Young Economists on the Future of Economics

Over at the Big Think, eight young economists weigh in on the future of the profession, including our own Justin Wolfers. Here’s Justin:

Specifically, the tools of economics will continue to evolve and become more empirical.  Economic theory will become a tool we use to structure our investigation of the data.  Equally, economics is not the only social science engaged in this race: our friends in political science and sociology use similar tools; computer scientists are grappling with “big data” and machine learning; and statisticians are developing new tools.  Whichever field adapts best will win.  I think it will be economics.  And so economists will continue to broaden the substantive areas we study.

And here’s NYU economist Xavier Gabaix on an alternative to the the rational-actor model:

The most central open question in economic theory, as I see it, is how to model realistic economic agents. Traditionally, economists have relied on the rational-actor model, but it is clear that it is just a rough caricature.  It has been greatly enriched by behavioral economics in the past 30 years.  Still, we are far from a unified, versatile, believable alternative to the rational-actor model.  I am hopeful, though, that this might be overcome—in part because of progress in the sister disciplines (psychology and neuroscience) and basic modeling, and also because empirical anomalies are forcing the economic profession to be more open-minded.  Contributions by computer scientists and physicists will help inject new perspectives into economics.


Eric M. Jones.

I think Allan Greenspan who, by being perceived as the-economist-who-had-it-all-figured-out did all economists a huge disservice, sort of like finding out that the emperor has no pants. Oh the mighty have fallen...and took with them the whole reputation of field of economics.

So future economics is probably to attempt to distance ones-self from the field.

Nosybear

"the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess. Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality…to the problems of institutions that run amok; to the imperfections of markets…and to the dangers created when regulators don’t believe in regulation."

Goes along with the search of a realistic economic agents. People make decisions not just on cold rationality, but along lines of societal and psychological influences - case in point, pet rocks. "The Economy" is just an emergent property, the sum of all the interactions between people and businesses but those interactions are driven by norms that have little or nothing to do with rationality. As an emergent property, "the economy" changes as peoples' tastes and values change. Witness the current resurgence of savings. Any science of economics has to take into account the values and preferences of the actors that comprise it.

By the way, I caught and tamed my pet rock.

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Tariq F

I've spent my career working in buy-side financial markets at a hedge fund/PE firm focusing successfully on inefficients markets investing but have a theoretical grounding in academic economics (and continue to publish research on the side), and from my vantage point I see clearly that market practitioners and academic theorists speak completely different languages. It's my impression that this type of gap between theoreticians and practitioners exists far more in economics than in other fields (i.e., engineering, physics, etc).

My strong bias is that the economics field will only be relevant if economists speak to the realities of the markets they study rather than creating mathematically-perfect models and structures that exist only in their ivory tower imaginations.

(And yes, I am a supporter of George Soros' Institute for New Economic Thinking.)

Mmm

This is SO rich! Young economists are starting to notice what any casual observer can see is a staggering assumption: that rational economists hold AS A PRECEPT that the average person instinctively calculates ALL of their interests and ONLY consumes what would be in his or her best interest. Anyone who has ever over-eaten, woken up with a hangover, missed a dental appointment, selected the wrong career, or brought home a pair of pants they never wear, knows the idiocy of this belief. Nevertheless, it is the model on which our economic and social policy decisions are made.
How many college degrees do you need to be this stupid?

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My other concern about the "rational actor" is that they always seem to think that the best deal is reflected in the cash being traded. They might account for hidden costs, like the time and expense of traveling to a more distant store, but they usually ignore hassle factors, like me not buying from websites that don't work properly on a Mac, or intangibles, like people buying status symbols rather than functional clothing. If we were really all rational actors, then manufacturers of knick-knacks would go out of business.

non-economist

And what will also help the economists "win" is to continue their all too common practice of completely ignoring well established work from other disciplines on topics that they have only recently decided to pursue.

Econokid

As a young economist, I'd like to chime in. I find it odd that people assume economists ignore other disciplines' work. Some of the best papers I've read analyze work done elsewhere and add a new understanding to the literature (economic epidemiology is an example). Also, I find it backwards that it's all the noneconomists, whose opinion of economics is shaped by a fundamental misunderstanding of what economics actually entails (it's not all about macro, and citing the financial crisis, with all of its complicated structures, is a poor excuse for the exclusion of an entire field). The assumption that agents are rational requires a richer understanding of the costs they face, and I think we do a disservice to people generally when we think they can't, in some way, maximize their utility given their preferences and costs just because we may be missing an important cost calculation in version 1.0 of a model. Economists talk all the time about the societal and psychological costs people face as they make decisions, externalities, and market imperfections. These and rationality are not mutually exclusive. An action not being based solely upon a monetary transaction doesn't mean economics has nothing important to say about it. Do I think the criticism many laymen have for economics is unfounded, yes. But some of it is legitimate. Is there room for growth? Absolutely. But economics is an example of a field that is very self-evaluating. If an economist messed up, you can be sure other economists will be first to analyze the work (as seen with our very own Freakonomics friends). Luckily, the tools economists have at their disposal will continue to evolve as well.

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Steve O

Well said. I think it goes both ways, and people always assume that they have more perfect knowledge and are more well-rounded than the other guys, whatever the field. However, because economics is so accessible and economists study such diverse issues, everyone has an opinion, so this phenomena is especially prevalent.