By Lawrence H. Summers
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. Below is Reuters columnist Lawrence Summers’s reply. Here are responses from Roger Martin, Ashwin Parameswaran, James Hamilton, Dean Baker, and a recap of Paul Krugman’s.
Mark Thoma is obviously right that academic economists should listen more to practitioners – both economists who who work outside the academy and also, although he does not stress this point, to those who are active participants in the economy as buyers and sellers of products, labor, securities or anything else. He is also right that much of what goes on in academic economics is rather removed from any reality and that there are all sorts of important practical problems that should get more attention from academics. However there are a number of respects in which his arguments is naive, incomplete, or goes to far and his analogy with what doctors do is misplaced.
First, there is a proper division of labor between those who develop theories and those who meet day to day challenges. It is progress, not regress, that today we have physicists who conceive theories and do experiments and civil engineers who build bridges. This work was done by the same people centuries ago. In the same way, it represents progress through the division of labor that it is no longer true that academics are the people best informed about the evolution of next quarter’s GDP as was the case even in the 1960s. While there are exceptions, much of the progress in modern medicine comes from scientific research done by people who do not on a regular basis see patients. Watson and Crick would have been slowed down, not helped, if they had spent time with MD’s.
Second, as Keynes’ comments on the advantages of being conventionally wrong rather than unconventionally right illustrate, it is a serious mistake to overstate the insights possessed by practitioners in any field. Anyone in mutual funds will tell you that active managers regularly outperform the market. Only economic scientists realized they do not. Contrary to the the implications of Thoma’s column, the best calls on the real estate bubble came from academics like Bob Shiller and Nouriel Roubini, not from any economists involved with the home building or realty industries.
Every industry’s leaders think they understand the economics of trade — protecting their industry is good. The difficulty of casual induction from practical experience is not confined to economics. The double blind controlled clinical trial was one of the great medical innovations of the 20th century, precisely because such trials refuted so much of what clinicians knew.