Current events and academic economics

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I believe that academic economics should focus more on analyzing current events. I believe this is the main reason why economists did not foresee the 2008 financial crisis. That's not to say that academic economists ignore current events; there are some examples of great current event analysis in economic journals. But as a whole, I believe that current events is of secondary importance within academic economics.

If you examine the papers published in the most recent issue of the Quarterly Journal of Economics, you'll notice that most of the papers are focused on researching general theories about economic phenomena. Although these papers are relevant to current events, it seems as though their focus is not commentary and analysis of today's economy in 2018. Here is a list of the papers in the issue:

• Distributional National Accounts: Methods and Estimates for the United States (Piketty, Saez, Zucman)
• The Morale Effects of Pay Inequality (Breza, Kaur, Shamdasani)
• Human Capital and Development Account: New Evidence from Wage Gains at Migration (Hendricks, Schoellman)
• Nation Building Through Foreign Intervention: Evidence from Discontinuities in Military Strategies (Dell, Querubin)
• Discretion in Hiring (Hoffman, Kahn, Li)
• Transparency and Deliberation Within the FOMC: A Computational Linguistics Approach (Hansen, McMahon, Prat)
• Recommender Systems as Mechanisms for Social Learning (Che, Horner)
• Frontier Knowledge and Scientific Production: Evidence from the Collapse of International Science (Iaria, Schwarz, Waldinger)
• Double for Nothing? Experimental Evidence on an Unconditional Teacher Salary Increase in Indonesia (Ree, Muralidharan, Pradhan, Rogers)
• Social Mobility and Stability of Democracy: Reevaluating De Tocqueville (Acemoglu, Egorov, Sonin)

I believe issue this can also be seen in undergraduate education. First I want to say that my undergraduate economics education has been very useful to me and I learned a lot of great information. I had great teachers and the lectures were always interesting. But during the tests, analysis of present day economy was not the focus. I had only two 2-credit classes focused on current events (Economics of the Pacific Rim and Economics of the European Union). In order to know what was going on in the real world, I had to read The Economist and other publications outside of class.

I also believe this is the main reason why economists did not foresee the 2008 financial crisis. Before the financial crisis, there should have been academic economists devoted to analyzing the current affairs of exotic financial products in the financial system. These economists would have published papers maybe as early as 2005 to ring the alarm about the widespread fraud subprime mortgage securities. Although this type of work would have been useful, it was largely absent.

There was one person who did this type of research but he worked at a hedge fund. Michael Burry, the main character in The Big Short by Michael Lewis said,

"I was in a state of perpetual disbelief. I would have thought that someone would have recognized what was coming before June 2007. If it really took that June remit data to cause a sudden realization, well, it makes me wonder what a Wall Street analyst really does all day."

I believe if you replace the words 'Wall Street analyst' with 'academic economist' the quote would still be true.

Tony Lawson: The Nature and State of Modern Economics

This post is a collection of my favorite quotes from Tony Lawson's book The Nature and State of Modern Economics. Lawson's book does a great job explaining why academic economics is broken. I believe this quote adequately conveys as Lawson's main proposition:

"Notice that this does not amount to a rejection of all mathematical-deductive modelling. But it is a rejection of the insistence that we all always and everywhere use it." (page 36)

His argument can be divided into four main points:

A. Modern academic economics is dominated by mathematics (4)
B. The economy is a highly complex organism (4)
C. Mathematical equations don't fully describe complex real world events (4)
D. Real economic understanding comes from analyzing current and historical events (4)

The rest of this post is a collection of quotes from his book organized according to these four points.

A. Modern academic economics is dominated by mathematics

1. "As is widely recognised, it is mostly only modelers that get appointments in university economic faculties; it is mostly only such modelers that get promoted; it is mostly only modelers that get research grants from certain sources; it is mostly only PhD's and post doctorate research taking the form of mathematical deductive modeling that get funding; it is mostly only this sort of research that can get published in core journals, etc." (page 139)

2. "In other words, I think it is fair to say that, within the economics academy, there are instance where this mathematising project maintains itself by closing off lines of intellectual competition, where it manipulates conditions both of variety generation and environmental selection." (page 246)

3. "...let me first observe that in economic journals the formalistic modelling activities seem currently to be continuing unabated." (page 106)

4. "This insistence often runs over to claiming that any contribution that does not take the form of a mathematical model is not proper economics." (page 205)

B. The economy is a highly complex organism

5. "Economics too has its more basic concerns. There include such matters such as social relations, collective practices, social positions, community, capitalism, money, corporations, technology, gender, rights obligations, human nature, care trust, crises, economy and so forth." (page 6)

6. "The conception of social ontology I have in mind is processual in that social reality, which itself is an emergent phenomenon of human interaction, is recognized as being highly transient, being reproduced and/or transformed through practice; social reality is in process, essentially a process of cumulative causation." (page 62)

7. "If the situation is one in which two or three mechanisms or tendencies are thought to dominate a phenomenon of interest, perhaps a range of likely outcomes can be safely speculated." (page 21)

8. "...the materials and principles of social reality are the same across economics, sociology, politics, anthropology, human geography and all other disciplines concerned with the study of social life." (page 45)

C. Mathematical equations don't fully describe complex real world events

9. "Even if the ontology I defend is roughly right, there may yet be pockets of social reality that provide the appropriate conditions for successes when utilizing methods of formalistic modeling, as I regularly acknowledge." (page 210)

10. "Social reality is of a nature that is significantly at variance with the closed systems of isolated atoms that would guarantee the conditions of mathematical deductivist modelling." (page 112)

11. "Firms, money, markets, institutions, social relations, even individual identities, cannot be experimentally isolated for each other." (page 16)

12. "...we are faced not with a ubiquity of regular behavioural patterns underpinned by isolated systems of human atoms, but with the perpetual emergence of novelty..." (page 122)

D. Real economic understanding comes from analyzing current and historical events

13. "...it is clear that the recent crisis situation (like almost any social situation) is something that needs to be understood rather than modeled." (page 122)

14. "Of course, the details of the recent period are complex, and a full understanding requires, amongst other things, a detailed analysis of the numerous structural transformations in the financial sector during this period..." (page 115)

15. "However, I should emphasise that explanatory analysis required to render any chosen contrast phenomenon of interest intelligible can take many forms. It may involve the identification of a hitherto non-existent local mechanism or set of conditions, or a reworking of previous understandings, including seeing connections or relations previously unnoticed, or even the elaboration of a highly abstract account of the workings of a system in its entirety. It all depends on context." (page 20)

16. "Suffice it to say that an intellectual opening up of the economics academy would be revolutionary indeed, allowing at least the possibility of genuine debate on all issues and the promise of progress and a freeing up of resources for relevant research that have long been allocated for practices that have little if any grounding or rationale or obvious practical benefit." (page 123)