Big economic ideas
Breakthroughs and brickbats
What economists can learn from the discipline’s seminal papers
IT IS easy enough to criticise economists: too superior, too blinkered, too often wrong. Paul Samuelson, one of the discipline’s great figures, once lampooned stockmarkets for predicting nine out of the last five recessions. Economists, in contrast, barely ever see downturns coming.
They failed to predict the 2007-08 financial crisis.
More than ever, economics today is an empirical discipline. Thanks to the power of big data, economists can track consumer behaviour in real time or know almost precisely how much a good teacher is worth to the lifetime income of children. But theory remains vital. Many policy failures might have been avoided if theoretical insights had been properly applied. The trilemma was outlined in the 1960s, and the fiscal multiplier dates back to the 1930s; both illuminate the current struggles of the euro zone and the sometimes self-defeating pursuit of austerity. The Nash equilibrium describes an outcome in which everyone is doing as well as they can given the strategies of others; it explains how countries compete with each other to cut tax rates in order to lure global capital.
Nor is the body of economic theory complete. Big gaps remain in the understanding of financial markets, for example, and on how best to regulate tech platforms like Facebook. The shortfalls are particularly glaring when it comes to modern macroeconomics. From “secular stagnation” to climate change, the discipline needs big thinkers as well as big data.
It also needs mathematics. Paul Romer, who is heading to the World Bank as its chief economist, has railed against “mathiness”, the habit of using algebra to disguise ideological positions. Economic papers are far too formulaic; models should be a means, not an end. But the symbols do matter. The job of economists is to impose mathematical rigour on intuitions about markets, economies and people. Maths was needed to formalise most of the ideas in our briefs.
Thinking far and wide
Economists still tend to look down on outsiders. Behavioural economics has broken down one silo by incorporating insights from psychology. More need to disappear: like anthropologists, economists should think more about how individuals’ decision-making relates to social mores; like physicists, they should study instability instead of assuming that economies naturally self-correct. This could make the maths trickier still. But not as hard as getting the profession to eschew its natural insularity.