The Decadence of Economics

Every time I move, I keep too many books. I hardly ever read paper books, preferring Kindle and Audible, yet every book on my shelf makes its appeal. Into the box it goes, to sit unread on another shelf.

Except academic economics journals. They’re easy to throw away.

As a PhD economist, I’m not really disillusioned with my field. I’m glad undergraduate economics courses are so popular. I wish people understood demand, supply, and market equilibrium better. I feel smug that economics majors earn more than most other majors. It pays to understand how capitalism works! And free-market economic thinking is central to the maintenance and flourishing of the Western heritage of liberty. Unfortunately, things go awry after the glorious insights of Econ 101.

The Good Old Days

Once upon a time, economists changed the world. Adam Smith’s Wealth of Nations showed the nineteenth century how to foster prosperity through liberty, bettering the human condition through laissez-faire policies and free trade. As a result, industry boomed. Mill, Marshall, Jevons, and Pigou further elucidated the workings of capitalism, while helping to smooth its rough edges. John Maynard Keynes showed how to avoid depressions and mitigate business cycles, and we got the unprecedentedly broad-based popular prosperity of the mid-twentieth century. And when government intervention went too far and began to stultify capitalist progress, Milton Friedman and F.A. Hayek spun rigorous expositions and lucid popularizations of the virtues of liberal capitalism. That helped to win the Cold War and spearhead an era of capitalist globalization that is still lifting billions of people out of dire poverty around the world. Economics has sometimes exacerbated the individualistic tendencies of capitalism, weakening community and tradition, and capitalist productivity has sometimes been channeled into war and imperialism. But economics has at least been a potent force, and probably more for good than ill.

The best economics articles from the 1930s to the 1960s are a joy to read. They cover a lot of ground in a way that’s lucid, ambitious, and often wise. These days, however, economics is no longer making net progress toward answering big questions like:

• How should society be organized in order to best meet the material needs of its members?
• How can policymakers prevent or mitigate recessions and depressions?
• What drives technological progress? Can it be accelerated?
• Why are some nations so rich and others so poor?
• Why is there so much economic inequality?

Obviously, this is a controversial claim. Still, rumors about the discipline’s stagnation have been flying for some time. A 2012 list of the twenty most influential economics papers of all time included nothing more recent than 1981. Paul Krugman, the world’s most famous economist, called our times in 2009 a “dark age of macroeconomics,” channeling insights from his 1997 book Development, Geography, and Economic Theory, a searching inquiry into how methodological narrowing in the field creates blank spaces in the map of economists’ knowledge.

Ronald Coase, a Nobel laureate (like Krugman) and the author of famous articles on the nature of the firm (1937) and the best policy response to externalities (1960), complained bitterly about the misdirected state of economics to EconTalk host Russ Roberts in 2012. He begged economists to stop wasting their efforts in futile abstraction and “just look around,” striving to think realistically about the world, as he had done. Finally, the good old undergraduate textbooks, which keep teaching opportunity cost, demand, supply, market equilibrium, utility theory, public goods, and so forth, decade after decade, witness to the decadence of contemporary economics by largely ignoring it.

Three Distinct Epistemologies

Academic journals in economics today have little credibility, because they insist on methodologies whose epistemological warrant is weak. Indeed, we can distinguish three epistemologies that are at work in contemporary economics and treat them separately. One epistemology—one style of argument, persuasion, and proof—is practiced in the undergraduate college classroom. Let’s call it the epistemology of Econ 101. Formal economic theory, as taught in grad school, features a second epistemology. A third and quite distinct epistemology governs empirical research.

Ironically, of the three, the epistemology of Econ 101 is the richest, the most nuanced and versatile, and the most philosophically defensible. It relies heavily on introspection to begin its inquiry, from which it derives concepts with which to interpret everyday experience. It culminates in skillful graphical arguments that capture complex causal interactions in ways that connect swiftly and persuasively with intuition. For example, the law of diminishing returns is derived from introspection: I enjoy the second piece of pizza less than the first, don’t you? From this is derived the utility function, which, combined with a budget constraint, yields the demand curve. Such economics can achieve subtle insight without straying too far from just looking around, as Coase advocated.

Unfortunately, economists tend to leave this approach behind in the classroom, because arguing from introspection and drawing graphs manually on a whiteboard feels unscientific. Also, it’s difficult. Formal theory’s epistemology starts by translating graphical arguments into math. Graphs deal in just two dimensions, or at most three. Math can deal with as many as you like. But there are hidden costs. Math slows the exchange of ideas down and sidelines intuition somewhat, because people can’t play with math in their heads the way they can play with charts on a whiteboard. Mathematical formulae make it harder to keep one’s analysis appropriately flexible and qualitative.

The real trouble, though, is the theorist’s obsession with solving for equilibrium. My dog won’t swim to cool off on a hot day, unless you throw a stick. Economists are a little like that. They can’t understand that sometimes the journey is more worthwhile than the destination. They’re not content to question assumptions, seek clear concepts and well-defined terms, characterize patterns, toy with conjectures, spin out plausible narratives, and slowly grow wiser. The game is to fetch the stick by solving for equilibrium.

One problem with this is that the real-world economy isn’t in equilibrium. There are always fluctuations, cycles, or unsustainable trends of some sort. A more technical and subtle problem is that solving for equilibrium is usually impossible unless production and utility functions take very specific, and often very unrealistic, functional forms. Economies of scale and scope, for example, are extremely important in the real economy, but they are usually neglected by theorists because they tend to prevent economic models from being solvable.

Data Quagmires

Sometime after the 1980s, economists got fed up with economic theory’s lack of realism and decided to focus on the data. Unfortunately, the cure was worse than the disease. For the typical economist today, research has nothing to do with drawing supply and demand curves. It involves downloading a dataset and crunching numbers. Start with descriptive statistics. Then look for correlations. Finally, try to establish causality by running regressions. Statistical significance is pay dirt. Maybe you have a little theory to guide you, but its quality is unimportant. It doesn’t need lucid definitions or impeccable logic or historical credentials or realistic assumptions. Disdain for theoretical “elegance” is in vogue. Theories supposedly stand or fall by their predictive success. A silly example can show what’s wrong with that.

Do people use umbrellas for protection against the rain? Most people assume so. But what do the data say? To test the theory, an empirical economist might watch restaurant patrons entering, and see (a) whether they carry umbrellas, and (b) whether the patrons themselves are wet. And lo, it is not the case that patrons carrying umbrellas are always drier! On the contrary, umbrella carriers are usually a little damp, especially around the lower legs, while non-umbrella carriers, though sometimes they are soaked, are often the driest of all. Evidently, then, the purpose of umbrellas is not to keep dry, but to achieve a moderate, well distributed dampness, and avoid the extremes of wet and dry. The data prove it! The coefficient is positive and statistically significant.

Of course, the right kind of statistical control for weather would fix this blunder. But only theory can discern that such a control is needed. Theory must direct inquiry in order for empirical questions to be competently framed and results competently interpreted. As theoretical acumen atrophies in the face of the indifference or scorn of the data cultists, economists in academe have almost abandoned talking about the economy in favor of trivial econometric obsessions. Moreover, it remains hard to open people’s eyes to the stupidity of much empirical economics, because the econometrics treadmill is useful as a make-work and credentialing program for tenure seekers.

Academic Corruption

I know a young economist who co-authored a paper with an older economist. That is, the young scholar wrote the paper, and the older scholar added his name to it. The topic wasn’t economics, and neither of them knew much about it. The young scholar downloaded some data, ran some regressions, and did a write-up on the statistically significant results. The older economist made a different kind of contribution. He knew the editorial staff of the journal where they hoped to publish, and he could guess what peer reviewers the article would be sent to—i.e., which people needed to be bribed with citations in order to get the paper published. The authors threw an awkward detour into the argument to create a pretext for the needed citations. The paper was published, and has over 100 citations, none of which the young economist has read.

I think that’s typical. “Publishing” is really the wrong word for what journals do in the age of SSRN. They certify work, for a fee, the return on which may consist in a “peer-reviewed” publication leading to tenure.

If journals are sometimes as boring to read as a stack of resumes, that’s because they largely serve the same function. Job applications masquerade as science because perverse customs make original scholarship—however trivial, wrong, and/or unread that scholarship may be. That’s the price of admission to a career explaining demand, supply, and market equilibrium to undergraduates.

I once saw a young economist at a conference indignantly eviscerate the invalid methodology of another paper. When I asked how we could reform the academy to avoid incentivizing such junk publications, he turned clean around and said that he was grateful to such journals for creating his overspecialized subfield. He was adding his contribution to get tenure, not to reform the broader field. To borrow terminology from Alasdair MacIntyre, in economics, the “internal” or intrinsic rewards of being fascinated by how capitalism works have been crowded out by the extrinsic rewards of chasing citations and tenured jobs-for-life.

Outflanking the Universities

What do you do when the emperor has no clothes? Other people need to step up and provide leadership. In the seventeenth and eighteenth centuries, the Enlightenment sprang not from established universities, but from gentleman soldiers and courtiers and statesmen, popular writers and clergymen, bohemians and sponges, who boldly called themselves philosophers and lived up to the name. Today, similarly, economics’ best hopes lie in uncredentialed economists from business, journalism, and government, abetted by academic mavericks.

Matt Yglesias is a journalist with only a BA, yet he has written about the economy more insightfully than any PhD economist for years. Peter Thiel is an entrepreneur and venture capitalist, with a BA and a JD, whose book Zero to One is a better work of economic theory than academe has recently produced. And the current best summary of practical monetary economics may be from MBA Alan Cole, the Senior Economist at Congress’s Joint Economic Committee.

Academics are most valuable as mavericks who skip the journals and connect directly with the public. Paul Krugman’s journalistic turn is an example, and George Mason University-linked economists like Tyler Cowen, Bryan Caplan, Don Boudreaux, and Russ Roberts also exemplify this ethos.

It’s time to ignore the academic economics journals and let the mavericks and volunteers take the lead. Uncredentialed economists and maverick academics offer the best hope for reviving worthwhile economics.