Change is needed in the next generation of economists - Financial Times

Diane Coyle is Professor of Public Policy at the University of Cambridge and author of Cogs and Monsters: What Economics is, and What it Should Be

Economists have an influential voice in debates about society and politics, and with that influence comes responsibility. The role of the discipline in shaping policy rests on the formal and informal roles economists hold in giving advice to governments and businesses. This gives economic ideas and research power over the kind of society we have. And for all its strengths, economics is failing to meet the needs of our times.

The profession’s advisory status started in World War II, including the development of concepts and measures (such as GDP) that are still used today. The UK’s Government Economic Service was founded in 1964 and now has around 2,000 members. Other economists work in regulatory bodies, local authorities, businesses and think tanks.

Many economists think of themselves as engineers, or plumbers (as described by Nobel laureate Esther Duflo), or (in Keynes’s famous quote) dentists. These metaphors allude to the importance of economics as applied statistics in analysing contexts such as how to raise taxes most efficiently, or where infrastructure investment will most boost productivity, or which university degrees have the highest social and private return on the money spent. This kind of analysis is powerful, can be extremely rigorous and makes an important contribution to policy debates.

However, there are two key shortcomings that need to be corrected if economics is to stay relevant to the biggest challenges facing society today, from climate change and biodiversity collapse to the excessive power of big corporations.

One is the absence of ethics. It is not that economists are less or more ethical than any other profession. Rather, that many think of the values and ethics of decisions as separate from ‘positive’ economic analysis. The urge to be as objective as possible, and to base analysis on data and rigorous statistical techniques, is of course welcome. But it is a delusion to think the value judgments involved can be delegated to others — elected politicians, say — or to believe that the economic analyst can stand apart from the society they are analysing.

There is an implicit moral framework underlying the economic analysis of which policy will give the better outcome. Is one tax more efficient than another? It depends what the definition of ‘efficiency’ is. Yet ‘welfare economics’, the branch concerned with questions like these, is scarcely taught now. Just as AI is having an ethics moment, economics needs one too. Engineering society is inherently value-laden, and economists are part of society, even if not very representative of it.

The second shortcoming is the failure of economists to update their assumptions, benchmark models and ways of working to reflect the economy of today. For instance, digital technology is pervasive in everyday life and work but is still largely invisible in economic statistics, even lagging behind initiatives to incorporate nature into economic measurement.

The notion that people are individual maximisers, with fixed preferences uninfluenced by others, was always incorrect but is absurdly so in an age of social media driven by advertising revenues. The benchmark needs to flip to reflect mutual interactions. This is starting to happen, with growing interest in evolutionary economics, economic narratives and agent-based modelling, but these are not mainstream and far from textbooks. Economics needs to stop being inward-looking and work with (real) engineers, climate scientists, computer scientists or ecologists for an integrated analysis of societal challenges.

Many economists will point out that good research is being done. Young researchers are flocking to areas such as environmental economics or digital markets. But new approaches are not internalised across the profession, and are far from mainstream policy debate. For example, in discussions of monetary policy and inflation prospects, the self-fulfilling and narrative aspects rarely feature prominently, while we are all daily taken by surprise by news of unexpected economic bottlenecks. There is no data to analyse these events because economists have not thought of markets as ecosystems vulnerable to collapse and therefore not prioritised collecting the data needed to understand them.

Economics is changing and I am optimistic that the next generation will ensure that economists continue to deserve their influence. But the challenges we face are immense and urgent, so the sooner this change happens, the better.

Adblock test (Why?)

Change is needed in the next generation of economists - Financial Times
Read More