It has been a couple of weeks since Paul Krugman set the blogosphere and academic lunch tables a buzzing with what was essentially a summary essay of what he has been saying for some time. The issue actually started last year when the Queen asked that same question at the London School of Economics. There is nothing like interest from her Majesty to get everyone’s attention. Of course, she was just asking what every non-economists were asking: wasn’t it your job to anticipate this?
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So let me try and disentangle the thing a little. But first, let me summarise my conclusion: I think the debate is over whether the market for economic science is working properly or not. This has been a long-standing interest of mine ever since I wrote an article on classic rejected articles in economics.
One thing I need to deal with initially is whether I was doing my job or not. You see, I was neither charged with the task of telling the government or anyone what to do about macroeconomics or financial stability and also, there was precious little evidence that, if I did, they would listen or care. In the end, I did try but this was on the level of using the available economic wisdom and a big issue was that useful material from academic journals was very hard to find. Krugman faced the same problem and so he, like many, went back half a century. His essay is born ultimately of a frustration that no one had been on the job since the Great Depression. Even his concern about the paradox of thrift was interesting for the fact that you could only find one published paper and one working paper on the subject. This was apparently the core issue at the heart of the fiscal stimulus debate and academic economics had not made any advances here.
So the real question is why academics, whose job is to pursue research that anticipates the long-term issues, did not generate useful insights here? Remember this is the quid pro quo for the idea of academic freedom: you people can work on what you think is important and not be swayed by current fashion or urgency provided that you, as a group, pursue diverse outcomes, work on them diligently, and store them in a suitable repository so that when their time comes, we are better off. It is a hard charge when people look at the entire academic field and say: where was your end of the deal?
This allows you to start to understand why lots of academic economists were upset with Krugman. John Cochrane basically argued that they were doing the research it is just hard. David Levine echoes a similar theme. He goes further to suggest that crises can’t be predicted and so that isn’t the right metric. I’ll come back to that one later. But at the heart of these emerging economist’s tiff, is that Krugman’s accusations cut to the core.
I’m not going to pretend that I am going to be able to resolve that debate here. But I want to frame its elements. Let’s talk demand and supply. In the academic realm, the demand for research is driven by what the peer-reviewed profession will accept. What passes as a contribution to knowledge from journals and tenure appointments is what drives that. So the question is whether there was a lack of demand from journals for the key research that might have helped during the current crisis?
Krugman is arguing that there was a gap that under-weighted research into the causes of crashes, financial market spillovers to the real economy, liquidity traps, etc. Countering him is a belief that the core foundations of that research agenda haven’t been produced. Economists have been working on bending the more idealised models to deal with this or to incorporate behavioural concerns but there haven’t been the advances. To be sure: to adjudicate this would require identifying key research that has been ignored and denied academic acceptance. And there are plenty of people putting their hands up on that score. But time will tell as to whether there were important core research or grant proposals that were unjustifiably ignored. Neither side has made an evidence-based claim there yet.
What about the supply-side? Were researchers just ignoring these things to work on what was easy, intellectually interesting or elegant? There is plenty of evidence that economists were working on those things. But there also appears to be some gaps. Economists like Cochrane need to ask themselves why it was that Ricardian equivalence — supposedly the accepted wisdom in the textbooks, classroom and journals — did not convince any major economy not to try a stimulus. One reason is because it does not hold. But then again, we have precious little evidence either way going into this. In the end, the result was a risk-weighted guess.
What Krugman and others are saying that not only was the profession not encouraging diverse research (on the demand-side) there may not have been much interest even if it was (from the supply-side). It is complex because demand and supply are related in this context as research takes place over time.
Think about the charge that economists did not predict the crisis. I think it is true what many are saying in that such crises are unpredictable. However, that does not mean that you should ignore the possibility of a crisis. You need to study them, their drivers and work out what to do should one arise. You should also consider whether you can reduce their frequency. No one blames a firefighter for not predicting a particular fire but they will blame them if they don’t know how to put them out.
The tiff as it is playing out in the popular arena is not very useful. But there is a need for academic economists to account for the lack of research in certain areas where it was, now with hindsight, most needed. Someone needs to guard the research agenda and to ensure there is diversity on the demand side (including with regarding to the allocation of public research funds). Similarly, we need to work out why a supply-side response may not arise even if there are incentives to allocate research effort on a particular path. But this requires a more high level and careful deliberation than what we have seen over the past couple of weeks.