After the 2008 global financial crisis, nearly every month or so an essay goes viral that discusses, often at length, how the profession of economics needs an overhaul. Not that there is no truth in the statement but the offered reasons are often seriously deficient in their understanding of what economists do and the strengths and limitations of their tools and methods.
add_main_imageThe usual criticisms are the following:
1. Economists ignore the importance of psychology, sociology, history and culture.mobAds
2. Economists think of human beings as some abstract mathematical machines.
3. Economists write very simplistic models of the economy forgetting that they don’t exactly depict the real world and that these models rely on very strong, and perhaps untenable, assumptions.
4. However much the economists wish it to be, economics is not a natural science. NextMAds
Let us take these in order. A criticism like “Economists ignore the importance of culture” sounds profound until we realize that it is banal. For example, for most goods the quantity demanded decreases if the price increases. This statement is valid both in downtown Manhattan and in a tiny Indian village. Obviously, in making this statement I did ignore the cultural aspect but I leave it to you to judge the importance of culture and history here. Arguably my example was too simplistic, and indeed it was. It is only when economists are seeking such general principles that they ignore culture, which is rather rare. If an economist were to calculate the price elasticity of demand for a Mercedes—percentage change in demand for Mercedes with a one percent rise in price—(s)he would most certainly not overlook the culture and context of the setting. One could glance at the recent issues of The American Economic Review, a top journal in economics, to see that an empirical paper set in sub-Saharan Africa will never, based on the evidence there, would indulge in a policy recommendation for Scandinavia, or even India. So, it may break the hearts of many but economists are indeed aware of this issue called “culture” and have tried to study it since a long time. A visit to Google Scholar might be helpful in finding several papers that study culture and economic phenomena.
To give an example, if in explaining a certain macro phenomenon I assume that a demand curve is upward sloping, a formal mathematical model will not leave any room for me to hide this assumption. Hence, the success or failure of the reasoning I offer will often depend on the sensibility and validity of my assumptions which is where, perhaps, the idea of doing economics as “science” comes from. Indeed, there have been recent critiques such as Paul Romer’s paper “Mathiness” where he argues that models in the theory of economic growth often hide substantive assumptions in mathematical symbols. But the prescription here is not to do away with mathematical models.
Having said all of this, I would not like to suggest that everything is perfect in economics today. There are several shortcomings especially in our predictive power. A lot many experienced practitioners have written extensively about other possible future avenues to improve the practice of economics. I personally quite enjoyed an essay by Robert Shilleron the importance of building in narrative and story-telling in the practice of economics. I strongly feel that a number of economists lack the art of journalistic story-telling, rare in journalism itself these days. Ariel Rubinstein from New York University has written numerous provocative and insightful essays, on the purpose of economic models and economic theory. One of my favourites is his contemplative essay titled Dilemmas of an Economic Theorist that discusses the role, if any, of economic theory in understanding the real world and improving it. I hope the critics from the media making sweeping conclusions like “Economists don’t understand the difference between correlation and causation”take the time out to get informed about what is really happening in this part of the world. It would improve both their understanding and the quality of criticism. Ill-informed criticism can create an illusion of profundity in some echo-chambers but is unlikely to attract the (likely) targeted audience.
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