Exciting economics is often misguided economics

IN THE long-running popular series about what’s wrong with economics, there is a new entry: Our profession is too insular.

“Economists generally agree that competition is good, and that markets with only a few dominant players are inefficient,” writes the economist David Deming in The Atlantic newspaper. “We may need to take a hard look in the mirror.”

Citing a new research paper by (naturally) four economists, which analyses almost 6,000 award-wining academics in 18 disciplines, he notes that the recipients of the major economics prizes, including the Nobel, “have collectively spent half their career at just eight universities: Harvard (where I teach), Yale, Princeton, Stanford, MIT, the University of Chicago, Columbia and Berkeley”. This is a far higher level of concentration than other fields.

I am hardly an apologist for my profession, but I would frame the issue differently.

The first point is that economics is a relatively mature science, and even surprising results are typically consistent with the laws of supply and demand. Innovations tend to be subtle – they could also be described, less generously, as underwhelming – concerning the relative size of effects.

So it is hard for radical new ideas to come out of nowhere, and that does lead to some geographic concentration, centred in the highest-reputation schools.

Compare this to the biosciences, where the successes of mRNA vaccines have been startling. Katalin Kariko, who shared the 2023 Nobel Prize in Medicine for her research into mRNA technology, did not receive a tenured professorship at a top university.

GLP-1 drugs, which appear highly effective in treating obesity and other maladies, were developed in Denmark, not at a US research university.

Solutions, not novelty

Can economics come up with truly novel remedies or ideas? Probably not. If there is a recession, or say hyperinflation, there is a standard kit of tools involving monetary policy, fiscal policy, deregulation and some other policy changes.

Economists can and do argue about the right mix of those policies in a particular case. But there is no “new drug” waiting to be discovered.

This lack of novelty does not make economics less scientific. Brazil, using standard economic tools, was able to beat back hyperinflation 30 years ago. President Javier Milei of Argentina is pursuing some time-honoured reforms, and if those policies are allowed to persist – a big if, but mostly about politics – they will succeed. Many nations have performed successful fiscal consolidations following standard economic advice.

As for microeconomics, if there is too much traffic on a highway, congestion pricing usually works. If there isn’t enough housing, deregulating construction or eliminating rent control are worth a try. No brilliant outsider will come along and say, “The way to get more housing is for everyone to drink two shots of vodka,” or some other novel or wild idea.

The point is not that economists have all the answers. It’s that we have a pretty exhaustive list of possible remedies.

As a tool of organised inquiry, economics was relatively late to develop; Euclid preceded Adam Smith by a couple millennia. But once there were some basic economic reasoning tools, the core “economic remedies” were filled in pretty quickly.

The speed of development stems from the limited number of core economic principles, such as supply and demand, thus making it relatively easy to derive their major implications.

The good news is that economists have already achieved a lot. The bad news is that a lot of the remaining work is doomed to be pretty boring and marginal. So one lesson is simply to appreciate the dullness of economics, because exciting economics is often misguided economics.

In my view, the top economics departments are less of a problem than some of the less well-known ones. The system would be better off if the non-top schools had stronger incentives to specialise and experiment instead of trying to rise in the rankings by following up on research.

In the meantime, I am not worried about Harvard. Economics professor Ed Glaeser is one of the fathers of the current Yimby – “Yes In My Backyard” – movement, which focuses on deregulating housing to boost supply. Larry Summers and Jason Furman were prescient about inflation. Raj Chetty is America’s leading researcher on economic and social mobility. And of course David Deming himself is worthy of sustained attention.

Yes, breakthroughs in economics are rare. But we have built an impressive catalogue of possible solutions to real-word problems. How many other fields can say the same? BLOOMBERG