The findings in this memo, “Research Evaluation in Economic Theory and Policy: Identifying and Overcoming Institutional Dysfunctions,” will also be presented by INET at the G20 Global Solutions Summit Berlin on Tuesday, May 29. The full memo is available at the G20 Insights website.
The problem this essay addresses can be framed in terms of two quotations from Alexis de Tocqueville. The first comes from his famous speech in the French Chamber of Deputies just prior to the outbreak of the Revolution of 1848: “We are sleeping on a volcano….do you not see that the earth is beginning to tremble. The wind of revolt rises; the tempest is on the horizon.” The second is from Democracy in America: “When the past no longer illuminates the future, the spirit walks in darkness.”
In 2018, the darkness is all too palpable: A chain of economic reverses that no prominent economists, central bankers, or policymakers anticipated has combined with other shocks from technology, wars, and migrations to produce the political equivalent of the perfect storm. The world financial meltdown of 2008 set the cyclone spinning. As citizens watched helplessly while their livelihoods, savings, and hopes shriveled, states and central banks stepped in to rescue the big financial institutions most responsible for the disaster. But recovery for average citizens arrived only slowly and in some places barely at all, despite a wide variety of policy experiments, especially from central banks.
The cycle of austerity and policy failure has now reached a critical point. Dramatic changes in public opinion and voting behavior are battering long entrenched political parties in many countries. In many of the world’s richest countries, more and more citizens are losing faith in the very ideas of science, expertise, and dispassionate judgment – even in medicine, as witness the battles over vaccines in Italy, the US, and elsewhere. The failure of widely heralded predictions of immediate economic disaster when the UK voted to leave the European Union and Donald Trump became President of the United States has only fanned the skepticism.
Placing entire responsibility for this set of plagues on bad economic theory or deficient policy evaluation does not make sense. Power politics, contending interests, ideologies, and other influences all shaped events. But from the earliest days of the financial collapse, reflective economists and policymakers nourished some of the same suspicions as the general public. Like the Queen of England, they asked plaintively, “Why did no one see it coming?”
Answers were not long in arriving. Critics, including more than a few Nobel laureates in economics, pointed to a series of propositions and attitudes that had crystallized in economic theory in the years before the crisis hit.[1] Economists had closed ranks as though in a phalanx, but the crisis showed how fragile these tenets were. They included:
- A resolute unwillingness to recognize that fundamental uncertainty shadows economic life in the real world.
- Neglect of the roles played by money, credit, and financial systems in actual economies and the inherent potential for instability they create.
- A fixation on economic models emphasizing full or nearly complete information and tendencies for economies either to be always in equilibrium or heading there, not just in the present but far into the indefinite future.
- A focus on supply as the key to economic growth and, increasingly after 1980, denials that economies could even in theory suffer from a deficiency of aggregate demand.
- Supreme confidence in the price system as the critical ordering device in economies and the conviction that getting governments and artificial barriers to their working out of the way was the royal road to economic success both domestically and internationally.
Initially, debates over this interlocking system of beliefs mostly sparked arguments about the usefulness of particular tools and analytical simplifications that embodied the conventional wisdom: Dynamic stochastic general equilibrium models; notions of a “representative agent” in macroeconomics and the long run neutrality of money; icy silence about interactions between monetary rates of interest and ruling rates of profit, or the failure of labor markets to clear.
Increasingly, however, skeptics wondered if the real problems with economics did not run deeper than that. They began to ask if something was not radically wrong with the structure of the discipline itself that conduced to the maintenance of a narrow belief system by imposing orthodoxies and throwing up barriers to better arguments and dissenting evidence.
The empirical evidence now seems conclusive: Yes.
Read the Full Memo at the G20 Website
Footnotes
[1] Nobel Prize winning economists who have recently appeared on panels critical of the way work in economics is now evaluated include George Akerlof, Angus Deaton, Lars Hansen, and James Heckman. See, e.g., “Taking the Con Out of Economics: The Limits of Negative Darwinism,” Panel Presented at the Institute for New Economic Thinking Conference in Edinburgh, Scotland, October 2017, available on the web at https://www.ineteconomics.org/conference-session/taking-the-con-out-of-economics-the-limits-of-negative-darwinism and “Publishing and Promotion in Economics: The Curse of the Top 5,” Panel Presented at the American Economic Association Annual Meeting, Philadelphia, January 2017; on the web at https://www.aeaweb.org/webcasts/2017/curse
