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Econ 101: Chicago? M.I.T.? Nope, Berkeley's on Top

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Which is the greatest university economics department of them all? Many people would answer "Chicago." After all, University of Chicago econ has a whole school of thought named after it -- the Chicago school is a term used to refer to free-market fundamentalism and the belief that economic actors are always rational. Chicago is home to the largest number of Nobel laureates in economics, and has been home base for such titans as Milton Friedman, Robert Lucas and Gary Becker. 

Paul Krugman, himself until recently a Princeton economics professor, begs to differ. It isn't Chicago, he contends, but the Massachusetts Institute of Technology that has had the greatest impact -- at least in the field of macroeconomics -- in recent decades. It's the M.I.T. students, not the professors, that Krugman says have come to dominate the field, especially students of Stanley Fischer and Rudi Dornbusch. 

Krugman has a point. Still, when I think of the economics department that has had the most influence on the profession in the past four decades, another candidate springs to mind: the University of California-Berkeley. 

Berkeley's influence goes beyond the standard impact of a high-ranking economics department. Researchers at Berkeley during the past four decades haven't just been prestigious and incisive, they have been different. Their research has taken economics in new directions, in terms of both methods and subject matter. It wouldn't be an exaggeration to say that the Chicago School has been replaced in prominence and influence by what I like to call the Berkeley Reformation. 

In the field of macroeconomics -- econ's glamour division and the public face of the profession -- Berkeley has a few heavy hitters, such as David Romer, a pioneer of New Keynesian business cycle theory, which has become the dominant theory in policy-making circles. It also has Maurice Obstfeld, the director of the International Monetary Fund's research division. But Berkeley's prowess is mainly in the less glamorous but far larger microeconomic fields, in which its pioneering researchers have sparked not one, but several revolutions. 

For example, Berkeley boasts Dan McFadden, who almost singlehandedly invented random utility discrete choice models. These models, which are used to predict consumer choices in a huge variety of situations, have been so accurate and successful that they are regularly cited as the canonical example of "economics that works." 

Another example of Berkeley trailblazing is David Card, who revolutionized the field of empirical economics with his use of natural experiments to study policies such as the minimum wage and welfare reform. Those empirical techniques have been so successful that they are now taking over much of the economics profession. In other words, Card's work is helping to change the very meaning of economics, from a largely theory-based form of mathematical philosophy to a data-driven science. 

If McFadden and Card changed what economists do, Emmanuel Saez has changed what they talk about. Saez is a longtime collaborator with Thomas Piketty, but while Piketty has been more in the limelight, Saez is in no way a junior partner. The duo studies economic inequality, which the Chicago School traditionally considered of only minor importance. Piketty and Saez have gathered a flood of data showing how severe inequality has become in our society, and have thus changed the conversation. 

Another Berkeley notable is Barry Eichengreen, an economic historian of unmatched prowess. Eichengreen mostly eschews the typical mathematics-heavy economic models for a broad, syncretic approach that gathers data from a huge number of sources in order to gain a sense of the big picture. He has written a number of important books on the gold standard, the Great Depression, financial crises and global imbalances. 

And let us not forget Brad DeLong, an enormously influential economic historian who has also done key work in the finance field. More recently, DeLong pioneered the field of economics blogging, and is my personal favorite economics blogger, though his style is often too pugnacious and his knowledge too abstruse for some. 

Some of Berkeley's heavy hitters have since moved on, but their legacy remains. The chief example is George Akerlof, whose pioneering insights into the economics of asymmetric information revolutionized the discipline in the 1970s, alerting economists to a huge class of ways that markets could fail and break down. 

Another star who did most of his work at Berkeley (he recently moved to Harvard) is Matt Rabin, one of the leading lights of behavioral economics. Though behaviorism started out as a psychological field, Rabin brought formidable mathematical skills to the discipline, creating sophisticated models of human behavior that have steadily won over skeptics. 

This list is far from complete, and I don't want this post to turn into an extended advertisement for the department. And I should point out that in addition to its econ department, Berkeley has one of the country's top business schools, which boasts many star economists such as Nicolae Garleanu and Terry Odean. 

The point is that Berkeley has done something similar to what the old Chicago School did -- it has changed the entire game. Through intellectual force and creativity, it has turned the ship of the profession in a new direction. We might call it the Berkeley Reformation. The Chicago School made economics about theory; the Berkeley Reformation has made it more about data. The Chicago School made economics about efficiency; the Berkeley Reformation has made it about inequality as well. The Chicago School was Panglossian in its belief that markets work well; the Berkeley Reformation showed deep, fundamental reasons that they break down. The Chicago School described the world in terms of perfectly rational agents; the Berkeley Reformation added the complexity of flawed decision-making. 

In the 1980s and 1990s, it could rightly be said that Chicago had conquered the economics world. But in the 2010s, the profession has pointed in Berkeley's direction. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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