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Time for critics of economics critics to move on!

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By David Orrell

There is a growing trend for economists to write articles criticising the critics of economics. These articles follow a similar pattern. They start by saying that the criticisms are “both repetitive and increasingly misdirected” as economist Diane Coyle wrote, and might complain that they don’t want to hear one more time Queen Elizabeth’s question, on a 2008 visit to the London School of Economics: “Why did nobody see it coming?”

Economist Noah Smith – writing in a blanket critique of an extract from a 140,000 word book by John Rapley – agrees that “blanket critiques of the economics discipline have been standardized to the point where it’s pretty easy to predict how they’ll proceed.” Unlike the crisis then! “Economists will be castigated for their failure to foresee the Great Recession. Some unrealistic assumptions in mainstream macroeconomic models will be mentioned. Economists will be cast as priests of free-market ideology, whose shortcomings will be vigorously asserted.” And so on.

The articles criticising critics then tell critics it is time to adopt a “more constructive tone” and “focus on what is going right in the economics discipline” (Smith) because “only if today’s critics of economics pay more attention to what economists are actually doing will they be able to make a meaningful contribution to assessing the state of the discipline” (Coyle). If the critics being criticised are not economists, the articles often drive their point on tone home by implying that they don’t know what they are talking about, are attacking a straw man1, or (not these authors, but a popular choice) are like climate change deniers (see also here and here).

Speaking as an early adopter of the Queen Elizabeth story (in my 2010 book Economyths, recently re-released in extended form), allow me to say that I agree completely with these critic critics. Yes, economists failed to predict the most significant economic event of their lifetimes. Yes, their models couldn’t have predicted it, even in principle, based as they were on the idea that markets are inherently self-stabilising. And yes, economists didn’t just fail to predict the crisis, they helped cause it, through their use of flawed risk models which gave a false sense of security.

But it is time for us critics to move on, and accentuate the positive. Only by doing so can we make a meaningful contribution. And as Smith points out, calls for “humility on the part of economists” are getting old (Tomáš Sedláček, Roman Chlupatý and I wrote Bescheidenheit – für eine neue Ökonomie five years ago). It’s like asking Donald Trump to admit that he once lost at something.

Of course, some people might say that it isn’t up to economists to tell everyone else when they should stop talking about economists’ role in the crisis, or bring up what the former head of the UK Treasury memorably called in 2016 their “monumental collective intellectual error.”

Some stick-in-the-muds note that “No one took any responsibility or blame for a forecasting failure that led to a policy disaster” and have called for a public inquiry into their role in the crisis. Instead of telling everyone else to move on, they argue, it is time for economists to own their mistakes and show some accountability. Well guess what, people – it’s not going to happen! And stop asking for a public apology. Let’s focus on what is going right and hand out some gold stars.

For example, there is the “data revolution” heralded by Smith. As he notes, “econ is paying a lot more attention to data these days.” Sure, economists are literally the last group of researchers on earth to have realised the usefulness of data. In physics the “data revolution” happened back when astronomers like Tycho Brahe pointed their telescopes at the sky and began to question the theories of Aristotle. But better late than never!

Though note it only really counts when you use data to falsify something important.2 Oh, here’s a data point – all the orthodox theories failed during the crisis! But you knew that.

Or there is behavioral economics, which Coyle notes is “one of the most popular areas of the discipline now, among academics and students alike.” Critics again might note that progress in this area has been painfully slow and has had little real impact. Tweaks such as “hyperbolic discounting” are equivalent to ancient astronomers appending epicycles to their models to make them look slightly more realistic. But that rational economic man thing is so over – straw man walking.

Admittedly, there has been less progress on a few things. The equilibrium models used by policy makers, for example, still rely on the concept of equilibrium – and so have nothing to say on the cause or nature of financial crises. Risk models used by banks and other financial institutions still view markets as governed by the independent actions of rational economic man investors, and are more useful for hiding risk than for estimating it, as quant Paul Wilmott and I have argued.

As Paul Krugman noted in 2016, “we really don’t know how to model personal income distribution,” even though social inequality – along with financial instability – is one of the biggest economic issues of our time. Some insiders such as World Bank chief economist Paul Romer – who compared a chain of reasoning in the field of macroeconomics to “blah blah blah” – describe the area as “pseudo-science”. And economics education still concentrates almost solely on the discredited neoclassical approach, complete with rational economic man, according to the student authors of The Econocracy.

But these are details. As Coyle notes, some economists are finally getting to grips with ideas from areas such as “complexity theory, network theory, and agent-based modeling” which of course are exactly those areas that critics have long been suggesting they learn from.3

Or the UK’s Economic and Social Research Council recently let it be known that it is setting up a network of experts from different disciplines including “psychology, anthropology, sociology, neuroscience, economic history, political science, biology and physics,” whose task it will be to “revolutionise” the field of economics. Again, that is nice, since Economyths called in its final chapter for just such an intervention by non-economists back in 2010.

So, yes, it is time to celebrate the new dawn of economics! But critics of critics – do try to move on from the same criticisms, we’ve heard it all before, in fact for decades now.


1 Coyle for example clarified that she was writing about “the character of a particular kind of straw man critique.” The “straw man” defence, as discussed in this excerpt from Economyths, has been used by economists since at least the 1930s – and is very frustrating. Mainstream economists present a core portrayal of human behaviour which is frankly ridiculous in its simplicity, alter it slightly, and then when people criticise it, the economists say they are criticising a straw man! One investigation into a Canadian economics department said this tactic had there reached a stage where it could be described as “gaslighting [i.e. psychologically manipulating someone into doubting their own sanity].” And yes, we know about behavioural economics etc., but one reason it hasn’t had more impact is because its findings are rather inconvenient for models. In other words, the fact that economists have been deploying the same argument for so long probably says more about mainstream economics than it does about its critics.

2 I would invite people who think there has been a real “data revolution” in economics to ponder the following two quotations. The first is economist Steven Levitt (of Freakonomics, and no stranger to data) discussing the problem that he couldn’t find a valid empirical example of a demand curve for his textbook, despite the fact that such curves are basic to neoclassical economics: “What I’d really say is that we completely and totally understand what a demand curve is, but we’ve never seen one. I don’t know if it’s fair to make physics comparisons, but you can imagine something like in the old days when the models had figured out something about protons and electrons, but we hadn’t actually figured out how to literally see an electron.” (My emphasis.)

The basic problem with demand curves comes down to identifiability of parameters, and yes some economists have tried to tackle it, but I’m not sure how economists can “know” what a demand curve looks like (and feature it in textbooks) without seeing one. It seems to me that if supply and demand are dynamic and interdependent then no such curve exists. (And no, it’s not like physics, unless perhaps you count supersymmetric string theory.) I would also argue that this belief in theory over data still permeates much of economics.

A similar conclusion is drawn in a recent paper by economist Richard Werner, who asks why – after so many decades – the process of money creation is still considered such a mystery. He notes that “the dispute can be settled through empirical evidence on the actual operations and accounting practices of banking.” In other words, by taking a look. “Surprisingly, in the observation period – from the mid-19th century until 2014 – no scientific empirical test had been reported in the peer reviewed journals.” (My emphasis.)

We’ll know economics is moving on as a scientific discipline when it actually uses data to falsify some of its key findings, including those concerning the most basic questions of all, namely how prices are determined, and how money is created. The reason I believe these have not been satisfactorily addressed by the mainstream is because their theory will fall apart without them. A completely new approach is needed. (And yes, I believe it’s coming – but the mainstream is not the place to look.)

3 So maybe the observation that economics was stuck in a reductionist paradigm and needed to learn from a complexity approach was not a straw man, as many mainstream economists called it.

From: pp.6-7 of WEA Commentaries 7(4), August 2017

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8 responses

  • Greg Gerritt says:

    When i asked the state legislature and other public officials in RI what they were using as an estimate of growth rates when they proposed a budget, they would not answer. Obviously their economists can not tell them in English. Thanks for the article. confirms what most of us knew already.

  • Paul Grignon says:

    “Why did nobody see it coming?”
    Because the fundamental problem is our concept of money and banking. Economists haven’t begun to seriously examine either, and in my experience they adamantly refuse to do so. All the chaos theory and behavioural economics in the world will get you no closer to the reason for the profession’s massive failures so long as the DESIGN of money and banking continue to be “givens” rather than the root of inquiry.

    My first animated feature Money as Debt (2006) explained money creation to the masses world wide. It is now online in at least 26 languages. It also predicted an imminent and ongoing debt crisis. The sequels provide a deeper analysis and solution

    I have more recently created two short animated movies that succinctly illustrate my very simple logic and the real world data (Federal Reserve) that backs it up. As always I invite viewers to challenge my info, assumptions and/or logic.

    Economists and a Pile of Nuts 2:17

    Mr. IMF and the Mystery of the Thirsty Swans 13:18
    Why the design of banking is, itself, the root cause of money system instability
    Inspired by a conversation with a senior economist and central banker
    who has worked at the highest levels of the IMF, and consulted for the World Bank and the Federal Reserve.

  • BC says:

    Debate. Debate among yourselves and invite the Paul Krugman’s to join you. Post the debates to YouTube. In short order common man will judge who’s full of manure and who is not.

  • Lyonwiss says:

    Criticisms have not been addressed, either repudiate or repair; they are just ignored. Hence criticisms should be repeated ad nauseam. Economics has made little progress in areas which matters: improving economies.

  • Jerome Ravetz says:

    Historical point: It was not astronomers like Tycho Brahe who pointed their telescopes at the heavens &c. The telescope was invented shortly after Brahe’s death. In the pursuit of an improved science of astrology, he actually designed and constructed instruments of much higher precision, with controlled accuracy, than anyone else. This achievement became crucial in Kepler’s work on Mars. The inaccuracy in prediction of the epicycle models was greater than the uncertainty in Brahe’s measurements, and that drove Kepler on to his discovery of elliptical orbits. For contemporary relevance, so long as precision and accuracy are so totally uncontrolled in so much of economic data, all its mathematisations are in the realm of fantasy.

  • Paul Grignon says:

    How difficult is it to comprehend the following?

    Money is created as someone’s debt to a bank on a definite repayment schedule and is then acquired and saved or re-lent indefinitely by those who have more money than they need. Economists blithely assume that all savings are eventually spent by the savers, which the FACTS prove to be untrue. In truth, in the aggregate, savings usually remain PERMANENTLY UNAVAILABLE to the borrowers that created that money and need it to retire their principal debts. This FACT is proven by the evidence of M2 and M1 provided by the central banks. In the USA, at any given time, M2 (total principal debt to banks) is normally 4 times M1, total money theoretically available to pay those debts. At the Crash of 2008 that ratio reached an unprecedented 5.26:1

    Multiple principal debts of the same money are created BY DESIGN of the system. Multiple principal debts of the same money can be serviced by velocity but can never be paid off. Nor can the total principal debt ever decrease without causing mathematically inevitable defaults. This means in practice that the only way to avoid widespread financial collapse is to FOREVER exponentially increase our principal debt to banks. That economists will not do this elementary math nor admit its truth is not just “failure” it is DENIAL at best and a CRIMINAL COVERUP at worst.

    From my now extensive experience debating them, it appears that economists are here to protect an elite criminal money system from discovery by the proles, not understand the economy nor manage it for the general good. I welcome any economist who would like to change that impression.

    My experiences with economists

  • Enquiring Mind says:

    Econ critique articles would benefit from a review of the Yves Smith book Econned.

  • Marco Saba (@marcosabait) says:

    There is an evident divorce between academy and the real life. The empirical testing done by the good Prof. Werner inspired an initiative on the monetary field in Italy: Moneta Nostra. This initiative began in October 2016 and it is about the citizens creating so-called scriptural Euro to pay off debts with the banks and the public administration. Unknown to most people, there is not a law in the EuroZone governing the “creation” of virtual Euro but only the issuance is disciplined by law, and issuance is about existing funds. Issuance against existing funds is what the public know because the banks self-style as financial intermediary. The myth goes on telling that banks do receive savings and issue loans out of those savings. The reality is that from an accounting point of view, money creation is not reported in the cash flow statement of the banks. Central banks – like ECB and SNB – even go further by not publishing the cash flow statement in the complete indifference of the public and of the experts treating the matter. In the void of law, everyone can create virtual Euros and pay off their debts. Even Greeks, if they knew about… The Bank of Italy recently tried to stop the operation by issuing a press release telling that this system is not good and that only banks can do the shenanigan. But the arguments are poor and self-defeating. The document tells that by creating Euro to pay off debts the citizens are menacing the established economic “order” and the “privileged position” of the central bank. The truth is that Euros created by citizens are accounted for and even registered in an European Monetary Cadastre, while the bank’s created Euro are clandestine to the accounting and to the public. Many cases are now open in the Italian Courts about this matter and we hope that the Judiciary will understand that the banking farce must be corrected to match the reality of money creation. Time will tell.

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