RPP is our code for the weekly blog post, op-ed by the School’s celebrity economist / pundit / opinionista, but he will probably only start writing in August, so in the meantime we are filling in with some guest posts.
This week Waldo Krugell on The future of Economics:
Yesterday The Onion joked that Economists are evacuating their families from the US, “often leaving half-finished survival bunkers behind them”. In the few years since the financial crisis there has been talk that Economics has failed us and there should be changes in the teaching of Economics – the rigour leading to mortis and all that.
Truth be told, this is not the talk over coffee in our School, but we often talk about our research and it may be useful to blog about where our field is going. Lucky for us, Ali Wyne of the BigThink blog recently asked eight top young economists about what they think the biggest unanswered questions are and about the breakthroughs that they predict.
On the practical side, the big questions are always the big questions: Why are developing countries poor? How can developed countries restart growth? How can we increase overall well-being?Thus, some see the future in the basic, big-picture, policy-relevant questions of macroeconomics. After taking a backseat to fine- grained Micro work, the crisis has put Macro back on the map. Gauti Eggertsson of the Federal Reserve Bank of New York says that the issues are things like optimal currency areas, bank runs, herding in financial markets and automatic stabilizers. Gita Gopinath of Harvard University argues that we need a better understanding of linkages across countries in trade, finance and macroeconomic policy. The interactions between developed economies and fast-growing developing economies, and between countries with different economic institutions will be important.
From a more theoretical angle the issue is how to model realistic economic agents. Time and again, people have shown that they are not rational utility maximisers with consistent preferences. Xavier Gabaix argues that behavioural elements played a key part in the build-up of the financial crisis and the analysis of economic agents can be further enriched by studying behavioural economics. The fields of psychology, neuroscience and computer science will be making important contributions to increased cross-disciplinary work.
Whether they favour Macro or Micro perspectives, applied or theoretical approaches, almost all the economists see the way forward as very much empirical. Justin Wolfers writes:
Specifically, the tools of economics will continue to evolve and become more empirical. Economic theory will become a tool we use to structure our investigation of the data.
In a different post Betsey Stevenson and Justin Wolfers write that business is booming in empirical economics. Our everyday activities are generating Big Data and increased computing power is making it easy and cheap to analyse. When you have data on everything, there is less need for rational, or representative agents.
So what does this mean for the average young economist sipping a cuppachino tomorrow morning? First, it does not matter whether you choose to examine Macro or Micro issues, they are linked. Whatever you do, you will have to bring it back to the roots of how people behave, and what it all means for growth and development. Second, you’ll have to invest in more methods training. The future is empirical, whather it is Micro RCT’s or Macro quasi-experiments, the data will be pouring in and everyone wants to know more about causality. Third, get ready to work with colleagues from different fields, using different methods – we economists are unlikely to figure it all out on our own.