The recent economic crisis has brought about an entire chorus of complaints about economics. Student groups request changes of curricula, institutes for new economic thinking became more prominent, Eugene Fama got a Nobel Prize. Oh wait… I think most of these critiques have been misguided and, yeah, Fama is pretty awesome. These critics are a little bit like complaining that meteorologists don’t control the weather better or that geologists do such a poor job at predicting when exactly San Francisco is going to suffer the next big earthquake. But still, I think there are many things that are shaky with mainstream economics.
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Before I give you my draft list, here’s how not to complain about mainstream economics. Don’t just pick your pet theoretical peeve and whine that other people don’t find it as interesting or important as you do. That’s not “failure of economics”, it’s either your failure to explain your position or, blasphemy!, you’re wrong. A failure of economics can only be institutional, i.e. somehow you have to show that the organization of the economics profession is a priori biased against certain positions. You can have either an emergent order argument about this (the bias is part of no one’s intention or strategy, but it occurs in the aggregate for some reason) or a corruption story (the economics profession gets captured by certain interest groups). So, here’s a list of such likely institutional failures:
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- The sources for macroeconomic data are mostly governmental. Not only do they suck, e.g. according to the data the Earth as a whole has a $300-$700 billion trade surplus with outer space, but we also don’t know exactly just how much each piece of information sucks – amazingly, all the numbers in the, e.g., World Bank dataset come without margins of error. As you may imagine, governments have a vested interest to distort the data in particular directions.
- The intended use of data determines what kind of data one gathers. Most macroeconomic data is intended to serve the purpose of government controlling the economy. To control the economy one does need some understanding of how it works in terms of causes and effects, but, still, one is going to be biased towards a very aggregated perspective, because the possible levers of control are few. James Buchanan & Richard Wagner have a classic paper on this, “The political biases of Keynesian economics” and Peter Boettke has recently restated their argument.
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These two arguments are about emergent order biases. Here’s also two corruption stories:
- The editors of all major monetary economics journals have and have had personal connections with the Federal Reserve. Larry White is pretty convincing that this is indeed a problem as these journals act as a filter as to what counts as respectable opinion about monetary economics.
- Most economists writing about business rely on businesses for their empirical data and have personal connections with firms that make them biased in favor of business interests. Luigi Zingales has recently caused a bit of a splash making this argument, and also being careful to point out that being pro-business is quite different from being pro-market. (His discussion with Russ Roberts about this is pretty interesting too.)