Saturday, December 11, 2010

Economic Theorist Avinash Dixit: Theory Versus Policy

Finance and Development, a publication of the International Monetary Fund, has a great profile article on Princeton economic theorist Avinash Dixit. It appear that Dixit combines both great theoretical work with great teaching ability; not only has he had a big impact on economic theorists, including some who went on to win the Nobel Prize in Economics, he has also been a great teacher. Dani Rodrik at the Harvard Kennedy School of Government has called Dixit "the best teacher I ever had" and his work has had a wide influence. 

One thing he asserts is that "economic theory came out of [the economic crisis] rather better than policy practice did." He goes on to suggest that the problem isn't theorists so much as those who tried to apply it in the political and business world without understanding its caveats:
But the real fault was not so much in economic theory as, if you like, in the political and business world, where people actually swallowed some of the simplistic views about the wonder of markets too much without recognizing the hundreds of qualifications that Adam Smith and a number of others have told us about, and we should all have known about.
This quote sounds great as a way for economic theorists to get off the hook: The problem isn't theorists; the problem is policy makers in business and politics who forget the many qualifications mentioned by economic theorists from Adam Smith onward. Except I think Dixit lets economic theorists off way too easily. If politicians and business leaders are simplifying the lessons that can be learned from economic theory in a problematic way, it should be the duty of economic theorists like Dixit to set them straight. Economic theorists have a duty to see that their work is not misused by those who misunderstand their findings. After all, if they allow policymakers in business to misuse their theories, then they are part of the problem. Policymakers who convince the constituencies that their policies are backed by economic theory but who are forgetting the important qualifications nonetheless gain false credibility. I just don't see how it is acceptable for economic theorists who are in an ideal position to set such policymakers straight to sit back in an ivory tower while Rome burns.

So contrary to Avinash Dixit, even if his assertions that "economic theory came out of [the economic crisis] rather better than policy practice" is correct, I would suggest that economic theorists still have some serious soul-searching to do. Even if the problem isn't with economic theories per se, but rather with the way those theories have been misapplied, doesn't that suggest that something must change in the way that economic theorists interact (or choose not to interact) with policymakers and those who make use of their work??

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