I had pointed to this very interesting speech by DeLisle Worrell, Governor of Central Bank of Barbados. I was really interested to check the profile of the Governor and was mighty impressed. He has done some really useful work on Caribbean economies and has served at IMF as a senior economist.
I also found this new speech which is like a continuation of his previous speech that criticised economists big time. This is given at Central Bank of Barbados’ Research Review Seminar on July 26, 2010. Supposedly the research department at the bank is quite good.
Building on the foundation of this proud record of achievement, the Central Bank’s policy research and publication are on the cusp of fundamental change, occasioned by remarkable innovations in the professional environment of economics, finance and accounting, as well as new challenges facing the discipline of economics itself. The changes in the professional environment include:
- The evolution of the internet, now the principal research tool of economists;
- Electronic publication, which has become the main channel of discussion, debate and sharing of information among economists, finance professionals, policy makers, international institutions, and the local and international business community;
- The proliferation of working papers, which have replaced published articles as the essential vehicle for the cross fertilisation of ideas; and
- The limitless possibilities for cooperation and collaboration among economists, finance professionals and policy makers, using the internet.
The new challenges are:
- The collapse of what has been referred to as the “traditional paradigm” of economics; and
- The need for research which gives practical, implementable answers to the questions businesses and governments have to address.
He points how his room has no books/journals etc with all available on internet. Even the process of peer-review journal is not as important with working papers available for free by great scholars.
The interesting bit about the speech is again the challenges he addresses.
The Internet has fundamentally changed how we work; the collapse of the accepted theories of economic behaviour will fundamentally alter what we work on, in ways that we have only just begun to discern. In my recent address to the BES, I spoke of my growing disillusion with the direction in which economic theory and practice have gone in the last three decades or more, with an orthodoxy, which seemed bent on rushing down a path to irrelevance. Thankfully, within the last decade there have been signs of intelligent life in the economics profession, with the emergence of the online journal Real World Economics, the burgeoning of research on happiness, and the hypothesis that the economy evolves according to universal laws of evolution– laws which are also seen in operation in biology. The challenge for us in the Caribbean is to find ways to use these new ideas to guide the design of our research. We have made a start in this direction, with a project on price formation about which I will say a few words later.
A second challenge relating to the content of our work is to design projects which can provide answers to the questions policy makers need to address. Too much of the analysis we do is of no practical use for decision making. If the exchange rate in Carjackistan depreciates, we start trying to estimate demand and supply for foreign exchange, when we know full well the reason for the depreciation is capital flight, because people no longer trust the Carjack government. We do a review of the economy of Outer Slobbovia, a country to which tourists are flocking in droves, and find that prices are rising fast because of the excess demand for hotels and services.
We calculate the real effective exchange rate, which is appreciating, and conclude that Outer Slobbovia is not competitive, no matter that it is stealing market share from all its competitors. This kind of misperception problem is related to the previously mentioned mistaken paradigm. Because our framework for thinking about the problem is wrong, we ask the wrong questions, set up the wrong thought experiment, assemble irrelevant data, and come to meaningless conclusions.
We need to take eclectic approaches to empirical work, acknowledging that economic theory can lead us in the wrong direction, and economic measurement and testing is at best a makeshift process. In our universities we teach aspiring economists to ask whether research has theoretical foundations; rather, they should be asking themselves whether the research makes sense, and follows sound principles of logic. The reality is that economics knows of no overarching theories that stand up to all tests, and we must therefore admit to a variety of small theories, to be understood, not as the laws of the Medes and Persians, but as clues to aid us in the search for deeper insight into the way the economy works.
We must also admit that our statistics and our tests are very fragile. We make statements like “the economy grew by 5 percent” with the same assurance as the statement that “DeLisle Worrell is 5’5” tall”. Those are not comparable statements of fact. My height can be established with certainty; the GDP of the country is an educated, informed guesstimate. The machinery simply does not exist to survey every company and individual who produce a good or service for sale, compute the total value of all those goods and services, deduct the value of all the materials and goods they bought, the electricity and input services they used, and adjust all those calculations for the changes in prices of all inputs and outputs. So we have to approximate.
I however don’t fully agree to this:
Our econometric tests are laden with assumptions that we often seem to forget. The most basic is that the future will be like the past, an assumption which we know to be more and more unwarranted, the further out we go. To give just one illustration: it is not reasonable to make inferences about the international economic crisis of 2008 from research on the stock market crash of 1929. In 2008 the world featured a network of shared information and finance, with instantaneous links right around the globe, and billions of ordinary people were involved directly in financial transactions, from small individual depositors and mortgagees to giant financial conglomerates.
In 1929 only a handful of people in industrial nations were involved with financial institutions in any way, and the average worker who found himself on the breadline would have had no notion whatsoever of the cause of his sudden unemployment. We live in a completely different world, and it is hard to understand why we would expect modern economies to behave as the economies of the early 20th century did. The moral of this story is that, although empirical tests are fundamental to good economic practice, we must be conscious of the assumptions we make, and qualify our inferences accordingly.
There are enough papers and analysis showing eco history matters. It may not repeat as Worrell says but surely rhymes. The economic landscape and players may have changed but you see the same kind of events.
He says we need to look at economics differently and there is an urgent need to revamp research:
There is exciting new research in economics which draws on the knowledge and insights of other disciplines, including finance, psychology, ethics, law, cognitive sciences, and others. Hopefully we will also see a resurgence of interest in philosophy and epistemology. We should all seek to broaden our own research into areas such as these in search of useful insights and guidance for policy. In the case of the Central Bank, I hope this will be reflected in increasing contributions to this seminar from members of all departments of the bank, not only the Research Department, and in joint research that crosses disciplinary boundaries.
These are exciting times for economics, and for economists and central bankers. We have a chance to contribute to the changes in approach to research and analysis for policy, we have a rich store of data from which to draw insight, and relevant analytic expertise is increasingly spread across the bank, and in disciplines outside of economics. Let us maintain our focus on policy, and let us draw on the knowledge and expertise of our colleagues throughout the bank, and in related disciplines, to help in the search for deeper insight into our evolving economies.
Just like the earlier speech, this one is also very good.