A time has come when the very foundations of the practice of economics should be reexamined. Some might say the time has passed when this undertaking should have been started. There are things an economist can do, and there are things he cannot. In this regard, Roberto Tamborini has published a short article on the future of economics (at roubini.com) which is worth reading: Follow up:
The reform of the economic profession and deontology should be profound. Economic education and research training, the journal system and the career selection mechanisms should recreate appettite for risk-taking in the search of new ideas instead of rewarding conformistic, riskless “normal research”. Fear of type-II errors (rejecting a good idea/paper) should rebalance the current obsession with type-I errors (accepting a bad idea/paper). The self-constructed image of the modern economist as social engineer (Mankiw, 2006) should be left behind. Predictions and prescriptions of those who study, and to a greater extent of those who live in, a complex system are necessarily conditional, conditional on available knowledge of the topology of the structure -which is necessarily incomplete- on the control of initial conditions -which may be very limited- on the reproducibility of “experiments” – which cannot be taken for granted. Hence economists should also be ready to accompany their recipes with a clear statement of their limits and potential damage if mistaken, as one can find in medicine dosage instructions. On the other hand, will institutional and political authorities be willing to pay pecuniary and non-pecuniary rewards to technicians falling short of the technical certainties of an engineer?
I am very sympathetic to these thoughts, yet I believe that there is a limit to influence of economics and economists. There is a demand for economic theories, and from there the circle starts. Some puzzles need to be explained, if possible as an equilibrium, and they will be. Many journals more or less openly admit that they have a bias. If savings are followed by investment then this journal is not for you, if you show that there are big holes in the modern macro, this journal is not for you, and so on (partly my experience, partly others). At our faculty we have some Versicherungsmathematiker (insurance mathematicians), who follow more or less the tradition of Gauss with his bell distribution and whatnot. What they say is that they tell the banks that use their portfolio models: ‘if everybody uses the same model, it won’t work’. However, it makes them money. Hence, there is demand for these kind of models and if you don’t come up with them, you’re out and somebody else will fill in for you.
So, I join Roberto Tamborini’s claim that we have to rebuild the foundations of economics. As stated at the beginning of this essay, there are things an economist can do, and there are things he cannot. It must be made clear which is which, so that there is a line between economists of a complex system and economists of a simple world. Maybe Robert Shiller has a point and we should reintroduce the phrase worldly philosophers (formerly known as economists).
Dr. Dirk Ehnts is a research assistant at the Carl-von-Ossietzky University of Oldenburg (Germany). His focus is on economic integration and economic geography, covering trade, macro and development. He is working at the chair for international economics since 2006 and has recently co-authored a book on Innovation and International Economic Relations (in German). Ehnts has written at his own blog since 2007: Econblog 101. Curriculum Vitae.