Great divide between academic, business and government economists

Mark Thoma has this another superb article on state of economics. He looks at examples from medical industry where academicians work closely with practitioners. In economics we have very little association between the two.

So medical academics apart from looking at how human body works also works on potential threats/new diseases etc. In economics it is mostly about how economics works and very little to do with treating health of economy and firms.

He starts interestingly:

How much confidence would you have in the medical profession if the teaching faculty in medical schools had very little experience actually treating patients, and very little connection to – even a lack of respect for – the practitioners in the field? Would your confidence be improved if medical research had little to do with the questions that are important to the doctors trying to serve patients?

Unfortunately, that’s a pretty good description of how economics has been practiced. The questions academic economists are trying to answer have little connection to the problems faced by business economists trying to help their firms make good, profitable decisions (and vice-versa). And though academics pay some attention to government policy, particularly Federal Reserve policy, addressing the problems faced by government economists trying to help policymakers make the best possible choices is not the main focus of this research.

There are differences in their scope of research:

This division between academic, government, and business economists is driven by the fact that economic theory and econometrics can be used for two different things. One is learning about how the world works. These “how and why” questions are the focus of academic research. For example, academic economists try to understand why demand curves slope downward, how business-cycle fluctuations in GDP come about, and how prices are determined in market economies.

The other use of theoretical and empirical economic models is forecasting, for example predicting where the economy is headed so that businesses can react accordingly, and predicting what might happen if various government policy proposals are implemented. These are the “what if” questions that economists in government and business are most interested in. What will happen to tax revenue if business taxes are cut? What will happen to the demand for my product if the Fed raises interest rates? What is the most likely course that the economy will take?

He says so economists had little to say when economies were collapsing and most said let it collapse. This is very different from the positions business and government economists are in. In medical field one tries to save the patient and in economics we discuss the merits of saving economies/firms…

Economics has lost the connection between the practitioners and the academics. This may have something to do with the desire among economists to become more of a science – a heavy focus on theory and math is the result. But no matter the cause, if we want to do all that we can to avoid big economic problems, and if we want to use the feedback from those testing economic ideas on real world applications as a way of better understanding how the economy works, then we must reestablish these ties.

These are really strong words.

Dr Subbarao also talked about this comparison with Physics in a speech. Russ Roberts even said economists would be biologists instead of physicists.

Such pieces are good introspective pieces.

James Hamilton of econbrowser agrees and mentions some interesting work which connects with reality:

I couldn’t agree more. Too many of my colleagues pay too little attention to how markets and institutions actually function. The profession and our ability to offer constructive policy advice are seriously impoverished as a result.

I should add, though, that there are a great many academic economists who feel exactly as Mark and I do about this and are trying their best to change things. Joshua Angrist of MIT and Jorn-Steffen Pischke of the London School of Economics have recently surveyed what they describe as acredibility revolution in econometrics, which is grounded in convincingly developing the connection between data, experiments, and policy advice. University of Chicago Professor Chad Syverson’sdetailed studies of the ready-mix concrete industry are a breath of fresh air, as are Berkeley professor Severin Borenstein’s research on airlines and electricity and Brandeis Professor George Hall and colleagues’ work on autos and steel. And there are many others whose research exemplifies what Mark is suggesting we should be doing.

These should be a good reading. . He says he started the blog for the same reason – connect economics with reality. It truly has been an amazing blog.

Krugman however differs and says practioners have been as wrong as academicians. Infact academicians like Shiller/Krugman (and many others like Rajan etc) pointed the crisis…..

So yes, listening to practioners is important and economics needs to be more real. What is also needed is others listening to academic economists who raise concerns over issues. These are mostly ignored in good times thinking this time is different, which we all know isn’t different..