THE TEACHING ECONOMIST - William A. McEachern                 

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Issue 13, Spring 1997

William A. McEachern, Editor

The Decline of Economics?

In one of the most visible critiques of the discipline in years, journalist John Cassidy writes that economics as practiced in the academy has grown increasingly irrelevant. Economists, he charges, seem caught up in "a giant academic game" that has little to do with economic problems of the times. In "The Decline of Economics" (The New Yorker, 12/2/96, pp. 50-60), Cassidy argues that despite hidden assumptions and complicated math, most economic models have produced little insight. Good economic ideas, he says, get neglected if not dressed in the garb of mathematics while bad ideas cleverly dressed in mathematics can survive even if contradicted by the evidence.

His main target is macroeconomists, particularly those of the new classical persuasion. Robert Lucas readily concedes to Cassidy that the evidence supporting some implications of rational expectations is weak. And Joe Stiglitz says, "it's very clear that the new classical economics is irrelevant." Yet rational expectations, according to Cassidy, still exerts a pervasive influence on macroeconomists. For example, even though "dozens of empirical studies have concluded that real-business-cycle models cannot explain economic fluctuations any better than Lucas's original effort, [real-business-cycle] theory has survived and prospered, its users apparently oblivious to the practical irrelevance."

Cassidy notes that the large-scale Keynesian models that Lucas criticized have done pretty well in tracking the economy since the mid-1970s, when they were modified to address his concerns. The Fed, the White House, and most foreign governments still use these models. But most young economists have given up trying to build macro models of the economy. Fresh macroeconomists, he says, are trained to do only two things: teach graduate macroeconomics, and publish in the journals. According to Cassidy, the problem of irrelevance has gotten so had that economic-forecasting firms are having difficulty finding young economists who can analyze the world in a non-Lucas framework.

As further evidence that academic economists have little to offer, he notes the recent decline in the number of undergraduate economics majors and the drop in the number of Americans pursuing a Ph.D. in economics. What's more, major corporations, such as IBM, GE, and Kodak, have shut down their economics departments, while companies in the newer technologies, such as Microsoft and Intel, seem to be thriving with few economists. One Morgan Stanley economist told Cassidy that his firm will not hire economics Ph.D.s without substantial work experience outside academe. "We insist on at least a three-to-four-year cleansing experience to neutralize the brainwashing that takes place in these graduate programs."

One way of getting economists back to reality, Cassidy says, would be to abolish the Nobel Prize for economics, "Deprived of the publicity surrounding the annual Stockholm ceremony, economists would actually have to do something useful to get noticed."

At the January meeting of the American Economics Association in New Orleans, I attended the roundtable session entitled, "Is There a Core of Practical Macroeconomics That We Should All Believe?" chaired by Robert Solow. During the question and answer period, I asked the panel if anybody had read Cassidy's article and, if so, what was the reaction. Martin Eichenbaum said his wife could not wait to show it to him. The general consensus was that the piece was misleading and unfair. Solow posed the following parable. Suppose the cat world appoints one of its own to observe humans and report back. Such a cat would report to feline colleagues the activities of humans — that they eat, sleep, walk, talk, and so on — but the cat would miss the whole point of being human. Likewise, Solow things that Cassidy observed what economists do, but he missed the whole purpose of pursuing economic research.

Yet Cassidy did not develop his critique in a vacuum. Several well-known economists were interviewed for the story. For example, Anne Kreuger notes that five years ago the Commission on Graduate Education in Economics reported how graduate programs were churning out technique-laden economists with little knowledge of real economic issues. Although that report, developed by a dozen eminent economists, raised red flags about producing "idiot savants," Krueger laments that, "if only the report and a pin had dropped at the same time, the pin would have sounded noisy." And Greg Mankiw inquires in the Cassidy piece, "Is economics making enough progress to justify the millions of dollars a year that the taxpayer spends to subsidize economic research?" His answer: "I think economists are probably overfunded, given the rate at which we make progress." He goes on to say that, "Economists are like dairy farmers. We think we deserve every penny we get."

I might revise Solow's parable a bit. The cat not only observes humans but asks them what they are about. Some humans complain about the human condition in general and about how some other humans think. Mostly this is constructive self-criticism, but problems get exaggerated because some humans resort to satiric hyperbole and a few are just—well—catty. Given the chorus of complaints, what's a cat to think? Cassidy confuses school-of-thought battles with more fundamental questions about how economic research should be carried out and evaluated.

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