Relevant economics

University of Oregon economics professor Mark Thoma has an interesting article on the direction economics should be taking.

Mark writes:

How much confidence would you have in the medical profession if the teaching faculty in medical schools had very little experience actually treating patients, and very little connection to– even a lack of respect for– the practitioners in the field? Would your confidence be improved if medical research had little to do with the questions that are important to the doctors trying to serve patients?

Unfortunately, that’s a pretty good description of how economics has been practiced….

Economics has lost the connection between the practitioners and the academics. This may have something to do with the desire among economists to become more of a science– a heavy focus on theory and math is the result. But no matter the cause, if we want to do all that we can to avoid big economic problems, and if we want to use the feedback from those testing economic ideas on real world applications as a way of better understanding how the economy works, then we must reestablish these ties.

I couldn’t agree more. Too many of my colleagues pay too little attention to how markets and institutions actually function. The profession and our ability to offer constructive policy advice are seriously impoverished as a result.

I should add, though, that there are a great many academic economists who feel exactly as Mark and I do about this and are trying their best to change things. Joshua Angrist of MIT and Jorn-Steffen Pischke of the London School of Economics have recently surveyed what they describe as a credibility revolution in econometrics, which is grounded in convincingly developing the connection between data, experiments, and policy advice.
University of Chicago Professor Chad Syverson’s detailed studies of the ready-mix concrete industry are a breath of fresh air, as are Berkeley professor Severin Borenstein’s research on airlines and electricity and Brandeis Professor George Hall and colleagues’ work on autos and steel. And there are many others whose research exemplifies what Mark is suggesting we should be doing.

Indeed, this is exactly the reason I began the blog Econbrowser six years ago, and I suspect the reason that Mark and a number of other prominent academic economists have been doing the same thing. I feel it’s quite vital for us to be engaging real-world events, policies and practitioners, and an economics blog is a very good forum for doing just that. As a researcher, I want to make sure that what I am doing is relevant and informed by what’s actually going on, and I want to be able to explain and defend what I’m doing to an intelligent reader who doesn’t necessarily buy into the jargon and maintained assumptions of the economics profession.

So I read Mark’s column as an invitation to economics graduate students, and older economists like myself, on how to have a constructive impact in our chosen field of study.


43 thoughts on “Relevant economics

  1. Rich Berger

    To which I would add that economists should be mindful of the limits of their understanding and the usefulness of complicated mathematical techniques as applied to the economy.

  2. W.C. Varones

    Well said.
    The scary thing is those same academics with no real-world experience are the central planners at the Federal Reserve who crashed our economy!

  3. Jonathan

    A close relative is in a top grad econ grad program. It’s full of math wizards, not economists. A large number have advanced math degrees. The dissociation will likely grow, not shrink.
    You need to separate out another factor: the inability of the economics profession to agree on anything approaching a standard model. You have the supply-oriented modelers and they tend to support conservative ideology. You have some demand-oriented modelers. You have a number of versions of monetarists. You have genuinely odd outliers. The equivalent would be no standard model in physics and a bunch of eggheads with little empirical ability but lots of math arguing about reality. That would reduce physics to little more than philosophy, which I think is a fair statement about macroeconomics these days: it’s a mouthpiece for philosophy and ideology masquerading as something like but not really science.
    I have no idea how to solve the latter problem. Your field needs help. As to the former, medicine is trying to address this now because their system is also broken. They are de-emphasizing the traditional requirements for med school admission, rewriting the admissions tests and testing ways to identify people who fit as doctors. As I see econ programs, they are making the testing more math, not less, another sign they are going the wrong way.

  4. CoRev

    Jonathon, well stated: “The equivalent would be no standard model in physics and a bunch of eggheads with little empirical ability but lots of math arguing about reality. That would reduce physics to little more than philosophy, which I think is a fair statement about macroeconomics these days: it’s a mouthpiece for philosophy and ideology masquerading as something like but not really science.”

  5. Ricardo

    I commend you. Not only could the modern economists benefit from looking at real life, but they could also benefit from the giants of the past. Nothing frustrates me more than hearing educated economists make mistakes that were refuted over 200 years ago and then brag about their ignorance of the refutation.
    I know that I would have understood Keynes a lot better if I had read the refutation of mercantilism before his fallacies were forced on me in graduate school.

  6. pete

    Indeed, looking at the original texts, like Smith and Ricardo, these were observation based theories, quite accurate. Then, as Boulding stated in 1949, “Samuelson’s Foundations” should have been the limit of the application of math to econ….unfortunately this was only the beginning….Lots of, as Robert Bassman would say in our econometrics class, Graffiti!

  7. fladem

    As a former grad student and as someone in business, what I would say is that economists are often very uneducated in the underlying reality of the actual economy. They lack an intuition based on experience with how business is actually thinking, or how deals are made.

  8. ppcm

    Econbrowser posts since at least two years are a testimony to frelated economies.
    Many posts have dealt with the form,means,substance of the active participations of private agents inclusive of public institutions,governments representatives, in defeating not only the basic equilibrium of an economy,but the basic constitutional rules, the basic accounting rules and practices.
    Many posts, have shown in details the reasons as to why an enormous gap of understanding may have arisen between the clause “everything remaining the same” and the results.
    Before grinding good seeds and tares together, it is a penultimate requirement to detect the seeds even when stifled by the tares.The measures of economic,financial efficiencies have to be recaptured.They are risks and they need to be accurately priced.Interest rates may rise,how many M/A have been concluded under the hidden proviso that interest rates would remain the same for the next 10 years (as of 2006).Research should be made on placing memorendum dated 2006.
    Where do economists,academics,economists,banks economists stand, is a liberal act where impartial assessment must prevail not only within the organization but also within the branch of industry.Banks have economic departments and do depend upon the rating agencies to perform their macro and micro risks assessments.
    Econometrics and econometricians have been very useful when trying to detect the imperfections of this new world,maths are a requirement not for its beauty but the rectitude of the process. Since the societies have been made short of rectitude, sciences may fill the gap.

  9. Bruce

    Professor, what is referred to as “economics” (“oikos” + “nomos” or rules or laws of the household or family or estate) has the fundamental flaw the assumption that the ecological system, i.e., Nature/physics/thermodynamics, is a sub-set of “the economy” (rather than the obvious converse) and that perpetual growth of population and resource consumption on a finite spherical planet is a given and desirable.
    This view was fashionable and possible since the Industrial Revolution and onset of the Oil (Hydrocarbon) Age because of the abundance of cheap, easily accessible crude oil.
    That “the economy” is obviously a sub-set of the ecological system, and perpetual growth of population and resource consumption on a finite planet is clearly not possible, and arguably delusional as a fundamental assumption, we desperately need a redefinition of “the economy”; that is, we need an economics that (1) incorporates the demonstrable thermodynamic limits of Nature of which we are an inextricable and interdependent part; (2) recognizes the ecological system as “the household” we humans inhabit with all other life on the planet; and (3) identifies falsifiable rules/laws of Nature or the ecological system to which we humans must consciously adapt in order to sustain a socially acceptable well-being for as many of us as is thermodynamically practical.
    Sadly, economics today is largely politics and an intellectual rationalization for the militarist-imperialist Anglo-American corporate-state’s trade regime, which requires perpetual growth of resource expropriation and consumption, increasing scale of ecological destruction, “war as economics by other means”, exponential growth of profits and capital accumulation, and extreme wealth and income concentration as the price (cost) to sustain the system.
    Alas, apart from the rather obscure (albeit less so in the past decade) work of those such as Georgescu-Roegen, Boulding, and Daly associated with so-called ecological economics, I am not optimistic that the economics profession in its current state is capable of acknowledging its inherent flaws and reforming itself in a meaningful or useful way to deal effectively with the challenges we face.
    Thus, the permanent structural effects of Peak Oil and falling net energy and available net oil exports from oil-producing countries will continue to bear down on us, reducing real per capita GDP and making impossible further growth of economic activity hereafter.
    Yet, economists will continue to persist in devising all manner of largely ineffectual, if not harmful, prescriptions to apply in attempt to sustain growth of resource consumption, gov’t spending, central bank debt-money reserve expansion, and reported GDP, never acknowledging that what they are advocating can no longer achieve the desired objective.
    Without acknowledging the limitations of the current economics milieu, as well as failing to recognize the underlying structural cause of the emerging structural constraints on economic activity, fiscal conditions, and overall societal well-being, i.e., peak global oil production, falling net energy, and population overshoot, economists will fail to challenge the dominant thinking and thus risk discrediting economics and economists alike.

  10. T-Dub

    Wonderful post! Notwithstanding your credentials as a preeminent Econometrician, your humility is something that we all can learn from.

  11. walt

    I think it is a mistake to think of physics as exemplary: as bad as macro economists are, are they really any worse than string theorists?

  12. Rich Berger

    Got mental indigestion? Your comment was the intellectual equivalent of a belch.

  13. Bruce

    Rich, I don’t doubt that from where you sit or stand.
    Be thankful that my apparent indigestion did not manifest its product from the other end.

  14. don

    I think care needs to be taken in making such arguments. So we should have people like Jaime Dimon direct economic policy? I would refer you to Krugman’s arguments as to why “business leaders” are particularly ill-suited to designing national economic policy.

  15. Erika

    I like your taste in papers – nice to see people like Chad Syverson and John Haltiwanger getting some credit for their interesting work.

  16. Hal

    Economists who blog are useful indeed if they don’t get too technical for the non-trained economist to grasp. The best are the ones that are also hospitable to comments: Krugman, for example, or this one. Others are not particularly welcoming: DeLong, Thoma, and a few others who pick and choose (sometimes rather whimsically it would seem) what comments they will permit.

  17. GA

    Since I heard a second-hand comment while in graduate school (attributed to Ken Rogoff, but I can’t say for sure) that research on Russia (in the 90s) was a dead-end because the numbers didn’t make sense and hence wouldn’t be publishable, I’ve been toying with the idea that every economist should spend some time in ‘a market’ that doesn’t make sense. Guess that would be Belarus these days.
    The point being that one would be forced to build an understanding of how things work from the ground up to make any sense of it, and a much greater appreciation for things that are assumed away (like transaction/search costs).
    I came back to this thought with a vengeance during the GFC (in Russia) – whenever I asked around about the macroeconomic impact of simple supplier credit – i.e. what happens when the corner store guy has to pay for all of his deliveries up-front, in cash, rather than getting any kind of trade terms? And what is the impact when this happens to everyone at once?
    In one sense, it’s obvious. But in another sense, it’s not, because as far as I could tell no-one has done extensive research on this, measured the relative impact of this type of shock compared to e.g. bank lending, or really got a handle on the magnitude of this type of non-bank finance. It’s just sort of assumed to not exist (or to be captured in bank data, which is improbable in many economies).
    I’d argue that this kind of factor goes some way to explaining why the GFC affected Russia so much despite the other advantages Russia had at the time (e.g. a lot of money to throw at the problem).
    And an area where the view from the real world may be advantageous – even if not necessarily better.

  18. Phil Rothman

    Jim: Your blog entries serially supply, IMO, the most insightful thoughts on developments in the macroeconomy, monetary policy, and oil/commodity markets available on the web, and stand as a testament to your intellectual acuity, commitment to investigation of economically substantive issues, and respectful treatment of your interlocutors. That said, I strongly agree with Larry Summers’s assessment that much of what Mark Thoma says in this piece is “naive, incomplete, or goes too far and his analogy with what doctors do is misplaced”:

  19. Mike Laird

    to Phil Rothman,
    Right – and Larry Summers did a great job in reviving the real economy, so we should listen to what he says on real versus theory. Right.

  20. Name

    Economics can never be physics, for the same reason you can not drop your wallet on a city sidewalk and expect to find it there the next day.
    It will always accelerate toward the ground at 9.8 meters per second squared.
    It will make a plop sound when it lands whether or not anyone listens.
    It will always remain at rest on the sidewalk until acted on by a wandering economist.
    Some will ignore it.
    Some will use it to enrich themselves.
    Some will use it to try to find you and help you.
    Some will use it to try to help someone else.
    Free will destroys social ‘sciences’.

  21. 2slugbaits

    What bothers me about Thoma’s article is that he is too charitable towards many that he would call practitioners. Practical economists with real skin in the game do have a lot to offer, and they have a lot of internal research to fall back on that academic economists miss. Think the research department at Goldman Sachs! I get that. But there is also a less charitable parallel with the medical profession: many of today’s practitioners are in fact simply frauds with PhD’s at the end of their name. Krugman calls them “entrepreneurial economists.” We know the usual suspects…Club for Growth, Heritage Foundation, Hudson Institute, etc. Their mission is to fog economic issues with glossy brochures that offer simpleminded nostrums aimed at an audience that is interested in public policy issues but has neither the time nor the technical training needed to actually follow real economic discussions. So a lot of what the public perceives as economics is really just Ersatz economics. Eventually we end up with a confused public putting a Heritage Foundation study of healthcare costs on the same level as a large MIT study. There’s been a tendency to dummy down economics and the result is the Tea Party.
    Within the academic profession itself there’s also been increasing specialization alongside an almost irresistable temptation for politically active economists to wander into areas outside of their expertise. For example, a lot of the RBC nonsense we hear today actually comes from academics in finance rather than macroeconomics. Back when I went to school economics was in the college of liberal arts and finance was in the business school alongside accounting, marketing and management. Increasing specialization also puts academics in a much harder position to revise views, so economics can only advance as a profession funeral by funeral. If you’ve spent 30 years working in an RBC paradigm and all of a sudden the 2008-20xx recession comes along, well, your basic theory about unemployment just doesn’t look credible so you end up spinning all kinds of absurd stories to try to square the circle. And that’s also a problem with the medical profession; specialists come to have a vested interest in explaining every medical malady in terms of whatever problem they’ve spent their careers studying. If you’re a chiropractor every problem looks like a misaligned spine.
    Finally, I’m as skeptical as the next guy about too much econometrics and math-for-the-sake-of-math in economics. Hey, Deidre (then Donald) McCloskey was one of my advisors. But even my old prof’s McCloskey and Robert Fogel taught classes on “cliometrics.”

  22. colonelmoore

    I am somewhat confused by commenters who assign more capacity for precience to the study of economics than can be expected. I think that this may come from utopian thinking, that somehow the world can be made better if only the planners try hard enough.
    There is a huge difference between a doctor, who is working in extremely controlled circumstances and applying amazing technology optimized for diagnosing a single patient, and the study of the economic aspects of an entire world system that has multiple noneconomic inputs. How do you predict the world economy so that you anticipate Fukushima or the shale gas revolution?
    Only a few years ago nuclear power looked bright and economists were doing studies about how it and other wedges could replace fossil generation. Should we now criticize their studies because nuclear power is crippled and natural gas is far cheaper than coal or nuclear? Or should we see that economics has its limits as does political polling or any other study of the behavior of crowds in a chaotic world?

  23. Bryce

    Keynes also was nonchalantly proud of not having read 19th century economists who wrote insightfully on what we now call macro. He was that cocksure of his own brilliance.

  24. Brian

    Nice swipe at the Heritage Foundation and the Club for Growth. But what about the Urban Institute, the Center for American Progress, Brookings, the Center for Budget and Policy Priorities, etc.? They are no less partisan and are just as willing to twist the facts to suit their agendas as anyone who is right of center. Just because a group’s agenda matches your own predilections doesn’t mean they are any less partisan or less prone to bending the truth.

  25. 2slugbaits

    Brian There may well be left-leaning groups who twist facts to fit an agenda, but those groups you mentioned are not among that group. There is a qualitative difference between Club for Growth and Brookings or CPPB. It’s like comparing MIT or Harvard with some Baptist bible college in east Texas. There are (or at least were at one time) a few reputable conservative think tanks. The Cato Institute used to put out some serious policy papers, and sometimes they still do. Once upon a time the AEI used to do good work. And I don’t think many people would consider the policy wonks at RAND as pinko lefties. Ask Bruce Barlett about the corrupt agendas coming out of right wing stink tanks.

  26. Phil Rothman

    To Mike Laird:
    How do you spell non-sequitur? Dostoevsky and Celine were great anti-semites, so (at least some of us) shouldn’t read ‘The Brothers Karamazov’ and ‘Journey to the End of the Night’? Right?

  27. Ricardo

    There is a very good book on this subject that was published in 1992 called “Educating Economists.” It is a compilation edited by David Colander and Reuven Brenner.
    Excerpt from the introduction:
    “In the United States, academic economists’ primary job is teaching economics.”
    “…A second important job of economists is to apply economic analysis to the real world.”
    …What is currently taught is deeply connected with criteria for advancement and promotion. Almost from the start of an economist’s training, the economist is directed toward technique, toward arriving at definite answers even when only fuzzy answers exist, toward becoming expert at modeling and game playing, but not recognizing the limitations of models – a lack of imagination that has dire consequences when the models influence policy-making.”
    “…Thus we believe that the current situation in graduate economics education is perverse and that the perversity affects everything that economists do.”

  28. Ricardo

    Note the following from an article by John Phelan.
    July 26th saw one of the most eagerly anticipated economic events of recent years. At the London School of Economics (former employer of Freiderich von Hayek), Professor George Selgin and Dr. Jamie Whyte for the Hayekians and Professor Lord Skidelsky and Duncan Weldon for the Keynesians gathered in front of a packed lecture hall to debate Keynes vs. Hayek. Two other lecture halls were required for the overspill. The debate will be broadcast on BBC Radio Four on August 3rd.
    Obviously there is interest in economics. More and more we are seeing that the hold Keynes had on the academic world is beginning to loosen. More and more there is a demand for a serious debate.

  29. Ian R. Campbell

    I send an e-mail most trading days to over 10,000 Subscribers to (, a Resource Company Research website. In those e-mails I have frequently said pretty much what Professor Hamilton has said in this article, and ‘good on him’ for standing up and saying what he has. We are either both right or both wrong.
    I included the following in an e-mail commentary that will be published on August 2:
    “From my perspective this (article content) again goes to my mantra that a great number of people do things by ‘rote’ – if that is the way it was done before, that must be the way to do it now – and don’t get up to 20,000 feet, exercise curiosity, are not nearly cynical enough, and don’t have the gumption to question how things are done, or what they read or listen to. I have said many times in these e-mails that I think many practicing economists are living in the past, and fail to take into account that globalization after at least 1995 if not a few years before, in combination with the computer and the availability of media coverage, in my view make economic predictions based on pre-1995 data largely irrelevant.”

  30. dwb

    many economists study lots of math, the theory being the math improves the modeling.
    many traders are ex-sports athletes, the theory being the discipline improves ones game.
    economists say markets don’t make sense
    traders say the models don’t make sense
    maybe economists should play more sports and traders should take more math. ;)

  31. Manfred

    IMO, Slugs makes two interesting comments (yeah, Slugs, on occasion I *do* find your opinions interesting…:-):
    1)”Finally, I’m as skeptical as the next guy about too much econometrics and math-for-the-sake-of-math in economics. Hey, Deidre (then Donald) McCloskey was one of my advisors. But even my old prof’s McCloskey and Robert Fogel taught classes on “cliometrics.”
    Here’s the thing: *who* in the profession decides how much math is enough? The current Zeitgeist in Econ? The AEA? The enlightened tenured profs at elite schools? The enlightened editors and referees of the econ journals?
    Here’s another thing: in 1971 James Mirrlees published (among other things) his optimum income tax paper, using the “Pontriyagin Maximum Principle”. With the current anti-math Zeitgeist, would that paper have passed muster *at that time* (of course, nowadays the MP is a common tool, sure) with the readers of this prestigious blog? Or would this paper have been forgotten in the dustbin of “too much math”?
    2)”Back when I went to school economics was in the college of liberal arts and finance was in the business school alongside accounting, marketing and management.” This is true in elite schools; Econ is a social science, and thus, it belongs in the Social Science section of the university. But in lower ranked schools, Econ is (I venture to say, but I have no data, I admit) in the Business School.

  32. B Westrom

    I couldn’t agree more. I have expressed this to many banking executives; the disconnect between institution and practitioner is wider than the Grand Canyon. These poor guys are running the banks blind. They have forgotten that market reality lives at the street level and you have to spend some time there to really know what is going on in your own yard.
    The emotional economics of it all, the prevailing mind-set and emotional state of the consumer is directly related to their financial resources. Discuss someone’s 401(k) with them and you will see what I mean. Ask someone about the benefits of their checking /savings account and you’ll see what I mean. Consumers are now totally disenchanted, disgruntled and disconnected from their most powerful resource, their income. The USA needs a Financial Revolution. Actually it’s already happening, but nobody has yet noticed it.

  33. Trent Rock

    When I was at UCSB, I would ask my fellow economics dept colleagues if they “knew who Alan Greenspan is?”. Only about 10% had even heard of the name :(

  34. M

    Professor, I’m surprised you didn’t mention Vernon Smith–his Noble-prize winnig research that introduced experimentation to economics was so out of the mainstream that I doubt it could have ever been performed in a leading academic department. Univerisities that allow their researchers the freedom to pursue non-conformist ideas play an under-appreciated role in advancing academic research.

  35. 2slugbaits

    Manfred Just so we’re clear, I don’t have a problem with math heavy econ; but I do have a problem with a heavy math emphasis that does not enlighten things or formally support intutive understanding. Your comment: *who* in the profession decides how much math is enough? is to the point. You cited the example of Mirrlees’ work using Pontryagin’s maximization principle. I’ll go you one better and one year earlier than Mirrlees’ work and cite the Kenneth Arrow and Mordecai Kurz book “Public Investment, The Rate of Return, And Optimal Fiscal Policy.” It’s one of the first serious applications of applying Pontryagin’s principle to optimal control theory. There’s a fair amount of math, but the intuitive insights in the book are well worth the effort. There’s even an insightful critique of Keynes’ concept of the interest rate. Today optimal control theory is standard stuff in economics. But sometimes it goes off track. For example, complicating the Hamiltonian with a stochastic differential creates a math mess, but at least if offers useful insights in the way that it turns a deterministic optimal control path into a set of stochastic contingency paths. That’s useful. Where things often go off the track is that too many economists (and especially finance economists) go through Ito’s chain rule and then lose interest in arguing what is the appropriate probabilty distribution for the differential. Instead of useful policy recommendations you end up with math masturbation. If it’s important to account for randomness along an optimal control path, why isn’t it also important to specify the distribution? Apparently the real world just isn’t interesting enough. We saw a lot of this with the financial whiz kids and the way they developed fancy financial math models and populated them with distributions intended more to make problems tractable than to actually model reality.

  36. Barkley Rosser

    Given that you have remarked on your motives for starting this blog, it is appropriate to comment on how well you have done it. I would say that you deserve very serious kudos (as does Menzie), as this is without question one of the very highest quality econoblogs there is, better than some run by more famous people. Congratulations.
    That said, I do think that Mark Thoma perhaps oversimplified the matter of who or what is a practitioner, as others have noted. People in think tanks, whether they are brilliant forecaster a la Dean Baker, or just partisan hacks churning out party lines, are not the same as people working in either government policy agencies or in the private sector. There is a huge variability of quality as well as honesty.
    The real issue, which you highlight in your remarks, is that economists should be in touch with the real world. In reply to several commenters here, I do not see that as necessarily involving less math. Certainly there are many abstract mathematical models that are not very useful in the real world. But all this says is that indeed those using these models, or at least studying them, should realize this and be open to alternatives that are better for real world use, some of which may also be mathematical, possibly even more so.
    It is Krugman who censors and bans comments, not Thoma, although De Long is far worse.
    W.C. Varones,
    Your comment about “central planners” at the Fed is simply ridiculous. Yes, they were among the many authors of the crash throughout both the private and public sectors of it. But, you must grant that they pulled a magnificent save when it hit, rapidly rolling out alternative lending facilities, tripling the size of the Fed balance sheet, and even taking on $600 billion in eurojunk to stop the crash of the euro, which junk they managed to largely unload within about six months, having replaced it largely with US MBSs. Pretty cool, if largely unrecognized or appreciated by the general public.

  37. dwb

    ok more seriously, if you want to really give the biggest boost to Economics, encourage empiricism. Having come from a hard science (bio) I was stunned in grad school when the statistical significance of my CAPM regression was nonexistent. But this was the keystone of modern finance!
    Too many times, I think well respected economists get themselves into policy discussions and their ideological bents hold sway. As the old joke goes, “what answer do you want.”
    The data is at best ambiguous, and you can’t do historical experiments. I agree 100%. But Economists should be the gatekeepers and validators as to what the data does and does not prove. But it seems more and more these days that Economists who actually look at data are liberal, while economists who make s&^% up to make a conservative.

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