“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us…”
— A Tale of Two Cities
Economics has been in turmoil ever since the global financial crisis. Even the Queen of England was perplexed enough to ask economists at the London School of Economics: “Why did nobody see the crisis coming?”
There has been no clear answer since then. What happened in 2008 has led to savage attacks on the state of economics on the one hand and honest attempts at soul searching on the other hand. Will all this overdue turmoil lead to a new age of hope in economics?
Let us first look at one example of a savage attack on the dominant economics consensus before the financial crisis. Paul Krugman wrote in January 2009 that we are living in a dark age of macroeconomics. He further explained that was distinguished the Dark Ages in Europe was not that they were primitive but that knowledge from the past was lost. What Krugman was in effect saying is that modern economics has suffered because of a loss of memory: what earlier economists said was forgotten by the profession. Krugman contentiously wrote elsewhere that there was no useful addition to the stock of macroeconomics knowledge since the mid-1970s.
There has been some soul searching as well. One example of this is the series of three conferences hosted by the International Monetary Fund on what economists have learnt after the crisis. The first one was held in 2011 on economics in the wake of the crisis. The second was held in 2013 on what economists have learnt from the crisis. And a third conference on whether there has since been progress or further confusion in macroeconomic policy will be held later this month. It is interesting that these three conferences are being led by Olivier Blanchard, the chief economist of the International Monetary Fund. In 2008, a few months before the financial crisis led to the most serious credibility shock to economics since the 1930s, Blanchard had written in a paper that the “state of macro is good” and that were was “a broad conversion of vision”. Much has changed since then.
The paradoxical fact is that the heated debates in macroeconomics have garnered most of the public attention. Far less has been said about the flowering of other parts of the economics discipline. There are far fewer debates about microeconomics. The Economist magazine wrote in January 2015 how Silicon Valley firms from Google to Facebook to Airbnb are hiring economists to not only analyse the behaviour of their users but also design new markets to bring buyers and sellers together. Their work is backed by new techniques to analyse Big Data using powerful computers.
The Economist believes the success of microeconomics has lessons for macroeconomics: “Established macroeconomists would do well to pay attention. They should start by being much more careful about data. Silicon Valley economists obsess over how the numbers they use are collected, and would not accept something as old-hat as GDP. Second, they should tone down the theorising. Macroeconomists are puritans, creating theoretical models before testing them against data. The new breed ignores the whiteboard, chucking numbers together and letting computers spot the patterns. And macroeconomists should get out more. The success of micro is its magpie approach, stealing ideas from psychology to artificial intelligence. If macroeconomists mimic some of this they might get some cool back. They might even make better predictions.”
The ongoing churn in macroeconomics as well as the advances in microeconomics suggests that we could be heading into a very creative period for economists. Even the Nobel Prize for economics has in recent years been given for fairly eclectic research. There was Daniel Kahneman for behavioural economics in 2002; Vernon Smith for experimental economics in 2002; Robert Auman and Thomas Schelling for game theory in 2005; Leonid Hurwicz, Eric Maskin and Roger Myerson for mechanism design in 2007; Elinor Ostrom for governance of the commons in 2009; Oliver Williamson for institutional economics in 2009; Alvin Roth and Lloyd Shapley for market design in 2012; and Jean Tirole for the economics of regulation in 2014. These awards give some idea of the scope of economics research in recent decades.
Some of the churn in economics is also being reflected in the classroom. Economics students from over 30 countries wrote an open letter to their professors: “We are dissatisfied with the dramatic narrowing of the curriculum that has taken place over the last couple of decades. This lack of intellectual diversity does not only restrain education and research. It limits our ability to contend with the multidimensional challenges of the 21st century—from financial stability, to food security and climate change. The real world should be brought back into the classroom, as well as debate and a pluralism of theories and methods. Such change will help renew the discipline and ultimately create a space in which solutions to society’s problems can be generated.”
As Charles Dickens would have said, this is the best of times and the worst of times to be an economics student. The problems with economics are well known. What is often lost in the noise is that a new generation of economics students have the historic opportunity to shape a new golden age of economics, by marrying the insights of the great economists of the past with the more contemporary work being done in universities, central banks, data labs and technology companies.