More Navel-Gazing from Academic Economists

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.

Update: Click through for related commentary from Willem Buiter, Mark Thoma, and Brad DeLong.


I must say, that was a breath of fresh air.

Perhaps this is yet another silver lining to this recession, is the impact it will have on the economics profession. I have heard countless times of the difficulty in measuring success of predictions in economics because of the lack of control on the experiments.

But one thing is clear - the previous approach of complete abstraction was not working.

I feel this problem is pervasive in both politics and general public discourse about policy. Getting academics to base their claims on evidence is as good a place to start as any.


Well spoken. It's always bothered me that the four things that actually count in competitive business:

-fickle consumers (no rational maximizers)
-brand loyalty (no fungible goods)
-time, transport and convenience (lots of transaction costs)
-ignorance of past, present and future (no perfect information)

are the first four "ceteris"-es that get "paribus"-ed in Econ 101.


Very good. The post was bigger than this, but I still get a twinge when we talk of more appropriate ways to forecast.

Regardless of what is done, these are words destined to be repeated:

"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"


I found if you copy that blurb, and replace "environmental science" with "economics" it is just as interesting.

Just saying - environmental models for climate change are presented as Gospel.

But, I agree with the take on macroeconomics.

David Chowes, New York City

Firstly, economics is not a science. (Though some aspects of it evidence a semblence of a 'social science' -- at best.)

We must never forget this!

Physics is a science -- a 'hard science.' We can predict to 1/10,000 of a second how long it will take an object to fall, when we drop it from 10 meters.

No one, except a totally ignorant or crazy person would disagree with my assertion.

But, with economics, there is not only variance between experts -- some Nobel Prize winners offer antithetical "opinions."

We, the lay public should never forget this. Economics simply involves too many variables and each professional
carries with them different value judgements which they believe are desirable.

Jayson Virissimo

"There's going to be a renewed emphasis on imperfect and sticky information.

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."

In other words, we should read more Hayek.


How refreshing. Perhaps there will be more collaboration between political/sociological economists, as well as psychologists and game-theorists. Perhaps philosophers of economics (as well as philosophers of science generally) will also be viewed as important to the development of better ways to cull significant data and to help create models that bring pertinent information to the forefront.

I just hope this attempt to quantify everything (based on what I've read from this blog) happens to subside quite a bit.

Richard Green

Computing and IT are bringing thousands of massive data sets every day for every conceivable issue to be studied in micro.

In macro, any given economy will give up 4 new data points for GDP, 4 new points for unemployment, 4 new points for inflation and as little as one for productivity.

How far is a researcher going to get mining those datasets again? Particularly when you're under publish or perish conditions, why take the long shot of thinking you can pull something original out of the limited data sets on the few (but absolutely massive) issues covered by macro?

Academics respond to relative implicit prices just like everyone else!


1- We are always in equilibrium. If you don't believe it, then we must forget 50-ish years of research.

2- Who does complete information macro? All models on search (labor and money), Industrial Organization (to cite two) make use of more complex tools that try to capture the complexity of human behavior.

3- People respond to incentives. If you want to blame the "macro people" about the recession, then you must also blame top journal editors. They should accept more "general interest biased" research. Nobody will care about issues that don't get them tenure. Cite me 1 job market paper for Phd at Chicago dealing with economic measurement in the past 20 years.

4- It's easy to blame the young researchers when you have a tenure and is from a top department.

5- Cience is about the truth, but would you be willing to change your approach?

From a game-theory-not-related-to-the-real-world guy.



F the economists, listen to the artists.

Mojo Bone

I just loved the phrase. "intellectually insolvent". ;-)

Daniel Colascione

Kevin, not to wander too far off-topic, but the entire point of this post is that economics is re-connecting to empirical reality and discarding naive notions like rational expectations. Climatology is completely different: while researchers may differ on the interpretation of data, these data have been central from the beginning.

Joe Smith

I am constantly amazed at the lack of outrage in the general public. Reckless criminal incompetence in Congress, Wall Street and university economics departments have brought the nation to the edge of disaster. Count me as a nihilist on this one - fire or imprison them all and start over.


yes I agree partically... but when I studies econometics my professor always reminded us that these models only have limited value for prediction. I was dazzled that in the "real world" people were using them and taking the output of this model as reliable.

thecools, UK

'I found if you copy that blurb, and replace “environmental science” with “economics” it is just as interesting.'

Um, how about no.

The statement..."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(read environment). The environmental science profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public..." would be false.

No they have not. They openly talk about the different problems and errors which may affect thier models. Their models are also based on empirical evidence backed up by scientific theory. The IPCC have been convinced since 1990 that climate change has been happening and has been man made.

However, debate has become increasingly difficult and shrill (as I assume this is what you are basing your argument on) because in the large part those opposed to their models base their arguments on ideology not criticism of these models.

Hence climate scientists have has to ramp up the rhetoric to conveince peoples. The models have flaws yes. However, to concentrate on these while arguing for a radical change to our economic system risks undermining their work and opens their words to deliberate misinterpretation.

There we go. How to people always manage to bring any debates back to Climate Change or Evolution, or compare someone to Hitler? sheesh!


Matthew R.

The teleology of academia in most disciplines has been moving towards increasing erudition, at the expense of relevance and even reality. If your mom can understand and benefit from what you've written, then it does your career no good. If your prose is dense and impenetrable, and your topic is arcane, then it must be brilliant. The emperor has no clothes.

Perhaps econ professors should function more like medical school professors, who actually have to treat real, live human beings as part of their duties. Perhaps the university shouldn't actually pay their econ profs, but put their compensation into funds and stocks that the prof chooses, with a vesting period of one year. How's that for incentivization?


I didn't know there were still microeconomists around.


I echo the thoughts expressed earlier that there was not nearly enough attention paid to the psychology of economic actors.

All those fancy mathematical economic models fail by failing to take into account the basic fact of human irrationality (believing that prices can only go one way - up, that this time is really different from previous bubbles, that the unthinkable cannot possibly happen).

Did the smart economists not notice the perverse incentives built into the housing boom? If everybody (brokers, realtors, lawyers, lenders) made money based on the VOLUME of housing sales, what do you suppose the goal of those people will be?

And then there are the Collateralized Debt Obligations (CBOs). Should anybody be surprised that there will be less due diligence if lenders believed that they could minimize and spread their risk around through these instruments?

I guess my point is: you economists, as briliant as you are with your math models, are not as clever as you think when it comes to what hhappens in the real world.


Eric M. Jones

In the article by Colander, Föllmer, Haas, Goldberg, Juselius, Kirman, and Sloth (nobody wanted to go out on that limb alone…), I note that several reference are made to the availability of computer data. Hark! I see a revolution where REAL facts are used, instead of hand-waving babbling. What a relief.

I ask myself: Is it possible to have a thriving discipline that masquerades as a science that is entirely bogus? That publishes "learned" tracts but is entirely (or mostly) just made up? That has schools and branches but exists only as a delusion in some over-active minds? That has pointless seminars and vapid award ceremonies? Of course it is--they're everywhere.

Feynman berated psychology as one such pseudo-science. Certainly chiropractic, Freudian psychoanalysis, phrenology, astrology, homeopathy, naturopathy, alchemy...the list is endless. Of course, some of these pseudo-sciences decided to become real sciences by adopting the scientific method (Hah, I simplify here considerably!); Chemistry "descended" from alchemy, astronomy from astrology. And in fact, physics itself was “Natural Philosophy” trapped in Aristotelian-dominated scholasticism until the 17th century. When Galileo showed his fellow Paduan professors his telescope, they would not look through it. In the 1850's medicine was hardly more advanced than when Constantine went to Constantinople but they finally broke away from the philosophy of humours and started to keep track of things.

Other than that pesky psychology-thing we have all the data for a working model of the economy. It is unfortunately true that real socialism becomes desirable when the economy can be modeled and used to create what could be the most good for the greatest number of people. The Soviets knew that, but they couldn't get the computers.



The real problem is that people expect economist to predict the future. While in hard sciences this is possible it is also possible for them to hold variables constant in the real world. For example they use things like vaccums that eliminate drag. In economics this would be almost impossible another problem is that there is an assumption that people always have full information and act rationally.