What Will the Current Crisis Do to Economics?

From John Chilton:

1. Tyler Cowen answers a reader's question: "What will be the impacts of the current situation for economics and economists. It seems clear that we have screwed up. We don't even have the excuse that we understood what was going on but no one listened to us...."

2. Greg Mankiw points to an interview with Galbraith the Younger (who said in the interview "It’s [failure to predict the crisis is] an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless." Mankiw goes on to observe "If [an Obama administration] is filled with prominent members of both [mainstream and heterodox economists], the internal battles over the heart and soul of the new administration's economic policy should prove fascinating to watch."

Perhaps the question that should be asked is will the crisis fuel an increase in the demand for heterodox economists? My kneejerk answer is no. From what I have seen, in the immediate wake of the crisis is a turning towards mainstream economists. There is not so much a desire to understanding why the crisis in all its details was not foreseen, but a desire to understand what happened, what emergency action makes the most sense, and how the economy will respond going forward.

Part of the problem of why the crisis was not widely foreseen is the fact that it's awfully tough to forecast the future, especially when you're forecasting months, even years, in advance.  Heck, weather forecasters rarely look out farther than a couple of weeks. 

But while I don't agree with James Galbraith, and while I think Arnold Kling's criticisms of contemporary macro are a bit harsh, macro models need to be improved.  Astronomers can't fully understand the universe by studying the average star or the average galaxy and economists can't fully understand the macro economy by examining representative consumers and firms.  With all due respect to my macro friends (you know who you are!), we simply need better macro models.

Chilton also offers this interesting insight:

I also sense that the demand for amusing microeconomic puzzles (to which I am drawn) will wane. Thus demand for freakonomics and other variants will slow if not fall during an economic slowdown much like the demand for fashion apparel.

I think that the Freakonomics stuff and the growth of sports economics over the 1990's were signs that times were good.  Because there weren't big crises begging to be chipped away at, many economists were able to focus on things that were "amusing" or fun (but still, in my opinion, interesting, useful, and important). 

But now that the crisis has come and we're living through it, attention will be diverted to understanding it.  Does that mean that the sports economics and Freakonomics will fall by the wayside?  Probably not.  But certainly there will be more attention given to money and banking and macro and less to the "amusing" fields.  But maybe this added attention will yield the useful insights that are so important.  In fact, I'm pretty confident something good will come because we economists are a pretty smart bunch.

Comments

[Toronto life insurance brokers]

Nice article. But how can you say the crisis wasn't predicted? Ok, maybe THIS crisis wasn't predicted, but generally, many economists have predicted our current system will lead to a crisis sooner or later! I am talking about the monetary system, when central banks are trying to control the economy - what about Austrian school? All other fans of gold standard? Monetarists? All of them feel there is a serious failure built in government-led economic systems...Maybe economists are not able to predict that "on June 16, 2029 there will be inflation in Botswana reaching 8,09%", but for sure (at least some of them) are able to predict "something is going wrong..."
Take care
Lorne