The abstract of a recent paper by Colander, Föllmer, Haas, Goldberg, Juselius, Kirman, and Sloth:
The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.
The authors call it a “systemic failure of the economics profession.” Krugman calls it “equilibrium decadence,” but rightly reserves his scolding for the macro tribe.
The claim is that academic macroeconomists have become mired in a particularly fruitless equilibrium, in which each is engaged in the search for ever-greater levels of formal elegance, at the expense of empirical relevance. There’s definitely something to this.
Today’s macroeconomists write for other macroeconomists. If you aren’t using the right tools, you aren’t part of the club. And so yesterday’s approach becomes tomorrow’s approach. Echoing Yogi Berra‘s famous dictate, each time macroeconomists came to a fork in the road, we took it. It doesn’t take a radical to suggest that perhaps trying the road less traveled might have led somewhere more interesting.
Despite this observation, I don’t share the gloom of the naysayers, but my optimism comes from looking beyond macro. As a whole, the economics profession has become more empirically grounded. New large datasets offer the prospect of truly understanding individual behavior in a way that paying lip service to “micro-founded models” doesn’t. Many are engaged in the tricky business of writing more psychologically grounded models that are closely tied to real human behavior. Computational advances allow us now to take differences in people, and how they respond, far more seriously. The absence of available data doesn’t necessarily require more complex theory; we are also learning how better to measure the objects we model.
Now all of this good work won’t mean anything unless it starts to impact the macro tribe; and countless corridor discussions overhead at this year’s annual meetings of the American Economic Association suggest that, finally, the rest of the profession is paying attention, and they are demanding more of their macro brethren.
Formally elegant but empirically irrelevant macroeconomists had a much harder time getting hired this year. Curriculum committees are also paying attention, looking to see classes that speak to real economic issues. Economists beyond the macro tribe are paying greater attention, and they aren’t willing to support the intellectually insolvent.
It may be too early to say that the new macro is already taking shape, but I’m willing to bet there’s going to be a renewed emphasis on imperfect and sticky information; rigorous analysis of micro datasets; plausible approaches to empirical identification; and — I hope — a belief that data, rather than op-ed debates can resolve the big debates. Institutions matter; political economy matters too. Behavior can be imperfect, markets can fail, and the unexpected does, in fact, occasionally happen. Today’s problems are both too real and too big to make ignoring the real world a sustainable equilibrium.