Opinion

Lawrence Summers

Economic specialization is a feature, not a bug

By Lawrence Summers
July 26, 2011

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 MartinAshwin Parameswaran, James HamiltonDean 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.

Third, there is as much of a problem of economists who are too responsive to worldly audiences as too little.  Think about the economists working for right-wing think tanks who proclaim that tax cuts raise revenues, or those who argue for protection of the businesses who employ them.  To believe as I do that  the movie “Inside Job” was wrong in many of its particulars and far too sweeping in its indictment is not to deny that the preservation of disinterest among academic experts is something very important.  Indeed, serious efforts are under way in academic medicine to reduce the linkages between academic physicians and pharmaceutical companies, though these companies obviously have a great deal of practical knowlege to share.

I have spent much of my career as an economist in dialogue with non-academic economists, and much more importantly, in dialogue with non-economists with important experience in the matters economists seek to understand and influence.  I have benefitted enormously from this interaction.  And I was once led to publish a paper entitled “The Scientific Illusion in Empirical Macroeconomics,” because I was frustrated by the lack of real world plausibility of what many macroeconomists do.  So I sympathize with Thoma’s complaints.  But as he follows his own advice and engages more fully with the world of practice, I suspect he will reduce the fervor with which he holds his views.

Comments
7 comments so far | RSS Comments RSS

I thought the most telling point in these exchanges was that Thoma, Krugman, and Summers glossed over any sort of mention of Dean Baker. Dean Baker points out, ahem, that he called the bubble. he has also called attention to lots of other less pleasant features of the modern economy and the economics profession.

In an exchange about “The Great Divide” designed to encourage humility, inclusiveness, and paying attention to some dissident voices, they do a remarkably good job of talking about the medicine without actually taking it.

Posted by EricHake | Report as abusive
 

The analogy with physicists and engineers is faulty. Engineers base their work on reliable theories and mostly reliable heuristics. There isn’t a SINGLE economic theory that is provably reliably correct, and pretty much so for heuristics too.

Posted by EmanuelDerman | Report as abusive
 

Isn’t it a bit strange for Summers, given his experience at D.E. Shaw, to repeat the EMH trope that active mutual fund managers don’t outperform the market? Of course they do not when evaluated as a group – collectively market participants cannot outperform themselves, especially net of fees – but individual money managers have outperformed and will continue to outperform markets. Consistently. It’s one of the more embarrassing failures of financial theory that academics ever since Fama can’t seem to model that.

Posted by loudnotes | Report as abusive
 

I think a novice can out perform the market, if you consider the S&P 500 as the market. A Chart to prove it:

http://preview.tinyurl.com/NoviceOutperf omsMkt

Which would a novice have chosen?

Posted by wrylyfox | Report as abusive
 

loudnotes, economists are not merely referring to an industry collectively outperforming itself. Fama has also presented data on serial-correlation of the returns of fund managers (whether those who do well before are more likely to do well in the future, and vice versa for those who do badly). His conclusion is that for the most part they don’t, though there is a very small portion of managers at the top who do seem to be worth their fees.

Posted by TGGP | Report as abusive
 

One would have thought that Larry Summers would have learned a little humilty from the utter failure of his “stimulus” package. Unfortunately, our modern Ivory Tower academic economists fancy themselves to be the 21st century version of The Vanguard of the Proletariat, and treat actual people as subjects for experiments in working out their grand designs. The Model says that scale leads to efficency? So let’s herd the peasants into large collective farms. Understanding of, or empathy for, actual people, as opposed to classes, groups and categories? Fuggetaboutit. The Model “abstracts from” the possible effects of special interests pushing insane regulations? So let’s ignore the downside of the ever more entagling regulatory state. The model abstracts from government failure and intervention in the mortgage market? Ignore institutional perversions. The model assumes a multiplier of 2 with money pulled out of thin air (but which might have to be repaid someday)? Go for it, regardless of the evidence or consequences. Amazing how failure only increases some people’s (and especially some economists’) arrogance.

Posted by lawrencefranko | Report as abusive
 

I agree with Summers. Similar to a disclosure required from the wall street analyst, there should be disclosure from the economist, Are they associated with right wing or left wing group, Are they registered as republican or democrat. There is nothing wrong about making a wrong assessment, but it is unethical to be deliberately misleading in the opinion.

Posted by Bipster | Report as abusive
 

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