More (#2) from The Undercover Economist Strikes Back:
...forecasting is not the economist’s main job. Unfortunately, economists have managed to stereotype themselves as bad forecasters because investment firms have realized that they can get some publicity by sending someone called a “chief economist” to the studios of Bloomberg Television, where said chief economist will opine about whether shares will go up or down. Most academic economists don’t even try to forecast, because they know that forecasts of complex systems are extremely difficult — if anything, rather than being overconfident in their forecasts, they’re too eager to dismiss forecasting as an activity for fools and frauds.
Keynes famously remarked, “If economists could manage to get themselves thought of as humble, competent people, on a level with dentists, that would be splendid!” It’s a good joke, but it’s not just a joke; you don’t expect your dentist to be able to forecast the pattern of tooth decay, but you expect that she will be able to give you good practical advice on dental health and to intervene to fix problems when they occur. That is what we should demand from economists: useful advice about how to keep the economy working well, and solutions when the economy malfunctions.
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When you look at the most exciting, innovative work coming out of economics today, it’s pretty much all from microeconomists, not macroeconomists. Think of Al Roth’s work on market design, in which he uses computer-based algorithms to allocate children to school places, young doctors to their first hospital jobs, and kidney donors to compatible patients. Economists such as Paul Milgrom, Hal Varian and Paul Klemperer are scoring notable successes in auction design, from Google Ads to lucrative spectrum auctions to efforts to support the banking system without giving massive handouts to banks. John List, Esther Duflo and others are designing economic experiments to reveal hidden truths about human behavior. These economists are much more like dentists — or doctors, or engineers. They solve problems.
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Macroeconomic models have become elegant and logically sophisticated, but suffer a serious disconnection from reality. The thinking has been that logical consistency must come first, and hopefully the models will start to look realistic eventually. This is not entirely ridiculous—Robert Lucas’s critique of the Phillips curve and the chastening stagflation of the 1970s showed economists that it wasn’t enough merely to draw conclusions from the data, because the data could change dramatically. But four decades on from the “rational expectations” revolution, there are good reasons to believe that macroeconomics is failing to incorporate some important perspectives.
...Three examples spring to mind: banking, behavioral economics and complexity theory.
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behavioral economics, a kind of fusion of economics and psychology, has made big inroads into economic thought in the past fifteen years… Microeconomists were initially skeptical, and many remain skeptical. But skeptical or not, they have paid attention and either embraced behavioral economics or criticized it.
But macroeconomists? They seem to have ignored behavioral economics almost entirely. Robert Shiller told me that while the microeconomists would show up to argue when he gave seminars on behavioral finance, the macroeconomists just haven’t shown up at all.
More (#2) from The Undercover Economist Strikes Back:
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