How economics can raise its game

26th July, 2019

How can economics become a more insightful discipline? Should it aim to be more like physics, with its precision and predictive power? Or should economists emulate anthropologists or historians, immersing themselves in the details of the particular and the unquantifiable?

There’s a case to be made either way. Some critics argue that economics is missing better physics: it got stuck in the 19th century with fusty old ideas like marginal analysis and equilibrium, and missed out on cool ideas like chaos theory and phase transitions that promise to shed insights on economic complexity or sudden crises. (See, for example, Philip Ball’s excellent book, Critical Mass.)

Others say that economics needs to put the mathematics down and back slowly away. As Immanuel Kant put it, “out of the crooked timber of humanity, no straight thing was ever made”, so economists should be less fond of putting rulers against everything.

The fact that both views have the ring of plausibility suggests that this is a tougher challenge than it might appear from the sidelines. Now a new paper addresses the question from the heart of academic economics: Nobel laureate George Akerlof, writing in the Journal of Economic Literature.

Prof Akerlof, now at Georgetown, argues that the academic discipline of economics rewards “hard” rather than “soft” research with publication in the top journals, and therefore with promotion and status. We know “hard” when we see it: numbers are harder than words, quantities harder than qualities. Causation is harder than correlation. Physics is “hard” and sociology “soft”.

There is much to be said for hard science. The downside is that certain questions cannot be answered — or perhaps even asked — in precise, mathematical, causal terms. They are still important, and if economics insists on “hard” methods it will overlook them.

Another Nobel laureate, the late Gary Becker, reflected on his college studies: “I began to lose interest in economics . . . because it did not seem to deal with important social problems. I contemplated transferring to sociology, but found that subject too difficult.”

What is fascinating about that remark is that Becker earned his prize by applying the hard-ish tools of economics to areas that seemed to belong to softer disciplines: addiction, discrimination, marriage and education. How well he succeeded remains a matter of debate. Personally I believe he contributed a lot.

Yet plenty of sociology remains outside the reach of the economists’ tools: it is important but too soft — or in Becker’s words, “too difficult”. More awkwardly for the economics profession, some key economic questions also seem more likely to yield to soft than hard approaches: what are the obstacles to social mobility? Where does innovation come from? Can we strengthen the institutions that matter for prosperity?

Beyond any particular problem there is also the challenge of combining insights from highly specialised subfields. Raghuram Rajan, when he was chief economist of the IMF, came closest to predicting the 2008 financial crisis. He later observed that economists had written insightfully on all the key issues but had lacked someone capable of putting all the pieces together.

Is this also a hard/soft problem? Prof Akerlof thinks so. He argues that the bias towards hard analysis also produces a bias towards specialised silo thinking, and that being a generalist is something of a soft skill.

I’m not sure that’s right. Certain mathematical tools are both highly portable and distinctly hard-edged. But it is surely true that the kind of synthesis that would have identified the looming crisis would have been too discursive to be published in a top economic journal.

So I am not completely persuaded that economics is, on average, “harder” than it should be. But I am in complete agreement with the recommendation that economics needs to be more tolerant of different methods, whether the latest ultra-hard physics or the softer explorations of anthropology or even a business-school case study. After all, the economy encompasses a lot of different things; why should it yield only to a particular set of analytical tools?

Economics has certainly profited from the insights of those outside the field, such as psychologist Daniel Kahneman, and the late Elinor Ostrom, a political scientist whose ambition to study economics was thwarted because, as a girl in the 1940s, she’d been steered away from mathematics. Both have Nobel memorial prizes in economics.

The insights can flow the other way, too. Charles Darwin’s theory of evolution was influenced by the economist Robert Malthus’s Essay on the Principle of Population. When working on the kinetic theory of gases, physicist James Clerk Maxwell drew inspiration from social scientists and their habit of thinking in statistical approximations about large populations.

It is easier to make such a recommendation than to embrace it. The further the leading economics journals stray from their core expertise, the more difficult they will find it to distinguish good work from bad. But at the margin, such moves offer a lot of promise.


Written for and first published in the Financial Times on 28 June 2019.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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