Michael Roberts – Is economics changing?

Macroeconomics remains divorced from what is going on in the real economy

Michael Roberts is an Economist in the City of London and a prolific blogger .

Cross-posted from Michael Roberts’ blog

Photo licensed under the Creative Commons Attribution-Share Alike 4.0 International license

Source: Debangana.mukherjee

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In an article entitled How economics is changing, FT columnist Harvey Nripia paints a generally positive picture of economics as an academic discipline in the 21 st century. He argues that economics has become more inventive and empirical and now provides, on the whole, increasingly useful advances in our knowledge about economies and how human societies can flourish.

No longer is economics ‘a dismal science’ that Thomas Carlyle was claimed to have called it in the mid-19 th century. Then ‘political economy’, as it was generally called, was mostly pessimistic about human progress. It is 250 years since Adam Smith suggested a break with monopolies and the development of free markets and the division of labour would lead to a huge leap forward in productivity and prosperity for mankind. David Ricardo and Thomas Malthus in the early 19 th century were less sanguine about such economic progress; the former expecting diminishing profits being squeezed by landlordism and the latter expecting unending poverty from excessive population growth.

But things are much rosier now, according to Nripia. Economics as a discipline is mushrooming and expanding into new fields of discovery. Economics is now the fifth most popular A level in England. It was hardly heard of back in the 1960s when it was suggested to me that I might like to try out this ‘new fangled subject’ that fell midway between the sciences and the arts. However, I suspect that the hugely increased popularity of economics at schools and universities in the last 40 years is more to do with its potential to deliver a better paid career in financial institutions and governments than if you study English or even sciences. As Benoît Cœuré of the ECB told economics students at a job forum of Paris School of Economics in 2019. “For many, a master’s degree is a natural step towards a PhD. And a PhD is essentially a promise of employment. In the United States, for example, the unemployment rate for PhD economists is about 0.8%, the lowest among all sciences. Not a bad place to start from.”

Nripia highlights a survey of economic journals that shows that economics has morphed into all sorts of areas of human behaviour and social norms. Papers on development, crime and gender “are on the up”. Another survey finds that “causal claims in economics have jumped. In 1990, 7.7 per cent of claims made in the literature were causal. In 2023, that hit 32.6 per cent. Additionally, papers with more causal claims are more likely to receive citations and wind up in top five journals, the research suggests. By this measure, economics is increasingly resembling a hard science.”

That sounds like good news. But there are contradictions. Modern economics loves mathematical models which have replaced theory. Marxist economist Ben Fine criticised the ‘model’ approach: “The goal “of modelling the economy is fundamentally misconceived… a model of the economy is not the economy itself”. As such, macroeconomics remains divorced from what is going on in the real economy.

Perhaps the most used in macroeconomics are the Dynamic Stochastic General Equilibrium (DSGE) models. They start from the unfounded premiss of equilbrium , namely that supply can be assumed to equal demand; they are dynamic because the models incorporate changing behaviour by individuals or firms (agents and they are stochastic , because they include random ‘shocks’ to the equilibrium. This is now what most macro economists spend their time doing. Forget empirical evidence, forget macro data, find a ‘micro’ foundation (model) that might help to at least offer a guide to what possibly might happen.

DSGE models have proved to be worthless in explaining anything. These models failed to predict before or explain after the Great Recession and are unable to explain the subsequent weak recovery, or Long Depression. And it is not hard to see why. There is a total absence of investment or profit as ‘shocks’ in these models. Everything starts with consumer preferences; the consumer is king as in the neoclassical world and Keynesian aggregate demand is reduced to just consumption.

But Nripia claims progress in economics is now happening. He says that the widening spread of economic ideas is the result of economists “eschewing theoretical models in favour of empirical approaches.” But the empirical approaches that Nripia praises are ‘difference-in-differences’ methods and ‘randomised controlled trials (RCT)’ – a form of ‘laboratory’ work on individual behaviour at the small scale level. RCT is justified by those who practice it because “ good economics is much less strident, and quite different. It is less like the hard sciences and more like engineering or plumbing: it breaks big problems into manageable chunks and tries to solve them with a pragmatic approach – a combination of intuition and theory, trial and acknowledged errors. ” Unfortunately, as Sanjay Reddy and others have pointed out, there are just as many faultlines in RCT as in the DSGE models. Meanwhile, empirical work to support the macro theories of modern mainstream economics is either sadly lacking or inadequate. For me, economics is a science, testing theory against evidence. But it is a ‘social’ science looking at the changes in the aggregate, not a science of individual behaviour.

Take inflation. Mainstream economic theory on the causes of inflation has been found wanting and the empirical evidence to back monetarism, or cost-push inflation or consumer expectations is weak. The same failure applies even more to explaining regular and recurring crises of production, investment and employment in modern economies. Neoclassical economics denies such crises as structural to capitalism and looks only for random ‘shocks’ to the harmonious equilibrium growth of modern economies. Keynesianism finds crises as just a ‘technical malfunction’ of investment and consumption that can be corrected by policy.

In his address to economics students, Cœuré dismissed the criticism that modern economics had failed to predict the outbreak of the global financial crisis of 2008-9. “This criticism is nonsense. Do we expect physicians to predict illnesses? We don’t, of course. But we expect them to help us cure illnesses. Economists should do the same. They should be judged by the quality of the advice they give.”

Cœuré thinks economists are like dentists, doctors or plumbers who clear up messes once they have happened. But are doctors all that matter in human health? Actually, improved doctoral skills in treating patients once they have become ill comes from scientific discovery about diseases, biology and the environment. Successful drugs and medical practices are the result of learning what the cause of the illness is. In medieval times, doctors applied all sorts of useless and dangerous treatments (leeches etc) because they did not know that about ‘germs’ (bacteria or viruses). Cholera was eventually abated by a geographical (empirical) study in London showing it was prevalent near bad drinking wells. Malaria and smallpox were resolved by discovering the carriers of the bacteria in various animals. Treatments by doctors then followed.

Nripia surprisingly omits one of the main tasks for economics in the 21 st century – the economics of climate change. Maybe that is because mainstream economics is doing little or nothing to come up with social scientific analysis and solutions on this literally burning issue.

Nripia has to admit that many “ results derived from real-world data and experiments are hard to replicate under the same conditions and methodology, with research suggesting that up to 70 per cent of recently examined economics papers contain some results that cannot be reproduced, sometimes due to “ questionable research practices or fabricated data sets ”. Indeed, AI poses a risk to Nripia’s optimistic future for economics. Nripia: “While some practitioners are embracing machine learning to process non-text data, such as images and sounds, or to capture non-linearity, AI is also creating low-quality content” and plagiarism.

Nripia ends on a positive note. “As long as the academy keeps a close eye on rigour, especially as economists embrace frontier technologies and methods, the future of economics looks dynamic. Not bad for a subject once thought so dismal.” For me, economics remains a ‘dismal science’ because the most important economic theories that expose the dismal state of the world are mostly ignored in the ‘profession’. So poverty for billions, rising inequality, continual financial crises and environmental destruction are worsening. Nripia ignores these fundamental trends for modern economics to analyse and solve in his fast moving stream of progress.

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