The future of Economics

A couple of days ago in Big Think there was an interesting post with the views of 'Eight of the world's top young economists' on where the field is or should be heading.

Here are some quotes which may make you curious to read the full post:

NICHOLAS BLOOM, 39 years old at Stanford

'…Why are developing countries poor?  In terms of impact on mankind globally, this strikes me as probably the biggest and most important current economic question.  I think the answer is complex and linked to a combination of factors around history, geography, luck, etc.  I am personally working on management practices: people in developing countries are poor because wages are low, and wages are low because firms are very unproductive, and firms seem to be unproductive in large part because of bad management.  An Indian worker makes in one week what an average U.S. worker makes in a half a day.  One big factor seems to be that factories in India are frankly very badly managed: equipment is not looked after, materials are wasted, theft is common because inventory is not monitored, defects keep occurring, etc…'

RAJ CHETTY 32 years old at Harvard

'…Many economists are concerned with two broad questions: how can we increase the rate of economic growth and overall well-being, and how can we reduce the rate of poverty?  Countless policies—taxation, education, healthcare, etc.—have been implemented in an effort to achieve those objectives.  One of our biggest challenges is to distill each policy’s unique impact so that we can understand which ones actually work and which ones do not. '

XAVIER GABAIX, 40 years old at NYU

'…The most central open question in economic theory, as I see it, is how to model realistic economic agents.  Traditionally, economists have relied on the rational-actor model, but it is clear that it is just a rough caricature.  It has been greatly enriched by behavioral economics in the past 30 years.  Still, we are far from a unified, versatile, believable alternative to the rational-actor model.  I am hopeful, though, that this might be overcome—in part because of progress in the sister disciplines (psychology and neuroscience) and basic modeling, and also because empirical anomalies are forcing the economic profession to be more open-minded.  Contributions by computer scientists and physicists will help inject new perspectives into economics.

The largest concrete questions in economics are, arguably, how to increase growth—particularly in developing countries—and how to avoid economic disasters and financial crises…'

Peter Leeson, 32 years old at George Mason University

'…My candidate for the biggest unanswered question in economics is the status of the rationality postulate: the decision to analyze actors as utility maximizers with consistent preferences.  If we view economics as an “engine” for understanding the world, the rationality postulate was that engine in nearly all of economics until quite recently.  The rise of behavioral economics has challenged the usefulness and, in a more subtle but radical way, the legitimacy of the rationality engine.'

Glen Weyl, 27 years old at the University of Chicago

'…In his famous 1945 article, “The Use of Knowledge in Society,” F. A. Hayek argued that despite their inequity and inefficiency, free markets were necessary in order to allow the incorporation of information held by dispersed individuals into social decisions.  No central planner could hope to collect and process all the information necessary for social decisions; only markets allowed and provided the incentives for disaggregated information processing.  Yet, increasingly, information technology is leading individuals to delegate their most “private” decisions to automated processing systems.  Choices of movies, one of the last realms of taste one would have guessed could be delegated to centralized expertise, are increasingly shaped by services like Netflix’s recommender system..'

Justin Wolfers, 39 at UPenn

'…Economics is in the midst of a massive and radical change.  It used to be that we had little data, and no computing power, so the role of economic theory was to “fill in” for where facts were missing.  Today, every interaction we have in our lives leaves behind a trail of data.  Whatever question you are interested in answering, the data to analyze it exists on someone’s hard drive, somewhere…'

Poverty and development issues, the limitations of rationality, huge disaggregated data sets and vast computing power.....

Read it all here: Empirics and Psychology: Eight of the World's Top Young Economists Discuss Where Their Field Is Going. 

What do you make of this?

...and I'm quoting Alan Blinder (click here for who Blinder is and for some interesting and accessible WSJ contributions):

'...Our teaching about monetary policy must be completely revamped. Specifically, students must now learn something about “unconventional” monetary policies. Remember “conventional” monetary policy? The Federal Reserve shortens recessions by creating more bank reserves (“printing money”), which fuels a multiple expansion of the money supply and credit because banks don’t want to hold excess reserves. So they get rid of them making more loans and deposits, which also lowers short-term interest rates. Compare that to current reality: Banks are content to hold over $1.6 trillion in excess reserves, short-term interest rates are stuck near zero, and Fed policy often works on long-term interest rates instead. No, this is not your father’s monetary policy, and the old ways of teaching about it simply won’t do....'

You will find his short contribution (Not Your Father’s Monetary Policy) in a roundtable hosted by the New York Times on 'Rethinking how we Teach Economics' here. You will also find there An Open Letter to Greg Mankiw written by some of his Harvard Econ 10 students and published in the Harvard Political Review.

The opening piece by Mona Chalabi is also interesting (and those against the HLP3 will rejoice but will be missing the point):

 '...An economist must be a "mathematician, historian, statesman, philosopher, in some degree." So, promisingly, begins the sixth edition of "Macroeconomics" by Greg Mankiw, a key reading for my introductory economics class at the University of Edinburgh (and still a key reading six years on). Unfortunately, the book, like the course that prescribed it, delivered on only one of those claims: to be a mathematician.What began as eloquent and logical graphs and formulas quickly spiraled out of control and I soon found myself reading that “economics is not only a social science, it is a genuine science. Like the physical sciences” and that financial crises can bepredicted by using the following formula:

 

I was not persuaded. The over-reliance on mathematical modeling and its subsequent abstraction, together with a near-disdainful attitude toward other social sciences, left me feeling entirely disillusioned with economics in the U.K. So much so that I decided to leave the university and study abroad at Sciences Po in Paris, which took a broader approach to the field of economics.'

All contributions are of interest.  Click away!

Development Thread (3):

Summer is almost over and it is time to get back to serious work as the academic year has begun or is about to begin.

I have to admit that development issues have been in my mind over the past few months as I will soon start to  teach the development section proper from the new syllabus.  For the first time, IB Economics candidates will be forced to answer one of two development related data response questions.  In other words, for the first time, an IB Economics candidate cannot avoid studying this most interesting (but also, in my opinion, demanding) section of the syllabus.  And judging from my (senior) examining experience, examiners have not been easy to satisfy in this area, at least in the past.  High marks require a solid understanding and background that is not that easy to achive in a matter of months.

In any case, I'd like to bring to your attention a site and a great talk/ slide presentation.

The site is the Center for Global Development.  It seems to have usefull information for us.  In it I found this excellent in my opinion talk and slide presentation by Owen Barder (Senior Fellow and Director for Europe at the Center for Global Development) on the evolution of development economics (very easy to understand) as well as a thought provoking presentation of development as a complex adaptive system that borrows much from physics and biology which, if nothing else, may help IB economics students realize the high degree of interconnectivity of the items in the development section of the syllabus and why 'simple recipes' that students like to propose (e.g. spend more on education and health and reform institutions) are unlikely to work.  It is not an easy to follow presentation as it is chock full of ideas but Barder manages to use great examples to drive his points home.

This talk seems to me as a great way to start discussions on development and that's why I'm thinking of using it this year.  The link from the Center is here but I will use repost from youtube: