elerian110_Westend61_Getty Images_illustration

Why Economics Must Get Broader Before It Gets Better

Mar 8, 2019 Mohamed A. El-Erian

Even as the public's skepticism toward their profession has grown, economists have continued to ignore increasingly obvious flaws in their analytical frameworks. A discipline long dominated by “high priests” must now adopt a more open mindset, or risk becoming irrelevant.

NEW YORK – The economics profession took a beating after most of its leading practitioners failed to predict the 2008 global financial crisis, and it has been struggling to recover ever since. Not only were the years following the crash marked by unusually low, unequal growth; now we are witnessing a growing list of economic and financial phenomena that economists cannot readily explain.

Like Queen Elizabeth II, who famously asked in November 2008 why nobody had seen the crisis coming, many citizens have grown increasingly skeptical of economists’ ability to explain and predict economic developments, let alone offer sound guidance to policymakers. Some surveys rank economists among the least trusted professionals (after politicians, of course, whose trust economists have also lost). A solid economic training is no longer regarded as a must-have for candidates for top positions in finance ministries and central banks. This marginalization has further weakened economists’ ability to inform and influence decision-making on issues that relate directly to their expertise (or what they would call their comparative and absolute advantage).

The profession owes its deteriorating reputation largely to excessive reliance on its own self-imposed orthodoxies. With more openness to interdisciplinary approaches and the broader use of existing analytical tools, particularly those offered by behavioral science and game theory, mainstream economics could start to overcome its shortcomings.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Already have an account? Log in

Support High-Quality Commentary

For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world's foremost leaders and thinkers on the issues, events, and forces shaping their lives. At a time of unprecedented uncertainty, that mission is more important than ever – and we remain committed to fulfilling it.

But there is no doubt that we, like so many other media organizations nowadays, are under growing strain. If you are in a position to support us, please subscribe now.

As a subscriber, you will enjoy unlimited access to our On Point suite of long reads and book reviews, Say More contributor interviews, The Year Ahead magazine, the full PS archive, and much more. You will also directly support our mission of delivering the highest-quality commentary on the world's most pressing issues to as wide an audience as possible.

By helping us to build a truly open world of ideas, every PS subscriber makes a real difference. Thank you.

Subscribe Now

Mohamed A. El-Erian

Writing for PS since 2010
133 Commentaries

Mohamed A. El-Erian, Chief Economic Adviser at Allianz, the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer, was Chairman of US President Barack Obama’s Global Development Council. He is President of Queens’ College, University of Cambridge, senior adviser at Gramercy, and Part-time Practice Professor at the Wharton School at the University of Pennsylvania. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers four years running. He is the author, most recently, of The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

Reimagining Davos
FABRICE COFFRINI/AFP/Getty Images

Reimagining Davos

Mohamed A. El-Erian explains why it's time for the World Economic Forum to revamp its annual gathering.

3
A Mixed Economic Bag in 2019
Photographer is my life/Getty Images

A Mixed Economic Bag in 2019

Nouriel Roubini explains why the global outlook for the coming year will depend on a broad range of interrelated factors.

6
Overestimating the EU Economy
Leon Neal/Getty Images

Overestimating the EU Economy

Mohamed A. El-Erian anticipates significant impediments to Europe's economic performance in 2019 and beyond.

7
The Dialectic of Global Trade Policy
anucha sirivisansuwan/Getty Images

The Dialectic of Global Trade Policy

Mohamed A. El-Erian suggests that the US turn toward protectionism may ultimately turn out to be a beneficial disruption.

9

new comment has been posted. new comments have been posted.

0 Comments on this paragraph, 21 Comments on this article

Michael Heng Jun 23, 2019

Mohamed A. El-Erian has good points. I would like to add the following: (a) to always bear in mind that economics is an EMPIRICAL SOCIAL SCIENCE. It is not mathematics, which can be detached from the empirical world. Neither is it like physics with its physical laws that can be captured in elegant maths. And be scientific: when theory does not fit empirical data, throw out the theory. Please do not hide useless theory by layer upon layer of mathematical cosmetics. Keynes was an accomplished mathematician, yet his General Theory has very few maths. (b) being s social science, it operates within societal context. So neglect societal context at your own perils. (c) the fundamentals are more important than techniques. Any decent economics program should consist at least 60% of fundamentals, with 40% or less for techniques. The latter may be out of date within a decade. (d) while teaching fundamentals, pay due attention to the historical context in which ideas are developed. For example Adam Smith, is well known for his pro-free market position. How many teachers will tell students that Smith lived in a time where the standards of honesty and competence of most governments in Europe were unbelievably low. The English government was controlled by an aristocratic clique, the place-jobbing, corrupt, cynical, and class-biased gentry. Also Smith argues that natural monopolies like railways should be run by the State or strictly regulated. The State must provide public goods such as defense, maintenance of law and order, education and healthcare. He even has no objection to competent and clean governments, like those in Amsterdam and Venice, venturing into business activities.
A new reply to this comment has been posted.
Per Kurowski Mar 26, 2019

Even after a crisis caused by excessive exposures to AAA rated and slow growth the High Priests of bank regulations in the Basel Committee, still fail to see that their risk weighted bank capital requirements pushes way too much credit to what’s ex ante perceived as safe, houses and sovereigns, making these less safe; and way too little to what’s perceived risky, entrepreneurs, making the economy weaker.
http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html
A new reply to this comment has been posted.
William Allan Mar 22, 2019

To regain its former policy pre-eminence, Mohamed A.El-Erian argues that economics must engage more deeply with other social disciplines. His main concern is about economists’ poor macroeconomic forecasting record, but he is also critical of monetary policy, particularly in the way that it has been, and is being, publicly explained. While recognizing that there are major gaps in economic theory and practice, it’s not clear that the first of these issues is likely to be met adequately either by behavioural science or by game theory. Most economists now recognize the need to engage with broader social science—notably behavioural science (Kahneman and Tversky, Sunstein and Thaler)—and the growing importance of institutional economics (North, Stieglitz, and many others). But it seems unlikely that either political ‘nudging’ or game theory provide anything like complete answers to our current, and I think primarily political, dilemma.
Ideological conflict within both economics and its political environment is the central issue rather than economists’ reluctance to engage with other social disciplines. Economics’ internal conflicts are longstanding, they remain unresolved, and have been recognized acutely following the GFC. Both monetary and fiscal activity have an impact on the economy. The major failures of modern economic theory stem from the rise of neoliberal politics and economics from the 1980s through to the GFC, and, possibly as a consequence, too little effort has been placed on developing a unifying theory that accommodates rigorous testing of the impact of each type of intervention in different circumstances. A significant part of this problem is that economic modelling has been dominated by its reliance on GDP as a target variable and as a measure of social value, though Its flaws as a measure of wellbeing have long been recognized. Pre-GFC, economic modelling and forecasting was built around these measures, and economists, as well as politicians, generally supported the centrality of GDP as the primary economic and social policy-making target at national and global levels. Post-GFC, economists have lost both the will and the political influence to establish a program to modify the national accounts and the way that these are used to measure and determine societal policies.
Post-GFC, it is easy to agree that monetary policy has become an area of great concern; blindness to the threats of asset inflation and the speculative excesses of risk-sharing and shadow-banking were major causes of the crisis. Greenspan’s obscure mumbling reflected the deep neoliberal belief both in the power of the market to resolve all issues and the consequent reduced need for regulation—disastrous in the case of shadow banking. Undoubtedly the economics profession took a beating over its general failure to foresee the possibility of the GFC. It remains puzzling, however, that fiscal, particularly Keynesian, economics has suffered most of the resulting political and popular disfavour following an essentially monetary policy failure.
The failure of neoliberal economic and political theory was clearly demonstrated by the GFC. But rather than moving beyond neoliberalism to a broader evidence-based social theory both politics and economics have imploded, particularly in the US but also among many other advanced economies. The US has elected as POTUS a businessman of uncertain reputation who thinks (and appears to have persuaded ‘his’ Republican Party) that the country will become great again by aggressive trade policy, muscular use of military power combined with deal-making with autocrats, dismantling the scientific and policy expertise of the executive branch bureaucracy, and aggressively disparaging the traditional media as purveyors of ‘fake news.’ Elements of ‘tea party’ neoliberalism remain, but the Trump administration relies heavily on mercantilist instinct; it scarcely connects to modern economic theory.
It may be that order will be restored in the US through its constitutional mechanisms. A great deal of damage has been done quite quickly, however, and it is by no means clear that the swings and balances of powers among the Presidency, Congress, the Supreme Court, and the States will restore an appropriate order. Gaming the constitutional system by all parties over the past two centuries and the remaining deep divisions of the civil war make an easy solution unlikely. These ideological divisions are not confined to the US. But loss of US leadership in these matters will pose large risks for global security, prosperity, and justice.
Where to from here? Neither economics nor other social disciplines—even those based mainly on biology and psychology—can meet the standards of measurement and verification set by the physical sciences. I agree with El-Erian that economic policy should be based on broader theory and more reliable and precise measures of social wellbeing. Nationally and globally, we must all be informed and aware of environmental and social costs and benefits, not just commercial profitability and growth. His call for a broader socio-economic discipline is well-founded, but it will only be achieved by a return to a political and policy-making environment that is based on a critical search for evidence and development of a more bipartisan and deliberative environment.
A new reply to this comment has been posted.
manuel werner Mar 10, 2019

While criticism is the lifeblood of renewal in any field, the overboard tone by economists is becoming a bit tiresome. All fields have had spectacular failures in their own evolution (physics, medicine, psychology, to name a few). The spiteful critics should not forget that Economics has also has some spectacular successes, like the backbone concave utility function, predating by decades the findings of neuroscience that humans react asymmetrically to loss and gain. The sanctimony should be a bit more restrained.
A new reply to this comment has been posted.
Eustaquio Vera Mar 10, 2019

Completely agree. Been saying so with lots of criticism to PS for years. Some hipothesis economists asume, simply don't hold. I suspect the ellites. Otherwise how can societies act so foolish. Of course I am for Trump.
A new reply to this comment has been posted.
Ariel Tejera Mar 10, 2019

It doesn't help that currently (we) people in the Economics profession are condemned either to deliver bad news, or to be irresponsible liars.
A new reply to this comment has been posted.
Theodore Schrader Mar 10, 2019

You know you're aloof (out of touch) when you point to happendings at Davos as an indicator of social and economic trends. My God, what foolishness.
A new reply to this comment has been posted.
Per Kjeldaas Mar 10, 2019

Take a look at Austrian Economics. It does not pretend to forecast the future, but when some of its disciples do, they have a better track record. Go to the Mises Institute.
A new reply to this comment has been posted.
vivek iyer Mar 10, 2019

Well written but this does not go far enough. 'High Priest' type Economists have remarkable longevity, probably because they just repeat themselves endlessly. This adds noise to signal and preserves delusional availability cascades. The problem with the 'new' Economics the author mentions is that their roots are in the Seventies. Younger economists have access to tools whose historical context they don't understand thus making themselves victims of their own Heideggerian Technicity. Meanwhile the Econophysicists are prowling around making, or pretending to make, shedloads of money. Every sort of nonsense- even 'modern monetary theory'- can have an arcane mathematical description borrowed from string theory or quantum gravity or stuff stranger yet.

It is probably a mistake to focus too much on Central Banks. The truth is Knightian Uncertainty has increased and, in any case, volatility is not a bad thing in itself.

Why not let Economics decline into a senile branch of Theology- or some other such genteel Academic niche? Henceforth, let job-market papers eschew junk econometrics featuring drive-by regressions in favor of pious hagiographies and naive apologetics. Economists must stop pretending to engage with the real world. This means adopting a hair shirt rather than trying to fit into 'skinny jeans' or whatever it is young people are wearing nowadays.
- Barry Rosenfeld Mar 10, 2019
  
  Oh, my, Mr. Iyer, you have hit the nail. Apparently, I'm not the only one who remembers Frank Knight. But why bother with existential uncertainty when the world can be reduced to actuarial risk? It's so much easier that way - easier to model, that is.
  
  Why not ignore Schumpeter as well, because the dynamic role of creative destruction on relative values can also be ignored if attention is only given to macro effects. Does anyone remember A. C. Pigou, whose Economics of Welfare described the way incentives built into systems of taxation and subsidies affect almost all economic activity through their effects on costs and prices?
  
  Is the history of economic thought even taught anymore in graduate programs? Does a knowledge of set topology make one a better economist? Can proving the conditions of equilibrium assuming the world is a cube tell us anything about economic activity?
  
  Astrologers used "mathematics" as well. But the fault, dear economists, is not in the stars ... .
  - vivek iyer Mar 10, 2019
    
    Well said!
    A new reply to this comment has been posted.
  A new reply to this comment has been posted.
A new reply to this comment has been posted.
louis calvez Mar 9, 2019

This article doesn't quite reach as far as distinguishing between a working design and a mere analysis, however complex the analysis can be made. As the engineers realistically admit, a working design cannot be simply the reverse of an analysis because of the environment that was radically discounted by analysis, but then comprehended to some extent by the attempt at design.

Every system has a local purpose to perform specific work against its environment for its purpose alone, but this implies an undeclared purpose: to discount the value of its environment, by its purpose alone (as source and sink). An organization increasing its scope and scale of purpose increases the discount of the value of its environment, and, by the expansion and intensification of its real world processes, degrades its environment at greater rate.

Economics as a system is flawed because it doesn't understand the divide between system and environment, yet it proposes a fix of the environment by expansion and intensification of system.

Social sciences make a radical assumption which is hidden and thus unquestionable: that a system can improve or repair its environment (social or physical) with adjunct processes that increase load on environment and produce effects which cannot be known or can be ignored by the model of knowledge and control of system.

However, this assumption can be assessed: If the interventions of system grow in mass and complexity, frequency and intensity, we can be sure that the environment is being increasingly devalued and degraded, and the degradation is being increasingly excused, justified or promoted by a powerful local purpose.

Liberal arts does not educate people to understand what a system can be and what it cannot be: Economics is the proof.
A new reply to this comment has been posted.
Jerry hough Mar 9, 2019

And then there is politics. Political scientists listed Trump as the worst President in American history in his first year in office. That is silly. No one can be judged in his first year, and in fact Trump has probably become among the 5-10 best in the history of Presidents on foreign policy, and no one can say that in the current atmosphere The economists who have had visibility to the public are those like Krugman and Summers who are nothing but shills for the DNC. They lead the public to believe that the "profession" doesn't even try at professionalism.
A new reply to this comment has been posted.
Daniel Reynolds Mar 9, 2019

In recent decades, economics seems to forgotten that it's a social science. Practitioners have increasingly drifted into this "...embrace of simplistic theoretical assumptions and excessive reliance on mathematical techniques that prize elegance over real-world applicability".
A new reply to this comment has been posted.
Michael Public Mar 9, 2019

As a business man and non-economist I distrust economists because they are paid by the same system they must criticize. Research shows that even those who ardently claim they can remain independent of the hand that feeds find themselves unable to do so. I would suggest an independent economist corp just like there is an independent judiciary.
A new reply to this comment has been posted.
Paul Friesen Mar 8, 2019

The biggest failing of many economists in the past crisis was that they forgot all their first-year economics. They forsook the simple old Keynesian ideas they still taught to undergraduates in favour of fancy "real business cycle" models and other even more esoteric models, even more divorced from the real world.

Keynesian economics works very well in understanding the last recession. The shock was very large, so large that interest rates hit the zero lower bound. What Keynesian economics says needs to be done then is fiscal stimulus. A little bit of that was done, but never enough. Resistance to it from many economists, who should have known better, drowned out the warnings of economists like Paul Krugman, who warned all along that what was being done was far too little. And when that proved right, far too many economists pinned the blame for the failure on what stimulus there had been instead of on the lack of adequate stimulus, and began preaching austerity. With economists speaking with such a divided voice, it is hard to blame politicians much if they steered a course somewhere in the middle. But that course was a disaster. Long years of unnecessary suffering were the result.

The only country to really apply Keynesian economics was China. It quickly implemented a stimulus plan that was 15% of it GDP (vs. ~2% elsewhere). The result was that it nipped the recession in the bud and continued its rapid growth.
A new reply to this comment has been posted.
Mike Robinson Mar 8, 2019

But there's another critical aspect here, relative to 2008: "CRIME."

In the years leading up to 2008, financial crime was rampant. Critical protective legislation such as the Glass-Steagall Act was dumped. Trading in "derivative securities" went wild, and when bets went bad they were shoved into the banks, so that governments would have to "bail them out" as "too big to fail."

The result was an explosion in the number of currency-units in circulation, and the papering-over of the consequences of these willfully criminal acts without doing anything to punish the wrongdoers or to reform the things which they exploited. The crimes did not stop and still haven't stopped. Instead, they're presented as though they were "the new normal."

I think that economists routinely overlook the "crime" factor – the simple fact that people will steal when given the opportunity, and that overseers and "enforcement" authorities can easily be in-cahoots. The events of 2008 were principally the consequence of criminal activity, and the so-called "quantitative easing" response was to let the criminals avoid punishment while cashing-in all their chips. "Crime DID pay." For them. But it meant that everybody else ... lost, and are still losing.
- Alan Kirman Mar 10, 2019
  
  You could push the crime aspect further. The huge fines levied on wayward banks have not deterred them from indulging in this sort of activity. This is simply because it is the bank that pays and no individual running the bank or company is harmed. As long as this is the case the culprits will just "factor the fine in" and decide whether or not to break the rules depending on the profitability of doing so. We have come too far from the situation in which trust was an important part of market behaviour and in so doing have encouraged rule breaking and ways to avoid respecting the rules. The only people who gain from that apart from those who direct the delinquent institutions are the lawyers.
  A new reply to this comment has been posted.
A new reply to this comment has been posted.