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Sunday, February 06, 2011

What is wrong with Economics

Raghuram Rajan has an interesting piece on what went wrong with the economics profession in the
years that led up to the global crisis. His big issues: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.

I think these, in turn, are directly related to the incentives of academic publishing. It's a recurring theme in agency theory: When the principal rewards the agent for performance in a certain direction, an excessive focus upon that comes about, and performance in other directions gets contaminated. When universities created an incentive structure linked purely to peer-reviewed journal pubs, economists focused on performing for each other, instead of performing for the world.

So in our diagnosis of the crisis, just as we criticise the HR policies of banks, we should also criticise the HR policies of universities.

While I'm quite aware of the narrowing of the mind that comes about from the Western-style process of focusing on pubs and tenure, it is not easy to find an alternative HR framework. George Stigler had a fascinating little article on this (which I was unable to find: do you know it?).

In India, in particular, the economics profession suffers from the twin maladies of low pressure and the historical baggage of development/socialist economics. On average, if an Indian economics department was given strong incentives to publish more, it would be an improvement. Performing for economists is better than not performing. At the same time, on the scale of mankind, it does seem that economists need to do more in terms of performing for the world.

Why does the publishing+tenure process work well in science and engineering? I have an opinion of one element that is in play there. In science and engineering, bringing in resources through research contracts is essential for doing research because research requires expensive equipment, staff, etc. There is, then, a joint production of academic publications alongside performing for the world (which allocates research funding). Hence, when the principal asked for academic publications, this did not generate a closing of the mind. In contrast, most research in economics in the top departments worldwide does not require bringing in external funding. So that source of pressure for performing for the world is absent.


  1. Hi Ajay
    Started following your tweets recently. Good job. I have long been looking for good discussions on the Indian economy and finance, and yours is a rare blog.
    On the same note, I think you are discounting the human character to endeavor - endeavor to think, endeavor to analyze, and endeavor to produce. Without any financial/funding incentives, why does that endeavor go missing? All the more, there is no 'vested' interest to create biases in research. So, it should be excellent quality.
    And, why does it ring true for India even more? Does the "end of the month salary check" make most of us too complacent in what we do?

  2. Is this the article by Stigler?

  3. When the salary of an economics professor was low, he had a strong incentive to engage with the world since consulting income could be 5x bigger than his wage.

    Over the last 10-20 years there's been a huge rise in salaries of economics academics, particularly at the top end of the spectrum. This has underlined the incentive towards "performing for other economists". A young economist learns a skill, gets tenure, uses that skill further, gets wage hikes, and so on. It's the easiest thing for him to do: To keep performing for other economists. The very steep wage profile has helped deter people from doing the hard work of stepping away from what they know (performing for fellow economists) to something they don't know (performing for the world).

    Economics today is thus a bit more sterile than it was 20 years ago.

  4. Rahul,

    Thanks! That's the one. I had read it ages and ages ago and just could not remember the ref.

    Folks: Rahul has the URL for the George Stigler article that I mentioned in the post.

  5. Ajay,
    In this genre 'Life Among the Econ' by Axel Leijonhufvud is a must read - it's a really fun piece (google and you'll get it)and says pretty much the same thing.

  6. Great! Glad to help out! Too bad that it is gated.

  7. Stop giving excuses for your Indian colleagues, Ajay.


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