Tuesday, October 21, 2014

Our Children’s Economics

TOKYO – The economics profession has not had a good crisis. Queen Elizabeth II may have expected too much when she famously asked why economists had failed to foresee the disaster, but there is a widespread sense that much of their research turned out to be irrelevant. Worse still, much of the advice proffered by economists was of little use to policymakers seeking to limit the economic and financial fallout.

Will future generations do better? One of the more interesting exercises in which I engaged at the recent World Economic Forum in Davos was a collective effort to imagine the contents of a Principles of Economics textbook in 2033. There was no dearth of ideas and topics, participants argued, that existing textbooks neglected, and that should receive more attention two decades from now.

Economists working on the border of economics and psychology, for example, argued that behavioral finance, in which human foibles are brought to bear to explain the failure of the so-called efficient markets hypothesis, would be given more prominence. Economic historians, meanwhile, argued that future textbooks would embed analysis of recent experience in the longer-term historical record. Among other things, this would allow economists-in-training to take the evolution of economic institutions more seriously.

Development economists, for their part, argued that much more attention would be paid to randomized trials and field experiments. Applied econometricians pointed to the growing importance of “big data” and to the likelihood that large data sets will have significantly enhanced our understanding of economic decision-making by 2033.

Overall, however, the picture was one in which the economics of 2033 differed only marginally from the economics of today. A textbook two decades from now might be more sophisticated than this year’s edition, fully integrating contributions that today constitute the frontiers of economic research. But it would not differ fundamentally in structure or approach from today’s economics.

The consensus, in other words, seemed to be that there would be nothing in the next 20 years as transformative as Alfred Marshall’s synthesis of the 1890’s or the revolution initiated by John Maynard Keynes in the 1930’s. In contrast to the economics of those years, economics today is a mature, well-established discipline. And, like any mature discipline, it advances incrementally rather than in revolutionary steps.

This presumption is almost certainly mistaken. It reflects the same error made by scholars of technology who argue that all of the radical breakthroughs have already been made. As this view is sometimes put, the next 20 years will see no breakthrough as revolutionary as the steam engine or the transistor. Technological progress will be incremental rather than revolutionary. Indeed, insofar as the increments are small, the result is likely to be slower productivity growth and a “Great Stagnation.”

In fact, the history of technology has repeatedly refuted this pessimistic view. We can’t say what the next radical innovation will be, but centuries of human experience suggest that there will be (at least) one.

Similarly, we can’t say what the next revolution in economic analysis will be, but more than a century of modern economic thinking suggests that there will be one.

All of this suggests that the economics textbook of 2033 will look very different from the economics textbook of today. We just can’t say how.

Indeed, one might question the very premise that, two decades from now, there will be textbooks as we know them. Today, introductory economics is taught using a textbook in which an eminent professor authoritatively bestows the conventional wisdom on his or her (typically, his) students. Knowledge, as encapsulated in the textbook and interpreted by the professor, is delivered from above.

This, of course, is also how newspapers traditionally delivered the news. Editors and publishers assembled and collated stories, and the newspaper that they produced was then delivered to the subscriber’s doorstep. But the last decade has seen a veritable revolution in the news business. News is now assembled and disseminated via Web sites, wikis, and the comment sections of blogs. News, in other words, is increasingly delivered from the bottom up. Rather than relying on editors, everyone is becoming their own news curator.

Something similar is likely to happen to textbooks, especially in economics, where everyone has an opinion and first-hand experience with the subject. Textbooks will be like wikis, with faculty adopters and students modifying text and contributing content. There still may be a role for the author as gatekeeper; but the textbook will know longer be the font of wisdom, and its writer will no longer control the table of contents.

The outcome will be messy. But the economics profession will also become more diverse and dynamic – and our children’s economics will be healthier as a result.

Read more from our "Dismal Soothsaying" Focal Point.

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  1. CommentedJP Smith

    I think one of the great potential areas for advancement will be the reduction in lag between data observation, policy change and ultimately economic behavior.

  2. CommentedJose araujo

    IMHO, the problem isn't the advances in economic science, the problem lies in the economic dogmas that prevent economists from advancing.

    We have now reverted to 19 century economic manuals, Mercantilism, Ford and Taylor are the current cutting edge of economic policy. The Austrians who have been dismissed decades ago keep on crawling to the fore front of the economic theory.

    We are ignoring most of the "discoveries" we have made in economy in the last century and some people claim economy has no explicative power, just because their dogmas prevent them from accepting the developments on the economic science.

    Keynesianism is one of the advances in economy that todays dogmas prevent from accepting. All the ergonomic and productivity discoveries of the latest century are being ignored in favor of Taylorism and Fordism, Business cycles being accepted in favor of the MMT.

    We are in the dark ages of economic thinking, not because of the lack of "good" theories and thinkers, but because of the modern inquisition...

  3. CommentedVincas Andriusis

    What will be the economic textbook after 20 years depends on whether or not we understand what brought the economy to a deadlock. If we do not change our approach to the economy of the same essence, and if at the same time we will try to find new qualitative combinations of the same model – the situation will be even worse.
    To see the future of the economy, it is necessary to change the direction of your mind: a pyramid egocentric consumer economy, which encourage citizens of the world for the consumption in the name of the well-being for the top of pyramid – is exhausted, and it's not the economy.
    We need to start thinking about the economy, in line with reality – about Integral World economy in the form of a circle.

      CommentedJose araujo

      We understand know what brought economy to this deadlock. Simple IS/LM model can explain why we are here, problem is that to many economists still the sun revolves around earth...

  4. CommentedMoritz G€d1g

    Comparing apples to oranges. Neglecting the inherent problems of the field. Physics and Economics are fundamentally different. In physics the last 50 years have actually not brought about any big results.

  5. CommentedMoritz G€d1g

    "big data", right. This murky buss-word will magically deliver results. Because finding correlations is the difficult part.

  6. CommentedYoshimichi Moriyama

    Queen Elizaabeth Ⅱexpectied too much but she was not alone in this. All of us expect what it cannot answer or offer.

    The revolution initiated by Keynes? No, he did not do any such revolutionary thing. A revolutionary event had taken place in the real world. No economist saw it. No one knew it. No one was abel to see it because we see economy or economic phenomena only through economics as we can observe and see heavenly bodies or microbes only through telescopes or microscopes.

    A revolutionary thing had happened but no economist could observe it because he was not endowed with any economics to see it. The greatness of Keynes was that he invented an intellectual tool which made it possible for us to see the great or revolutionary change that had come about.

    The great or revolutioary change was that we had entered into an era in which Say's Law no longer applied. Why the Law did not hold any longer was because machine production had permeated our industrial society. An automobile is made by machines; bread is baked by machines, and those automobile production machines and bread baking machines are all made by machines. Bread goes rotten so bakers have to bake them every morning; they will not lose their jobs. But the machines and the machines that made them are endurable goods and the workers who engaged in their production lose jobs because the machines do not go rotten. This is why artificial arousal of demand through governmental intervention is necessary.

    The third comment I would like to make is that economics is not a universal science. The economics as we have it today presupposes that man is greedy; that man is motivated rationally by the rational desire to maximize his or her monetry interest. In a differently oriented society our economics would be a laughingstock; people there would have a different economics. Economics twenty years later will largely depend on what sort of outlook on life people will have.

    Lastly, Keynes was not an economist and a mathematician alone; he was also a great philosopher. Even Bertrand Russell owed a part of his philosophical develoment to him.
    Economists ought to be sociologists and philosophers, too.

  7. CommentedProcyon Mukherjee

    Barry is so right at the end with the withering away of text books and I am very certain that the collective spirit of bloggers together with the interactive nature of exchange-blogging would replace many of the existing media through which ideas get propagated in this field.

    The only doubt that I have is that the explosive and exponential nature of the increase in the blogging activity would make us irrationally attentive to the trivia while the rational inattention to the fundamentals would increase the risk of constantly 'missing something'.

  8. CommentedZsolt Hermann

    Any science, practical method humans use is based the system we exist in, the conditions around us.
    In order for them to work, function properly, they need to be adapted to the actual conditions.
    Economics is basically the external reflection of how human beings relate to each other.
    The reason economics could not predict the crisis and still cannot offer any solutions is because the present principles, tools, the whole methodology is based on the former system, former human relationships ignoring all the evolutionary changes happening with exponential speed recently.
    Humanity has integrated into a single, interconnected network. Each element is fully dependent on all the other elements.
    Moreover so far we ignored that we live in a closed and finite natural system, we have been taking, exploring, exploiting and destroying everything around us in order to fulfil ourselves as if there was no tomorrow.
    And now we reached a stage where there could be no tomorrow if we continue ignoring the interconnected human network and the finite natural system.
    We need completely new methods, principles, and tools, but first we have to learn about and understand the system we are locked into, all the conditions surrounding us.

      CommentedEdward Ponderer

      Just to add here, it would seem that the most fundamental change in methods and tools is the need from Humanity becoming its own measurement and computational system. This only happens by means of a behavioral economy based upon mutual responsibility. Humanity itself become a neural network of countless sensory nodes and processors.

      In short, we are at a critical juncture of evolution -- and because we are human, success or failure is largely in our hands. The "4th pillar" of evolution, altruism, must be understood as enlightened self-interest. REALLY understood, like mathematics, not just lip-service. We have reach the point of complexity and non-linearity in our global interdependent coupling of a great fork in the road. We either evolve like a single creature, altogether, forming mutual servo-systems -- tissues, organs, the analogous works -- or we continue to depend upon simple-minded, one-brain fitting, ego-based economic models whose intrinsic simplicity and linearity will cause crack, snap, sludge, and all forms of Murphy's Law multiplication of entropy --- to teach us all the science of Chaos. The hard lesson would come as the reduction of normative economic theories disintegrating between our individual fingers as the sand castles return to their element.

      It is advisable to push away from the status quo while we still can.

  9. CommentedThomas Haynie

    Economics could use a paradigm shift coming from a crisis point ala Thomas Khun. I got the sense that whatever new work is done it is constantly cast into the Hayek-Keynes box, which I would argue is not productive or doing the discipline or anyone else any favors. As time begins to shed light on the failures of libertarian ideology my hope is that the politics of economics and ideology can be overcome to advance the discipline. History in the other sciences has shown that when all is thought to have been discovered something else major is around the corner.

  10. CommentedMarc Laventurier

    Imagine the clouds parting to reveal the face of a Pythonesque God sporting a fiery mortarboard, who booms, "Choose!", proffering with one Vatican-sized hand a 'growing' whirlwind of (possibly Zimbabwean) bank notes while with the other cupping a sylvan glade bisected by a crystalline stream where a grinning Marx demonstrates his famous catch and release technique referred to in The German Ideology.

    A steaming fissure in the earth explodes below the diety, and a surprisingly cheerful British accent intones, "But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight." (John Maynard Keynes, Economic Possibilities for our Grandchildren)

    And I say (in the forthcoming Meaning Machine) yea, verily it shall come to pass that they shall beat their yamakas into hoodies and in the fullness of time knowledge of the lord will lay upon the land, and it will not resemble economics but rather operations research + poetry.

  11. CommentedFrank O'Callaghan

    The history of the last century is one of increasing productivity and increasing wealth.

    The distribution, control and efficient use of this wealth has been one of the great tragedies of human history.

  12. CommentedShane Beck

    In the post 20th Century perpetual growth model, the only interesting question is whether the global trading system will experience a gradual decline or a sharp decline, currency wars notwithstanding. If any economic textbook of 2033 will approximate real life conditions either now or in the future, I'd be greatly surprised.