Economics in Transition


In a recent Project Syndicate article, Prof. Diane Coyle of Manchester University reviews three (critical) books on the state of economics, namely Andrew Lo’s Adaptive Markets; a collection of essays on Deidre McCloskey (here is a link of a INET interview with her) and Richard Bookstaber’s The End of Theory. In a nutshell, Prof. Coyle’s essay expresses frustration at cheap shots at the discipline (her advice, roughly: do not overlook the emergence of new approaches as these books are trying) and advises (or so it seems) patience, because the evolution of a new coherent approach from a myriad of new promising research programs or areas, “[b]ehavioral psychology, complexity theory, agent-based modeling and the like, along with historical narratives, an emphasis on institutions, methods such as randomized control trials and now big data and AI” will simply take time.

Having been on the practical side of things for years (and not being bright enough for this kind of stuff), I do not need to concern myself too much with what the future holds for the discipline. I must humbly add however, that the many critiques of the discipline are indeed cheap shots. For instance, judging the utility of the discipline merely on its ability to forecast the future – as it is often done — feels very wrong and misguided to me.

So for those who are looking for some balanced writing on the issue, I have two quick (humble) recommendations to make.  This short paper by LSE’s Ricardo Reis does a very nice job arguing that many of the critiques of mainstream economics are “off target”, and that despite all the criticism, many useful things are still happening in the world of econ research. His advise is more discussion/debate as well as more support for the writing of graduate textbooks. Reis paper is also useful in providing a literature review of sorts on the stuff recently written on the topic, including some “DSGE-bashing” and Paul Romer’s (now infamous) critique of the identification problem in economics (or more generally, in social sciences).

My second recommendation is a speech by Janet Yellen delivered last October during a Boston Fed conference.  In her speech, Mrs. Yellen identifies 5 research areas (demand-supply demarcation; heterogeneity vs. representative agent models; financial sector-real economy interaction and so on) that require more work.  I read this list as what’s been amiss in econ research until the Global Financial Crisis, and the discipline can no longer ignore.  I enjoyed reading it and of course learnt from it…

Turning back to the above-mentioned books in the Doyle review, I have yet to order two of them, but I had already started reading Lo’s Adaptive Markets, which is indeed a great book. It offers, among other things, a middle way between loving and hating the “EMH” (Efficient Market Hypothesis). Lo’s advise is, just embrace the AMH (Adaptive Market Hypothesis) instead. The AMH, as explained in Chapter 6 of the book, is comprised of 5 principles, which essentially acknowledges our limitations as human beings, but also our strengths — that we learn and we are not so bad in abstract thinking and so on. Put differently, we are, at the end of the day, bunch of imperfect algorithms trying to do our best even though we are badly limited in our capabilities, yet, we are still evolving, working on it. It is no wonder, as a modeling strategy, biology reigns supreme over physics, in the AMH world.