The Future of Economics: Research, Policy and Relevance

That was the somewhat grandiose theme of the Australian Conference of Economists held in Melbourne last week. I was invited to give a keynote presentation and got this as the default topic. It seemed like a challenge and I gave it a go – here’s my presentation (4.8Mb PDF). For those who would just like to cut to the chase, my penultimate slide gives the main story

* The global economic crisis should have produced a crisis in economic theory
* Instead, business as usual
* A path to inevitable irrelevance

I’m using the Dropbox public folder for this. I’d be interested to hear from readers if there are any problems, and also if it went smoothly.

65 thoughts on “The Future of Economics: Research, Policy and Relevance

  1. @Jim Rose

    “A controlled disintegration in the world economy is a legitimate object for the 1980s.” – Paul Volcker, 1978

    Read Yanis Varoufakis’ The Global Minotaur.

  2. financial crises are not a new phenomenon – they have been around for centuries. the Bank of England was formed in 1694 in response to a crisis as was the Fed in 1913.

    There are two longstanding explanations of financial crises:
    1. Panics
    2. Fundamentals

    Banks issue liquid liabilities in the form of deposit contracts but invest in illiquid assets and this mismatch results in frequent banking crises

    Friedman and Schwartz (1963) among other things, argue that banking panics can have severe effects on the real economy. In the banking panics of the early 1930’s, bank distress developed quickly and had a large effect on output.

    Friedman and Schwartz argue that the crises were panic-based, and offer as evidence the absence of downturns in relevant macroeconomic variables prior to the crises.

    Calomiris and Mason (2003) say that fundamentals during the first three banking crises in the USA in the early 1930s, suggesting that panics did not play a significant role

    There is a vibrant literature on financial crises in what to do about them in modern macroeconomics. If it is in a monetary history of the United States, it is problematic to argue that modern macroeconomics has not taken it on board and is studying it in detail.

  3. In the middle ages, they had been studying how the universe worked for thousands of year. Nevertheless, that is not to say that their then modern theological theories provided any guidance.
    The naive ideas of Friedman and friends have not survived the recent reality tests anywhere as well as the ideas of Keynes .. That said, there has been the usual reluctance by libertarians to acknowledge the evidence.

  4. @Freelander
    From reading a bit about Galileo and his trial, I believe the scientists in the middle ages had more reason to trust Aristotelian science. Even Galileo had not completely discredited it.

  5. Aristotle was part of the scientific tradition. The scholastic approach taken by the theologically inclined in the middle ages was not. They based their approach on appeal to authority, authority in the form of popes and princes, and in the form of ancient sacred books like the Bible and the texts of Aristotle and others.

    Aristotle’s speculation’s based often on careful observation and study were remarkable for his time,but the approachhis speculations were often in need of replacement. Unfortunately. Aristotle’s approach to knowledge died, or went up in flames at the time of the book burning that ushered in the ascendancy of the Jesus cult.

  6. Thanks John, This was a good read and it downloaded fine.

    Following on from the complaints from a few green fellow travellers about a lack of attention to environmental externality issues, limits to growth etc. I was wondering about what your thoughts were in regard to several matters relating to environmental economics. Having part read your book I know you are genuinely interested in these matters unlike I fear many colleagues siloed away their academic departments or worse being employed as destructor beasts in organizations like IPART with a mandate to ignore environmental issues altogether in traditional neoclassical economics style. Anyway here are the issues:

    1. (as an outsider) I’ve recently become aware of the Jevon’s Paradox that suggests that all our future efforts aimed at reducing resource impacts via efficiency gains are doomed.

    2. It strikes me – and this also relates to the crash of 2008 – that the demands for short term profits are perversely preventing long term rationality and investment prevailing in respect to both the environment and conventional markets. And frankly I cant see any way out of this trap of people wanting money now rather than less tangible benefits in the future. As I understand it it means in practice we really dont value to the environment or our future at all, platitudes aside and the. How can we escape this vice in the future. On this line I gather you support the Stern review – but does the very low asset depreciation used really make sense?

    3. Tim Jackson as you are undoubtably aware argues for ‘Propserity without Growth’. While I sympathise and support notionally, he doesnt seem to offer any mechanism for achieving this. Any comments on how to do this in the future especially given the Jevons paradox and as I understand it your support for growth through a return to Keynesian economics.

    4. Recently we witnessed the debacle of Rio20+ which you dont mention. Did it register with any economists at the meeting or do such talk fests operate in a different universe?

    5. Regarding ‘sustainable growth’ one person who apparently popped up at Rio20+ was former PM Gro Brundtland of the famous report. I hadnt realized it but she is pushing for an increase in the real global economy by a factor of 4-5 on the basis of being realistic. As a limits to growther I was stunned by this. It appears she expects efficiency to solve things in the future but I worry about the reality (see above).

    6. Your focus for change seems to be on the economics separate from ideology. David Harvey’s book ‘A Short History of Neoliberalism’ suggests your profession is deeply embedded in a much larger paradigm which will be challenging to extricate itself from. The dominance of Neoliberalism would seem to explain why there has been the lack of change in economics that your talk was on. Care to comment?

  7. As a completely disilliusioned/bored undergrad economics student, it seems to me that economists in general completely ignore what should be THE overarching and urgent research project: How to increase (or maintatin) the wellbeing of a society without necessitating the production and consumption of stupid shiit we don’t need. I don’t think it’s overly dramatic to say that it’s really a now or never question for the survival of humanity through this century and into the next.

    An example of what I’m talking about is the Australian govt’s response to the GFC. As far as the alternative of doing nothing, I’m very much of the opinion that the stimulus was the right action to take, but if we think about it for a second, what was the theory behind the stimulus? People need to buy supid shiit they almost definitely don’t need, so that people can keep their jobs making stupiid shit that people almost definitely don’t need – because that is the only way we can maintain peoples’ welfare. This is a flaw so fundamental and urgent that I’m quite sure most people who read this comment will regard it as the naive and idealistic rambling of an undergrad who’ll soon grow out of it.

    I’m not sure, and I’d like to ask here, if this is something that economists recognise as a fundamental problem but ignore in favour of easier problems regarding the theoretical details within the current framework, or is it not considered an issue at all?

    In my opinion the work the most economists are currently doing could safely be flushed down the toilet and erased from all memory without any negative impact on society whatsoever, and very probably a very positive impact, thanks to the chance it would give future economists to look at the world around them and formulate theory and policy recommendations based on the reality of a species more than half way through destroying it’s own habitat and therefore chances for long term survival. I don’t think the same could be said of any other ‘sicence’, social or hard.

  8. Priyvet – as an older and more cynical person embedded for the moment in academia I’d counsel a little patience without being patronising – And maybe trying to think about it differently. I’m similarly dismayed by the direction of current economics but dont mean to suggest that what you are learning or indeed that conferences such as John’s one are useless. They emphatically arent. Some quick illustrations why you should keep at it:
    – while the dominant economics seems to be leading us to environmental holocausts its principles do offer many insights into the behaviours of people which set up these problems – for example patterns of resource exploitation and why designing the globe to allow future generations some comforts as well as ensuring ecological sustainability is proving so intractable.
    – economists dont exist as isolated units but rather as social groups and even collectives which are very much in evidence at conferences. This moderates the rate of innovation/change in ‘the dominant paradigm’ you seem to be looking for. There is a lot of literature on the philosophy of science which works to explain this – Lakatos and Kuhn are the two names which most pop up.
    – Theory crises such as at present definitely promote innovative and critical thinking which economics clearly needs – and it is unlikely to come from the older generation but rather people like you who get on top of things.
    – You say you are bored with class room economics. The precorporatization function of universities was to get people to think for themselves. Why dont you do this as well? Your access to the primary literature present and past is now at level us older farts could only dream of. Alternatively there are many books around dealing with the sociology of economics as it were which places your learning in context – John’s book or something more populist but still technical like ‘Extreme Money’.
    – Finally in the future you will probably start accumulating some cash – But what to do with it? Your knowledge will be useful I guarantee – if you use it. Its just the answers might be dismaying – like leaving your cash in a term deposit but such is life.

  9. @Privyet

    Although I’m not suggesting any political ideology here, but to answer your questions and thoughts about economic theories you have to look at it from various perspectives.

    To start off, you have to understand how the capitalist system (the one we’re living in at the moment) works. How the demand and production of ‘useless things’ ‘creates’ economic growth and thus keeping the population employed; along with understanding how the economy works and the effects of economic policies.

    Then you have to understand the problems under this system, these include cultural problems (capitalism is a famous cultural killer); the change in the ethic of the society due to the change in the competitiveness of the society; the problems inequality creates such as the ability under the capitalist system to influence the mainstream media and politics thus even influencing academia such as science, law, economics; the issues of finite resource; and environmental problems such a system can create.

    Then you can look at the alternative systems and economic theories along with the problems they might have as well.

    The academia economics is heavily influenced by neoliberalism, so understanding all this might actually be problematic for you doing your degree as it did for me.

  10. @Privyet

    You’re absolutely right.

    I’m undertaking a masters in political economy and I’m really interested in two things:

    -financial crisis
    -the ecological limits to growth

    Whilethe first is interesting and important in the short- to medium-term, with some longer-term corollaries, the second is the big question. An existential and moral question, the likes of which we have never dealt with. I don’t feel economics, mainstream or otherwise, is making anywhere near the contribution it could and should to its answers.

    One problem with orthodox economics is the unit of analysis being the individual. In this case, such a focus is wrongheaded and will not cut it.

  11. @Privyet – I totally agree with Tom and add a couple of points related to the academy.

    – What you see in courses is presented as solid but in reality many ideas you are encountering are works in progress reflecting disparate perspectives.

    – All social sciences are hard because objectivity is harder to approach than in the ‘hard’ sciences – which still generate diverging views at their edges.

    – Many tools you get from economics e.g. modelling, statistics and dealing with complexity have other applications in harder sciences. Learning them will help you understand arguments and uncertainties over climate change, the Queensland floods and much else.

    – The academic search for alternative economic systems has been going on for >200 years . The problem is to find better alternatives which work in reality and can be achieved without bloody revolution. One theme which illustrates this isnt easy and relates to your social concern and you might be interested in exploring is that of ‘Sustainable Development’. Some ‘thought leaders’ notably Gro Brundtland consider we need to grow the global economy by a factor of 4 to 5 to achieve equity because we need a ‘realistic’ path to lift all out of poverty . On the other hand limits to growth proponents e.g. Tim Flannery argue we are already well over a sustainable. Exploring the issues around this contrast with the tools you get from economics will illustrate why a sane middle road has been hard to find and capitalism still rules.

  12. @Privyet

    “An example of what I’m talking about is the Australian govt’s response to the GFC. As far as the alternative of doing nothing, I’m very much of the opinion that the stimulus was the right action to take, but if we think about it for a second, what was the theory behind the stimulus? People need to buy supid shiit they almost definitely don’t need, so that people can keep their jobs making stupiid shit that people almost definitely don’t need – because that is the only way we can maintain peoples’ welfare.”

    Some people may have used the stimulus money to pay off debt, others may have used it to give a present to their grandchildren, some people may have used it to pay electricity and other utility bills (instead on increasing credit card debt), etc. I don’t think it can be presumed, as you do, that all of this money was spent on unnecessary ‘sh*t’.

    You ask for the theory behind it. The GFC is still ongoing. In the first instance there was an almost total collapse of the wholesale debt markets which potentially affects every aspect of ‘the economy’ (globally in this case); a catastrophic point where, by definition of such a point, prediction of anything, even the value of say an exchange rate one hour ahead is impossible. The then Head of Treasury, Ken Henry, a PhD in Economics, advised move fast and go for households. It was good advice IMO.

    If you have come across the Edworth-diagram by now, then a total collapse of the system is equivalent to looking at a blank page. (The economic ‘stuff’ can be interesting too for some minds.)

  13. This is the answer: “when university administrators combine ecological economics with evolutionary psychology into a truly transdisciplinary curriculum”

    This brilliant observation is only one of the gems I found in a review of the book, “The Evolutionary Bases of Consumption.” by Joseph Vogel, Department of Economics, University of Puerto Rico

    Full text of article

    Has anybody read the book?

  14. @Newtowniar

    I’m afraid at 25 I’m a bit older and a whole lot more cynical then the average undergrad. I started late and haven’t always chosen the quickest path through the degree. When I was just starting in 2009, I found a copy of Steve Keen’s ‘Debunking Economics’ which I read and, despite not understanding a lot of the detail, found very invigorating. So I wrote to him and he was kind enough to reply in detail, recommending that I

    ‘do as many straight maths courses as you can in your electives. The key courses are linear algebra, introductory calculus, and differential equations. With those beneath your belt you’ll be better equipped than 99% of economists (heterodox ones included) in being able to contribute to developing a dynamic economics.’

    And since I’m fascinated by mathematics (despite not having a great talent for it) I was happy to take his advice, adding another year at least to my degree.

    I appreciate the advice. I know that it’s necessary to understand completely the current orthodoxy in order to challenge it and propose alternatives. I’ve been kind of resigned to it from the start, but it has been very hard to maintain interest enough to get the good grades I need if I’m to do anything useful with the degree in the future. As it’s taught, economics’ perfect mix of difficulty and complete pointlessness, together with it’s dry subject matter, is just right for sucking the joy out of study. Reading books like John’s is the only way I keep myself interested.

    In your last point there are you suggesting that economists can use their knowledge to make better investment decisions? I though the famous irony was that economists more often than not make terrible investors?


    Like I said in reply to Newtowniar, I accept the need, as a student, to go through the whole process of learning about current theory. I do think there’s a bit of irony in that we have to learn this body of theory that most economists recognise as largely discredited, precisely because it is the orthodox and therefore perpetuating its status as the orthodox…if that makes sense. Anyway, my argument refers more to the work that academic economists are doing. So much of it just seems (to me) so absurdly irrelevant in the face of the problems we’re facing.


    “I don’t feel economics, mainstream or otherwise, is making anywhere near the contribution it could and should to its answers.”

    Exactly my feelings.

    @Ernestine Gross

    Actually all of those examples of ways people might have spent the stimulus money are perfect examples of the stimulus’ purpose of maintaing/increasing consumption levels. I’m not arguing with the effectiveness of the stimulus. My argument is with the philosophy that says that consumption, regardless of actual need, is necessary in order for our society to prosper. It’s a philosophy that will change, and we have to decide if it will be a conscious change or the result of natural limits being reached (and the resulting chaos and suffering).

  15. @Privyet

    Thanks for the comments. Regarding my last point about personal investment decisions some comments on why these matters have a personal as well as wider dimension.
    – I understood that Keynes famously did quite well for himself and his college.
    – The current superannuation system forces everyone if they are in work to make investment decisions which are active or passive (do nothing and effectively trust the fund managers, banks and financial swindlers). As Thatcher famously said ‘there is no alternative and in this respect she is currently correct as neoliberal ways of doing things go from strength to strength despite the last 5 years of crisis.
    – In the years leading up to and following the crisis I was forced to consider this choice seriously. I had an extensive understanding of risk, some understanding of economics and little of finance except I’d been burnt about 20 years back – not badly but enough to want to know more before following the herd into problematic stocks or what we now know to be dodgy CDO based investment. In hindsight that little knowledge and a risk averse outlook saved me.
    – When something is personal it has a way of focusing the mind which is never a bad thing.

    – Something different but on topic – suggest you have a read of – it seems student disatisfaction with economics teaching is widespread.

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