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What is new and essential in economics?
By "new," restrict yourselves to 1990 and afterwards. I see mid-1980s as the end of a great era in economic theorizing. Take game theory, principal-agent theory, and the economics of information, and apply them to everything, for better or worse. This was an exciting, indeed intoxicating, time to learn economics. While applications continue, we have run out of new ideas on those fronts. Experimental economics is completely Nobel-worthy, but it is now over forty years old. What are the next breakthroughs or the breakthroughs which have just been made? Comments are open...
Posted by Tyler Cowen on June 7, 2006 at 06:15 AM in Economics | Permalink
Comments
The new breakthrough will come from sociological economics and the links between formal and informal incentive mechanisms. Social networks explain certain economic outcomes and are not taken into account in present economic models. See Mark Granovetter homepage for some examples. http://www.stanford.edu/dept/soc/people/faculty/granovetter/granovet.html
In many of the realms that economics has entered in the last couples of decades, informal networks shape decision making as mas a formal incentives do. The effects of these linkages should be considered if we want to enhance our prediction capabilities.
Posted by: joan prats at Jun 7, 2006 4:59:26 AM
The two-way interaction between economics and sociology (especially security) seems crucial to me. For example, closed borders are bad for innovation and growth, but good for security, which in turn fosters internal efficiencies (since you can trust those around you) which are good for innovation and growth...
The game-theoretic approach has (to my knowledge at least) mostly focused on individual and corporate actors, not state and substate actors: if we are entering a world where national boundaries and the extent of government power are in flux and subject to experimentation, this is unexplored territory.
Posted by: sammler at Jun 7, 2006 5:03:06 AM
Behavioral economics - especially the interaction between sociology and econ, the decreased tensions among their practioners when communicating with each other. Also, the experimental econ that requires technology that didn't exist until very recently (fMRI's and such). Perhaps these two fields will jointly influence micro theory on taste formation, which might revolutionize micro beyond the mere Thaler type insights.
Posted by: anon at Jun 7, 2006 7:45:44 AM
As the political season begins, I have been trying to locate candidates and causes that I feel will move our country economically "forward"
eventhough I see what is happening on Main Street as a more important factor than the State House or Washington DC in making it happen but I cannot ignore that I do have to keep an eye to what our politicians are doing. Fortifying the borders makes for good news spots, but I am more concerned about national catastrophic health insurance, national licensing for drivers, national registration for automobiles. We need systems that address the mobility and individuality of today's world. Changes to our daily economic life happen daily and worldwide. I will be interested to hear what others see as the economic future.
Posted by: Anne Raftery at Jun 7, 2006 7:51:50 AM
The application of economic modeling tools to the things that psychologists have figured out about why people believe what they do and how they can be persuaded to change their beliefs. People are already thinking about this in "standard" econonmics terms (such as thinking about the effect of media ownership restrictions on persuasion). I think it will branch out into political economy stuff. Nothing is more important than what people believe.
Posted by: David J. Balan at Jun 7, 2006 8:17:57 AM
While I agree with the Behavioral Economics suggestion, I also think Agent-Based Computational Economics (http://www.econ.iastate.edu/tesfatsi/ace.htm) will catch on with new economists.
Posted by: Tom at Jun 7, 2006 9:11:15 AM
All those Nobel prize winning insights from the late seventies and early eighties turned out to be exceptions, not the rule, and so you have economists like Stiglitz and Krugman arguing for every type of intrusive regulation imaginable because they 'proved' that markets are inefficient. I'm not sure that's such a great era.
What is a consensus among economists that was not there in 1989? That socialism is inferior to market economies in producing wealth and taking care of the environment. Of course, this was mainly an empirical matter, but it became too obvious to argue, and Samuelson did for decades, that they were comparable in growth, and better at using their resources, etc.
Posted by: eric at Jun 7, 2006 9:24:21 AM
I second the point about computational economics, which may well partially displace mathematical economics as a standard methodology, just as simulation analysis will become of increasing importance in the hard sciences. As computer technology develops, it will become easier to develop genetic algorithms that will determine how autonomous agents behave given specified maximands.
There are three primary potential advantages:
(1) Computational models can include far more parameters than mathematical models. Some economists criticize simulations by saying that they make too many arbitrary assumptions, but leaving important parameters out of models for mathematical tractability is at least as arbitrary.
(2) It will be far easier for economists to collaborate through computer models than by incorporating one another's insights into their own mathematical models. Ultimately, computational economics may lead to production of large, robust open-source packages that model virtually all aspects of an economy. Just as with open-source software, institutions will develop to determine what gets included in the "standard" packages, and what parameter values should be.
(3) Once robust software frameworks develop, it will be far easier to model new ideas using software than with math. If there is a complexity of the real world that the existing model does not capture, a little bit of code can make the model richer. For example, suppose one is studying the effects of fee-shifting in litigation (a topic of current interest for me). One just has to specify different possible fee-shifting rules, and one can see what the outcomes would be, with other parts of the code taking care of other aspects of the problem (e.g., judicial behavior, cognitive biases, etc.).
Posted by: Michael Abramowicz at Jun 7, 2006 9:53:46 AM
I second David J. Balan's point from above: Nothing is more important than what people believe. Research on heterogeneous priors, belief formation, how mistaken or biased beliefs get exploited in the market place, and so on is imho the most exciting new development in mircoeconomics.
Another extremely important development was the spread of "incomplete contracts" - thinking across pretty much all subfields of applied micro and even into macroeconomics and business cycle theory. Pretty much all the important papers of the 1990s in labor, development economics and even international trade are based in some form on Hart and Moore's work.
Posted by: Commenterlein at Jun 7, 2006 10:12:19 AM
the shift away from traditional television to the internet will shed some insight into the social and economic implications of advertising.
Posted by: Josh at Jun 7, 2006 10:15:27 AM
Slightly off-topic, but probably the exciting new development we have all been waiting for: money economics!
http://www.journals.uchicago.edu/JPE/journal/issues/v114n3/31428/brief/31428.abstract.html
I should add that I am not trying to make fun of the paper (which I have not read yet). In fact I had the pleasure to interact a little with Keith Chen when he was a grad student at Harvard and have the utmost respect for him.
Posted by: Commenterlein at Jun 7, 2006 10:21:28 AM
AAAAAAAAAArgh, I meant to say monKey economics. Even though it's also money economics. Monkey. Money. Monkey. Money. That's what I get for posting before I had my coffee.
Posted by: Commenterlein at Jun 7, 2006 10:23:16 AM
I think behavioral economics and nueroeconomics, basically the synthesis of psychology into economics to create more accurate "mono-economic" models and new theory resultant from the aggregation of these models.
Posted by: Michael Foody at Jun 7, 2006 10:36:39 AM
ALthough this has been going for a few years already, I think the economics of
location is going to have the biggest policy impact (and the biggest scholarly
impact) of any emerging field of economic study.
A) Location economics (or urban economics or the "new economic geography") has
attracted some of the finest minds in the field -- Glaeser, Krugman when he's
not writing strident op-eds, Venables etc.
B) It has a direct set of consequences for debates raging in every city in the US
really world-wide. The ability to computer models and apply testable
hypotheses to the stil-raging Jane Jacobs v. Robert Moses argument.
C) The same theoretical tools hit a number of econ sub-fields -- international trade,
international macro, micro, urban econ. Also has big implications for econ-
related fields (like law and econ, which is on the way to being obsessed with
zoning and other legal tools that have negative (or positive) agglomeration
effects)
D) Computers have enabled real progress in the field.
or
Posted by: JustaThought at Jun 7, 2006 10:57:49 AM
sammler, above, is mistaken in his comment that game theory hasn't been applied
to the economics of the state. In fact it has, by Joseph Kalt and others, who
have elaborated a public goods theory of the state.
My favorite candidate for a Nobel prize is Benoit Mandelbrot, who has done
some good empirical work, such as a study of cotton prices, which overturned
Samuelson's view of how stock prices fluctuate. Mandelbrot also applied the
theory of fractals to financial markets.
Posted by: Bill Stepp at Jun 7, 2006 11:02:25 AM
Experimental economics might be 40 years old, but field experimentation is extremely new and has proven many of the prior conclusions of laboratory experimental economics wrong (and neoclassical price theory correct).
Posted by: Alec Brandon at Jun 7, 2006 11:27:10 AM
My vote is for welfare economics and the foundations of utility theory. Check out my comment over at EconLog from a while back on "Prisoners of the Food Metaphor: Why Economists Misunderstand the World."
I see public choice theory and welfare theory as pushing in opposite directions. Individualist understandings of utility are inadequate because almost all enjoyment, other than of food-- enjoyment, not consumption; the term "consumption" is part of the reason that economists are prisoners of the food metaphor-- is inherently communal, which implies that coordination problems and micro-externalities are a more important constraint on human welfare than resource constraints (especially as the world gets richer, materially).
This is related, a bit, to formal and informal incentive mechanisms, and I agree with the first commenter. But the general insight is that a lot of the things that people value can't be bought for money directly, yet they can and must be analyzed by economists if our understanding of human happiness is to be more than a travesty.
If welfare economics will (should) push microeconomics in a communitarian direction, macroeconomics should move in a libertarian direction, pushed partly by Austrian and real business cycle theories, but especially because of public choice theory, which shows how misguided is the economist's traditional posture of advisor to the government. The entity that economists have imagined they are advising-- a benevolent government trying to maximize the public welfare-- simply does not exist. A tension between economics and democratic politics may develop, on issues like immigration for example... which may also force a re-examination of the link between economics and ethics, as economists may have to entertain the question of whether the state's claim to be able to restrict beneficent labor flows as part of its "sovereignty" should deserve special deference, relative to other forms of violence.
Posted by: Nathan Smith at Jun 7, 2006 12:12:49 PM
I agree Agent Based Economics and in a related way finance is going to be huge, huge, huge.
Posted by: mickslam at Jun 7, 2006 1:00:25 PM
I think the consensus emerging is that neoclassical methodology has exhausted its usefulness (and some might even agree its welcome). I expect heterodox thought finally becoming a little more mainstream. Experimental and Behavioral are just the beginning. Economics will finally get over themselves and welcome more insight from sociology (a relationship akin to that between physics and chemistry -- physics, however, really is foundational!). Reductionism is out and complex system theory is in. This revolution has barely taken root in the dismal science, whereas int physics, biology, climate science, and ecology it has. What is needed is a Samuelson of sorts, well-versed in the canonical mathematics and also in complex system theory (modern dynamics), to write a phenomenal new textbook with which to train the new generation of economists.
Posted by: DerSucherDerWahrheit at Jun 7, 2006 2:18:01 PM
I too would have said Behavioral Economics, because maybe I am thinking of it more in the context of Behavioral Finance. As a financial economist, the behavioral approach seems to be the latest breakthrough. However, there seems to be more resistance to it in finance than in other economics subfields.
Posted by: ryan at Jun 7, 2006 2:24:04 PM
Behavioral and neuro are possibilities, but I still have to be convinced they can be stated in a rigourous enough way to make them more than just a collection of facts. Some of the suggestions above that seem the most likely are field experimentation, belief formation, and especially spacial economics, which at this point is almost practice without a theory.
Posted by: carl at Jun 7, 2006 2:24:48 PM
The economics of human biodiversity.
http://www.vdare.com/Sailer/wealth_of_nations.htm
Posted by: Steve Sailer at Jun 7, 2006 3:02:14 PM
Experimental economics might be 40 years old, but field experimentation is extremely new and has proven many of the prior conclusions of laboratory experimental economics wrong (and neoclassical price theory correct).
Alec, I am curious to know exactly what field experimentation has proven incorrect relative to laboratory experiments. Thanks.
Posted by: AZ at Jun 7, 2006 3:18:35 PM
I guess Alec refers to some of John List´s experiments on gift exchange in labor and goods (baseball card) markets.
List provides some initial evidence against social preferences in the marketplace. However, his sample sizes are extremely small (in the forthcoming econometrica paper), and it´s no wonder that he cannot find evidence for gift exchange.
Therefore, I wouldn´t call it "proven incorrect", it rather suggests that there might be additional forces at work compared to the situation in the laboratory. Whether or not gift exchange prevails in the market is, in my opinion, still far from clear and more field experiments are needed to resolve the puzzle.
However, thanks for the reassuring comments, since I am a grad student focussing on behavioral and experimental econ :)
Posted by: JL at Jun 7, 2006 3:37:42 PM
AZ:
A couple of things that come to mind are:
John List's work on the endowment effect (indifference curves probably don't cross)
List's work on market anomolies on individual's with experience (not as many anomolies)
List's work on gifts exchange and labor output
Glenn Harrison's work on discount rates (not nearly as hyperbolic as people thought)
There are more, but note that field experimentation is an extremely new field of experimental economics (it was first used awhile ago, but it started being used as a method seperate from lab experiments only a little while ago).
Posted by: Alec Brandon at Jun 7, 2006 3:40:09 PM
