A great divide holds back the relevance of economists

By Mark Thoma
July 26, 2011

By Mark Thoma
The opinions expressed are his own.

Reuters invited leading economists to reply to Mark Thoma’s Op-Ed on the “great divide” in economics and will be publishing the responses. Here are responses from Ashwin ParameswaranJames HamiltonDean Baker, Lawrence Summers, and a recap of Paul Krugman’s.

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. The questions academic economists are trying to answer have little connection to the problems faced by business economists trying to help their firms make good, profitable decisions (and vice-versa). And though academics pay some attention to government policy, particularly Federal Reserve policy, addressing the problems faced by government economists trying to help policymakers make the best possible choices is not the main focus of this research.

This division between academic, government, and business economists is driven by the fact that economic theory and econometrics can be used for two different things. One is learning about how the world works. These “how and why” questions are the focus of academic research. For example, academic economists try to understand why demand curves slope downward, how business-cycle fluctuations in GDP come about, and how prices are determined in market economies.

The other use of theoretical and empirical economic models is forecasting, for example predicting where the economy is headed so that businesses can react accordingly, and predicting what might happen if various government policy proposals are implemented. These are the “what if” questions that economists in government and business are most interested in. What will happen to tax revenue if business taxes are cut? What will happen to the demand for my product if the Fed raises interest rates? What is the most likely course that the economy will take?

Again, a comparison with the medical field is useful. Science can help us to learn about how the body works, and that certainly aids our efforts to battle disease. This is an important area of research, and we wouldn’t want to cut it short. But knowing how the body works isn’t enough, we also need the ability to diagnose current illnesses and to predict when someone is going to get sick. In addition, we need to have treatments available to fix the problems that we’ve identified. Periodic checkups, for example, allow us to predict who might get coronary disease, and then take action to avoid much bigger problems down the road.

Academic economists have emphasized the “how it works” part of economics; in econometrics, for example,  the focus is on hypothesis testing to determine which model of the economy is best, rather than on forecasting the future of the economy. Academic economists do evaluate policy proposals theoretically and empirically, and they do provide forecasts of the economy. But forecasting in particular is not the main focus of their efforts, , and they’ve all but ignored – even looked down their noses upon – forecasters and practitioners in the government and business communities. They are often viewed as data grubbers who use old-fashioned models and techniques, and are thus unworthy of attention from high-minded academics.

However, a few practitioners saw the housing bubble coming. Shouldn’t academic economists try to learn from them? What did they see that the academics missed? In addition, if the practitioners in the field are unaware of or do not have the technical ability to use the best approaches to the problems they face – criticism from academic economists over how business economists used value-at-risk models prior to the recession comes to mind – whose fault is that? Shouldn’t academics try to help the practitioners get over this hurdle instead of turning their backs on the problem, and then looking down at them when they don’t use or misapply cutting edge techniques?

The failure of academic economists to predict the crisis shows just how costly such insularity and arrogance can be. The patient (the economy) didn’t need to have a heart attack (financial meltdown), because even though the signs were there, the academic community had little interest in learning how to read them, let alone in developing early warning and intervention strategies for bubbles and other problems. The Fed does some of this, of course, and the financial crisis has motivated some academic interest in developing early warning systems that would have helped us to identify and do something about stock, housing, and other bubbles before they inflated to dangerous levels.

The medical profession would do much worse without connections between the practitioners in the field and the how-it-works types in the labs. The questions researchers ask, for example, are shaped by the needs of the practitioners trying to prevent and cure illness. What types of tests can doctors do in their offices and labs to quickly and reliably indicate the current health of a patient and to forecast future health problems? In economics, if reliable tests for bubbles had been available to business economists, that could have saved the economy from considerable losses.

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.

PHOTO: A stethoscope rests on a container of hand sanitizer inside of the doctor’s office of One Medical Group in New York March 17, 2010. REUTERS/Lucas Jackson

53 comments

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actually, a lot of academic medicine is no different.
I have experience in the field of drug resistant bacterial infections (super bugs, MRSA, c diff)
there is an awfull lot of academic medicine that is removed from reality.
For instance, it is clear that we have an epidemic of childhood obesity and type II diabetes in this country, an epidemic that is caused by social and economic factors (subsidys to sugar, when we see a donut as a toxic substance like a cigarette, we are making progress)
yet academic doctors treat typeII diabetes as a medical condition

Posted by joeenuf | Report as abusive

Maybe what causes the gulf between difficult academic disciplines such as economics and the more practical issues of life is that the more practical issues of life are usually grasped intuitively. The voter and politicians don’t have a lot of patience with theory. It’s rare to see politicians with strong academic backgrounds. And people don’t trust theories. But they gobble up, and cobble together ideologies like they were mother’s milk.

Ideologies don’t even try to be systematic, at least not the stuff that gets disseminated by blogs and media outlets. The impatience with academics is as old as Jonathan Swift and as modern and notorious as Mao’s Red Guards and his program to reeducated urban elites on collective farms. I doubt that anyone ever asked those “reeducated” academics whether they learned anything useful. They were told what to believe.

Theorists don’t like to leave any question unanswered. Employment, on the other hand, usually requires adherence to standard operating procedures and to work within one’s area of competence. And even if they have the theory – a difference in opinion among theorists can blunt it’s effectiveness. Economists really don’t have anything as tangible, or such a model of a compact system as the human body is, to work with.

You may be exaggerating how scientific the practice of medicine really is. The theory and science may be superior to the delivery.

Gold has such a strong appeal world wide because most people generally don’t know much more about the almost complete abstraction we call money than to give a token in exchange for a good or service. Gold tends to be the most primitive and believable token and devotees tend to forget that it is really just another commodity.

BTW – Will a reader with one intro econ course in college get much from the book “Economic Theory in Retrospect” by Mark Blaug? I not only don’t fully understand why supply and demand curves slope – I can’t quite understand why they are curves? I “attend the course” every few weeks when I do my laundry. Is there an easier intro?

Posted by paintcan | Report as abusive

Mr. Thoma, congratulations for having the courage to take your field to task. I am convinced that there are no solutions to our economic problems that will be found in the realm of politics. It makes little difference which party or ideology is in power when they all take their economic advice from economists who basically adhere to the same dogma and remain focused on one thing – macroeconomic growth. It’s the field of economics that must change if we are to have any hope of fixing our economy.

Among the other sciences, nothing is sacred. Everything is put to the test and old theories give way to new when the data and facts prove them wrong. This is what’s wrong with the field of economics. There is one parameter of economics – indeed, the most important parameter – that no economist dares to tackle. I’m speaking of the economic ramifications of population growth. Ever since the beat-down endured by economists following the seeming failure of Malthus’ theory, economists have steadfastly refused to ever again consider the subject of overpopulation, and anyone who does is immediately dismissed and riciculed as a “Malthusian.” Economists are united in their response: man is ingenious enough to overcome any obstacle to further growth.

Perhaps man is clever enough to stretch resources and mitigate stress on the environment indefinitely. But, since it’s impossible for population growth to continue forever, even if we tried, shouldn’t economists at least be curious enough to ponder what, then, will bring it to an end? If they did, they might discover the relationship between population density and per capita consumption, and the role that an excessive population density plays in driving down per capita consumption and, consequently, in driving up unemployment and poverty. And they may discover the role that disparities in population density play in driving global trade imbalances in manufactured products, the imbalance that now threatens to collapse our economy.

If the field of economics wants to better understand how the economy works, then it must be willing to consider the impact of every parameter.

Posted by Pete_Murphy | Report as abusive

There is something called hard sciences (eg. physics) and soft sciences (eg. economics). Macroeconomists, like Thomas, have been fixated on their econometric models – in which variables such as *behavioral economics* cannot be quantified or fixed as a constant/fixed variable. Consequently, academic economists got further and further away from real world economics – ie. behavioral economics.

The other area of academic focus should be *political economy*. I don’t know how many US academies today formally graduate Ph.D.’s in political economy. One would think in a world of globalization, the notion of global political economy would find a nitch in academic centres of learning today.

The last academic proponents of the subject was Gunnar Myrdal (Sweden) and John Kenneth Galbraith (USA).

Posted by hariknaidu | Report as abusive

The thing is, basic economics offers all that was needed to see the bubble:

1) capital assets always depreciate over time – classically, “a car loses half its value when you drive it off the lot” – houses are no different

2) economic profit represents economic inefficiency, either monopoly or other obstacles to a free market – if the price of something is far in excess of its cost, and increasing, something is seriously wrong

The housing market was like buying a car off the lot, and onto a used car lot the next day and selling at a profit, and more astonishingly, driving it for a year or two and then selling it for 50-100% more than you bought it for.

But perhaps I’m so attuned to housing bubbles because I bought my house in what I was sure was a bubble in 1986, but wanted the house to live in for decades, and was selling my old house for a huge increase in five years in just five days of listing. What I wasn’t expecting was a 20-30% fall in prices in a year. In 25 years tracking my house price, it has gone up only as fast as inflation, except from about 2002 to 2006 when it was about 30% higher in price.

Posted by mulp | Report as abusive

As Milton Friedman used to say, a good model is one that simulates well the past but is also capable of explaining unexpected things in the future. Arguably, econometrics is not the way to understand economics; it usually uses a set of parameters which attempts to forecast the future but can never explain the future, ie there is no economic theory in the modelling. Also, some of these parameters, such as income growth, may not be predictable themselves!
To understand economics, one needs to realize the effect of trade (deficit) on wage income and savings. But for more than 30 years now, economic theory, namely consumption theory, has taken a detour; Because of these teachings, we now have a generation of clueless economists!
On the other hand, if you apply the teachings of Adam Smith to Keynes and Friedman-Modigliani then you can reach to conclusions on why for instance growth can be positive and savings be negative and why consumption imports have a inverse relationship with change in personal savings. Why countries, such as China, suddenly have huge savings. In other words, to understand the wealth of nations and investments as buying a house, higher education or financial equity you need to know what factors affect income growth.
See my result and comments at http://knol.google.com/k/savings-and-gro wth#

Posted by cwucnspt | Report as abusive

I have a Master’s degree in Public Policy from the University of Chicago, and am continually dumbfounded at their ardent desire to hire academic economists over practitioners. In a normal economics department, of course, but the focus of the school is to train practitioners, not economists.

Posted by Adam_S | Report as abusive

“An economist is a man that can tell you anything—he’ll tell you what can happen under any given conditions, and his guess is liable to be just as good as anybody else’s, too.”
─ Will Rogers, Radio Broadcasts 5/26/1935

Posted by leslie20 | Report as abusive

“1) capital assets always depreciate over time – classically, “a car loses half its value when you drive it off the lot” – houses are no different.”

Buildings are not the same as cars. They are generally built of more durable materials and it is difficult to separate the land value from the structure built on it. There are depreciation schedules for commercial buildings but longer than for other assets like cars and machinery. And the building itself does not depreciate uniformly. The structure of the building could last for hundreds of years. The finishes are what wear out. The fact that depreciation of the asset is a write off, also forces renovations when no real need may exist. This is good for creating economic vitality but may be insane if the future brings scarcity of resources and a real need to watch ones energy consumption and waste generation.

Real estate tends to be more valuable the more that can be built on it.

The argument also ignores the impact of zoning laws that artificially limit the density of urban and suburban development. Communities are using zoning law to preserve whole towns in amber knowing full well they can increase the value of the real estate and restrict the area to the affluent only by making it too expensive for the “undesirables”. “Undesirable” is a magic quality that can include anyone without sufficient income. If communities could zone in reverse – i.e. exclude anyone with too high an income – there would be many who would try that too. But property taxes can do the same job of limiting too expensive development that might also pose a threat to “our town”.

The extremely arrogant comment by oneofthesheep suggests that it is in the self-interest and the right of developing countries to force the sterilization of what it deems marginal or unproductive people. If the commenter is serious, then he is also arguing that the developed economies, who are not only the greatest gluttons of resources – with little restraint of their ability to feed every desire however frivolous, also have a right to endanger far older societies that aren’t as dependent on all the luxuries the developed world can’t imagine living without. Take a look w Google earth and Darfur and notice how little it takes to live and still have offspring.

Ask yourself – oneofthesheep – who is most fit to live? The immensely obese man who can’t walk without artificial means or the man who can still walk on his own two legs?
Who has the right to sterilize the other? The fat man may be living in a fantasy of his own invention.

Posted by paintcan | Report as abusive

One more thing – China doesn’t suddenly have “huge savings”.
They have been building their economy with “slave labor” for over 50 years. By slave labor – I mean that they were using collectivized efforts for decades and only within the last 20 years have they become the better-paid manufacturers for the globe. They concentrated on capital formation. Only now is the Chinese consumer being “re-educated” to shop till he drops.

If you take a look at popular mythology – like Feng Shui sites on the internet- you can see all sorts of knick-knacks that celebrate wealth and savings. Feng Shui is a lot older than the current regime.

Posted by paintcan | Report as abusive

I think the same thing is happening in many fields including the medical field. Knowledge has taken us to wonderful frontiers of discovery, however, we lack a way to implement those discoveries. In addition, we have many more educated. Educated does not mean intelligent. Unfortunately, too many people educated beyond their inteligience muddy the water because it permits the moderately intelligent to the drown out the voice of true genius. You know the old saying, too many cooks spoils the broth.

Posted by SeaWa | Report as abusive

Whenever there is MONEY involved – TRUTH will be hard to find.

There is a lot of MONEY involved in Medicine.
There is a lot of MONEY involved in Economics.

So doctors will continue to get paid for treating SYMPTOMS.

And Economists will continue to get paid for treating the SYMPTOMS.

Curing the Diseases, Medical or Economic –
means Someone in Power will not get Paid.
So it won’t happen.

Posted by redou | Report as abusive

Most economist have contributed nothing and in fact a very good case could be made that the policies they have spouted have actually been destructive. Using ones common sense would have resulted in better outcomes. They fail to see that economics is not a science but an art that constantly changes along with human interaction. It cannot be modeled (as we have seen time and time again the models have failed….at which in everycase they say we only need to tweek the model again)as the model is only as good as the knowledge of how humans will react to various inputs…none being very consistent….that’s why they always want to use the constant of all humans act “rational” all the time….it is the only way the model would tell them anything but even that is false so give false answers.

Posted by KarlMarx | Report as abusive

As a person who does not posses the academic credentials of Mr.Thoma and certainly not of a Dr. Krugman but has an undergraduate degree in accounting and economics with a decent measure of common sense, I take exception to his assertion of the arrogance of academia to predict or see the economic crisis. Most of what was and had been going on in the area of credit/finance was a prescription for disaster that even my neighbor who didn’t get past third grade predicted it terms of the meltdown. We had banks no longer acting as banks in the traditional sense after the safeguards of the Glass Steagall Act had been removed at the end of the Clinton era. Banks no longer had any interest in the mortgage loans that they made, as we are witnessing today with the robo-foreclosures it is difficult to now who the mortgagee is. If you don’t have money at risk you don’t pay attention.

How does one whether an academic or practitioner predict the level and consequences of epidemic greed. What economist has access to the the practices of rating agencies that were cooking the books and doing as instructed by the banks packaging credit to investors. Who could have predicted that Alan Greenspan would have had the chutzpah to make such a blatant assertion that Social Security was a threat to our nation’s financial health but that he saw no housing/credit bubble. Who knew except a few insiders who were sounding the alarm bell that the SEC was not minding the store.

Nevertheless, as my neighbor observed we had Wall Street bankers out of control, we had stagnant middle class income gains and skyrocketing home prices bolstered by cheap abundant credit, consumers were on a buying binge paid for with plastic and we were off shoring jobs that previously paid an American a living wage by the millions.

I submit that this did not require a doctorate in economics or the world’s most sophisticated economic modeling to predict, as my neighbor Sam said “It was just common sense and as plain as the nose on our faces”. Blinded by greed everyone was just looking the other way.

Posted by seattlesh | Report as abusive

For China, it is a “huge” increase in savings compared with what they had before Nixon visited China.
According to Clower’s Dual Decision Hypothesis, Keynes’ disavings is basically caused by errors in estimating income. For instance, you buy an expensive car expecting a nice bonus at the end of the year. When that bonus never materializes or it is compounded by the fact you were fired and stayed unemployed, then you have a disavings, i.e., overspending. Many will try to limit the damage by selling the car but over consumption already happened!
Due to exports, in countries with high wage growth such as Japan in the 1970s and 1980s, there was a large increase in savings. Once the jobs moved into China, Japanese personal savings level off and Chinese workers savings went up.
The important point to notice is that if change in savings is a function of wage growth then it is possible to have negative savings with positive growth, i.e., US savings.
Again, the summary and the links are in:
http://knol.google.com/k/savings-and-gro wth#

Posted by cwucnspt | Report as abusive

Economics is like physics before atoms, chemistry before molecules and biology before genetics & evolution. What relevance to reality all these very ornate & mathematically sophisticated models if they cannot predict with any accuracy? I am intrigued by all the claims of economics to be useful, but little evidence that it is useful.

Posted by MarkRB | Report as abusive

The answers to these questions are all found in the film “Inside Job”. Too many people moving between Treasury, Banks and Harvard… Looking objectively at economic theory ?? Too much money to be made elsewhere !! The problem is that many of them become politicians too, so the real problems do not get dealt with.

Look what happens too, when too many people move between News International and Scotland Yard…

Posted by b1quet | Report as abusive

It is some times easier to make a point through exaggeration. In this case it’s the academicians versus the practitioners, much like science versus religion. This doesn’t mean it’s false, just polarized.

A number of important factors besides the academic versus practical have been left out of the equation that involves the public perception of economists.

First, the media: If the economy weren’t complex enough, we have a media that is largely untrained in economics, even less than meterology, let report on the economy frequently, often with unattributed sources. Even when they are attributed, the media rarely can comprehend that there are other points of view AND have no way to discern which might be the most reliable sources.

Second, Sources, bias and agendas: Reporters often don’t make a distinction between the comments of a Nobel Laurette in Economics and an analyst-economist from a Wall Street firm. Many of the economists quoted by the media work for companies that have agendas involving the government, its policies and its subsidies. This makes their prognostications suspect. The same company that gave triple-AAA ratings to mortgage derivative junk is also frequently quoted on the media regarding economic policy and predictions. Academicians on their part have different models that can result in varying predictions, but who has ever heard any of them explain the difference in the models and the varying results?

Third, Data: This is important. Most of the economic data is collected and reported by government agencies. Theoretically, it is unbiased. However, both the legislative and executive branches learned many years ago that statistics that can help them Gerrymander, can also impact their political lives such as with the unemployment rate.

The United States Department of Labor’s Bureau of Labor Statistics (BLS) used to report unemployment from a variety of sources and filled in big gaps (mostly long-term unemployed) with surveys and additional analysis. As the politicians discovered that high unemployment statistics were bad for their incumbencies, they found a way to significantly reduce the reported rate. “To save money”, the official unemployment rate was changed to “the most reliable” sources, the States. Unemployment applications and counts of those receiving unemployment benefits were now the sole component of the official unemployment rate. Those no longer receiving unemployment benefits were categorized, “No longer in the labor pool” and/or “no longer looking for work”, an insult to those who no longer received benefits, but were desperate for work.

This change in the official unemployment rate works great for politicians, but what does it do for economists and their models of real-world unemployment? Let’s provide an example. One source of such data claims that the real unemployment rate is typically about 70% higher than the official rate – in good times, and worse in bad economic times. Who says this, the BLS! They continued to survey and analyze – not saving any money – and report the “under” employment rate. They even claim that this does not report the real unemployment rate which is considerably higher, more than 100% higher during The Great Recession!

When models are based on incorrect data, who could trust the predictions of any economist? Why aren’t there economists screaming at the lack of unbiased data?

BTW, who decided that the only definition of a recession/depression is a positive GDP? Doesn’t every economist know that a breakeven sustainable growth rate is somewhere between three to five percent, recently pegged by the Council of Economists @ 2.75%? By that measure, the United States is still in a Recession. And, if a Recession lasts more than two or three years, isn’t that a Depression? That’s how most Americans would define it, but then, of course, they’re not economists nor among the two percent that is rich.

Posted by ptiffany | Report as abusive

Don’t economists still work under the assumption that a science must write out emotional reactions? Greed is an emotion. The classical economists base their analysis and models on people acting in their most logical self-interest. They don’t look at issues of illegality or fraud either. Those activities wreck the model.

Economists want their models to exist in a perfect abstract framework and can never really find that in human behavior.

I haven’t reached Marx yet in the Econ review, but have a general idea of his theory, but one thing is obvious. The theory outlined so far was written in a time before ubiquitous mass media and the feedback and self-reinforcement it creates. Smith was dealing with a world that was primarily agricultural. Marx was writing in a time when industrialization was becoming the rule of economic life. Neither of them could have imagined the extreme leveraging of modern life. Few people had mortgages in Smith’s day. Marx’s proletariat would have been renters.

I’m looking for the economic theory that theorizes commercial hype, advertising, corporate self-promotion, and the impact of all of those things on consumer choices. Is there an economic theory about monopolies that are just short of being illegal? Is there a theory about “keeping up with the Joneses”? Other than spurious Thorsten Veblen, I can’t think of any. Is there an economic theory of propaganda?

I know there are such studies touching on what “rational behavior” really is in economic decision making but they tend to cross disciplines with behavioral science and psychology and they aren’t dealing with farmers or factory managers. I don’t think the early writers had any idea what a middle class was? That may still be too difficult to define let alone to theorize about?

Posted by paintcan | Report as abusive

The real issue is that many economists are not practicing economics. Rather, they are practicing what today would be called political economy, the most important aspect of which is ‘who gets what’. Virtually every ‘economic’ argument or debate you see in the press is about who should get what and it all boils down to the people in line to get something arguing for and those who would rather get those resources arguing against. Economics as most people know it has been co-opted solely for this purpose.

I don’t think there is a huge problem with this, but I also don’t think an economist has much more to say about the issue of political economy than a historian, philosopher or hard scientist.

Posted by jeremycjohnson | Report as abusive

What do you mean “broken”? It is ludicrous to think it was ever “fixed” in the first place. Economics is NOT a science, never has been and never will be. It will NEVER be able to predict the future, which is to say it is useless except for those lucky few prognosticators whose careers depend on it.

Cato didn’t understand why two soothsayers didn’t burst out laughing when they met each other crossing the street. How economist don’t either is a mystery too.

Posted by Truth_Teller | Report as abusive

As paintcan’s comments point out,too many economists do not think ‘outside the box’. We need more innovators in the field. Redou also makes an excellent point with the ‘money’ angle. Why would an economist in the private sector with accurate, predictive knowledge share it with his academic counterpart for free? Knowledge (not theory) like that will go to the highest bidder, who will consider it a trade secret.

Posted by changeling | Report as abusive

What about the simple fact that in science, you can set up an experiment. You can actually test your hypothesis in real life. With Economics, I can’t set up my very on economy to play guinea pig with. If there is anything economists are guilty of, it’s not taking more of an effort to collaborate with other all other disciplines in academia. Within medicine, Doctors get to focus on all their scientific training to become good practitioners. Those trying to predict events with the economy have to include psychology, weather, politics, etc… if they want to make an accurate prediction.

Posted by MangoMan2111 | Report as abusive

“There often occurred to me the difference between the Professor of Economics and the business man, as judged by their financial success. The business man may not perhaps be on the same intellectual plane as the professor, but he bases his ideas on real facts and puts the whole power of his will behind their realisation. The professor, on the other hand, often has a false conception of reality and although perhaps having more ideas, is neither able nor anxious to carry them out; the fact that he has them is satisfaction enough. And so the business man has the greater financial success.”

Erwin Rommel. 1942

Posted by David_Maitland | Report as abusive

We have a severe sycophant problem. Anyone who does not agree with mainstream theories is not rewarded. Those who parrot the answers they are expected to give are rewarded. Pavlov proved this theory sometime ago.

Posted by Gordon2352 | Report as abusive

Some year twelve students in a well-respected Jesuit institution in Sydney, Australia think that the lifeblood of an exchange economy is the productive process not the financial system. They are being told that the firm and household diagram which is used in economic textbooks is “unscientific” because it overlooks the fact that there are two kinds of firms: those that produce basic goods and those that produce capital goods which are used in the production of the basic goods. Basic goods are consumed directly and more or less immediately; capital goods are only consumed indirectly over a longer, often indeterminate, period of time. The students are told that because there are two kinds of firms a “truly scientific analysis” requires an understanding of the relationship between two distinct economic circuits. The basic circuit is the flow of consumer goods and can be understood as a rate (so much every so often) and the producer circuit is the flow of capital goods and can be understood as a series of accelerators (speeding up, slowing down, or even maintaining) the rate of flow in the basic circuit. The purpose of economic analysis and policy is to monitor the relationship between the circuits in changing contexts.

Moreover, these students are able, by simple observation, to verify what they are being told. They are convinced that the single circuit of firms and households as presented in the standard textbook is indeed unscientific and seems to explain why the economy operates about as efficiently as trying to ride a standard pushbike up a steep hill. Think of a variable speed pushbike and the way it is possible to “shift gears” and change the amount of effort required to pedal when faced with a hill or a valley and make for a more leisurely, less taxing ride. The rider of a standard pushbike doesn’t have such freedom! And with freedom comes responsibility.

It provides a fresh perspective on “capitalism”. To be sure, finance plays a part but as one—and definitely not the only one—of five variables in a scientific understanding of economics.

WHAT IF the future lies in “teaching” the science of economics (not as “predicting” but as “understanding” exchange as isomorphic with production)?

Posted by TomHalloran | Report as abusive

You can’t really compare economics with science. Scientific experiments allows us to hold factors constant so that we can accurately observe what happens when we do certain things. We can’t create our own little economy to be our guinea pig so that we can experiment what will happen if we stop stimulus spending, or if we cut taxes to zero or w/e. It would be unethical to even do so given the catastrophic consequences that can occur from a bad outcome.

Furthermore, we can’t control all the factors anyways so it would never be a real experiment. Unfortunately, the number of factors that affect the performance of the economy goes into other academic disciplines like psychology and politics.

Posted by MangoMan2111 | Report as abusive

The commonality between medical professionals and medical professors is they both work towards saving lives using their knowledge. Difference between politicians,business economists and the academic economists is that the academics think they are saying the best for the people. Businessmen do what is best for money for themselves and politicians do nothing but blame each other and ruin the economy. Frustrated101

Posted by slnsimhan | Report as abusive

Thank you for an excellent post about such an incredibly important issue and was delighted to read some truly impressive feedback in the readers’ comments. I did not feel the same about a similar discussion in another blog.

Posted by jpblaw | Report as abusive

Keynes is still relevant but his ideas are used only in fragments….in effect we have been saying ‘govt stimulus is good…always good’. Keynes actually said major govt DEFICIT spending should only be done in recessions. He said deficit spending at ALL times, good and bad, exagerates the business cycle!!! Krugman tends to ignore this. Krugman also seems to ignore the ‘Keynesian ENDPOINT’ ideas of Pimco’s Tony Crescenzi.

Posted by peterfairley | Report as abusive

From a layman’s point of view I think the problem is pretty simple. Economist are stuck with 20th century models and then apply 21st century Political Correctness to them. In the mean time the global economy is changing before our eyes. I don’t think economists will be able to provide accurate models until well into 2030 or beyond. It is hard to hit a moving target.

Posted by tmc | Report as abusive

@one of the sheep – I don’t have to have a vision for humanity. For one thing – I’ve never seen Humanity in its entirety and all it’s complexity. Even if I had a vision, humanity isn’t likely to believe me. Visions have a way of changing and in ten years time it, or humanities condition, may be changed enough to make it useless. It would be a constantly changing vision and it would be wise, even if I thought I could be the physician for the planet’s ills, to follow the Hippocratic oath that obliges Doctors to “first do no harm”.

There already is a lot of family planning aid to developing countries. But you assume the masses of low-income people are a problem. It costs so much more per head to make people in the developed economies happy or satisfied and they are never really satisfied. It is the developed economies that use the lion’s share of the worlds’ resources and are creating such a problem with their waste stream. And you – you smug fat man – want the rest of them to remove themselves voluntarily so you can do what for humanity? You haven’t offered a vision either – didn’t you notice?

The Andaman Islanders in the Indian Ocean survived the Tsunami without loss evidently. The complex developed world could die off and all they might notice is the sky above them got quieter without the roar of passing aircraft. Maybe economists should start there with something simple. But the Islanders won’t let anyone near them and they wouldn’t be that simple. Money isn’t a thing – it is a concept.

Economists can’t seem to perform experiments. They can usually only observe and try to draw conclusions. As far as I know, they have never been able to make the equivalent of Galileo’s simple and elegant experiments to prove and quantify acceleration.

Most of Adam Smiths models were wrong. It’s a very frustrating history to try to read through because so far the models are all something that will have to be forgotten when I get to the latter more modern economists. The models are intellectual icons and are useful for further discussion. I still don’t know why the curves curve but the author makes it so clear that so many other assumptions Smith used are wrong that it doesn’t really matter. I shouldn’t have sold the old Samuelson textbook years ago. It has something to do with probability as I recall from the econ class.

Posted by paintcan | Report as abusive

The science of economics is much complex than other types of sciences, and much caution must be taken in its application to real life situations. Instead of castigating the theoretical economist, i beleive much collaboration is needed with the consumers of the economic theories.

Posted by 0okm9ijn | Report as abusive

Most people wonder what happened with the job market in the US. I look at Apple and see how well Iphone, Ipad, Ipod, and the other gadgets are doing. For US workers, very little wage income is derived from the sales of them, except maybe in design and sales. Most manufacturing work is done in Asia countries, specifically Japan, Taiwan and China. If, as experts calculated that about 50% of an Ipod is manufacturing cost, billions of dollars are actually sent to these countries annually. Given that Apple like other large international corporations don’t have to pay much corporate tax, the main tax collected are sales and custom duties. That tax cannot compensate for loss in personal income (and corporate) and social security tax. That is why consumption imports have an inverse effect on personal savings. The more imports the less income and savings and vice versa. As my mathematical result shows, change in savings is a function of income growth, if income is slowed or turned negative then you have permanent unemployment and federal/state debt debacle. In other words, it is the trade deficit! See my result and other comments at http://knol.google.com/k/savings-and-gro wth#

Posted by cwucnspt | Report as abusive

As someone who got my BA in Economics, I must say this article had a profound effect. It so nails the issue on the head. But it should be known that Medical school does NOT prepare doctors to practice medicine. For that there is “residency”, which is like an internship where education is turned into practice. But the point that the academic, corporate, and government sectors do not communicate well is valid and should be corrected.

Unfortunately as a science, economics is barely more practical than sociology with it’s controversies and inconsistencies. In the teaching, policy making, and the practice of economics and sociology, it is the unexpected and infrequent situation that presents the greatest threat. Both try to predict the future based on past behavior which minimizes the significance of other possibilities.

Since the future is not bound by a set of assumptions, all theory, practice, and policy is inherently flawed. Over time the gut instinct of lucky individuals is more effective in predicting the future than the application of some academic model, and Government policies provide political allies loopholes making legislation less effective. So any half-hearted effort to rectify these issues is unlikely to produce anything of value. What is needed is a think tank or high-level Government entity that can bring the parties together and over time, produce reliable results.

Paul Volker’s efforts as Obama’s economic adviser comes to mind. But then we saw what came of his efforts.

Posted by LEEDAP | Report as abusive

Where the world is heading in any direction, economic or medical, is becoming more and more defined lately by the masses, and not the businesses as many grass roots efforts go forth on the Internet to take back our freedoms that have far too long been infringed upon by corporations greed and lack of caring about public welfare.

People are learning to say NO to high priced patented drugs that have been repeated re-patented into a new name from an old drug and people can darn well say NO to the shoddy practices we have seen in our government and businesses of late.

We, the consumer, have the power to spend our money or not. It is not all stock market, industries and government that determines how the economy will turn. It
is whether WE trust the people who want us to spend our money.

Why should I spend money of goods that I don’t need, made outside of the USA of poor quality, after greedy corporations took our jobs so that they could making bigger profits. Greed started our downfall, and I will not longer support greed. I will support make in the continental USA by American citizens.

The solution our economic downfall is to reverse what lead up to it: Tax breaks ONLY for corporations that manufacture inside the US, and hire US citizens and import tax on good brought into the US for those who wish to buy foreign made items; like it was in the 1960′s – when there were good jobs in America and very little unemployment.

Posted by pjdxxxwa | Report as abusive

Is not there a conflict of interest between business economy (outsourcing…cheapest location for labor)/financial economy (profit for the shareholder) and the national (social)economy.

The latter demanding proper wages, based on our level of cost, allowing us to buy goods…that are currently made by our companies on foreign shores?…

Hence the impossibility to significantly create jobs out of QE?

Was that problem probably overseen when Reagonmocs started to grab hold of the economic thinking?

Posted by Checksbalances | Report as abusive

@pjdxxxwa

I could not agree with you more, this grass root initiative should be massive, but that means also a stronger government, because it should be “promoted”

1)Import tarriffs of 50-100% onm the production (FOB) price of imported too cheaply produced goods.
2)Only in case the low wage countries increase the salary’s for industrial workers substantiually (25%) per year (Fordisme, tio create more home consumption)this tarriff should be reviewed.
3)Investment in solar energy and for instance desalination plants to recreate fresh water and strongly help our trade balance. (no import of oil)
4)Reintroduce reasonable taxation for the very high earners. (quite often resulting from profits, made on outsourcing or financial manipulation of other men’s earnings)
5) Create new industries , cradle to cradle for instance.

Posted by Checksbalances | Report as abusive

Deficit before Reagan: 1000 billion dollars

Reagan (the birth of Reaganomics) : $ 1,900 billion
George Bush (I): $ 1,500 billion
Clinton:$ 1,400 billion
George Bush (II): $ 6,100 billion
Obama…mainly due to decisions made by his predecessor (wars, tax cuts) so far: $ 2,400 billion.

Why the heck do we still vote elephant?????

Posted by Checksbalances | Report as abusive

economic theory and practicing it are different things.if i want to be a sailor ,i should know the theory about swimming but i have to be in the water too.

Posted by chalala | Report as abusive

The problem with economists is that they all believe that economies are managed by supernatural forces that “right” them based on criteria that is, at best, arbitrary. The rational ones who aren’t mathematically incompetent saw the bubble for what it was.

Posted by nondescriptuser | Report as abusive

how many tea party types support getting into the 2 wars we are in?
WE ARE AT WAR
who cuts spending during a war?
not patriots!

Posted by chjj | Report as abusive

As a scientist, let me tell you that it is possible to deduce laws, then test them, by merely observing phenomena. The economist only has a slight disadvantage.
There was an informant in the Watergate era who’s famous quote was “Follow the money.”
Instability, when it is due to a controlling party, will allow that controlling party to benefit from the instability. There is no motivation on the part of those who control the world to create stability, until they break the dog that they are wagging. That hasn’t happened since the great depression. We had a period of stability after that great breakdown. Don’t forget that that great depression was only cured when the world war forced even the most staunch fiscal conservatives to really pump those ever so evanescent dollars into the economy.

There is no money, there are only people, goods and services.

Posted by catraeus | Report as abusive

I think I owe oneofthesheep an apology for jumping to too rash a conclusion.

But I think he gets the cart before the horse. People in the developing countries seem to have fewer children because they don’t need them anymore to insure their own survival. But first look at the photos of refugees and count the kids. As I recall, refugees don’t seem to have large numbers of children and it is difficult to keep those they have alive. Having children is a survival instinct.

Big families happened in this country either with the pioneers on the prairies or expanding states – where they could at least be certain they would all eat – or in the early days of factory life with massive immigration during the later half of the 19th century. Their numbers have been shrinking rapidly with or without family planning. My grandparents lived with prohibitions against family planning of any kind and raised large families. Their children don’t seem to have practiced it either and yet none of them had more than two or three children. My generation has had even fewer. My generation knows about family planning but I’m not at all sure it really matters. I’m not sure they use contraceptives and they are all grandparents now. I never looked at their medicine cabinets.

With or without family planning- something happens to the urge to raise large families when people are absorbed into a specialized and industrialize society. The Chinese force it by fiat but the west seems to do it to stay within their means or to rise in careers.

You wanted a vision for the future. Three quarters of the earth’s surface is ocean. So much of the most dense development pressure seems to occur on the planet’s coastlines. That coastline could have a mirror image in off shore or even deep water floating development. Buildings are no heavier generally than land-based buildings or rather they don’t have to be. It is their shape and footprint that is the issue on the water. Ships used to be designed more or less with 2/3 above water and 1/3 below. Modern ocean liners seem to be much shallower and wider and are becoming more like tall barges or houseboats. It appears to be safer to weather a hurricane in large ship than it is to endure one on land. The ships are designed to withstand high winds. Tsunamis are a threat near shore or on land where the wave fronts are most obvious. In deep open water they are barely evident at all and the wave front moves rapidly but hardly disturbs the surface at all. You can look it up

On land, buildings go up when one can’t go wide. Land based development competes with agriculture and natural ecological systems. It must also compete with seismic movement and storms. Urbanization is spreading rapidly in the developed and developing countries to the detriment of all other uses. At least two New England states are becoming enormous suburbs. They have built-in enormous fuel costs for e heating and transportation alone. Those are not particularly productive uses for fuel. There is no point in denying the possibility of global warming. It makes too much sense as a theory.

The Africans are talking about developing the savanna and that could mean the extinction of already threatened wildlife. The areas nearer the hone of Africa – in the Sahara – have been experiencing droughts for at least 30 years. Global warming may cause greater desertification there.

The ocean is in a constant state of movement and it is known that wave action or current movements can be used to generate power more or less economically. If the power source is cheap – how efficient does the means of conversion really have to be? Development located where climates are more or less temperate could reduce the need for fuel for heating and cooling. It could even require less material for shelter. Transportation on water is the easiest way to move massive freight shipments. Telecommunications are making it possible to live anywhere. It is not too dreamy eyed to consider the possibility that the future of mankind could be housed between the tropics of Cancer and Capricorn.

I’m not talking water world. I’m thinking Venice or Amsterdam. Venice sits on islands and is built on piles that extended the shallow sandbars that were its foundations during the decline of the Roman Empire. One could do nearly the same thing without the islands. Development off shore means all the investment goes toward the building with little pressure from high land prices. It also goes toward buildings that can be moved easily without the threat of being trapped in areas of stagnation or decay. It could be possible to build cities without slums because slums tend to be caused by fear that investment will be trapped in areas of decreasing land values. It would not be difficult to move entire buildings.

I can’t imagine that space colonization is going to be a new frontier for any but those sponsored by industry or government, and/or are very wealthy or well trained. We are not likely to see the equivalent of the homesteaders of the mid west. It will require such a very disciplined and constrained life that it could made the Chinese or Japanese look like free living slobs. After all, anything done in space will be extremely expensive in as much as anything sent up there must be sent at least 27,000 miles up and will take some time to get there. They will never go “outdoors” to get a breath of fresh air. In fact – no one who lives there will ever breathe fresh air nor are they likely to drink fresh water. Any attempt to build earth like worlds could be centuries in the future. And it is difficult for so many people to accept the restrictions of conventional 21st century urban life as it is. Life in space could mean a life that must be lived under nearly military discipline and military life is a life without all the rights of civilians.

So much of the modern economy seems to be based on something other than older intuitive theories of what wealth meant or what it takes to move money or keep an economy alive. The developed world lives with a variety of subsidies. Perhaps it should aim them better? Before one attempts space wouldn’t it be wise to have a half way step to make life without Terra firma less of a shock?

Apologies to the author for drifting so far from the subject.

Posted by paintcan | Report as abusive

In the forth paragraph – it should have said “Buildings on water” are no heavier…. Modern construction tends to be light weight. Water is heavy at about 67 pounds per cubic foot. Salt water is a little heavier.

Posted by paintcan | Report as abusive

Paintcan:

You err when you state that your grandparents — who had large families on the frontier — didn’t engage in ‘family planning’. They did. They lived in a society which was very, very careful to ensure that men and women didn’t reproduce out of ‘love’ or ‘lust’ or carelessness. Instead, these people had children within a marriage sanctioned by a sustainable society. This is family planning, and it’s been proven to work over the entirety of recorded history.

Compare that to the Africans (whom you refer to as an ‘older society’, but who are, really, nothing more than human animals with no ‘society’ to govern their base instincts). For the most part, the affected Africans simply take what they want with no thought of the future.

Taxing civilized societies to support these human animals is the height of stupidity. As you know, it doesn’t actually help these human animals, because they die anyway. All it does is enrich the corrupt politicians who exort this money from well-meaning but unthinking Westerners.

Don’t be so quick to assume your uneducated Grandparents were ignorant and innocent. I would wager they knew a lot more about the world than you do.

Posted by Renaldo1 | Report as abusive

Countries don’t give money purely from the goodness of their heart and you combine a number of different funding streams and try to maintain that the issue is “taxation”. I didn’t say my grandparents were from the prairies. They arrived too late to kill off the aborigines.

My grandparents came from southern and middle Europe. They were low income or they would have likely stayed there. All the well-developed “human animals” that were managing to remake the face of Europe and swelling their numbers enormously were crowding them out. They were calling it an age of progress at the time. The native sentiments in New York where they landed tended to dismiss them as human animals. I’ve seen late 19th century newspaper editorials opposed to building codes in Manhattan, that dismissed the immigrant neighborhoods as filled with human animals that would kill themselves off to fit the lousy housing. They thought it was stupid to improve conditions too. The next line is usually – it will only spoil them and they will only make more of themselves if they are too well fed. A lot of academics economists would have used that line.

The developed countries of the world could easily write off aid to the developing world. And the developed world will very likely not listen to anything you say thereafter.

And don’t be coy, tell me what my grandparents knew that I didn’t hear about? No one gave my grandparents parents credit for family planning and I don’t know where you get your notions. The rule throughout history was to encourage as many children as possible to out pace infant and child mortality mortality and loss due to war.

Posted by paintcan | Report as abusive

@Mark Thoma, thank you. The “how it works” models seem to be designed by people with Aspergers who can’t grasp that you can’t make the people fit the model. (Sorry professor, but those with Aspergers seek out such professions as Economist and Professor, given the math and computer models involved and also, lack of need of social interaction as a necessary skill)

@Mulp, the sub prime bubble was like having a lot of old used cars, removing parts to sell later (fake notes and documents, not securitized) getting a crooked inspector to inflate the price (fraudulent property appraisals and ratings by S&P)and selling the lemons as brand new BMWs. (CDOs, using MERS as the facade )

@redou, you sir, are correct. It is the “greed is good” mentality. Curing the disease also means getting rid of the cause and of course those who caused the problems are the very people who are trusted to make it run efficiently… Bankers, Fed, Congress, treasury, ratings agencies, justice system … etc. (and of course the economic advisers)

Posted by hsvkitty | Report as abusive

Without getting into a bunch of different graphs like S curves and utility curves or the idea that the trading on Wall Street is actually a Mandelbrot formula, why don’t we talk about ‘real’ economics. I have worked for years and one truism that comes out is that they do not give raises or bonuses to the lower part of the economic spectrum (the 200 million that don’t make more than $100,000 a year) unless they have to. If they want to keep people or if it is the industry standard they will pay that wage, but they try to pay less every year, and they also pay less when hiring the same skill 10 years down the road. The nature of business is to do that with, unfortunately, most businesses today considering people as chattel that are a cost item similar to a bolt. People should be in a separate category.
The problem is that classical economics was tried for 150 years in this country. It worked well when the economy was small and agriculture based, where 99% of the people had or worked on a farm where they lived and had food to eat, whether there was a depression or not. As the industrial revolution took hold, a new type of animal was released, that didn’t care about people or whether they starved or not. It was only profit based, which is OK, but it needs to be regulated so that it does not get out of hand because the capitalist has a great advantage against the working man. Soon, our economy started having depressions every 10 years with everybody losing everything and the banker stealing everything and leaving town. This is why we started banking laws, which were gutted since Reagan got in and that led to the large losses that they were able to perpetuate on customers, because they did not have mortgage regulation or enough reserve funds. Classical economic was replaced by Keynesian economics, which worked great since the Great Depression, but Reagan started this Neo-classical trickle down, Voodoo economics, which is basically a very complicated scam that has been perpetuated on us by people without any regard for what will happen to America. Now we find that neo-classical economics doesn’t work either and the people that are behind it do not believe in it either – they just want to steal everybody’s money and to hell with America. To hell with them and everybody that is opposed to them please vote in the next election and do not let them stop you no matter what!

Posted by builder7 | Report as abusive

@checksbalances—You are on the right tack from that point in 1980.

There was a take-off in the information technology that coincided with Reagan econ policy, making it look quite successful to some. Here was when the work of Bator, Samuelson, Pareto, Smith and Keynes should have come together.

Anyway, a take-off in bio information tech could and should happen right about now. It would significantly reduce health care costs—healing is cheaper and better for the whole crew.

Posted by sailorlw | Report as abusive