On the systemic failure of the economics profession

I came across a research paper published last year with the title The Financial Crisis and the Systemic Failure of Academic Economics.   The abstract of this paper is as follows:

The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.

I agree with this thesis.  Whether such a major restructuring of economic research will occur is questionable.  Academic reputations, large amounts of money, and influence are at stake and there are numerous organizations and informal networks with an interest in maintaining the status quo.

A key critique of standard economics thinking presented by the paper is this:

“The implicit view behind standard models is that markets and economies are inherently stable and that they only temporarily get off track.”

Since markets and economies are influenced by phenomena such as weather(agriculture), the pace of technological progress(manufacturing and consumer products), and human behavior(war, for example) that are non-linear and frequently destabilizing; the paper appropriately criticizes the prevailing approach:

The confinement of macroeconomics to models of stable states that are perturbed by limited external shocks and that neglect the intrinsic recurrent boom-and-bust dynamics of our economic system is remarkable. After all, worldwide financial and economic crises are hardly new and they have had a tremendous impact beyond the immediate economic consequences of mass unemployment and hyper inflation. This is even more surprising, given the long academic legacy of earlier economists’ study of crisis phenomena, which can be found in the work of Walter Bagehot (1873), Axel Leijonhuvfud (2000), Charles Kindleberger (1989), and Hyman Minsky (1986), to name a few prominent examples. This tradition, however, has been neglected and even suppressed.

Of course, the existence of factionalism with respect to competing theories and allocation of research resources is not limited to economics; as a review of Kuhn’s The Structure of Scientific Revolutions will show.  But suppression of access by decision makers to dissenting views likely is more damaging in the economic sphere as it leads to misallocation of resources that has direct impact on the populace as a whole.

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