14th June 2017

This meeting examined if, and why, there is a ‘monoculture’ in macroeconomics; whether there are barriers to innovation in macroeconomics; and whether academic macroeconomics has become divorced from ‘real world’ economic challenges.

Knowledge and orthodoxy

Richard Bronk suggested that economists’ misunderstanding of inherent economic uncertainty supports an analytical monoculture that leads to intellectual blind spots and an underappreciation of pluralism in policy making. Economists are comfortable with the traditional dichotomy of risk and uncertainty but ignore the irreducible uncertainty in economic processes created by innovation inherent in capitalism (e.g., Shackle’s “what does not yet exist cannot now be known”). Bronk touched on the re-interpretation of uncertainty in the methodological departure from Keynes/Hayek to Lucas (others argue this had happened already). This interpretation allowed macroeconomics to be recast in a narrow class of analytical models – closer to physics but inappropriate for a system based on innovation.

Analytical monocultures create a powerful anchor due to the epistemology created by a single cognitive structure. This creates a robust but narrow academic culture with limited integration with other disciplines. Intellectual challenges such as bounded rationality, biases and information are translated as ‘bolt-ons’. Monocultures also create limited fields of vision and ‘blind spots’. Policy economists trained in this framework argue for ‘best practice,’ but with uncertainty over economic processes such practice cannot be known. Plurality in regulation and respect for the benefits of diversity, even if at some cost to efficiency, may be more appropriate. Paradoxically, fields where there is greatest innovation tend to have the greatest push for a singular approach to regulation. Persistence of the monoculture may reflect the coalition between political institutions and certain advocacy coalitions (e.g., Schmidt and Thatcher, 2013).

Roger Farmer explored possible constraints to innovation in economic departments. He argued that they are dominated by well-understood rules where publication in the top 5 journals is the key to success. These journals are administered by the dominant departments. Much of what is published is in fact ‘junk’, but it is the track to tenure in the top departments. Departments are better described as factories for creating monoculture economists where experimentation is discouraged. He suggested treating the top 15 journals equally.

Doyne Famer offered some thoughts as a physicist. In physics the journal hierarchy is flat, there is an incentive for novelty, empiricism is essential and economics seems to move slowly. Hundreds and thousands of data points are available whereas in macroeconomics, for instance, there have only been 15 or so business cycles recorded in any single country – during which time the economy has evolved through different states – making empirical exploration and verification more challenging. In contrast to physics, the Nobel in economics is more like a lifetime achievement award and somehow liberates the winners to finally engage in public debate.

The discussion included the following points:

  • The ‘monoculture’ in economics and disregard for pluralism was widely acknowledged. Perhaps most disconcerting is how this is also dominant in undergraduate teaching where reports of very low tolerance for alternative ideas and approaches. This is re-enforced by the textbooks. While there are initiatives, the dominant text books continue to have a pre-crisis, US (large open economy) focus and no real enquiry into other approaches.
  • There is a perception that the monoculture charge and failings are specific to ‘macro’ rather than ‘micro’ economics. One reason may be that econometric identification is easier in micro due to natural and quasi-natural experiments while macroeconomics is general so identification is harder. Transformation in data availability has created ‘micro-econometrics’ while macro data has barely changed in sixty years. The second order consequences of irreducible uncertainty (via the responses of other agents) is also more problematic to systems. Macroeconomics seems to be inherently more political so policy institutions prefer to use a ‘we don’t do macro’ defence, while making important implicit macroeconomic assumptions. It was pointed out that macro is not in fact unique and that labour market economics has probably had greater failures of understanding.
  • There was a suggestion to extend John Neville Keynes’s positive / normative dichotomy to pure economic science without any claim to policy assessments and policy based economics. Some asked what was the difference of this Network from INET? Those involved in INET were keen to point out that there is much greater emphasis on interdisciplinary research in our Network and the general view was that macroeconomics could not become like former Soviet system economics. It was too important to make some headway given the challenges we face.
  • It was also suggested that economists should look at other disciplines who faced similar hierarchical issues. Other disciplines had similar challenges (e.g., psychology). Economics is seen as dominant over other social sciences, such as sociology and psychology, often hampering proper policy evaluation and implementation.

Elite networks and the limits to Innovation

Laura Bear read from comments Leon Wansleben on the formation of knowledge at central banks and in particular, the Bank of England. It was suggested that before the crisis the Bank’s research department had begun to resemble an academic research department. There was considerable overlap in personnel which may have re-enforced some of the monoculture in academia. For example, credit and asset price inflation was recognised but considered manageable; perhaps not surprising given the absence of finance in most macro models. The Bank can also get trapped within the political context of its own framework. Defending operational independence for inflation targeting may create some resistance to entering more contestable policy domains. This may have led to excessive reliance on policy silos. Different tasks were disentangled and addressed separately, instead of taking into account the interdependencies.

The discussion included the following points.

  • The UK has a few public institutions that dominate the political economy discourse – the Treasury and Bank of England standing out. While other departments are crucial to the economic landscape – Business, Education, Work and Pensions to name three – they are not really considered as part of the macroeconomic framework is seen as the domain of fiscal and monetary policy. An open question is whether there should be more cooperation or awareness of the interdependencies. There is also a long standing issue of openness and incentives for dissenting views both inside and outside our leading institutions. Networks with our leading economics departments and research institutes may discourage dissent and alternative perspectives and lead to biases in policy making.
  • The finance industry has been shaped by the models produced in academic departments. It is therefore no surprise that universities form an important supply chain to the financial services sector. Yet this may bias the teaching of economics. Maths holds primary importance, while the role of other aspects that may be important in informing on economic thinking are overlooked, such as history and philosophy. The closeness of the finance industry may also lead to biases in the development of research agendas and even blindness at some areas of financial research. The lack of disclosure of interests outside of academia remains an alarming shortcoming.
  • It was acknowledged that the Bank has changed significantly since the crisis. However, the lack of any meaningful enquiry into the events and responses around the financial crisis may have eroded public trust in our institutions and may take some time to replenish.

Macroeconomics in Public Culture

Paul Gilbert discussed the lack of inter-disciplinary work in economics. He drew a contrast with engineering where there was a large effort to interact with social sciences and the arts in the latter half of the last century. Such interdisciplinary approaches enabled a more robust engagement with questions around socially responsible energy development. He argues that narratives that help illustrate economic phenomena to the public are important, as found in focus group research carried out by political scientists. Policy  recommendations are most potent when models or metaphors resonate with such narratives, making it crucial for economics to break down these barriers to understanding. The liberal arts therefore provide an opportunity to act as ‘cultural brokers,’ able to improve engagement between macroeconomists and the wider public. Addressing this will bring vibrancy and innovation to the field.

Joel Benjamin presented his experience in conducting research into the nature of sub-national government borrowing. He noted that policy is too pre-occupied with ‘one size fits all’ types of policies, and urges for analysis at a regional level so that significant differences, which may lead to unintentional consequences after the implementation of policy, are taken into account. Too much attention is paid to the financial sector for policy advice, as opposed to interacting with local councils. The data and information provided by the latter is often considered too granular and precise to be relevant for policy on a nationwide scale. The Treasury in particular failures to engage the wider public. Specifically, little attempt has been made to interact, even to recognize, the concerns of the ‘Occupy’ movement that took place across the western hemisphere. Additionally, too little attention is paid to ‘stability’, with a lack of consideration of the impact from the financial sphere on the public sphere may reflect a bias in favour of the City.

The discussion included the following points.

  • Economists have a privileged position in public discourse. They are invited to give their views, but there is very little recourse if they are incorrect. It is unclear when economists are answering on the basis of their research or simply their casual assessment based on their priors. It was noted that the ‘economics profession’ is one of the least trusted by the public. In contrast, physicists are noted to have much greater pull on public opinion; the discovery of the Higgs Boson, as an example, made headlines. Part of the reason may be related to the complexity of the problems that economists deal with, and that a clear answer will always be subject to a list of caveats.
  • There is a clear need for macroeconomists to find a way of better connecting with the public. According to a YouGov poll only 12% of the public agree that “politicians and the media talk about economics in a way that is accessible and easy to understand”. This is not encouraging for the quality of our political debate and democracy. It is unclear whether economists are best placed to deliver this. Moreover, even the economic methods of analysis always have implicit valued judgements. There are other ways to allocate resources such as need (health care) or first come (public spaces) that are preferred to a market mechanism. The lack of enquiry about the omission of financial regulation from the 2017 Election manifestos is surprising but un-noted by economists.
  • The formulation of macroeconomic policy on the basis of focus groups has a dark side. Effective communication can easily outweigh economic evidence. For example, ‘take back control’ asked us to avoid our base fear of ‘losing control’, which is a far more powerful sentiment than any nuanced economic argument. What is to happen if politicians use communication skills to sell economic policies beyond the critical assessment of economists? While the OBR may have solved this problem for budgets, the big economic issues are outside scope. Are we comfortable with marketing and communication of priors and prejudices supplanting economic analysis.

Bureaucracies and the ‘will to ignorance?’

Linsey McGoey described how ‘ignorance studies’ is a growing academic subgenre and distinct from the risk and uncertainty dichotomy. The basic premise is the importance of recognizing that different organizations and individuals can have incentives for not wanting to know unsettling or inconvenient information. Understanding the motivations; forms of personal capital; and institutional resources that make it feasible and / or advantageous to ignore information is a neglected but important task for social scientists. Insights from ignorance studies have led to recent advances in psychology that map forms of non-knowing among individuals, the sociology of knowledge and institutions, and, most recently, to economics. The story of the emperor’s clothes is a particularly striking metaphor for society’s use of ignorance; put simply, why do the citizens believe the child’s observation? Attending to the problem of ignorance can help to augment the empirical robustness of economic and sociological studies of economic change.

A growing body of literature in microeconomics has sought to model the uses of strategic ignorance by individual actors. Behavioural economists have conducted lab-based experiments on the use of strategic ignorance in decision-making. Their findings add nuance to a number of economic axioms, in particular that individuals naturally seek to maximize their interests through seeking information about the outcomes of actions. The field of ignorance studies is growing fast. A new book series from Routledge on ignorance studies was launched in 2016, with editors drawn from economics; psychology and sociology. It’s arguable that some of the most important and exciting work on ‘strategic ignorance’ is being developed by game theorists within economics, but disciplinary silos has thus far limited wider knowledge of recent developments. Sociologists can bring an understanding of why silos occur, and how they can be overcome.

Tony Price highlighted a self-sustaining cycle by which public institutions operate in research. As institutions seek to better understand themselves, and how they should operate, they change and adapt to new findings. Eventually, these adaptations may impact how institutions view themselves, closing themselves off to fresh perspectives and new ideas. Even observing the institution may change its behaviour. The philosophy of Foucault may be instructive in seeing economic processes at once consistent with individuality and liberty but also creating power bases within this order. One suggestion is to see the role of the ESRC in this light. He also highlighted that economics involves interaction and exchange. The Folk Theorem in games suggested that the norms which emerge from repeated games with similar agents can centre on almost any outcome. This suggests monocultures are inappropriate but also the risk of change.

The discussion included the following points.

  • Very little is said about the role of hierarchy in determining economic outcomes. However, the crisis made institutions realize that there is pressure on them to change; the distrust may have already led to a greater role for industrial strategy, but, as noted previously, regional models do not feature. There is also a danger that institutions are concentrating policy efforts on issues that they do not understand. Attention is also drawn on the influence of politics in incentivizing wrong approaches.
  • Foucault commented on users of economics and the unpredictability of policy innovation. The creation of the Euro common currency is portrayed as one consequence of largescale groupthink, by which its implications were barely understood by the policymakers in charge. Another participant draws on lessons from Mongolia’s experience with foreign investors in resource extraction; subsequent macroeconomic consequences fostered distrust, which impacted policy.
  • The example of the Emperor’s New Clothes was discussed further. The point was made that the ‘child’ in the global financial crisis case were in fact some highly visible and credible members of the economics establishment. Perhaps the existence of multiple Emperors – global financial institutions – mean that it is more difficult for dissenting voices to be heard. How many warnings would it have taken to change the banks’ views on MBS? The realization that there are different possible outcomes when ignorance is introduced to the game may lead to a different understanding of the robustness of macroeconomic policy making.

17 July 2017