Wednesday, March 25, 2009

Studying economics in 2009

Stephen Matchett writes in today's The Australian on studying economics in the wake of the financial crisis. The whole piece is worth reading, I have included a few highlights.

Dismal science of economics faces dilemma.... THE ability of economists worries Craig Emerson. The Small Business Minister, whose PhD in trade policy is "very orthodox economics", says the profession should have seen the global financial crisis coming.
"After the Berlin Wall came down there was no alternative ideology to the free market and deregulation became a 'monology'," he says.......

But while he is concerned by the quality of economists' expertise, other people are worrying whether we will have enough of them. It certainly seems Australia is short of economists.

Treasury is recruiting graduates in other disciplines and has hired Monash University to teach them high-level economics. Productivity Commission chief Gary Banks says there are not enough people "skilled in quantitative methods" in the public sector.

As Joshua Gans, a professor from the citadel of academic economics, the Melbourne Business School, puts it, "everybody wants policy-based research, but nobody does the work". This is all bad news for the public service's capacity to provide government with the hard data and analysis the policy process depends on, according to Banks.

And it's also bad for business. According to HSBC chief economist John Edwards: "Economics honours graduates are very employable but not enough of them are being turned out."

Critics say the shortage of economists demonstrates difficulties in a discipline where the intellectual orthodoxy has long ignored new ideas and, ironically, what the market wants. The big issues in economics now are not explorations of the way economies work in perfect worlds, where consumers are rational and markets never fail, but exploration of the impact of neuroscience and human behaviour. And above all there is eco-economics, which argues humanity's impact on the environment makes traditional economics irrelevant......

"The real advantage of neo-classicism is that it is mathematically tight and teaches skills. But when you need to teach real-world economics it's a lot harder," UNE's McNeill argues. "Students don't like the hard-core maths of the neo-classical approach," says Sandra Hopkins, who wrote her PhD on exchange rates and is now a professor in health economics at Perth's Curtin University. She says that in a two-year appointment to the Organisation for Economic Co-operation and Development in Paris, she met many policy specialists who didn't model everything, which showed her "you don't need maths to advise government".

Two popular trends based on these ideas have opened the discipline to enormous audiences. Economists such as Steven Levitt, co-author of probably the bestseller on economics, Freakonomics, and Tim Harford, who claims to "uncover the new economics of everything", popularise the discipline's principles by applying economic laws to real life. Behavioural economics takes this one step further, testing how our brain chemistry, rather than our supposed constantly calculating conscience, shapes our economic behaviour.

But Gans says the discipline has seen it all before and rejects the idea economics is imprisoned by the false paradigm of the omniscient market. "Everything that has happened in the global financial crisis is in economics 101. The idea that economists are obsessed with markets is wrong, very few people believe markets are always rational," he says. And although he rejects the idea that an emphasis on the environment is either new or outside the scope of conventional economics, he argues it is not his role to decide what people should do with their lives. "People want bigger houses, cars with more features. Is my job as an economist to say 'No, you can't have that'? Or is my job to work out how to efficiently provide resources? In my role as an economist I don't want to be a parent. I am reluctant to tell people what they can't

Meanwhile, after 20 years behavioural economics appears to be an established research interest for mainstream economics, with the Productivity Commission sponsoring a conference on the discipline 18 months ago.

In fact, Gans says, we need more research on core aspects of economics on essential issues, such as what the Government's stimulus packages will do. "We don't do nearly enough work on measuring things. For example, we don't know what government spending multipliers are. What studies there are were done in good times in Australia or in the US." And Australia needs more intellectual ammunition, such as the cost benefit analyses produced by the Council of Economic Advisers in the US, "the boring stuff that doesn't generate press releases".......


  1. Speculative bubbles are NOT taught in Econ 101. In fact, I'd argue that the profession has learned little about bubbles since Irving Fisher proclaimed, "Stock prices have reached what looks like a permanently high plateau."

    It was the failure of the economics profession to recognize the housing bubble that caused this crisis.

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