Recently, Benoît Cœuré, a leading French member of the Executive Board of the European Central Bank, delivered an address to economics students at the job forum of Paris School of Economics. He wanted to explain to the gathered students that becoming an economist was a great thing to do and paid well. “For many, a master’s degree is a natural step towards a PhD. And a PhD is essentially a promise of employment. In the United States, for example, the unemployment rate for PhD economists is about 0.8%, the lowest among all sciences. Not a bad place to start from.”
But the money was less important because “your PhD should be fuelled by your passion and your love for research rather than by hopes of earning more money.” That was the reason he studied economics and worked his way up as an economics bureaucrat in the public sector, in ministries of economy and finance, statistical institutes, international organisations such as the IMF, World Bank and other development banks, OECD, and central banks such as the US Federal Reserve or the European Central Bank. Working in these agencies, Cœuré, reckoned “is probably as close as it gets to applied economics.”
Cœuré’s experience in the public sector may be different from those of us who worked in the private sector. Having worked in the private sector, in banks and other financial institutions in my ‘career’, economic policy advice is not the target but instead, ‘how to make money’. Economics is geared to either corporate strategy for profits in production and trade or to investment strategy for profits in financial speculation.
For Cœuré, economics “is literally about taking the models, tools and methods that you learn at class to help design public policies.” And as a considerable fraction of that work then ends up being published as new research “there is a virtuous feedback loop between academia and public sector institutions… Macroeconomic models underpin almost all of our work at the ECB.”, says Cœuré. That raises the question of the utility of models in economics.
Marxist economist Ben Fine has attacked mathematical models in economics because they have replaced theory. “The goal “of modelling the economy is fundamentally misconceived… a model of the economy is not the economy itself”. “ For Fine, mainstream mathematical theory is “unfit for purpose”. Models have a place but “their extreme limitations need to be recognised.” As such, macroeconomics remains divorced from what is going on in the real economy. For example, the famous accelerator-multiplier Keynesian model may show the instability in capitalism, but it does not show why.
On the other hand, Dani Rodrick reckons models are the strength of economics. They are what makes economics a science. Rodrik rejects the view that economics can provide “universal explanations or prescriptions”. All mainstream economics can do is “map bits of economic reality”. In other words, economics is not ‘political economy’ in the sense of the classical economists and Marx.
Cœuré recognises that models have their limitations. “That’s when art, or rather artisanat – craftsmanship – comes in. We need to interconnect these models, and fit them into a general equilibrium view of how the euro area economy evolves dynamically – preferably in a tractable way.” Unfortunately, the track record of general equilibrium models leaves much to be desired.
With collapse of Keynesian economics in the 1970s, the mainstream concentrated on explaining ‘business cycles’ or ‘fluctuations’ in an economy using ‘modern’ techniques of modelling from what it called ‘microfoundations’. Econometric analyses like the Phillips curve were ditched because such ‘correlations’ between employment and inflation had been proved wrong. The job now was not to look at macro or aggregate data but to work out some ‘model’ that started with some premises of agent (consumer) behaviour or preferences and then incorporated some possible ‘shocks’ to the general equilibrium of the market and then considered the number and probability of possible outcomes.
Thus were born the Dynamic Stochastic General Equilibrium (DSGE) models. They were based on equilibrium assumptions because they started from the premise that supply would tend to equal demand; they were dynamic because the models incorporated changing behaviour by individuals or firms (agents); and they were stochastic as ‘shocks’ to the system (trade union wage push, government spending action) were considered as random with a range of outcomes, unless confirmed otherwise. This is now what most macro economists spend their time doing. Forget empirical evidence, forget macro data, find a ‘micro’ foundation (model) that might help to at least offer a guide to what possibly might happen.
But DSGE models have proved to be worthless in explaining anything. These models failed to predict before or explain after the Great Recession and are unable to explain the subsequent weak recovery, or Long Depression. And it is not hard to see why. There is a total absence of investment or profit as ‘shocks’ in these models. Everything starts with consumer preferences; the arch consumer is king as in the neoclassical world and Keynesian aggregate demand is reduced to just consumption.
Since the Great Recession, general equilibrium models have lost their glamour to some extent. Cœuré quotes our recent Nobel prize winners, Abhijit Banerjee and Esther Duflo: “We, the economists, are often wrapped up in our models and our methods and sometimes forget where science ends and ideology begins. We answer policy questions based on assumptions that have become second nature to us because they are the building blocks of our models, but it doesn’t mean that they are always correct”.
This is somewhat ironic. These Nobel prize winners do not use DSGE models. Instead they use Randomized Control Trials (RCT). You see: “good economics is much less strident, and quite different. It is less like the hard sciences and more like engineering or plumbing: it breaks big problems into manageable chunks and tries to solve them with a pragmatic approach – a combination of intuition and theory, trial and acknowledged errors.” The plumbing analogy follows closely Keynes’s view that economists are really like dentists, sorting out the aches and pains of capitalism. Unfortunately, as Sanjay Reddy and others have pointed out, there are just as many faultlines in RCT as in DSGE models. The Nobel prize winners’ ‘economics of poverty’ actually shows the poverty of economics.
That does not mean it is impossible to use mathematical models as long as they are based on realistic assumptions and tested empirically. Marxist economics is based on scientific method. You start with a hypothesis that has realistic assumptions that have been ‘abstracted’ from reality and then construct a model or set of laws that can be tested against the evidence. The model can use mathematics to refine its precision, but eventually the evidence decides. Moreover, macro-economics is the world of the aggregate, not individual behaviour. That delivers measurable data to test a theory.
The mainstream economics that Cœuré promoted to the Paris students as the basis for public policy has hardly proved successful in practice. Just consider the ECB’s own attempt to deal with the banking crash of 2008-10, the euro debt crisis of 2011-3 and the subsequent attempt to revive the Eurozone economy. Cœuré claims that “the forward-looking nature of monetary policy makes the use of models indispensable”, but it seems that these models have proved to be ‘too simple’, and so monetary policy operations have become much more complex; with “forward guidance in central bank speak” and unconventional monetary policy’ like ‘quantitative easing’.
Cœuré says that “When we started purchasing securities, we had no guidance. but “over time, ECB staff have successfully filled this void. We now have state-of-the-art term structure models that help translate changes in the amount of bonds into changes in long-term interest rates.” Well, maybe. But the ECB’s economic forward guidance on inflation and growth has been proved pretty much wrong. The ECB has failed to achieve its 2% inflation target and real GDP growth has persistently fallen below ECB forecasts. The Long Depression has defeated mainstream economics.
Forget forecasting. Cœuré recognises that “uncertainty is a pervasive feature of our profession”, so he dismisses the criticism that economists failed to predict the outbreak of the financial crisis. “This criticism is nonsense. Do we expect physicians to predict illnesses? We don’t, of course. But we expect them to help us cure illnesses. Economists should do the same. They should be judged by the quality of the advice they give.”
Again, we get the view that economists are like dentists, doctors or plumbers who clear up messes once they have happened. But are doctors all that matter in human health? Actually, improved doctoral skills in treating patients once they have become ill comes from scientific discovery about diseases, biology and the environment. Successful drugs and medical practices are the result of learning what the cause of the illness is. In medieval times, doctors applied all sorts of useless and dangerous treatments (leeches etc) because they did not know that about ‘germs’ (bacteria or viruses). Cholera was eventually abated by a geographical study in London showing it was prevalent near bad drinking wells. Malaria and smallpox were resolved by discovering the carriers of the bacteria in various animals. Treatments by doctors then followed.
There is no substitute for the ‘big picture’. Economists should not be doctors but social scientists, or more accurately they should develop an economics that recognises the wider social forces that drive economic models, in particular, the social mode of production that is capitalism. That is political economy, mostly not taught in universities and certainly not practised in international agencies.
In his address, Cœuré recognisedthat central banks had failed before the Great Recession. This was because its models expressed “an absence of a meaningful financial sector, which left models at a loss to explain the origins of the crisis and its consequences for the economy.” And “prevailing models were built on a standard linear Gaussian set-up and hence proved inadequate to examine shocks on the scale of the global financial crisis.” In other words, they assumed a normal steadily growing capitalist economy where there were no underlying contradictions that could erupt violently.
Remember the words of the then Fed chair Ben Bernanke back in 2004, just before the Great Recession. He was proclaiming “The Great Moderation” that capitalism had become. “the substantial decline in macroeconomic volatility over the past twenty years, is a striking economic development. Whether the dominant cause of the Great Moderation is structural change, improved monetary policy, or simply good luck is an important question about which no consensus has yet formed. This conclusion on my part makes me optimistic for the future, because I am confident that monetary policymakers will not forget the lessons of the 1970s.”.
Mainstream economics underestimated the depth and length of the Long Depression that followed, where even negative interest rates have no effect on the ‘real economy’ and where attempting to reduce public debt (as in the Greek crisis) made things so much worse “in the aftermath of the crisis, with tragic social consequences”. But don’t worry, Cœuré told the students, “our general equilibrium models now feature a fully-fledged banking sector that accounts for the presence of financial frictions and that also allows us to analyse the effects of macroprudential policies.” And we are getting much more data that can help economists solve problems: “big data and richer and timelier datasets will help improve the input to our models.”
Cœuré cited climate change is perhaps the most far-reaching of the challenges ahead for economists. But he was delighted to tell the students that economics was making great strides in helping in that area: “William Nordhaus was awarded the Nobel Prize in Economic Sciences last year for integrating climate change into macroeconomic analysis.” Again, there is a certain irony here. For heterodox economist, Steve Keen, among others, has done an effective debunking job on the Nobel Laureate’s assumptions and forecasts. Actually, mainstream economics is doing little or nothing to come up with social scientific analysis and solutions on this literally burning issue.
Having expressed confidence in monetary policy as the tool to revive demand – despite evidence to the contrary, Cœuré finished by reminding his audience that “economics is a social science. Models will not take away the burden and responsibility of making judgements. Economics involves much trial and error – you have to take decisions in the fog when you can barely see your hand in front of your face. This makes our profession exciting!”
Maybe exciting – but also fraught with failure in that fog and with serious consequences.
10 thoughts on “Economics as a social science”
The problem with Economics is that, contrary to the other main sciences, it is regressing, not progressing: Keynesianism is worse than classic economy (up to Ricardo); Monetarism is worse than Keynesianism.
Since the Austrians, bourgeois economics has given up being a science. Ever since, it has accomplished the feat of degenerating even further: now it can’t even make up a convincing narrative to confuse the masses. Nowadays, it is essentially superstition, pure religion.
The 21st Century bourgeois economist is more close to the priest who consulted the Sibylline Books than the engineer in Ancient Rome. It’s can’t even be the “plumber/dentist” anymore.
La economía nunc,a fue ni será una ciencia. Al igual que el derecho, fue un invento humano al margen de la naturaleza y sus leyes. Por ejemplo, ¿puede existir el derecho romano si la propiedad no es individual y sí es social? En el caso de la economía, desde Ricardo, todo se somete a dos aspectos: la propiedad privada pilar de todo concepto y la rentabilidad, necesaria para que pueda subsistir. Es, parafraseando a Marx, un fetiche.
Remember the applause when social democrat Thomas Piketty published a long book about the need for economists to get back to reality?
About Benoît Cœuré and about the mainstream economy and from Adam Smith, says the excellent Alejandrdo Nadal:
” The discourse of capital.
Who takes the floor when economic theory speaks?
It is capital that takes the floor when economic theory speaks. Marx is the first to correctly answer the question we asked at the beginning: economic theory is the discourse of capital. ”
I wonder if Ben Fine and other Marxist economists apply their criticism of modeling to climatology, a field whose models are at least as primitive as economic models and which haven’t even been tested against past predictions. Like economic models, there are many factors that climate models cannot account for. Climate prediction based on modeling is at least as flawed as predicting economic outcomes using models.
If the following is statement applies to economics, then the same should be acknowledged regarding climate modeling:
“The goal “of modelling the economy [or the climate] is fundamentally misconceived… a model of the economy [climate] is not the economy [climate] itself.”
When, like the Nobel Prize winner, economists Incorporate climate modeling within their economic models, the predictive capabilities can be little better, and likely worse, than guessing.
Are socialists too dependent on the climate crisis as a pretext for ending capitalism to be symmetrical?
Well, I dont agree with Fine that models are worthless. Models with realistic assumptions that are then tested and replicated can provide empirical support for theory. Climate models of various sorts and assumptions have delivered pretty much similar outcomes. That suggests strong grounds for recognising that they are broadly right. Denying climate change and global warming as the result of human activity despite the overwhelming evidence of these models is taking a big risk with the future.
Because Keynes got macroeconomic profit wrong for the most elementary case, economists messed up the more complex sectoral balances equation which reads (I−S)+(G−T)+(X−M)=0.#5
This provably false equation, though, is applied by MMTers.#6 It provides the theoretical foundation for the MMT policy of deficit-spending/money-creation. And this is the point, where scientific incompetence becomes hazardous to the general public.#7 Economists bear the intellectual responsibility for the social devastation of all economic crises since the Great Depression.
As Monsieur Cœuré summarized it: “… economics is a social science. Models will not take away the burden and responsibility of making judgements. Economics involves much trial and error — you have to take decisions in the fog when you can barely see your hand in front of your face. This makes our profession exciting!”
The general public does NOT need this kind of excitement. The sooner it can leave 200+ years of scientific incompetence and generously rewarded agenda-pushing for the Oligarchy behind the better.
* Michael Roberts Blog
#1 Scrap the EconNobel
#2 What is so great about cargo cult science? or, How economists learned to stop worrying about failure
#3 Get it econ suckers: microfoundations = false, macrofoundations = true
#4 How Keynes got macro wrong and Allais got it right
#5 The axiomatically correct balances equation reads (I−S)+(G−T)+(X−M)−(Q−Yd)=0.
#6 Down with idiocy!
#7 Econogenics: economists pose a hazard to their fellow citizens
In the meantime, following a rise of 188,000 in US payrolls in October, we have had a rise of 266,000 last month. The unemployment rate is now down to 3.5%.
So, that next recession that the law of falling profits has supposed to have been predicting for the last five years, at least, has again not materialised, let alone the predicted “slump”.
Never mind there is always next year to look forward to.
You should not seek or expect a recession such as a sharp, sudden and pronounced fall in growth, employment, etc. But a permanent deceleration of growth, a weak and / or negative growth with GDP growth of less than 1.5% per year and rising unemployment. You should not look for the data in the monopolist / imperialist countries (Usa, mainly) or in the monopolist companies (FAANGS, DowJones, etc.) but in the rest of the countries and companies. If you do so, you will find that government recession. We are already in it, and it is a long-range recession with an extreme increase in inequality. Extreme misery leading to one of the 4 horsemen of the Apocalypse (Walter Scheidel, economic historian). It is the empirical evidence that demonstrates that the capitalist mode of production does not stop until SUNK THE COUNTRIES (to its majority population, the working classes). Sinking that only solves a democratic socialism. A revolutionary socialist impulse.
Somehow, Part 1 got lost. For the full text and see