In this week’s America (h/t Felipe), Chuck Wilber, a professor emeritus in economics at ND, offers his take on how economists missed the “Great Recession.” In it, he directs much of his criticism at the pedagogy of economics.
Economics is a lot like theology, despite the former’s claim to be a science. Theology uses self-evident first principles from revelation or natural law and then, through the use of intermediate principles and judgments, evaluates real world issues. Economics uses an abstract model constructed from similarly axiomatic assumptions about how the world works, such as the principles that people are motivated by self-interest, that wants exceed resources or that resources are mobile and fungible. From these principles, economists then develop economic policies, with appropriate regard for real world exceptions to their models…
If a statistical test appears to falsify the theory being tested, the test is rejected and the economist tries different proxies until the test comes out the way he or she expects. The data will be massaged and the test redone until the results “prove” the theory. Why? Because economists believe the tenets of microeconomic theory the way theologians believe the core tenets of their faith.
Accusations of data mining plague the social sciences. But clearly there must be something deeper at work:
How do people become economists? David Colander writes in his delightful book, The Making of an Economist, Redux:
Were an undergraduate student to ask an economist how to become an economist, he would tell her to go to graduate school. She might demur, asking, “Wouldn’t it make more sense to go to Wall Street and learn how markets work?” Getting firsthand experience may sound like a good idea to her, but most economists would briskly dismiss the suggestion. “Well, maybe I should get a job in a real business—say, turning out automobiles.” The answer will be “no” again: “That’s not how you learn economics.” She might try one more time. “Well, how about if I read all the top economists of the past—John Stuart Mill, David Ricardo, Adam Smith?” Most economists would say, “It wouldn’t hurt, but it probably won’t help.” Instead, he would most likely tell her, “To become an economist who is considered an economist by other economists, you have to go to graduate school in economics.” So the reality is that, to economists, an economist is someone who has a graduate degree (doctorates strongly preferred) in economics. This means that what defines an economist is what he or she learns in graduate school.
Over the past 30 years or so the graduate economics curriculum has become more and more like a program in applied mathematics with a corresponding de-emphasis of economic history, history of economic thought, industry studies and industrial relations. This narrowing of focus gets reinforced as the student finishes the Ph.D. and gets a job in the academy. The greatest rewards go to those who make advances in theory and publish in the half dozen top academic journals. Few articles will be accepted by these journals that do not start with the standard abstract model and then derive some new “interesting” result. Publishing in public policy journals, by contrast, is considered much less prestigious and can even count against an aspiring academic by showing that one is not a serious economist. And of course, after receiving tenure this is what one knows how to do.
Under this view, the sociology of the profession is established very early on. I would argue it starts even earlier, at the screening process for Econ PhD. Anyone who knows me knows the mental hoops I was jumping through during my senior year to complete Real Analysis and Linear Algebra so that one day, I might be credentialed enough for grad school (and then I find out that some class named Topology is now the haute couture for prospective grad students). Grad schools want people who think in a very narrow way, and a narrow discipline results.
Next, Wilbur zooms back out to the crisis itself:
Between their narrow technical training and their bias toward free markets, most economists failed to see the coming perfect storm of economic recession and financial crisis. In fact they paved the way for it by urging the deregulation of financial markets, which in turn allowed the creation of all kinds of dubious new debt instruments, wildly increasing the leverage of bank capital, and even allowing huge Ponzi schemes to go undetected. When the extremely low interest rates set by the Federal Reserve were added to this, the “bubble” created in the housing industry was a natural outcome, and the spread to the financial sector was catastrophic…
Robert Schiller, an economist at Yale, thinks the failure to foresee the financial collapse is the result of fearing to deviate from the consensus of the profession. And he does not think that economists have learned the lesson: “The rational expectations models will be tweaked to account for the current crisis. The basic curriculum will not change.” Dani Rodrick, an economist at Harvard University said, referring to the free-market model, “We have fixated on one of the possible hundreds of models and elevated that above the others.” […]
I must not end without saying some positive things about economics and economists. There is much new work, even though still seldom included in the core curriculum, that is exciting and holds out varying degrees of hope for a regeneration of economics. Behavioral economics, evolutionary economics, happiness economics, economics of social capital and social norms, and the economics of asymmetric information all hold out hope of breaking through the twin constraints of methodological formalism and competitive equilibrium…
Even more encouraging is a growing recognition that economies require ethical behavior in addition to self-interest…[Adam Smith’s] understanding that virtue is a prerequisite for a desirable market society remains an important lesson.
Interesting stuff from a man who has spent much of his life thinking about the ethics of economics. He is yet another example of the potential that a heterodox economics department has.