You would expect the Economist to support
economists. Presumably, several of the writers studied the subject. One day,
they might want other economists to give them a job. Yet in the last couple of
weeks, the magazine has gone a long way towards decrying their own profession.
And I think they are right.
To be fair, one way they have been having a
side-swipe at macro economics has been to praise micro economics. For years,
the micro cousins did not get much of a look in, as the macro sort held court
with politicians, businesses and social sciences. Models were in vogue, and
macro economists thrive on models. Meanwhile, the nerdy micro sort, who ponder
individual relationships between variables and look at smaller units such as
industries or firms, were considered interesting to technical sorts but not
likely to change the world.
There is something of a parallel with
maths, which was my subject. The micro economist is the pure mathematician. I
spent most of a term at college learning to prove that a path between two
infinite parallel lines would at some stage have to cross any third parallel
line in between the two. Well, duh. Like, er obvious man. Beautiful it may be
but so what?
Meanwhile applied mathematicians got to learn
how objects behaved in the physical world, and applicable ones could calculate
useful probabilities. They actually used the pure maths proofs to do these
things, but usually they started from them as premises and moved on.
Now, the pure mathematician is like the
micro economist, while the applied one works in macro. So why are micro
economists top of the pile right now?
The first part is what micro economists are
doing well. They are thriving in the era of big data. Before, behaviour of
individual customer groups might have been interesting, but there was no money
in it. A firm might employ a macro economist to try to predict how a market
would develop, but a micro economist would be an expensive luxury.
But this has changed. Now, firms using the
web can understand each of their customers to a valuable extent. When I log
onto a travel website, how long do I stay on each page, and which pages do I
visit together? That information can be a good guide to how likely I am to buy
– am I shopping to buy or just browsing? If I am a buyer, I can be steered
towards information and value added products. If I am a browser, I can be sent
to advertising screens. All this can happen within fractions of a second. In
this way the firm can maximize its chances of a sale from buying me, while
using browsing me to make itself more popular with its other paymasters, firms
using their site to advertise.
In this way, internet firms large and small
are growing their revenues, one customer at a time, and to do this they need micro
economists, to work out which connections are relevant, build models, and
create algorithms. As a customer, I find it all as rather creepy, as though
people are looking over my shoulder all the time. But as someone interested in
economics and value creation, I find it fascinating.
So someone coming out of economics school
can build a career from their micro economic expertise now. But there is
another reason macro economists are floundering. It is because they are doing
such a bad job.
The most glaring example of this came with
the financial crisis. Barely a single economist predicted this, beyond a few
private Frazer’s who cry doom every year. Their models simply and utterly
failed. And since the crisis they have been scrambling to try to explain it and
to build new models, with a singular lack of success. The whole field seems
broken just now. I have some sympathy for people like Christine LaGarde and
Janet Yellen, who seem to be doing a great job simply by following gut
principles. We should also be careful before condemning politicians like Angela
Merkel. Austerity may be wrong-headed, but most of the so-called experts were
advocating it until very recently.
I have a couple of bits of advice for macro
economists, ideas which might help understand how they got into the mess in the
first place.
First, it seems to me that many macro
economists have forgotten whom their customers are, or at least become to
closely allied to the biases of too small a customer group.
Who are they trying to please? First, their
own profession, which has ingrained bias towards established principles even
when these have been proven inadequate by events. Next, and more insidious,
economists are closely related to businesses and think tanks, often allied to
political ideology. So instead of the flow going from analysis to model to
policy, it seems to go the other way. Some vested interest wants a policy,
comes up with a supportive model and produces selective analysis to back it up.
In this way, macro economics can become like
politics itself, in thrall to big money and powerful interests. I am sure there
are many economists out there trying to do a good job without such bias, but
perhaps they are swimming against a strong tide.
Linked advice is to focus on metrics,
including challenging existing metrics. A classic one is GDP, long quoted as
almost the first predictor of health of an economy.
Yet GDP is plainly a flawed measure. The
Economist pondered how the softer gains from modern technology, such as speed
and range of choice, could be measured, since GDP fails. In the same issue, we
learn that the British economy is hamstrung by something technical about a gap
between performance of British firms overseas and foreign ones in Britain,
again missed in GDP.
GDP itself strikes me as a measure more for
businesses than people. If you are an investor or run a business, you want the
total economy to grow, since that will create more demand. But as a measure of
well-being, worthy of trumpeting by politicians, surely GDP per capita is
better. If GDP grows 10% but population grows 10% too, then people are no
better off. Look at GDP per capita, and China does not look so smart, Europe
and Japan not so hopeless.
Then, it matters where GDP comes from. Does
it all go to wealthy investors? At least someone had the smart of idea of
measuring median income a few years ago, since that feels a good measure for
Joe public. There must be more such innovations available, if only economists
were to actively look for them.
Not all GDP supports competitiveness
either. We read that the cost of corruption and poor investment choices in
autocratic regimes hamper competitiveness. But market economies have “bad GDP”
too – look at the massive legal and healthcare costs in the US. Why has no-one
tried to understand how GDP could be segmented?
Other well-used metrics seem to be past
their sell-by date as well. Unemployment rate is an example. Work has changed:
some choose to work less, while others are forced to work multiple part-time jobs.
Metrics should be developed to understand this better, and such models could
help drive good policy.
To be fair, the Economist does as good a
job as anyone in challenging shibboleths. I just wish the profession it
represents to follow its lead. That way society could benefit.
Come on macro economists, rise to the
challenge! It is a wonderful subject, loaded with uncertainty and potential. It
is a regret of mine that I did not divert from maths to economics – I have
never really used my college maths. I hope a new generation can lead the dismal
science to somewhere less dismal. Escaping the pockets of vested interests and
seeking smart new metrics would be good places to start.
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