Are economists conquering the world

Diane Coyle celebrates the increasing policy influence of economists in recent years but issues a challenge to RES members to engage with the wider public to ensure the legitimacy of this influence and to consider carefully some fundamental changes that are required in the training of young economists. Diane is the author of The Soulful Science (Princeton University Press) and an economist engaged in consultancy, the Competition Commission, and the BBC Trust. She is a former member of the RES Council.

Are economists conquering the world? You might think so by looking at policy debates in many countries. We are designing markets and auctions, taking monetary policy out of the hands of politicians, advising on transportation, or health and education reforms. Of course, economists have always been at the heart of a wide range of policy debates, but this combination of pervasiveness and depth of impact is new.

Whence the improvements?
There is good reason for the heightened importance of economics, which is that we have made genuine advances in understanding in many areas of the field. Monetary policy is a good example. In the 1970s and 1980s the policy advice of monetary economists was riven by ideology and consequently very sensibly discounted. The 1990s tossed the clash between monetarism and Keynesianism into the dustbin of history. And while there are still controversies, these are side issues to the professional consensus about both how to set policy, and what institutional forms are appropriate.

Across the entire range of the subject, the past decade or so has seen a ferment of intellectual activity. In virtually every specialism, there is a growing body of new empirical evidence with the potential to deliver a better understanding of our economies and societies, and better policy advice. Some of the areas of advance are positively fashionable — behavioural economics is one example. But others are barely known outside the ranks of the profession. Everywhere from growth theory and development economics to the study of education, labour markets or competition policy, there has been immense progress in our scientific understanding.

There are several possible explanations for this kind of progress. One, probably the most important, is simply the availability of plentiful and cheap computer power, which has transformed so many subjects. This has gone hand in hand with the collection and sharing of a very large number of new data sets, from historical and comparative GDP statistics to panel data sets on individuals, households and firms. And, needless to say, handling data is far, far easier now than in the days when cards or tapes had to be fed into a timeshare computer. What’s more, econometric techniques have also improved immensely, in achievements recognised in Nobel memorial prizes.

Some methodological innnovations have been stimulated by computer power too. Experimental methods and simulations clearly would not have been possible otherwise. There have also been analytical improvements in modelling approaches, such as the type of increasing returns models in widespread use in economic geography, trade theory, growth theory, and industrial economics. Last but not least, the use of game theory has grown widespread, and is important enough that not only the Nobel committee but even Hollywood became aware of it. Game theory has been particularly important because virtually any human interaction can be interpreted through its perspective, so this has taken economics into many areas of life previously considered the exclusive domain of other disciplines. If economics has become imperialist, to use Ed Lazear’s term, it is because of game theory.

Reading recently some of the research in a number of fields published since my days as a graduate student 20 years ago, I was astonished at how much economics has changed. Individually, the developments in any one area would be quite impressive. Taken together, they seemed to me to amount to a dramatic change in the nature of economics, a decisive move away from the neoclassical tradition in which I was trained. Although this post-war tradition has been ludicrously caricatured by many critics of economics, and was never quite as arid and reductionist as painted, it also seemed to me a welcome move. Without any sacrifice of rigour or analytical muscularity, economics has returned to its rich and humane Enlightenment roots as the scientific study of collective human behaviour. It is scientific not in presenting experimentally falsifiable hypotheses, but in the way that evolutionary biology or geology are also scientific, in modelling important aspects of the (social) world around us with relatively few variables, and confronting the models with empirical evidence.

Before this all starts to sound too Panglossian, however, I want to issue a warning to the profession. There are two potential threats to the health of the subject and its ability to influence others.

But beware the threats
First, the renewed policy influence of economists, firmly based as it is on an intellectual renaissance, does not mean that we are newly popular. On the contrary, economists are probably regarded by others with more suspicion than ever. I suspect that even the parts of economics which are appreciated by the wider public now, such as the economics of happiness or behavioural results, are popular because many people believe that they undermine economics rather than strengthening it: that they show policy should really be directed towards maximising happiness but narrow, dismal economists still want it to focus on maximising profits and incomes. The detail that it is economists who are at the forefront of the happiness approach is no obstacle to such a belief.

There is a danger that if we do not address this widespread public mood, the favourable influence of modern economics on policy development will be undermined. There is a general view that economists are malign policy Svengalis, even though wrong.

Natural scientists are in a somewhat similar position. There are certainly controversies in science, but they do not undermine the growing body of technical knowledge, knowledge which has implications for the choices made by governments and individuals. These implications are not always welcomed. Scientists are not - unlike economists - generally distrusted by the public, but their results can often be regarded with suspicion.

They have responded with a major initiative to enhance the public understanding of science, under the auspices of the Royal Society, the Royal Institution and the British Association. The ESRC has its own public understanding of science initiative. I believe we need now a public understanding of economics initiative. In the absence of much apparent interest in economics on the part of the ESRC, the RES will have to take the lead in this. I strongly urge its council members to reflect on this suggestion.

The second challenge for the economics profession is to revise the curriculum, especially at undergraduate level. In his marvellous book, Marshall’s Tendencies, John Sutton noted that new economics students ask two perfectly reasonable questions: Are people really rational? Can these simple models really adequately capture reality? He continued:

By the time that students are a couple of years into their studies, both these questions are forgotten. Those students that remain troubled by them have quit the field; those who remain are socialized and no longer ask about such things.

He’s absolutely right. Far too many young people are utterly discouraged by their early studies in economics, the plunge into patently over-simplified and meaningless algebra. Students should not have to wait until they are well into their graduate studies before being introduced to the present-day richness of their subject. Although some of it has crept into the textbooks, what's really needed is a thorough redesign of the curriculum rather than a softening of the edges.

When I spoke recently to the newly-founded Economics Society at the London School of Economics and diffidently asked its members what they thought of this suggestion - after all, these were surely some of the brightest and most committed economics students in the land and well advanced in their studies - they were overwhelmingly enthusiastic. In their eyes, most of their peers were taking an economics degree only as a passport to a lucrative job like investment banking. The minority who thought they might be interested in further study seemed to be clinging a little desperately to the idea that the subject would eventually turn out to be as interesting and important as they had initially hoped.

The reason there are relatively few PhD students in economics is surely that we are beating the enthusiasm out of young people much earlier in their education. Of course, we all got through something like the present curriculum ourselves, but that is no reason for believing it should not be redrawn. With hindsight I stuck with my studies in economics thanks partly to an inspirational teacher in Peter Sinclair, willing to fan any flicker of interest with extra tutorials over breakfast in the market, and thanks partly to studying it alongside politics and philosophy, which satisfied my broader interests.

In my book The Soulful Science my aim was to present to readers an overview of the range and excitement of developments in economics during the past decade or so. It covers economic growth and development, the assumptions of microeconomic modelling, and the different approaches to modelling collective behaviour, such as complexity or public choice theory and institutional economics. Overall, it has a very positive message about the intellectual advances and empirical discoveries we economists have made, and the consequent capacity of economics to contribute positively to well-being and the quality of life. Surveying the literature indeed made me newly enthusiastic about economics.

However, here I want to issue a challenge. Unless we improve the training of future generations of economists, and unless we engage with the wider public to ensure the legitimacy of our influence on policy, it won't ultimately matter that the economists at the frontier of the subject today have done such impressive work. Intellectual progress needs to be embedded both professionally and socially if it is to make a lasting contribution. The professional readers of this newsletter are exactly the people who should be taking up this challenge.

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