Blame the Economists, Not Economics.

I have been such a strong critic of the dominant neoclassical school of economics and free market fundamentalism, that I could perhaps be misunderstood as wanting to replace it with a better paradigm, or even to keep all discussion of economics out of public policy discourse. Not so. I agree with Dani Rodrik's essay with this title that we need more to reform the economists than the economics.

The fault lies not with economics, but with economists. The problem is that economists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful.

They forgot that there were many other models that led in radically different directions. Hubris creates blind spots. If anything needs fixing, it is the sociology of the profession. The textbooks at least those used in advanced courses - are fine.

Non-economists tend to think of economics as a discipline that idolizes markets and a narrow concept of (allocative) efficiency. If the only economics course you take is the typical introductory survey, or if you are a journalist asking an economist for a quick opinion on a policy issue, that is indeed what you will encounter. But take a few more economics courses, or spend some time in advanced seminar rooms, and you will get a different picture.

Well, that's a pretty big problem because millions of ordinary citizens and policy makers have been indoctrinated with "the typical introductory survey," and never get to the advanced seminar rooms. And then he goes on to describe the damage done by advanced training in macroeconomics, but regrettably does not call out academic economists for not reforming the way they teach survey courses and advanced macroeconomics.

. . . .

Macroeconomics may be the only applied field within economics in which more training puts greater distance between the specialist and the real world, owing to its reliance on highly unrealistic models that sacrifice relevance to technical rigor. Sadly, in view of today's needs, macroeconomists have made little progress on policy since John Maynard Keynes explained how economies could get stuck in unemployment due to deficient aggregate demand. Some, like Brad DeLong and Paul Krugman, would say that the field has actually regressed.

Economics is really a toolkit with multiple models - each a different, stylized representation of some aspect of reality. One's skill as an economist depends on the ability to pick and choose the right model for the situation.

Economics' richness has not been reflected in public debate because economists have taken far too much license. Instead of presenting menus of options and listing the relevant trade-offs - which is what economics is about - economists have too often conveyed their own social and political preferences. Instead of being analysts, they have been ideologues, favoring one set of social arrangements over others.

Exactly. Every economic model necessarily starts with simplifying assumptions. Instead of always starting with assumptions that seem most likely to be true about the bit of reality being studied--and actually testing assumptions against reality--too many economists seem to use only the assumptions that for philosophical and political reasons they would like to see in some utopian world.

One of the problems may be that economics is not a "profession" like law, medicine, engineering, accounting, etc. "Professionals" are generally held accountable for giving bad advice or putting their own interests ahead of the clients', but it would be pretty hard to sue an economist on either ground. The Harvard Business School and other graduate schools of management are reconsidering whether they have erred by not making management more of a profession, as reported in the New York Times today.

For all of the emphasis on analytical rigor in business schools today, another major recommendation of the foundations' reports from the 1950s — that business become a true profession, with a code of conduct and an ideology about its role in society — got far less traction, said Rakesh Khurana, a professor at Harvard Business School and author of "From Higher Aims to Hired Hands," a historical analysis of business education.

Business schools, he said, never really taught their students that, like doctors and lawyers, they were part of a profession. And in the 1970s, he said, the idea took hold that a company's stock price was the primary barometer of success, which changed the schools' concept of proper management techniques.

Instead of being viewed as long-term economic stewards, he said, managers came to be seen as mainly as the agents of the owners — the shareholders — and responsible for maximizing shareholder wealth.

"A kind of market fundamentalism took hold in business education," Professor Khurana said. "The new logic of shareholder primacy absolved management of any responsibility for anything other than financial results."