Economics. What lies ahead?

Man on book towerAs a voracious reader, I often hit upon articles from subjects related to economics (e.g. sociology, finance, mathematics, and others) that stimulate my insane quest for knowledge. On the one hand, this is good as it expands our horizons and gets ourselves looking at problems from different perspectives. On the other, being an undergraduate student, I sometimes feel overwhelmed by the ocean of amazing papers written by scholars from disparate universities around the globe. Indeed, the amount of literature we’re exposed to challenges one’s composure. On this basis, I deem it necessary to periodically reorganise my thoughts and objectives by writing down what my opinions are and what I’m looking for when studying.

These are some of the questions I occasionally find myself wondering about:

What is economics? What’s the purpose of getting our hands dirty with the ‘dismal science’? How many students are purely interested in it as a social science, rather than a springboard to promising careers in the financial industry? How this in turn affects our approach towards the discipline? In addition, how do economic models relate to the actual social world? When do they fail and why? What about the assumptions underlying rational choice? Hence, on what grounds do we engage in value judgements? What to say then about the debate between different schools (e.g. Austrian vs Keynesian)?

I won’t try to answer them here. Rather, I’ll briefly reflect on some compelling aspects of economics.

Let’s face it, there are lots of instances where economists disagree on what should be done, especially in macroeconomics. Sometimes, there is agreement about an economic principle but different interpretations of a particular situation. Sometimes, there is even disagreement about principles. This leads, inter alia, to a series of funny jokes like “economics is the only field in which two people can get a Nobel Prize for saying exactly the opposite thing” – taken from a hilarious collection of jokes about economics.

At the same time, economics evolved in such a way that it’s become increasingly technical, complex, and diverse. As you probably know, it’s common to see economists studying mathematics, engineering, or physics at undergraduate level by then pursuing doctoral training in economics. To reconcile with this fact, one has to consider that many interesting problems economists face today require strong analytical skills as well as mathematical modelling and computer programming ability. It’s not surprising we’ve got universities offering degrees in Economics and Computer Science, Economics and Mathematics, and so on.

For example, here’s a stunning example of a fruitful marriage between economics and engineering! We also know economics borrowed heavily from physics terminology, although the concepts constructed around these terms in economics are very different. Mentioning physics just reminded me of an exotic interdisciplinary field called econophysics, which has much to do with finance actually. No doubt, certain research fields are so appealing, considering there’s much to do in order to improve our understanding of how we humans ‘work’. Another field that impresses me more than others is complexity economics.

Of course, I’m not even close to being competent in these areas. Nevertheless, they constitute a source of inspiration for me to keep studying and accumulating knowledge, which might turn out to be useful in the future.

In light of what I read, economics seems to be merging at an increasing rate with scientific disciplines. In a 2013 paper titled Big Data: New Tricks for Econometrics, Hal Varian wrote that graduate students in economics should “go to the computer science department and take a class in machine learning”. He also expects “collaborations between computer scientists and econometricians will be productive in the future”.

In this respect, it’s important to consider what kind of revolution is taking place in the labour markets. Several economists as well as engineers claim tons of jobs are going to be destroyed by artificial intelligence in the years to come while, hopefully, new ones will be created by the advent of the Big Data era. This, in turn, poses many questions relative to the potential lack of highly qualified labour force needed to match an increasing demand by growing digital companies competing in today’s internet economy. Joseph Schumpeter’s creative destruction pops up in my mind. Nouriel Roubini recently talked about it and MIT Tech Review issued an interesting article.

Coming back to the issue of economics as a discipline, even though the idea of achieving ‘scientific status’ by dressing elegant (the so called ‘physics envy’ of economists) may be alluring to practitioners, it will probably never be realised for the very same reason economics is a social science, where history, geography, politics, psychology, and sociology play an eminent role too. In his book Capital in the Twenty-First Century, Professor Thomas Piketty writes:

To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.

As a side note, Piketty holds an MSc in Mathematics and a PhD in Economics and, during the first minutes of a nice talk, he clearly defines the limits of economics. Moreover, if you liked to hear from an outsider, listen to the physicist Lee Smolin talking about his experience with economics.

Along these lines, I’d like to report a couple of academics’ opinions on the difficulty of inferring causal relationships in the social sciences. During last February’s Study Month event, I had the chance to discuss with the LSE tutor responsible for ‘EC1002-Study Month’. Referring to the peculiar position of economics, she said:

Economics relates to the real world and often uses historical – rather than experimental – data to test its claims. Whilst in theory we can assume ‘ceteris paribus’, in practice it is very difficult to turn off every other influence in the real world except the factor we would like to examine. When people carry out studies in different contexts over time, this can gradually lead to a consensus, but when a big event happens, this can also test people’s previous understanding and lead to new ideas forming.

James Abdey

Dr James Abdey

The second contribution comes from Dr James Abdey, who’s well known by most of us students for his exceptional lectures in statistics:

It is important to take stock of the limitations of assuming causation when working in social research. […] In economic and other social science applications of statistics, one usually just observes a sample of the available population, without controlling for any of the factors that may influence the measures observed. Such studies are observational studies. Much of the methodology of statistics is devoted to disentangling the effects of different factors in such observational studies, but it is better to have a designed experiment, whenever possible. Of course, the social sciences do not really lend themselves to designed experiments. For example, we do not have multiple versions of an economy to which we can apply different mixtures of fiscal and monetary policies. Instead, we have one economy to which we apply a particular mix and observe what happens.

Finally, there are four short videos I’ll never get tired watching. It’s the Light and Fruit Debate series where Professors Amos Witztum and Nicholas Barr discuss their view of economics and the role of economics as a discipline. I’d particularly suggest them to those readers with a taste for the philosophy of economics. Among other things, you’ll find some beautiful arguments on the nature and evolution of economic investigation and the inherent troubles caused by non-mechanic human behaviour (e.g. moon motion vs. human reactions; if interested about the latter topic, take a look at my previous post).

Well, every citizen should learn some economics as much as they learn about languages, literature, science, and so on. It’s my opinion that major crises occur also because we are somehow economically and financially illiterate. After all, a few big winners imply numerous small losers, who generally ignore why they get to lose and how they should’ve behaved. I leave you with a pearl of wisdom by Amos Witztum:

We have to speak a language we all understand. The power of economics in my view is not the question whether it is right or wrong empirically. To me, the power of economics is that it was the most successful framework of mind to allow humanity to think systematically and consistently of a very large number of issues, within all the problems, within all the limits, […] but at least we can have a debate. And in that respect, if you don’t understand the language in which we all talk you are out of the system, you are not a citizen.

Obviously, we’re still citizens even if we don’t ‘speak economics’. Yet, knowing this language puts us in a position where we can change things.

Till next time!

Oscar is studying for the BSc Economics and Finance independently in Italy.

3 thoughts on “Economics. What lies ahead?

  1. Really great post!
    I believe that economics must be taught in connection to historical events which led to emergence of economic theories. Plain mathematics (as some economists like to see it) does not really help us to understand the reasons behind particular theories…
    There is a great subject in the sillabus “Economic history of the 20th cen” …. well, this subject must have been made mandatory for all econs students.

    Like

  2. Thanks Yuriy.

    You’re right about history. Indeed, the course you mention is highly relevant. I agree it should be studied, especially by aspiring economists!

    Like

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