The decline of economics
In recent years, I’ve been bemoaning a new “dark age of macroeconomics”. I know less about current trends in micro, and thus was interested in these comments by Steven Levitt (from an interview by Jon Hartley):
Steve: “Yeah, yeah, sort of everywhere. Every macro department feels a lot like heavily influenced by Chicago. And I think for better or worse that has been a success story for the Chicago way of thinking. I think just really the opposite for Chicago micro; we have not had very many students who’ve gone out and been influential, maybe Ed Glaeser being a clear counter-example to that. And I think in the marketplace for ideas, I gotta say that the Chicago price theory really has lost. And it hasn’t caught people’s imagination. And I remember I was on a call with Milton Friedman as long after he left. He left Chicago in 1978, but this must have been 20-something years later where he was upset that Chicago price theory was not doing well, that it wasn’t being appreciated. And I remember Casey Mulligan saying, “Hey, Milton, I thought you believed in markets. Let’s just face it, price theory is losing in the market for ideas.” And Milton Friedman got so upset about that. He believed in markets until it applied to Chicago price theory where he thought that it was the right way, so markets shouldn’t have any bearing on it. But I think that’s just the truth. That the people who you think of as being the logical heirs to Chicago price theory, the two that come to mind really are Ed Glaeser and Jesse Shapiro, they’re not at Chicago. And with Kevin [Murphy] retiring, there isn’t, when Kevin Murphy retiring, there just isn’t anybody around now really, other than Casey Mulligan, who could really keep the torch going. And the movement in terms of textbooks and what people are taught is just so away from what I think of Chicago price theory, which is not as mathematical, it’s more about how you take the simple tools the very old tools you know tools that go back to people like Marshall and how you use them. It’s really the skill that I see in Chicago price theory (one that I don’t have) is how do you look at a problem and understand it to the lens of the right tool. And it’s not complicated. It’s usually very simple. Once you can see it, it’s usually not much more than intermediate micro is what gets applied. And it’s more artistic. And I really feel like our field has moved towards technicality. Harder proofs. More mathematical. And I don’t see any going back. I think it is essentially lost to posterity at this point.”
I find this very depressing. To me, Chicago price theory is not just a branch of economics, it is economics. It’s the core of what we know about applying economic theory to the real world. When I’m told that Chicago price theory is going out of style, it tells me that economics as a field is going out of style.
And it is. Does anyone doubt that economists have far less influence in the Biden administration than in previous administrations? Or that they would have little influence in a future Trump administration (likely to be dominated by protectionists like Peter Navarro and Robert Lighthizer)?
PS. I’m not convinced by the “market test”. Political and economic fads go in and out of style. What’s popular at one point in time tells us little or nothing about what will be trendy a few decades into the future. Monetarism lost the market test in the mid-20th century, then won the market test, and then by the end of the century we ended up with a synthesis of monetarist and Keynesian ideas.
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14. March 2024 at 16:49
Casey Mulligan was a big party of the first T administration.
The TCJA also was mostly good.
14. March 2024 at 18:54
It’s going out of style, because it failed to create stability.
Bitcoin is the future; everyone knows that.
Fiat is dead.
THe monetary economists don’t want to believe it. They want to live in their fairy tale world. They laugh, as bitcoin rises and the dollar plummets, claiming it’s all just a fad. It’s not a fad. People laughed at the iphone too. they’re not laughing anymore.
Your profession is still valid, but only from the classical point of view. supply and demand still exist, obviously, so it’s just the monetary economics is on the way out.
You often talk about your wealth. You call yourself affluent. You seem to have a lot pride in your “affluence”. But let’s look at your so-called “wealth” for a moment.
1. The core of your money came from a Bentley salary. In other words, it came from the government. The government printed money to pay for student loans. Those student loans went to the school. The school paid you from those loans. You didn’t earn your money from the private sector. It was printed and trasnferred.
2. Most of your money is presumably tied up in assets. You probably have loans on most of those assets. You can pretend those assets belong to you, but they don’t. They belong to the bank. If you need a loan to buy a house, you’re not affluent.
The ponzi scheme is coming to an end. Your entire generation lived on debt. It was all fake. It was never going to be paid back.
Our generation, because of your spendthrift attitude, now cannot afford housing. The bubble will burst, and we will either have to renege on the debt (that’s what will happen) or pay back the debt (Impossible).
You maxxed out the credit card, and so now Bitcoin is the new currency. It has fixed supply, so you and your thugs (and that’s why you are) cannot just print more whenever you feel like it.
If you want something, you actually have to save for it. Imagine that. If you want to fund your endless wars, you will have to take that money out of your savings. You can’t print money for your war, taxing everyone else.
By the end of the decade, if you’re not holding BTC, you’ll be broke. Nobody will accept your worthless paper. Your assets will be confisicated by the bank to pay whatever debt they have. And that will be the new monetary system.
A much better monetary system when third parties cannot control your money supply, taxing you in the process, creating bubbles and busts.
14. March 2024 at 19:03
“It’s going out of style, because it failed to create stability.
Bitcoin is the future; everyone knows that.
Fiat is dead.”
Schizophrenia at its finest, people.
14. March 2024 at 19:45
I’m not sure how I feel about this. Here’s my negative take on price theory (admittedly a simplification): it consists entirely of showing how a simple supply and demand model explains whatever is in question, and then after that writing “QED.” That’s it – find a way to make supply and demand tell the story you want it to tell, and then call it a day.
On the other hand, my positive take is: supply and demand is a really useful model, and is particularly robust across almost every domain. Are you worried about overfitting your model, adding in extra parameters/frictions/etc. that are largely up to your own discretion? Well, stick with supply and demand and you can avoid all that and still explain a lot.
I guess really what I want is for economists to have a mastery of all the tools, whether it’s price theory-style thinking, or more “modern” methods (especially the stuff that has come out of the credibility revolution like causal inference work), and the wisdom to recognize each tool’s benefits, limitations, and proper use. Have people moved too far away from the price theory way of thinking? I think that’s probably true, but I think there is such a thing as being too far in the other direction as well.
14. March 2024 at 20:28
Scott, where do you think it is best to go to school for economics for anyone curious in studying it?
14. March 2024 at 20:41
Once the exchange rate of BigMacs to bitcoins stabilises, we can talk about bitcoin being the future. (It’s actually theoretically possible. Especially if the futures market and ETFs allow short sellers to help stabilise the value of bitcoin. That’s essentially equivalent to running fractional reserve banking.
Though even if cryptocurrencies ever become popular for everyday transactions, it’s still very unlikely that bitcoin will be the one that everyone would use. There’s plenty of other crypto alternatives out there with better designs.)
Scott, we have to acknowledge that the demand side of the marketplace for ideas doesn’t value ideas in proportion to how true they are.
Markets work just fine for ideas. Just like markets work just fine for music, but that doesn’t mean that the popular music that the market provides plenty of is any ‘good’. It’s just the kind of music many people want.
Btw, I think you can probably find the best economists in private companies. Eg Google is very, very keen on micro-economics to help design and analyse their ad auctions and how people react to incentives online.
And financial companies are really interested in macro-economcis so they can help predict and anticipate the impact of policies and other economic developments.
Alas, because this work mostly happen behind closed doors, we don’t see much of it.
14. March 2024 at 21:41
Cody, To be clear, there’s a lot more to Chicago price theory than S&D (although S&D is important!).
Junio, When I was young it was definitely Chicago. Today, I’m not sure. I’d probably choose GMU if I were young.
Matthias, I agree about good economists often being in the business world. Levitt said that Jon Hartley was one of his best students, and I believe he went to Goldman Sachs.
14. March 2024 at 22:10
Scott, thanks for the response. I have been considering UCLA but I know the acceptance rate there is low (same with UChicago). I’ll likely look more into GMU since it intrigues me.
15. March 2024 at 03:07
Haven’t the GMU folk also being fleeing and/or retiring the last five years, i.e. I feel.GMU today is a shell of what it was in 2010? Plus I forgot who said it recently, but they basically said macro is pointless, just worry about micro.
That said, as a college drop out after three years of economics in the prestigious UW-Milwaukee program, what’s the summarized hoopla about Chicago Price Theory? A quick Google simply says “it was a book by Friedman, influential” as opposed to what is suggested in this post that it’s some grand unified macro model taught across America,i.e. is it simply a competitor to Keynesian/Austrian or something else?
15. March 2024 at 05:56
Chicago Price Theory would tell you that markets “work” relative to some criteria when there are incentive structures that reward/punish behaviour that approaches/moves away from what’s conducive to that criteria. There are many incentives in academic economics, which don’t necessarily line up with the research criteria that Milton Friedman thought would lead to good theories. So Friedman’s scepticism about the “market for ideas,” at least in academic economics, was perfectly consistent.
Most of the time, when people are thinking about the “market for ideas,” they mean verbal communication of abstract ideas. That this is a very different type of activity from paradigmatic market behaviour is obvious: there are no profits, money plays a RELATIVELY peripheral role, excludability/rivalrousness is complex at best, and so on. Of course, sometimes you get something verbal communication, as in science, where the incentives line up to achieve amazing things. However, there’s no reason for the “market for ideas” to be as good at supply true/useful/explanatory theories as the market for bread is good at supply bread. These are very different exchange behaviours.
15. March 2024 at 06:26
“What’s popular at one point in time tells us little or nothing about what will be trendy a few decades into the future.”
Isn’t that in direct contradiction to your claims about morality being about what people believe in the future?
15. March 2024 at 08:05
Peter, It’s just good microeconomics, that takes seriously ideas like incentives, opportunity cost, markets, rationality, etc.
Harding, Yes, I suppose that there’s a long run movement toward moral progress, but ideas like nationalism go in and out of style. Maybe each round is a bit less objectionable than the previous version.
15. March 2024 at 09:05
I agree with Cody. Using simple models to predict policy outcomes has its benefits (and it’s all I know), but the profession and policy makers now tend to focus on more empirical methods, even though ‘identification games’ have their limitations – and frankly, I thought ‘Freakeconomics’ was mostly pretty unconvincing (except the sumo stuff). All the attention on the effects of minimum wages on low income employment and high marginal tax rates on high income employment – centre left academics like Arin Dube, commentators like Noah Smith and policy influencers like Jason Furman – they’re all interested in what the data say, and the data often don’t support the first principles model, or at least not unambiguously. In the past you’ve argued that elasticities are much higher in the long run than in the (measured) short run. I agree. But until that can be ‘proven’ to a degree that persuades sceptics, old-school price theory will remain in the doghouse.
15. March 2024 at 09:30
Rajat, But empirical work on minimum wages and taxes are all over the map—so why should we put much weight on those studies?
I’d add that the right way to think about Chicago economics is not “minimum wage laws reduce employment”, it’s “minimum wage laws distort the market in many different ways, of which employment is only one (and not necessarily the most important)”
Ditto for rent controls and housing.
I certainly don’t view “high income employment” as the most important aspect of high tax rates, although I do suspect that 90% MTRs discouraged rich wives from working in the 1950s.
15. March 2024 at 20:07
Scott,
Agree. Chicago price theory is economics.
I think there are a number of factors at work.
1. You don’t get ahead in economics, punditry or media by repeating old theories especially ones that are straightforward and obvious….but like monetary theory, truth outs in the end.
2. There have been so many shoddy stupid empirical studies done in the service of political ends that trust in the profession has been eroded…. and the problem has been exacerbated by the failure of mainstream economists to criticize the garbage that gets published.
16. March 2024 at 09:00
I have no idea what the Chicago Price Theory is. I just try to learn enough to time the financial markets.
But the decadence of economic theory clearly stems from one colossal error, that banks lend deposits. That turn started with the influx of Keynesian economists at the FED in the early 60’s.
Sometimes micro and macro are diametrically opposed. Economics should emphasize macro, not micro.
16. March 2024 at 13:43
I think the reputation of economics has declined a bit. That’s mostly due to macro and its inability to predict major events and also due to such public and wide disagreements about macro theory and how to apply it. (OTOH, people talk about economics much more than in the past.) Otherwise I think it’s incredibly useful, especially if you own or manage a business of any size. Someone needs to develop a practical econ course. At least where i went to school long ago it Econ 101 was clearly intended as an intro to future econ courses. A practical course that looked at important concepts like incentives, trade offs, opportunity costs, value of present day money vs future money and a couple of other concepts. If I were made God-emperor of a local university it would be a requirement.
Steve
16. March 2024 at 14:04
dtoh, I agree.
Steve, Steve Rubb and I wrote a good textbook that was an intro to economics with a business flavor. It didn’t sell.
17. March 2024 at 06:44
re: “due to macro and its inability to predict major events”
That’s a myth. Everything that’s happened has been forewarned. Sumner’s reaction is typical. Dr. Robert D. Auerbach, who taught commercial banking at KU, reacted the same way.
People that can’t understand the concepts just dismiss and ignore the historical evidence.
Both stagflation and secular stagnation were predicted in 1961, in “Should Commercial banks accept savings deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43. By Dr. Leland James Pritchard, Ph.D., Economics, Chicago 1933, M.S. Statistics, Syracuse (Phi Beta Kappa).
“The expansion of time/savings deposits in the DFIs adds nothing to GDP”…”The growth of commercial bank-held time “savings” deposits shrinks aggregate demand and therefore produces adverse effects on gDp”…”The stoppage in the flow of funds, which is an inexorable part of time-deposit banking, would tend to have a longer-term debilitating effect on demands, particularly the demands for capital goods.” 1964
Dr. Philip George’s “The Riddle of Money Finally Solved” said essentially the same thing.
In May 1980, in response to the DIDMCA, Pritchard said there would be a “pronounced decline in velocity”, that the S&Ls would have to act like banks in order to survive, that the GSEs would take over the mortgage markets, and that the GFC would be due to the erosion of legal reserves.
In his Dec. 1973 money and banking class he said the DJIA, then at c. 1000, would be @ 600 when we came back in the fall of 1974.
Pritchard picked every top and bottom in stocks since WWII until his passing in 1991. He is the only economist that ever-understood money and central banking.
17. March 2024 at 09:33
We know when the FED will drop rates. It will be when N-gDp falls, when M*Vt falls. And we know when that will be, as short-term money flows peak.
With O/N RRPs @ 413.877, we are close to that date.
19. March 2024 at 03:58
This should warm the cockles of Sumner’s heart:
Peter Navarro is going to prison.
Well, maybe Navarro will learn something about prison economics while in the joint.
19. March 2024 at 07:13
Scott- Not surprised. That’s why I would need to be God-Emperor. I think it would probably work well as a 1-2 credit required course many places have now. I would have it taught in the Freakanomics style to make it more accessible.
Steve
19. March 2024 at 09:32
It is the market test.
Leftist yearnings are more powerful than economic realities. It doesn’t help that the right — as a force of realized economic rationality — is dead.
19. March 2024 at 09:35
dtoh…
I’m waiting for some studies that look at local carbon emissions versus local temperatures for a coming refutation of AGW theory.
19. March 2024 at 15:56
Scott, Funny. People have looked at correlations between local fiscal policy and local growth, as you may know.
19. March 2024 at 18:07
Anup Malani has an interesting thread on twitter that disagrees with you about the prevalence of Chicago price theory, you should check it out.
19. March 2024 at 21:27
Mankiwsmom, Yes, I saw that. I guess he’s in a better position to evaluate its current status, but I see a lot less of what I view as Chicago economics than I did back in the 1990s.
21. March 2024 at 11:26
I don’t think everyone agrees with the Chicago Price Theory, to wit, monetarism has never been tried.
Volcker never tried monetarism. In his book “Keeping at it”
“Pg. 105: “We needed a new approach. To have more direct impact, we could strictly limit growth in the reserves that commercial bans held at the Federal Reserve against their deposits. That would effectively curb growth in deposits and the overall money supply. Put simply, we would control the quantity of money (the money supply) rather than the price of money (interest rates). “
First of all, the price of money is the reciprocal of the price level, not the level of interest rates.
Most of all, with the intro of the DIDMCA, total legal reserves increased at a 17% annual rate of change, & M1 exploded at a 20% annual rate (until 1980 year’s-end). Back then the money multiplier was operable.
21. March 2024 at 11:34
Lawrence K. Roos, Past President, Federal Reserve Bank of St. Louis & past member of the FOMC (the policy arm of the Fed) as cited in the WSJ April 10, 1986 “…I do not believe that the control of money growth ever became the primary priority of the Fed. I think that there was always & still is, a preoccupation with stabilization of interest rates”.
“Reserves don’t even factor into my model, that’s not what causes inflation and not how the Fed stimulates the economy. It’s a side effect.” – Former Fed Governor Laurence Meyer, co-founder of Macroeconomic Advisers
Donald Kohn “I know of no model that shows a transmission from bank reserves to inflation”
You can believe what you want, but the correct viewpoint is that Powell and the FED failed us.