I originally became well-known as a blogger for criticizing the economics profession — specifically, macroeconomic theory. Back in 2011-12, when the Great Recession was still lingering and the European debt crisis was raging, everyone wanted to hear why the economists had gotten it all wrong. By “the economists”, of course, they meant macroeconomists — nobody wanted to hear jeremiads against labor economists doing careful empirical studies of minimum wages, or tax theorists quietly working out the impact of changes in international tax policy. That stuff’s boring. Macro — the grand theories of booms and busts, growth, trade, inequality, and so on — has always been the glamor division of economics, and it was macro that people wanted to see taken down a peg.
And so we did. The intellectual revolution that I got to be a tiny part of in the early 2010s largely succeeded. In the decade since, the status of academic (macro)economists has fallen among the U.S. political class. The demotion began under Donald Trump, who downgraded the head of the Council of Economic Advisers from a cabinet-level post, and whose economic advisers consisted mainly of businessmen like Steve Mnuchin, right-wing think-tankers like Stephen Moore, and — to be brutally honest — hacks like Peter Navarro.
Biden has largely continued this trend. Janet Yellen was a prestigious economics professor, but Biden’s CEA is mostly think-tankers, and its chair up until this month was Ernie Tedeschi, who has a Master’s in public policy and primarily worked as a financial analyst. (This is not a knock on Ernie, who is a very smart and good guy; just a demonstration that academic cred is no longer at the premium it once was.) Meanwhile, anecdotally, economists are no longer regarded as the all-purpose sages they once were — Tyler Cowen still has excellent advice on where to get lunch, but the fact that he is an economist no longer seems to lend that advice a special sheen of intellectual authority.
The blogger rebellion gave voice to built-up frustrations, but ultimately the cause of (macro)econ’s loss of prestige was its obvious failure to stay relevant in a changing world.
The financial crisis was a big part of that, of course — economic theorists largely failed to anticipate the possibility of such a crisis, to observe the risks building up, to anticipate the consequences of the crash, or to prepare a policy response — a very rare exception being Ben Bernanke, whom we were very lucky to have as Fed chair in 2008-9. (Ironically, the post-pandemic inflation has conformed much, much more closely to standard textbook macroeconomics, and few people have noticed or cared.)
But it wasn’t just the financial crisis. There was a whole litany of macro things that seemed to have gone very wrong, right under the economists’ noses. The profession barely even paid attention to the long rise in inequality that began in the 1970s, and when they did start to pay attention, they had few theories to explain it. Economists had almost dogmatically supported free trade, and were thus blindsided by the China Shock in the 2000s. And the relentless focus on shareholder value as the one goal of a corporation seemed to have financialized the economy, with managers now focused on slashing jobs to juice quarterly profits rather than investing in innovation for long-term growth.
So it made sense to stop listening to (macro)economists quite so much — or at least, to no longer give them pride of place, and to supplement their perspectives with people from different backgrounds. But that left many economists themselves casting around forlornly for the relevance they once enjoyed. A prime example is Angus Deaton, who won the Econ Nobel in 2015, but who now spends much of his time making public mea culpas for both himself and his profession. In a recent post on the International Monetary Fund’s website called “Rethinking My Economics”, Deaton rattled off a whole list of things that he thinks economics has gotten wrong and needs to change.
This is, in principle, a healthy exercise. But Deaton’s post reads like a pastiche of populist political causes from the 2010s that are already starting to go stale, along with a few inside-baseball methodological gripes that he’s been nursing for a while. Ultimately it still seems to take it for granted that economists are still the West’s key intellectuals. It, and other critiques like it, have largely failed to grapple with what I see as the key problem — the fact that macroeconomic theory itself, as it’s practiced today, is ill-suited to helping us understand the problems we face.
So first let’s go through Deaton’s critiques, and then I’ll talk a bit about what I think the real problem is, and how it could be fixed.
Deaton’s complaints (and others like them)
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Author: Noah Smith
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