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How will the financial crisis affect the economics profession?
Paul, a loyal MR reader, asks:
What will be the impacts of the current situation for economics and economists. It seems clear that we have screwed up. We don't even have the excuse that we understood what was going on but no one listened to us; economists have been in powerful positions for a long time, and it is generally agreed that Ben Bernanke is both a powerful and a well respected economist. Will demand for economics courses fall? (It seems obvious that demand for finance courses and so for finance professors will decline.) I am not teaching this semester, but I would like to know from those who are: What do you tell students when they ask what economics had to say about the current mess? It seems to me that this situation will have profound implications for economics as a scientific and also as an academic discipline and I would like to see a discussion. Your blog is probably an ideal place for such a discussion.
I believe that demand for economics classes will rise, as it often does in economically troubled times. Some of this will be "shaman demand" rather than "knowledge demand." The consulting incomes of finance economists will fall and fewer talented people will go into finance. Speaking fees will fall since fewer economists will give talks at hedge funds. The relative status of macroeconomists will rise and the relative status of microeconomists will fall. Economists will gain in fame and lose in income. What do you think?
Posted by Tyler Cowen on November 3, 2008 at 07:53 AM in Economics | Permalink
Comments
Dating from the publication of "Freakonomics," economics has had a star turn, "15 minutes of fame," if you will. Nowadays, any talk of money or assets or securities leaves people with a bad taste in their mouths. Economists, with their images as eminently logical, semi-Spock types who cut to the core of problems, are out of favor. Now it seems like sophistry and false wisdom. The pendulum probably swung to far in favor of economists before, now it's going to go too far in the other direction.
In other words, the bursting of the world economic bubble will NOT lead to the inflation of a bubble in academic economics.
Posted by: CK at Nov 3, 2008 8:12:48 AM
I was with you until you said, "The relative status of macroeconomists will rise and the relative status of microeconomists will fall." I don't understand what this means, but if the status of a macroeconomist falls, due to his inability to predict this problem, then wouldn't the status of the microeconomist also fall, due to the public's inability to differentiate the two? Although, I would expect the macroeconomist's income to fall, while the microeconomist's income to stay constant. As, finance firms pay macroeconomists, I have witnessed traders and fund managers mocking economists briefings, due to their inability to help. I do not know how many top notch macroeconomists lend their time to consulting finance firms, but I think this crisis will convince managers to stop wasting money.
Posted by: brainwarped at Nov 3, 2008 8:19:48 AM
"The consulting incomes of finance economists
will fall and fewer talented people will
go into finance. Speaking fees will fall
since fewer economists will give talks at hedge funds. "
Hmmm... Does this statement violate the fundamental rule of Economics --- supply/demand/price?
Posted by: J.K. at Nov 3, 2008 8:33:51 AM
I'm with brainwarped, I don't understand the logic of "The relative status of macroeconomists will rise and the relative status of microeconomists will fall." Haven't we just seen a gigantic demonstration of the weakness of that branch of economics in terms of predictive power and providing a theoretical framework that sheds light on the most important issues of the day?
Posted by: ao at Nov 3, 2008 8:49:48 AM
Tyler & Alex,
How about the # of page hits of Marginal Revolution during the crisis?
Posted by: Leonardo Monasterio at Nov 3, 2008 8:53:51 AM
We don't track page hits but Mark Thoma claims his are way up; ours are probably up too. As for ao, it is often attention which generate status, not predictive power per se.
Posted by: Tyler Cowwen at Nov 3, 2008 9:02:59 AM
I'm probably representative of a trend. A couple years ago I was reading one or two econ blogs in my mix (including this one). Now they are my top-ten. A huge housing/debt question turned into first a housing and then a credit crisis. Those bumped my energy and environment focus to the back-burner. I'll probably stick with you (still hoping for Alex's mea culpa on debt ;-) until that becomes ... boring.
Posted by: odograph at Nov 3, 2008 9:05:35 AM
Economists have never managed to predict recessions very well. Economists haven't really failed in anything, the basic theories still apply and work, and they have to continue to be taught.
Posted by: Greg Loutsenko at Nov 3, 2008 9:06:06 AM
I'm an A-level (16-18 year old) teacher of Economics in the UK, and this year's intake (which started September) was up by over 20% on last year (actually more like a third, but I've shaved some off due to various other factors). Not convinced its entirely crisis-driven, but it seems to be at least some influence, anecdotally.
I'll get back to you for 2009 intake...
Posted by: Andrew Lay at Nov 3, 2008 9:09:59 AM
The relative status of macroeconomists will rise because they will be developing new models in light of uncertain credit constraints. Nothing has changed in micro, they will continue to regress kids against money and the like; there may well be a paradigm shift in macro.
Posted by: Millian at Nov 3, 2008 9:11:56 AM
Should have also added that the numbers of my students who wish to study economics at university is increasing, though harder to get a meaningful number on that as the numbers are small. The importance of knowing/understanding economics seems to be the prime cause.
Posted by: Andrew Lay at Nov 3, 2008 9:13:39 AM
Well, Austrian economists has been predicting this crisis for years. Nouriel Roubino, as a post-keynesian, predicted it, too.
Posted by: Carlos at Nov 3, 2008 9:20:31 AM
I think the comments look pretty reasonable, although I
do not know about speaking fees for economists at finance
groups. Tyler probably knows that better. However, I
know that I have been swamped with requests to speak to
all kinds of local civic and other groups, badly swamped.
I do happen to be one of those who long said we were
having an unsustainable housing bubble, and that its decline
would cause all kinds of problems. Of course, I also happen
to be the first economist ever to provide a mathematical model
of the most widely observed type of bubble, those that decline
for awhile after their peak and then crash, which is what
happened in the credit/derivatives market (peak, Aug. 2007,
crash, Sept. 17).
Regarding micro and macro, most standard micro assumes rational
agent model, which does not look so hot at the moment. The current
dominant macro model is the DSGE model that assumes a ratex micro
foundation. I have long argued that this is silly, and I see macro
models of various sorts that look in a different direction to be
gaining some increased interest in the near future.
Posted by: Barkley Rosser at Nov 3, 2008 9:28:10 AM
I have been telling my kids for many years when they go to college if interested in business take econ rather than general business courses.
Econ major with a year of accounting and a year of marketing seems about right, with a minor in math or a science.
Did they listen? The first 2 didn't, the 3rd (and most sensible one ;-) ) seems to be.
Posted by: at Nov 3, 2008 9:55:14 AM
Speaking as an economist/portfolio strategist with some 20 years experience selling my services to portfolio managers, they do not want to hear the truth. I have lost more clients over the years for being right than from being wrong.
If a manager loses the clients money doing what everyone else is doing they probably will keep the client. But if they go out on a limb and lose money they are almost certain to lose their clients. Frequently, just going out on a limb is enough to lose the client even if you are right.
There is tremendous pressure for investment managers, strategists and/or business economists to stick with the consensus even when the consensus is wrong.
Posted by: spencer at Nov 3, 2008 9:55:20 AM
It is not that economics itself has been discredited, but that a certain small subset of ideas have been rather decisively disproven. The ones that held sway for so long through successive administrations and used to justify all sorts of dubious policies. These and their proponents are rightly viewed as modern-day Lysenkoism, and hopefully, with their demise, will allow the science to actually become scientific again. Instead of one shop in a propaganda outfit.
Posted by: ScentOfViolets at Nov 3, 2008 9:56:57 AM
Thesis:
All we can say for certain is that lawyers will "fare" much better than economists (pun intended).
The part where economists ... "get blamed" (apart from Greenspan), is just coming up, as part of the "response", so stay tuned... and ask again in 2 years.
Posted by: Amicus at Nov 3, 2008 10:47:00 AM
Possibly of interest, from page 1 of WSJ's dead tree edition today:
“Behind AIG’s Fall, Risk Models Failed to Pass Real-World Test”
Posted by: ZBicyclist at Nov 3, 2008 11:29:00 AM
Interest in economics will certainly increase (I, too, have been hitting the blogs lately although I never had much interest before). However, we have plenty of micro theories to explain the poor incentives in a situation where the more we mess up, the greater the demand for our talents.
More critically, this should be a time for introspection in the profession. The fact that more people enroll in our courses does not mean we have been successful. The fact that we have been so much in the dark - here I am not underestimating the intelligence of the profession and the contributors to discussions such as these, but I am referring to the complete disagreements on facts without positions converging to some measure of the "truth" - should make us ask some tough questions. Have all the theoretical advances been worth it? Macro, in particular, has become intensely mathematical, perhaps at the expense of real understanding. Keynes now seems a lot closer to understanding the truth of macro cycles than any of these more elegant theories since that time. Perhaps we are trying to answer the wrong questions. We have focused on equilibrium rather than growth; rational behavior rather than actual behavior; technique rather than knowledge.
It is not that all of these efforts have been wrong or wasted. But, the reward structure in academia certainly does not lend itself to understanding anything. It is easier to get published by being overly narrow and overly rigorous and eschewing any real use of psychology, sociology, or ecology. Are we so sure that we have been on the right course?
Posted by: dale at Nov 3, 2008 11:33:09 AM
I teach an undergrad finance course, and let me tell you, enrollement has never been so high.
Posted by: at Nov 3, 2008 11:33:28 AM
It's rarely been my experience that people _outside_ the highest levels of business and government actually listen to what economists have to say. They may occupy powerful positions, but in the mainstream they're nobodies who nobody has ever really placed a lot of stock in - unless they adopt a partisan position, such as Krugman, in which case other partisans will hold them up simply for their academic credentials. But the average man in the street is rarely exposed to real "economics," and almost INVARIABLY when I do see economic issues discussed, for example, on a cable news program, the talking heads invited to yack with the talking heads is NOT an economist. He's some sort of business graduate, or a journalist who has 'covered' economics, but he is very, very rarely an actual economist, of any sort. This may be a little tangential to the question, but it's a major pet peeve that I've held for a few decades now.
More specifically to the original question, I don't know why this should discredit economics as field any more than holes in other 'social' sciences. And it's not like there haven't been many economists who can make the case that they did see this coming (whether they really did, or whether the hows and whys were accurate, is a separate issue), but that no one listened to them. "No one listens" and "economist" are, again in my experience, frequently go hand in hand.
Posted by: MM at Nov 3, 2008 11:41:36 AM
It seems to me that economic analysis is not the problem, and economics will not suffer at all. The change will be the consideration of implicit assumptions that underlie the models we study. The most fundamental being the incorrect assumption that people make rational decisions. It would appear to me that this one has been a long time coming; humans are irrational decision makers. The idea that consumers will maximize their utility is right, the problem is that the idea of what constitutes maximum utility is essentially incorrect.
Posted by: Noah at Nov 3, 2008 12:32:40 PM
I think the bigest hit to economics is our relevance because we are so naive. Most economists were saying that our consumption growth was outstripping our income growth and that this had to end sometime, perhaps badly. I was hoping for a more balanced adjustment with the dollar declining and our exports growing, which was certainly correct from about mid-2006 through mid-2008.
I'm in a business similar to Spencer's and deal with lots of portfolio managers. The conventional wisdom was that the sophisticated bankers and hedge fund managers had it all under control. It wasn't easy to question the CW without being called an alarmist. You had to have the data and they weren't readily revealing it to you (or the regulators for that matter).
How the finance sector is willing to rig the game in their favor and payoff anyone in the way is our biggest miss. Bernanke and Greenspan look foolish in accepting the CW, but so too do politicians like Barney Frank and Chris Dodd as they defended the GSEs. In their defense, there were plausible scenarios that said that the problems were "contained" and the pressure accept was enormous--not just from Wall Street but from the public, too.
We've clearly experienced the worst case--higher energy prices, just as fragile financial systems in Europe, and emerging markets that are even more messed up as we are (i.e. no decoupling). My guess is barring some disastrous policy proposals in the next few months, we'll get through this better than Europe and China.
As far as economic theory goes, I see nothing that has been discredited. We need to improve our understanding of behavioral economics, compensation incentives, and how to regulate finance better, but what's new? We've always had problems trying to get this right, as financial innovation outstrips the regulators ability to comprehend. On the big picture, standard theory said that consumption bubbles had to end at some point and that they are usually painful.
Posted by: Elfin at Nov 3, 2008 12:52:34 PM
Here is my "cheap shot": there is all this talk on this blog about economics as a science yet... there is this enormous and ongoing failure. (I am a scientist).
That said, I'd expect more interest, not less. As for finance, after a brief drop and a phase of "now we have learned the lessons", I expect that there will be a big upsurge.
Posted by: Mark at Nov 3, 2008 2:09:09 PM
"economics as a scientific ... discipline": if it were, there would be no need to make the claim.
Posted by: dearieme at Nov 3, 2008 2:23:04 PM
