The crisis and mathematics in economics

The current crisis questioned the extent to which economics has produced “useful” knowledge, in particular the areas of macroeconomics and financial economics. There has been another round of criticisms and of defenses that may interest historians and economists alike.

The Economist, Jul. 18th 2009 Cover
The Economist, Jul. 18th 2009, Cover

The July 18th edition of The Economist had in its cover a melting wax-like book titled “Modern Economic Theory”. In it there are two interesting articles appraising the developments in macroeconomics and in financial economics (and the hypothesis of efficient markets) and the problems these economists have had in dealing with the crisis.

After that, the Nobel Laureate Professor of Chicago, Robert Lucas, has written an article to the magazine noting that:

both pieces were dominated by the views of people who have seized on the crisis as an opportunity to restate criticisms they had voiced long before 2008. Macroeconomists in particular were caricatured as a lost generation educated in the use of valueless, even harmful, mathematical models, an education that made them incapable of conducting sensible economic policy. I think this caricature is nonsense and of no value in thinking about the larger questions: What can the public reasonably expect of specialists in these areas, and how well has it been served by them in the current crisis?

Lucas goes on to defend Fama and the efficient hypothesis market and to argue against the “caricatures” in The Economist‘s briefings (in the macro piece, mainstream macroeconomics is referred to as “dark age of macroeconomics”). He recasts his view that the crisis is an adverse shock that has being dealt with by many macroeconomists over the last two years. In doing so, these economists have “drawn on recently developed theoretical models when they judged them to have something to contribute. They have drawn on the ideas and research of Keynes from the 1930s, of Friedman and Schwartz in the 1960s, and of many others.”

More recently, a new round of criticisms has started in the United Kingdom. The Queen has visited the London School of Economics on November 5th last year and has asked there why had no economists noticed the crisis that was on its way? On July 22nd, 2009, Professors Tim Besley (LSE and external member of the Bank of England monetary policy committee) and Peter Hennessy (Department of History, Queen Mary, University of London), on the behalf of the British Academy, wrote a letter to the Queen giving the consensus view that emerged during a forum promoted by the British Academy a few days earlier, whose theme was “The Global Financial Crisis: Why Didn’t Anybody Notice?” They summarize this view as following:

So in summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.

A group of ten dissident British economists felt that Besley and Hennessy’s letter did not address the heart of the issue: “that in recent years economics has turned virtually into a branch of applied mathematics, and has been become detached from realworld institutions and events.”  They wrote another letter to the Queen explaining their position. Among them, one finds Sheila Dow (University of Stirling), Geoffrey Harcourt (Emeritus, University of Cambridge, University of Adelaide), Geoffrey Hodgson (University of Hertfordshire), and Malcolm C. Sawyer (University of Leeds).

Let’s see what comes next.

7 thoughts on “The crisis and mathematics in economics

  1. I find it encouraging in this debate that there is a consistent call for people to study more history of thought and economic history. Although more weight is placed on the latter by people like Paul Samuelson in a recent interview, as I noted elsewhere.

    In general, Lucas’s defence is a strange one, and he argues that The economic models which failed to predict the crisis are fine, not because they came close, but because they don’t even consider crisis as a possible outcome… That of course sparked a debate on the role of economists deriving from the letters to the Queen about how we need to pay “more attention to historical, institutional, psychological and other highly relevant factors”.

    That said, not much of substance seems to be happening – at least yet… The AER (june) actually had a historical paper in it, although by history we are talking the developments of Krugmans trade model over time as perceived by Krugman himself… I guess its a start… of what I don’t know.

  2. Lucas states: “both pieces were dominated by the views of people who have seized on the crisis as an opportunity to restate criticisms they had voiced long before 2008.” What a nasty tenor! Why not say: “both pieces were dominated by the views of people who see the crisis as reconfirming their criticisms they had voiced long before 2008.”

    After all it is not merely a matter of theoretical debate, but about which kind of theory fits the facts best. As a first impression, the crisis does not seem to render Lucas’ position more credible, and this is what some critics want to highlight.

  3. I’m a second year a Economics major student and i have over the last past semesters had problems with the way Economics has totally been diverted,maybe subconciously,into mathematics. Doing pure math and sprinkling it with a little economic theories simply isnt enough. I dont really see what matrix would do to someone who is planning his scale of preference. Its true you may need math at a certain point in time,but truly,economics has become math,lets face facts. I may not be a professor to ascertain if its a good progression or its actually going to be detrimental to economics as a discipline in say 20yrs.

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