Robert Shiller and Virginia Shiller (Robert Shiller’s wife) have written this nice paper looking at economists in this crisis.
Shiller couple argues that economists have lost their worldly philosophical ways. Earlier economics was taught along with philosophy and other social sciences streams. Now they have been divorced with economics becoming more specialised and technical over the years. THis has both positives ane negatives. Positive is their field has become more enriched with more and more research. Negative is economists have been unable to link various dots and missed seeing the crisis coming.
In his influential 1953 book The Worldly Philosophers: The Lives, Times And Ideas Of The Great Economic Thinkers, Robert Heilbroner gave an inspirational account of what economists do, an account that was assigned as supplemental reading to countless beginning economics students over decades. Heilbroner wrote that he chose the term “worldly philosophers” because of the breadth and moral depth of economists’ inquiry. The appellation stuck, and for many years it was common to refer to economists as worldly philosophers. The inspiration of that book has contributed to the desire for many to go on to become economists, and to productive lives as researchers.
But, while the volume of research turned out by economists is most impressive, there are questions whether “worldly” and “philosophical” are represented as much as they should be in economic research. Has economics as a profession substantially lost sight of the idealism that existed in earlier decades? Has the strong impulse to pursue narrow specialization in order to propel research to the frontier led to some loss of moral perspective?
They look at research of two most prominent economists – Adam Smith and Keynes- to show how they drew ideas from philosophy.
Adam Smith was a professor, not of economics but of moral philosophy.2 His The Theory of Moral Sentiments, first published in 1759, was a mixture of philosophy, psychology, and economics. It puzzled over the guiding force behind economic activity: are people inherently selfish, or do they have a concern for others? In assessing human morality, Smith found his way to psychology, and an effort to describe accurately human drives. This book was the foundation that enabled him ultimately to write his Wealth of Nations in 1776, the book that laid the foundation for modern economics.
John Maynard Keynes wrote a philosophical work A Treatise on Probability (1921) on the deep foundations of probability theory. He doubted that we should even be thinking in terms of probabilities: “Some statistical frequencies are, with narrower or wider limits, stable. But stable frequencies are not very common, and cannot be assumed lightly.”3 This led him to think of probabilities as degrees of belief, and hence psychological phenomena, to reject much probabilistic economic modeling, and to formulate a concept of animal spirits as a force in the economy.
Using other social sciences with economics, Keynes kind of predicted the second world war!!
Keynes’ interest in philosophical issues led to his influential book The Economic Consequences of the Peace, written at the end of World War I about the Versailles peace conference. He expressed concerns about the heavy reparation payments from the Germans imposed by the Versailles treaty, and interspersed purely economic analysis with ideas of the psychological impact of the reparations, the popular sense of their justice, as well as of the moral character of the people negotiating the treaty. Keynes’ analysis anticipated the economic, social, and political events that lead to the tragedy of World War II. This work, one of the most significant successes in the history of forecasting by an economist, showed an extremely broad, inductive, mode of inquiry.
The paper calls to promote this inter-disciplinary thinking amidst economists :
After the apparent failure of economists to see the possibility of our recent financial crisis, there are emerging signs of greater interest in a balance between specialization and knowledge of findings in other fields, including history, psychology, and sociology. What can the profession do to encourage its members to continue this trend? Are there supports or incentives that could encourage young economists to have greater investment in reclaiming the title of worldly philosophers?
Those who are in the position to influence the direction of economic research, including those who evaluate research proposals, engage in the hiring and promotion of researchers, or who manage scholarly journals, are in a key position to encourage broader perspectives which bring together various approaches to allow a more sophisticated assessment of economic problems.
Shiller takes the example of Journal of Economic Perspectives which was started for this purpose:
An example of what can be done has been the creation in 1987 of the Journal of Economic Perspectives. In the first issue the inaugural editors, Joseph Stiglitz, Carl Shapiro, and Timothy Taylor, lamented that “specialists talk most easily to other specialists,” and asserted that economists needed a new journal to “serve as a scholarly economics journal for the general audience of economists.” They wrote: “The title of the new journal was chosen to reflect two central aspects of its mission: to provide a range of perspectives on economics and to show how an economic perspective can help in understanding society and some of its problems.
The Journal did bring some papers which talked about the looming crisis:
Articles in that journal did not predict the world financial crisis that began in 2007, but the journal did publish a number of articles that were relevant just before the crisis. The spring 2005 issue included an article by W. Scott Frame and Lawrence J. White that worried about systemic issues posed by Fannie Mae and Freddie Mac, though it did not suggest imminent failure. The Fall 2005 issue featured a symposium “Cognition, Brain Science and Economics” that included a paper, by Ernst Fehr and Jean-Robert Tyran, which presented a cognitive theory of speculative bubbles based on experimental economics, though it did not discuss the current situation.
The same issue had an article by Charles Himmelberg, Christopher Mayer and Todd Sinai about the alleged speculative bubble in the housing market, though it reached a weak conclusion that “it is impossible to state definitively whether a housing bubble exists.”13 The winter 2005 issue included a symposium on sociology and economics that set the stage for a discussion of the sociology of the current speculative situation in the markets, though it did not actually do this.
Though the journal did not predict the timing and scale of the crisis still it did bring some insights via different ways.
But the kind of effort exemplified by the Journal of Economic Perspectives to encourage professional economists to synthesize from a wide variety of research directions and to form judgments about the pressing issues of the day is the right direction to go. We simply must implement more changes, such as other interdisciplinary forums, and improved design of incentives for researchers, both in their training and in their subsequent careers. The real imperative for researchers is that efforts need to be redoubled to encourage cross-fertilization and broad-spectrum thinking, driven by the broad moral purpose of improving human welfare.
Hmm. I would actually prefer economists to be just philosophers connecting the dots and let the world decide whether they are good enough to be worldly…
A nice paper…