Yes, judging by the criticism heaped upon the dismal science in recent years. Macroeconomists in particular, we're told, were blind to the rising risks that eventually killed the economic expansion and unleashed the Great Recession—the deepest contraction since the Great Depression in the 1930s. In fact, economics is at once the problem and the solution, as Roger Backhouse argues in an intriguing new book: The Puzzle of Modern Economics: Science or Ideology?
Backhouse, a professor of the history and philosophy of economics at University of Birmingham, narrates a tale of evolution and debate in the dismal science in the 20th century in search of clues for deciding how (or if) economics has stumbled. At the core of this story is the mathematization of economics. As Backhouse recounts:
From the 1930s onward, the Econometric Society's conception of what it meant to be rigorous became increasingly influential. Economics came to be seen as a technical discipline centered on modeling—the construction of mathematical representations of the economic activity.Promoting and strengthening better living through mathematically rigorous economics has been high on the agenda for economists for years. Indeed, some of the biggest names in the profession are closely linked with the rise of quantitative modeling. Thanks to John Maynard Keynes, Paul Samuelson, and others, the dismal science is primarily a quantitative field. As a result, Backhouse explains, "economists were applying formal, mathematical modeling to an increasingly wide range of economic problems" in an effort "to be scientific."
How, then, could economists be so blind to the risks that bubbled ahead of the Great Recession? The pursuit of science implies greater accuracy. But economics isn't physics. This hasn't been lost of the economics profession, even if the general public thinks otherwise. Backhouse reminds that criticism of economics has been ongoing from within. What's more, there's always debate about what's relevant, what's not, and what constitutes enlightened economics—macroeconomics in particular. Indeed, arguments over what caused the Great Depression of the 1930s still rages—80 years later! One could reasonably argue that there's too much debate, and that it rolls on for too long.
If endless debate is destiny in economics, that's no surprise. There are no easy answers—certainly no single, all-encompassing explanation in this field. There's ample room for criticism, of course, and praise. But if commentary is to have any relevance, it must be specific. Economics in the 21st century is too diverse, too wide ranging to be pigeonholed and summarized as right or wrong. The next best thing, Backhouse suggests, is understanding modern economics by way of understanding the theories that drive the profession. Here is where the proverbial rubber meets the road.
Our conception of whether the dismal science failed or triumphed in recent years depends on which brand of economics we're looking at and what expectations we harbor. Searching for clear answers about what ails economics is complicated by other factors, Backhouse advises, including the possibility that some economists use certain theories to advance political agendas. Meanwhile, a given economic theory's influence is largely dependent on whether it's the mainstream or not.
Why can't the debates be resolved by simply testing a given theory? The short answer: It's economics. "Thus when economists test theories, the results are often inconclusive," Backhouse writes. "Sometimes this is because they have not used the right data. It can also be a problem when there are too few observations to estimate models precisely, perhaps because the government has only recent started compiling statistics in a given area or because definitions have changed." And because economists often seek to identify the causes of economic changes, as opposed to simply finding reliable patterns in the data, the process of explaining cause and effect is riddled with nuance.
Ultimately, Backhouse can't tell us if economics has failed or triumphed. The profession won't submit to such a general test. It's akin to asking if science is productive or not. Instead, Backhouse offers the next-best thing: explaining how economics has evolved, why it's complicated, and how it's still useful despite the obvious shortcomings.
Along the way he presents a compelling case for dismissing the criticism that mathematical rigor is hurting economics. "The appropriate response to inadequate economic theories is not to abandon the attempt to be rigorous," he opines. "It is precisely because economists such as Akerlof or Stiglitz had developed abstract theories of how markets worked that they were able to see that the common sense view of how financial markets operated were wrong."
The closest Backhouse comes to sweeping conclusions are statements such as: "…where problems are narrowly and precisely defined, and where they involve agents whose motivations are well understood and who operate under well-understood constraints, economic analysis is remarkably powerful."
That's good news for microeconomics, and so the challenge is (still) in macroeconomics. That's not surprising. The factors that drive an economy are hopelessly vast and the interactions unfathomable. No wonder that economists reduce the infinitely complex relationships that comprise an entire economy to simplified models. That's a solution as well as a recipe for problems. Yes, economics works best when narrowly defined, as Backhouse asserts. But macroeconomics doesn't have that luxury. "Because the problems are so broad, the available theory and evidence leave much scope for the intrusion of both intellectual values and ideology."
Yes, macroeconomics has come a long way over the decades. But expecting macroeconomists to prevent recessions is a bit like asking meteorologists to deliver a particular type of weather next Thursday. Backhouse does a fine job of telling us why economics is so bedeviled, and why the profession is at perpetual war with itself. He also reminds that macroeconomics has made astonishing progress in explaining how economies tick, and which policies are likely to succeed or fail. But that falls well short of providing flawless prescriptions for how to avoid recessions or engineer growth in the next quarter.
Most economists agree that a healthy dose of free market capitalism is a plus for creating wealth. But there's a furious debate over the details. How much is too much capitalism? How much regulation (if any) should there be? Is capitalism inherently unstable? Such questions are macroeconomic questions, but they're also political topics. Macroeconomics by its very nature invites debate, dissent and deliberation.
So, has economics failed? That's an unfair question, Backhouse's book suggests. Yes, the recent crisis has spurred a healthy re-evaluation of everything from Keynesian policies the to efficient markets hypothesis. But the flaws of most established economic theories are tightly bound up with their successes. Separating one from the other is devilishly difficult, if not impossible in economics. No wonder that simple answers in the dismal science are the exception rather than the rule.
This post has been republished from James Picerno's blog, The Capital Spectator.