students auditorium Hero Images/Getty Images

The Three Revolutions Economics Needs

The silence of most economists on the underlying causes of the political ructions erupting throughout the West – and on what, if anything, can be done to restore economic vigor – has been deafening. And it provides further evidence of the profession's refusal to acknowledge the need for change.

PARIS – The West is in crisis – and so is economics. Rates of return on investment are meager. Wages – and incomes generally – are stagnating for most people. Job satisfaction is down, especially among the young, and more working-age people are unwilling or unable to participate in the labor force. Many in France decided to give President Emmanuel Macron a try and now are protesting his policies. Many Americans decided to give Donald Trump a try, and have been similarly disappointed. And many in Britain looked to Brexit to improve their lives.

Yet economists have been largely mute on the underlying causes of this crisis and what, if anything, can be done to restore economic vigor. It is safe to say that the causes are not well understood. And they will not be understood until economists finally engage in the task of reshaping how economics is taught and practiced. In particular, the profession needs three revolutions that it still resists.

The first concerns the continuing neglect of imperfect knowledge. In the interwar years, Frank Knight and John Maynard Keynes launched a radical addition to economic theory. Knight’s book Risk, Uncertainty, and Profit(1921), and Keynes’s thinking behind his General Theory of Employment, Interest, and Money(1936) argue that there is no basis – and could be no basis – for models that treat decision-makers as having correct models with which to make decisions. Knight injected an uncertain future, Keynes added the absence of coordination. But subsequent generations of economic theorists generally disregarded this breakthrough. To this day, despite some important work on formalizing Knight’s and Keynes’s insights (most notably by Roman Frydman and his colleagues), uncertainty – real uncertainty, not known variances – is not normally incorporated into our economic models. (An influential calculation by Robert J. Barro and Jason Furman, for example, made predictions of business investment resulting from Trump’s corporate profits tax cut without bringing in Knightian uncertainty.) The Uncertainty Revolution still has not succeeded.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

http://prosyn.org/i3Gghfo;
  1. haass102_ATTAKENAREAFPGettyImages_iranianleaderimagebehindmissiles Atta Kenare/AFP/Getty Images

    Taking on Tehran

    Richard N. Haass

    Forty years after the revolution that ousted the Shah, Iran’s unique political-religious system and government appears strong enough to withstand US pressure and to ride out the country's current economic difficulties. So how should the US minimize the risks to the region posed by the regime?

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.