Friday, April 29, 2011

Is Academic Economics Adapting?

Brad DeLong has a great post that is really worth thinking about for economists and non-economists alike. Although the financial crisis and the subsequent recession should have been a gigantic signal to economics departments that they have to adapt, DeLong sees little evidence that they are actually doing so. As a result, academic economists may deservedly lose influence, or as Brad DeLong puts it:
Perhaps academic economics departments will lose mindshare and influence to others – from business schools and public-policy programs to political science, psychology, and sociology departments. As university chancellors and students demand relevance and utility, perhaps these colleagues will take over teaching how the economy works and leave academic economists in a rump discipline that merely teaches the theory of logical choice.
For economists, this is worth thinking about. Is the stunted view of the economic world that one gets as one looks at the economy more and more exclusively from the perspective of economic models and theory good enough? Or do economic models and theory need to be supplemented by more robust thinking "outside the box" in order to enable better insight into the economic world and how it actually works? Do academic economists have a strong enough understanding of the history of their own discipline?

For non-economists, this is very much worth thinking about as well. It seems that economics has gone astray. That much of the work that economists have done recently has turned out to be irrelevant, or worse, actually harmful. If academic economists are handcuffed by narrow methodologies that render them less and less relevant, it suggests that other academics from business schools, sociology, anthropology, and psychology will need to step into the vacuum so that policy makers are able to understand how the real world economy actually works. Economics may have the term "economy" in the very name of the discipline. That does not mean that the real world economy is what economists are actually studying in all instances.

On the other hand, maybe Brad DeLong is incorrect in his thinking that economics needs to adapt. As Avanish Dixit has suggested, maybe the problem is that academic economists have not been listened to enough by "practical men who believed they had conquered risk."

I am inclined to think that the problem is not so much economic theory, which can be useful when used with appropriate caution, as much as not doing enough to combine and temper economic theory with facts on the ground as well as with markets themselves which are prone to being dominated by "practical men" who, motivated by fear or greed, overreact to the transitory trends of the moment. To criticize academic economics is not to criticize theorists exclusively, but merely to point out that academic theorists need to grapple with the problem of why "practical men" don't listen to them. That is why are "practical men" so irrational, unlike the homo economicus that is assumed in standard economic models. (Though it should be pointed out that this important question is starting to be addressed with the rise of behavioral economics.)

Whatever one ultimately thinks, Brad DeLong's post is worth thinking about.

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