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Science of economics faces scrutiny, debate after financial crisis
By John Gong |
September 14, 2009, Monday
|
Print Edition
Print Edition
A SPIRITED debate is underway at the renowned publication The Economist over the validity and usefulness of economics as a science. The renowned British publication is circulated around the world.
The pages recently contained an attack on macroeconomics and financial economics, which performed miserably in forecasting the fall of Wall Street and its fallout.
The legion of game theorists and option modelers in the industry were also targets, accused of complicity in inflating the financial bubble.
Useless
One article was succinctly summarized by quoting Nobel Laureate Paul Krugman: "Much of the past 30 years of macroeconomics was spectacularly useless at best, and positively harmful at worst."
The August 8-14 issue of the Economist featured a rebuttal by Professor Robert Lucas at the University of Chicago, who is the central figure of the current mainstay macroeconomics theory, equipped with micro-foundation models and rational expectations.
A generation of economists is trained with Lucas' textbook, and the theory is widely understood as the pillar of the modern government macro policy framework.
The debate then moved onto The Economist's Website, including a vicious attack recently on Lucas by Professor Ping Chen at Peking University, my old pal at the University of Texas at Austin in the early 1990s.
Ping's argument was even more extreme in advocating the exact opposite side of what the first Economist article intended to criticize - employment of mathematical models, and this time with even more sophistication of nonlinear techniques rooted in physics study of chaotic phenomena (let me reveal the secret that Chen is originally trained as a statistical physicist).
Without taking a position on either side, I would like to rush to the defense of economics as a legitimate science from a micro perspective.
Examples abound of its successful policy applications in many areas.
Industrial organization theories, constituting a major branch of microeconomics, historically played a pivotal role in antitrust legislation and law enforcement in the US and other OECD countries.
Corporate mergers and acquisitions now typically need to undergo a rigorous antitrust review that usually invites economists' participation in the process. Economists are regularly hired as consultants, myself included, to be involved in China's antitrust projects.
Fundamentally economics is a science about human behavior. You may argue that not all people behave logically and rationally (including my two boys sometimes when they are angry) to justify mathematical modeling.
Yet we still call it a science as there are plenty of regularities and consistent patterns that can be discovered when our research object is the human collective at a societal level. Individual aberrant behaviors certainly exist, but they only represent fringe noises that can be largely ignored when human collectives are aggregated.
There is a famous economists' joke that three opinions emerge if you put two economists in a room. Well, besides a round of laughter on hearing this joke, I plead with you to give us a break with a bit of understanding.
And on that note, I will head to my microeconomics classes of the fall semester with a strengthened sense of pride and confidence.
(The author is an associate professor of economics at the University of International Business and Economics, Beijing. The views expressed are his own. His e-mail: johngong@gmail.com)
The pages recently contained an attack on macroeconomics and financial economics, which performed miserably in forecasting the fall of Wall Street and its fallout.
The legion of game theorists and option modelers in the industry were also targets, accused of complicity in inflating the financial bubble.
Useless
One article was succinctly summarized by quoting Nobel Laureate Paul Krugman: "Much of the past 30 years of macroeconomics was spectacularly useless at best, and positively harmful at worst."
The August 8-14 issue of the Economist featured a rebuttal by Professor Robert Lucas at the University of Chicago, who is the central figure of the current mainstay macroeconomics theory, equipped with micro-foundation models and rational expectations.
A generation of economists is trained with Lucas' textbook, and the theory is widely understood as the pillar of the modern government macro policy framework.
The debate then moved onto The Economist's Website, including a vicious attack recently on Lucas by Professor Ping Chen at Peking University, my old pal at the University of Texas at Austin in the early 1990s.
Ping's argument was even more extreme in advocating the exact opposite side of what the first Economist article intended to criticize - employment of mathematical models, and this time with even more sophistication of nonlinear techniques rooted in physics study of chaotic phenomena (let me reveal the secret that Chen is originally trained as a statistical physicist).
Without taking a position on either side, I would like to rush to the defense of economics as a legitimate science from a micro perspective.
Examples abound of its successful policy applications in many areas.
Industrial organization theories, constituting a major branch of microeconomics, historically played a pivotal role in antitrust legislation and law enforcement in the US and other OECD countries.
Corporate mergers and acquisitions now typically need to undergo a rigorous antitrust review that usually invites economists' participation in the process. Economists are regularly hired as consultants, myself included, to be involved in China's antitrust projects.
Fundamentally economics is a science about human behavior. You may argue that not all people behave logically and rationally (including my two boys sometimes when they are angry) to justify mathematical modeling.
Yet we still call it a science as there are plenty of regularities and consistent patterns that can be discovered when our research object is the human collective at a societal level. Individual aberrant behaviors certainly exist, but they only represent fringe noises that can be largely ignored when human collectives are aggregated.
There is a famous economists' joke that three opinions emerge if you put two economists in a room. Well, besides a round of laughter on hearing this joke, I plead with you to give us a break with a bit of understanding.
And on that note, I will head to my microeconomics classes of the fall semester with a strengthened sense of pride and confidence.
(The author is an associate professor of economics at the University of International Business and Economics, Beijing. The views expressed are his own. His e-mail: johngong@gmail.com)
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