Top of the News: Commentary
LOST IN THE WILDERNESS OF ECONOMIC THEORY
If economics were a sport, the U.S. could retire the championship trophy. For the fourth straight year, and for the 11th time since 1980, the Nobel prize for economics was taken home by economists from American universities. The winners this year are two top economic historians: Robert W. Fogel of the University of Chicago, best known for his controversial study of the economic efficiency of slavery and for his work on the early American railroads, and Douglass C. North of Washington University in St. Louis, who has written on the evolution of feudalism, markets, and other economic institutions.
Ironically, none of the recent prizewinners comes from the ranks of the macroeconomists, the group that traditionally takes center stage in times of economic distress. Since 1990, when the latest string of American prizes started, the economy has grown at an anemic 1.2% rate, and the ranks of the unemployed have surged by more than 1.5 million. Yet during this period, the awards have been given for work in joint fields--law and economics, finance and economics, family and economics, history and economics. Macroeconomics--historically the core of the profession--has been ignored by the Nobel prize committee for the past six years.
BLACKBOARD BUNGLE? For good reason. The lack of recognition accurately reflects the current dismal state of macroeconomics. Ever since the mid-1970s, when Keynesian ideas came under attack, macroeconomists have been flailing about in all different directions. Monetarists have jostled with supply siders, who fought with neo-Keynesians, who argued with rational expectations theorists. "The problem with macroeconomics is that it changes every five years," says Donald McCloskey, an economic historian at the University of Iowa. Macroeconomic "research has been very confused and very controversial, he says." Adds James S. Heckman, a labor economist at the University of Chicago: "There's a real sense that macroeconomists have gotten into a mode of talking to each other and not addressing serious issues."
Indeed, for most intents and purposes, macroeconomists have abdicated their responsibility to explain the ups and downs of the business cycle--the stuff like unemployment and recessions that people really care about. Instead, says McCloskey, the core of macroeconomics has become "blackboard speculation" that deals with abstract mathematical theories rather than useful applications.
One of the consequences of this confusion is that almost all econometric models used to forecast the U.S. economy still depend on insights from a quarter-century ago, developed by such luminaries as 1980 Nobel Laureate Lawrence R. Klein, now 73. "To a large extent, macroeconomists haven't tried to improve macro forecasts or macro models," says Olivier Blanchard, a leading macroeconomist at the Massachusetts Institute of Technology. Indeed, forecasters are viewed as second-class citizens within the profession--even though government and businesses depend on forecasts to guide policy and investment decisions.
By contrast, many of the recent Nobel winners--arcane as their research topics may sound--have been doing research with more practical applications. For example, before his work on slavery, Fogel collected evidence that the rapid growth of the U.S. railroads in the 1800s was not necessary to drive America's economic development. When brought forward into today's world, this conclusion suggests developing countries don't need to pump money into a "leading sector," such as steel, autos, or semiconductors, to ignite economic growth.
GROWTH PATTERNS. North, too, has looked to apply his research in recent years, traveling to Russia, Eastern Europe, and Latin America and offering advice on how to create new economic institutions in those countries. What such regions need most, according to North, are "secure, well-enforced property rights that will allow people to make investments."
But no matter how worthy the latest Nobel winners are, it's sad to realize that there still is a gaping hole at the center of economics--where macroeconomics used to be. For policymakers and ordinary people looking for guidance on what to do next, there is precious little to be found. "I don't see many signs of change," says MIT's Blanchard. "I wish I saw them, but I don't." More's the pity. HOW MACROECONOMICS WENT ASTRAY
THE 1960 Hubris overcomes the profession, and
macroeconomists prematurely declare the death of the business cycle.
THE 1970 Keynesianism comes under attack when macroeconomists are surprised by
the "theoretically impossible" combination of slow growth and high inflation
after 1974-75 recession.
THE 1980 A fragmentation of the faithful occurs as monetarists champion tight
money to lower inflation, and the recessions of the early 1980s follow.
Supply-siders, meanwhile, advocate big tax cuts, and enormous budget deficits
THE 1990 Confusion reigns: Keynesians bemoan the lack of fiscal stimulus,
monetarists worry about excessive money growth, and rational expectations
theorists doubt the efficacy of government policy.
DATA: BUSINESS WEEK