilities whose outcomes are likely to be random and unpredictable. All this of course has he effect of dethroning economics from its self-appointed pre-eminence as the physics of the social sciences. 

All these controversies, and the circumstances that have given rise to them, have imparted a fresh impetus to the need to ask old questions: what is worth knowing, what is worth teaching. yet by some strange and tragic irony, it is those disciplines where one can ask the old questions that are being called upon to justify themselves, precisely when the so-called "practical" sciences of economics have failed spectacularly to yield urgent answers to questions from the real world.