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Home Publications Blogs Beat the Press Economic Theory Predicts that We Would Not Have Very Good Economists

Economic Theory Predicts that We Would Not Have Very Good Economists

Tuesday, 30 November 2010 06:51

Suppose that school teachers could keep teaching and get regular promotions year after year no matter how badly they performed in the classroom. Suppose also that there was no incentive to teach well. Economic theory predicts that we would get a large number of unmotivated mediocre teachers.

Okay, suppose that the people who design economic policy never need to worry about getting fired no matter how badly their policies turn out. They continue to hold their jobs and get regular promotions. Under such circumstances we should expect that we would get mediocre economists.

This simple fact should have been included in an interesting WSJ discussion of efforts to promote new directions in economics. If there is no incentive to get things rights, then economists should expect that economic policy will be largely done by people who are not competent.

Comments (20)Add Comment
Makes sense to me.
written by Procopius, November 30, 2010 6:29
In fact, that seems to apply to the whole commentariat. None of them ever get fired. They have no penalty for being wrong. Bill Kristol is so wrong that you can chart a good course just by doing the opposite of whatever he says is good. All the Sunday talk show regular guests. I'm grateful Jason Linkins live blogs them on Sundays so I don't have to watch them (well, I stopped watching TV years ago anyway, so that doesn't really apply, but it's amazing how they can shout the same absurdities week after week [they don't seem to just talk any more] and still enough people tune in to the shows so they can sell advertising).
job needed
written by frankenduf, November 30, 2010 8:11
i have a great idea!- we should freeze the wages of some middle class civil servants- not in the military of course- nobody wants to cut military spending- this will save the government alot of $- and this will score me a job as a federal economist!- oh, and we should freeze the wages of some bank ceos, as this would save the banks alot of $, and align incentives with bank viability!- rats, for some reason, i just got fired...
environmental pressure
written by david, November 30, 2010 9:42
Good point. I read that discussion already (via Krugman's blog), too bad no one thought of that. I mean, Farmer, he's got yet another well-paid gig with a few results to lure Soros in, I wonder if he'll build this into his model?
Flawed beginning
written by NewDealDem, November 30, 2010 9:46
I have a real problem with this part at the beginning of the WSJ article:

Disparate as their ideas may seem, all three are grappling with a riddle that they hope will catalyze a revolution in economics: How can we understand a world that has proven far more complex than the most advanced economic models assumed?

Plenty of economists and non-economists predicted and understood, very simply, why the "Great Recession" came about. This whole theme that nobody knew this was going to happen and economics has to be rethought is a bunch of BS.
all economists are not macro economists....
written by pete, November 30, 2010 10:27
Why is the validity of "economics" restricted to forecasting. Economics is simply the study of getting the most out of scarce resources. Most (competent?) economists agree that human nature means that most people make mostly *rational* or boundedly rational decisions most of the time. We can even have rational bubbles. Economic policy mostly involves messing with the constraints, messing with relative prices through taxation, or redistributing income or wealth. Somehow this has led the popular press to describe economists as *liberal* or *conservative* rather than simply discussing the merits of the arguments objectively. This is unfortunate in that very *competent* economists are labeled *incompetent* because the results of their analysis are deemed either liberal or conservative, and then tossed aside. As long as this is the norm, that economists are either considered brilliant, such as the oracle, Dean Baker, or insane, such as the incompetent (according to the oracle) Nobelist Krugman asking for a housing bubble in the midst of a housing bubble, as long as we use this categorization, we are doomed. I don't think any other science (other than climate science) uses this awful split. Instead, physicists or chemists, etc., argue merits of models etc. in a rather sane fashion.

Is a carbon tax liberal or conservative? To me the discussion involves simple welfare economics. Is an inflation surprise as a tool liberal or conservative? Neither Marx nor Hayek would approve. Is a redistributive tax structure liberal or conservative? Depends on the welfare model..Rawls? Sen?

Calm down, drop the incompetent, argue within the science, not in meta-economics.
written by izzatzo, November 30, 2010 10:48
We're looking to hire a 'what is' Positivist Economist rather than a 'should be' Normative Economist. Are you qualified? (Yes.)

OK. Here, answer this question that we use to screen out Moral Relativists and develop a short list:

What is the cost and benefit of doing a cost and benefit study on a cost and benefit study?
Brilliant post!
written by David Cay Johnston, November 30, 2010 11:53
How nice to get a good laugh with all the dreary news because of half-baked theories sold by smug economists who keep getting it wrong, especially when those who keep seeing the problems, accurately describing them and warning accurately about the coming problems get dismissed as cranks, nut cases or naive.

We need empirical reality, not dogma.

Bravo, Dean.
written by liberal, November 30, 2010 12:01
NewDealDem wrote,

This whole theme that nobody knew this was going to happen and economics has to be rethought is a bunch of BS.

Exactly. Moreover the article fetishizes models. Dean didn't need a complicated model to understand we were in a housing bubble.
written by liberal, November 30, 2010 12:06
pete wrote,
Instead, physicists or chemists, etc., argue merits of models etc. in a rather sane fashion.

You're kidding, right?

First, sciences like physics don't have normative implications like economists do. Your pretending that there's no reason to distinguish economics from other sciences demonstrates either amazing naivete or disingenuousness.

Second, economics itself insists that incentives affect individual behavior. It's obvious that most economists face enormous incentives to twist their theories to favor the rich and powerful. And it's quite clear from the history of economic thought that this is indeed what happens.
written by liberal, November 30, 2010 12:07
pete wrote,
Most (competent?) economists agree that human nature means that most people make mostly *rational* or boundedly rational decisions most of the time.

LOL. Sure it does, when you define "rational behavior" in a tautological way.
Rational? -- Rational From Whose Perspective
written by Ron Alley, November 30, 2010 12:50
Economists use the term rational to define an individual's behavior in an exaggerated way. Almost everyone believes he acts in a rational manner and when asked will state that he almost always acts rationally. Almost everyone can explain why his behavior was rational. Who can really quibble with self-perceived rationality?

Economists tend to substitute their definition of rational for the individual's definition. Perhaps economists think themselves objective or at least prefer their definition of rational behavior to the individual's perception of rational behavior.

Unfortunately, humans and their behavior defy such objectified labels as rational. We are surrounded by a world of examples of human's whose rational behavior defies objective labeling.

Recent examples that come to mind are the ordinary people in the Tea Party movement who made rational choices and voted for Tea Party candidates. I'm sure that everyone of them could explain why their choice was rational. Would economists find their votes rational?

Human behavior is human behavior, period. Economists, psychologists, politicians, marketers and financiers must take it as they find it, struggle to understand it and make the most of it.
written by diesel, November 30, 2010 12:55
Bertrand Russell constructed a scale that ran, Math, Physics, Chemistry, Biology, Sociology, Psychology (which I reconstruct from a fuzzy memory). As you can see, the scale runs from the precise but emotionally contentless Math to the immeasurable but extremely "relevant" immediate reality of pure ineffable subjectivism at the extreme end of psychology. Economics would fit near sociology. It employs mathmatic models to describe decisions that ultimately rest on individual and collective emotionally-charged choices.

Because the field covers such a wide expanse, it seems likely that a successful economist would need to know a lot about a lot. Not a little about a lot, but a lot.

We may construct matrices and solve as many simultaneous equations as our computers can handle, but judgement is still required in assigning multipliers to the variables. And this judgement must not only simultaneously hold in mind all the relevant factors, to which it has assigned the correct valences, but must also be aware that its models are merely representations, and compensate accordingly.

The true incentive to "get it right" is not economic reward or avoiding punishment in the market, but striving for knowledge.
written by pete, November 30, 2010 1:15
I believe Hayek agreed that the amount of information necessary is overwhelming, and hence the bias towards letting markets figure things out rather than central planners like Bernanke/Geitner/Krugman...
All economics is undead, and mere anarchy is unloosed upon the world
written by John Emerson, November 30, 2010 1:50
The politics was there first, and the science was built under it. The Laffer Hypothesis was almost instantly refuted and abandoned, but who cared? The Great Moderation was just a hypothesis, too: a certain regularity was observed and pumped up into a law which happened to be highly convenient to one political tendency — but there never was any law there, it was like a lucky gambler ‘s system for winning the numbers game. The Efficient Markets hypothesis was much the same. Its weak spots were known from the beginning, but there was no way to force its backers to admit anything, and it was only finally tested when it it was written into policy and the world economy collapsed. The experiment that falsified the Efficient Markets and Great Moderation hypotheses is the world we live in – a world which may never recover from what is already the longest and deepest recession since 1929. But the political agenda is rolling on, because, really, who cares? The next thing we need to do is reduce Social Security benefits.

Economists can only test their theories by taking political power; otherwise these theories are purely scholastic and hypothetical.

More at the link.
written by Ben, November 30, 2010 3:53
As a Physicist and Chemist who has dabbled in several levels of high level modeling, I can say with absolute certainty that nearly every mathematical model constructed to the model the macroeconomy is overly simplistic and completely flawed. As scientists, we cannot find an exact solution for a 3 body problem. What makes economists think they can solve a 6 billion body problem? The economy is an ever evolving complex system that surely cannot be summed up with such a primitive mathematical equality like Y = C + I + G + (X - M)
written by BillA, November 30, 2010 4:23
Economic Political Theory Predicts that We Would Not Have Very Good Economists Politicians
- economists seem the least of our problems just now
written by diesel, November 30, 2010 4:26
Right on, Ben.

And yet, as you no doubt know, statistically large entities can be modeled with an authority that cannot be applied to individual entities. So there is some "truth" to sociological equations.

The problem with every social science is that chains of reasoning are just that--chains. They pull better than they push. They help us make sense of the past, where they seem to link historical events in an unassailable chain of logical certainty, but prove less capable when projected into the future.
written by dcc, December 01, 2010 8:30
What part of economic theory is this referencing - rational action?
But they're very good at arcane math!
written by ts, December 01, 2010 8:43
And some of them have nice beards.
Economic science x poverty
written by Vitor, December 02, 2010 4:54
If we had so many good economists there would be less poverty in the world. Please, read the idea I tweet about @NobelEconomics and comment on the article. Why good economists don't give a look at this idea? I search research partnership.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.