Debate, dissent, and ideology in the world of economics8 min read . Updated: 10 Jan 2015, 01:20 AM IST
The great financial crash in 2008 has opened up the scope for debate in economics
The great financial crash in 2008 has opened up the scope for debate in economics
Economists are usually viewed as an argumentative lot. Put twelve economists in a room, and you will hear fifteen different opinions, an old joke goes. But the facts do not seem to validate this popular perception. New data published by a European economist, Joe Francis, shows that the number of debates in the top economics journals has fallen dramatically over the past four decades.
As the chart below shows, there was a sharp increase in the proportion of debates in academic economics from the 1920s through the 1960s and an equally sharp fall since then.
There seem to be four key drivers behind the decline in level of economic debates over the past four decades: history, politics, specialization, and academic incentives which reward conformity over dissent.
“The rise in the debates began in the 1930s, presumably as economists suffered from pangs of Great Depression-inspired doubt," writes Francis in a blog post. “(John Maynard) Keynes did most to increase the level of debate, while the strength of Marxist ideas must also have played an important part in encouraging a culture of cantankerousness. Paul M. Sweezy, North America’s leading Marxist economist, for instance, contributed to the debates in these journals."
The so-called rational expectations revolution brought about a sea change in academic economics and veered the academic community towards a neo-classical consensus (neo-liberal hegemony to detractors), leading to a fall in the level of debate within the profession. To put it simplistically, the rational expectations revolution provided the intellectual basis for ‘light touch’ regulation, by positing that markets will auto-correct left to themselves, and state interventions can only be counter-productive. Many economists felt that the big debates against Keynesian and Marxist economics had already been won. The period of the great economic moderation after the oil price shocks of the 1970s only strengthened the neoclassical consensus, while the fall of the Berlin wall a quarter century ago put a nail in the coffin of Marxist economics.
Specialization within the profession also contributed to a decline in big debates, as specialists veered towards niche publications to discuss specific aspects of their research agenda rather than discuss big ideas in the top journals. Even within sub-disciplines such as macroeconomics, economists subscribing to different schools of thought stopped discussing each other’s work. For instance, Keynesians who noted market imperfections and highlighted the importance of state interventions in addressing them, and new classical economists, who downplayed such imperfections refused to address each other’s ideas for a long time.
The exchanges between two Nobel laureates, Robert Solow, representing the Keynesian school of thought, and Robert Lucas, representing new classical economists, are perhaps the best illustration of this trend.
“While Lucas, the leading new classical economist, was proclaiming that ‘people don’t take Keynesian theorizing seriously anymore,’ leading Keynesians were equally patronizing to their new classical colleagues," wrote Gregory Mankiw, the Harvard University economist, in a 2006 research paper. Mankiw goes on to highlight how the two economists sparred on this issue without really answering each other’s questions.
In his 1980 American Economic Association (AEA) Presidential Address, Solow called it “foolishly restrictive" for the new classical economists to rule out by assumption the existence of wage and price rigidities and the possibility that markets do not clear. He said, “I remember reading once that it is still not understood how the giraffe manages to pump an adequate blood supply all the way up to its head; but it is hard to imagine that anyone would therefore conclude that giraffes do not have long necks."
In an interview with Arjo Klamer (1984) a few years later, Lucas remarked, “I don’t think that Solow, in particular, has ever tried to come to grips with any of these issues except by making jokes." In his own interview in the same volume, Solow explained his unwillingness to engage with the new classical economists: “Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the Battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon Bonaparte."
Academic incentives could also have played a part in tempering the scope of debate within the profession. Career progression in academia depends on success in publishing research papers in top journals, and in economics, editors of top journals exert enormous influence because of the nature of the publication process, as Chicago University economist Luigi Zingales (who co-wrote the book Saving Capitalism from the Capitalists with Raghuram Rajan) pointed out in a 2013 research paper. Young contributors, especially if they are untenured faculty, can easily give in to the suggestions of a persuasive editor, slanting the discourse on a certain subject. All it takes to propagate certain ideas in the profession is to capture a few top editors, suggests Zingales.
“The lack of bias in the publication process depends crucially upon the lack of bias of the editors or, at least, the diversity of biases of the editors across major journals, since there are multiple outlets and thus an author can shop around," wrote Zingales. “Unlike in law, though, the search process is impaired by the prohibition to submit the same paper to multiple outlets contemporaneously. Combined with the relatively long review time and the multiple rounds required, this process gives quite a bit of power to the editor to massage papers in the direction they prefer. If an assistant professor who is going up for review soon is asked at the last round of a long review process to modify slightly the conclusions to make them more palatable to a certain audience, would he refuse? Probably not. Not only does this action bias the conclusions of one paper, but it projects a perception that to publish in that journal one has to reach the ‘right conclusions.’ Hence, researchers who want to publish in that journal would start tilting their conclusions in the right direction. In equilibrium, the editor does not have to exercise any arm twisting, because all the distortion takes place before the first submission and is done voluntarily by the researchers to reduce the risk of seeing their paper rejected."
Zingales backs up his simple theoretical model of intellectual capture with an empirical example of how research on executive compensation published in top journals tended to display a pro-business or at least a pro-executive tilt (perhaps because editors of such journals themselves want to be on corporate boards at some point).
Zingales’ research shows that the incentives for a young economist are stacked in favour of conforming to the status quo, thus creating a vicious cycle: the old consensus survives precisely because new research is massaged to support it! The macro-economists Amit Bhaduri and Deepak Nayyar had made a similar point in their post-liberalization book, The Intelligent Person’s Guide to Liberalization. The duo argued that scholars often choose the path of ‘least intellectual resistance’ because that leads them to plum jobs such as those at the World Bank. But this impoverishes the level of debate in the profession.
As Francis points out, the lack of debate would not have mattered if economists had ‘successfully answered all questions they are supposed to ask’. But as the great financial crisis showed, that was not the case.
In fact, several post-crisis assessments of the economy and of economics have pointed to the lack of diversity in economics as a key reason why the profession as a whole failed to foresee the crisis. While significant research on market imperfections was conducted in the 1960s and 1970s, the lessons were either ignored or buried over time. The rational expectations revolution in economics gave rise to the belief that market prices are ‘true’ reflections of fundamentals at all times (rather than on average). The distinction between market efficiency (on average) and market rationality (under all circumstances) was lost. The great economic crash of 2008 therefore came as a bolt from the blue.
The post-crash report of the Financial Services Authority (FSA) authored by Adair Turner underlined such intellectual fallacies which led to the crisis, and caused the Great Recession that the world is still struggling to cope with. Once we accept that markets for both liquid and illiquid assets are susceptible to herd behaviour and may not necessarily reveal true prices of assets based on fundamentals, regulation has to strike a balance between the quest for complete markets and the risk of instability that it might impose, the Turner review argued. The concept of ‘market discipline’ that is supposed to correct erratic behaviour of market participants also came under question, because market prices failed to indicate that risks were increasing.
The United Nations committee on the crisis led by Nobel laureate Joseph Stiglitz pointed out that regulatory capture occurred through the realm of ideas, rather than mere lobbying for a specific cause. It highlighted the risks posed by the revolving doors between the world of academia, government, and investment banks, a risk which Zingales also cautions against.
While it is difficult to judge as yet if the economics profession is on a self-correction course after the shock of 2008, there are some welcome signs of change. For one, there is far greater scepticism both among lay people and among academic economists to any economic proposition today. The crisis has also allowed a more heterodox bunch of economists to capture public attention. The spread of the internet and the proliferation of blogs (which bypass journal editors) have also helped in the growing diversity within the profession. There have been changes from the demand side as well. As an earlier Economics Express column pointed out, there is growing disaffection among economics students, who are demanding a change in the way mainstream economics is taught and practised. The call for greater intellectual diversity in economics has found great resonance worldwide, with several policy makers lending their weight behind the campaign.
There are other signs of change as well. One of the surprises of 2014 was to see the conservative newspaper, The Economist at the forefront of the campaign to defend the not-so-conservative French economist Thomas Piketty (whose magnum opus clearly evokes Karl Marx’s treatise on capitalism) when he was being attacked by other commentators and publications.
Time will tell if these changes are enough or if we waste the opportunity the crisis has presented in reforming the profession. But one can draw some comfort from the fact that there is a greater openness in discussing and debating economic ideas today.
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