Dave Colander Middlebury College

1. How Models get Muddled: Complexity, Policy, and the Trouble with European Graduate Economics Training Dave Colander Middlebury College

2. My niche: (1) Looking at Economics through an economist’s lens • Sometimes described as the economic court jester—the one who says what everyone knows, but knows better than to say. • To understand what economists do, you have to understand their incentives, and interpret their actions and theories through those incentives. • My basic claim is that there is an incentive compatibility problem, so that the profession isn’t doing what society would like it to do as much as it could be doing. • The primary reason the problem exists is that there is a lack of a market test for economist’s output. • I concentrate on graduate education because graduate school is the reproduction process—it captures the replicator dynamics of the system, which defines the system.

3. My niche (2) Complexity theory, policy and the History of economic thought. • Latest work in in how the role of models has changed from models serving to inform judgment to models providing answers. • Complexity policy would be much closer to Classical economic methodology—Mill’s half truths approach, or even Marshall’s one-thing-at-a-time approach than the modern “economic of control” approach

4. What Does Society Want Economists to do? • Pure Science: Provide insight on the workings of the economy--Advance our scientific understanding of the economy. Involves both theory and empirical work. • Pedagogy: teach relevant insights from theory and understanding to students and to society. • Policy: Better Living Through Economics • Hands-on applied policy: Solve particular economic problems. Apply economic understanding to real world issues • Hands-off applied policy: Provide general advice on solving broader public policy questions.

5. Primary Thesis of Talk • Far too little training in, and credit for, hands-off applied research. • Corollary: Government economists are highly undervalued in the profession, and the skills they need are not emphasized in economic education. • The situation is worsening in Europe and European graduate programs structure their programs after US programs.

6. Cause of the Problem: A Quantification Bias in Measurement of Economists’ Output • Hands-off applied policy research (Journal article output)—overvalued • Teaching--Undervalued • Hands on Applied Policy--undervalued • Reason for undervaluation: Difficulties of measuring teaching and hands on applied policy output. “Measured research” has come to mean only publications in appropriate quality-weighted economic journals.

7. Result of the quantification bias • Way too much focus on journal article output of abstract scientific and hands-off applied policy written for other economists, not policy makers. • Way too little focus on hands-on applied policy work and teaching of relevant skills.

8. If society faced the true cost of producing a hands-off applied policy or scientific theoretical journal article, would it pay? • If the costs were salient to the funding agency or other organization paying for reseach, would they pay, or would they have them do another type of research? • Research costs of academics are hidden—time taken away from teaching. In US, typical to say 90% of effort spent on research, even though on paper, division is 1/3rd research, and 2/3rd teaching and research. • What is the cost: Cost of writing a typical hands-off applied policy article.

9. What is the cost of a typical journal article? • 200 hours per article; 10 hours reviewing • $100 per hour • Administrative and distribution expenses • $2000 (editing, proofing, etc) • Cost of article-$23,000 • Change of acceptance in some journal—50% • Cost of resources to produce a published article: $46,000 • The question that needs to be asked is: Does society value the article that highly? • Researchers are not paid for articles so only administrative and distribution costs need to be covered. • The publication and distribution has to be subsidized. • Primarily academic libraries buy them, and a large percentage of articles are not looked at. • There is a serious question about the value of many journal articles.

10. Is the value of the research worth the costs?—No market test. • Q Could you compare economists to other scientists? • Shaikh: Compared to lab scientists, the cutoff point for being useless is much higher for an economist than it would be for a lab scientist. Even a bad lab scientist will contribute much more to society than a half-decent academic economist. • Q Why is that? • Shaikh: It is because of the nature of economics. The structure of what gets published and listened to means that what is considered good economics doesn’t always constitute good economics. In my view good economics has to have some sort of policy implication. That is incredibly difficult, and good applications require top quality economists. In the physical sciences, good applications do not necessarily require top quality scientists. • Q What percentage of the work is useless? • Shaikh: In a top journal like the Quarterly Journal of Economics I’d say at least half are useless. Probably 20% are useful and the rest are unclear. • Q Would you both agree? • John: Ideas that don’t have any ready policy implications could have policy implications later. • Shaikh: I take that into account. I am including all future policy implications when I say that 50% are useless. Fifty percent will never be cited or read again. • Q Do you agree? • Nino: Yes. • John: I don’t know enough to say, except for maybe in my area. • Q Well, how about in your area? • John: I haven’t read enough yet in my area to be sure about my answer. If pushed I would say less than 50% is junk, but that the junk is still a sizable amount. • Shaikh: My 50% is complete junk.

11. Why do economists do it? • Because it advances them in their career. • Tenure in university depends primarily on such publication, not on other work. • When it counts for tenure and promotion, the publication becomes an end in itself. Any article published is worthwhile. • Continual increase in number of journals, and outlets.

12. Hands-on applied research generally faces a market test • Somebody wanted it done, and thought it was worth the time. • My conclusion: • The value of time put into hands-on applied research generally exceeds the value of time put into hands-off applied research, because it faces more of a market test.

13. The need for Balance • A good profession is a balanced profession—the question is: what balance? • My argument is that the US training system has it wrong: need 5%, possible 10% doing pure scientific and hands-off applied research, but we don’t know which 5% or 10%, so 20% to 40% of profession working on such issues will probably capture most of the work that is good. • The remainder focus on teaching, and doing hands-on applied research. • To do that we need consumers of theory, not producers of theory. We need economics who can write for non-economists, who can integrate economics ideas with other issues, and who can choose the appropriate model.

14. Problems with this overfocus on hands off applied research • Theoretical work isn’t abstract enough • Applied work isn’t applied enough • To give my sense of the correct balance between theoretical and applied work, let me review some old jokes. • Economist searching for keys under the light post joke.

15. My argument is that it is under the light post that economists should be searching. • But they shouldn’t be searching for keys; they should be searching for an understanding of topography. • The models are way too simple for the complex reality—and they are too often used for direct policy advice, even when they don’t fit the situation. • Need much more abstract work—non linear dynamics, nested systems, agent based computational models, cluster analysis • Type of model that was incorrectly used for direct policy advice—DSGE model—with globally rational representative agent for directions on macro policy.

16. Models and Econometric Work as aids to judgment, not as Judgment • Important part of Classical Economics • Nassau Senior • methodological writing. For example, Nassau Senior, the earliest Classical economists who took a strong interest in methodology, writes: • (An economist’s) conclusions, whatever be their generality and their truth, do not authorize him in adding a single syllable of advice. That privilege belongs to the writer or statesman who has considered all the causes which may promote or impede the general welfare of those whom he addresses, not to the theorist who has considered only one, though among the most important of those causes. The business of a Political Economist is neither to recommend nor to dissuade, but to state general principles, which it is fatal to neglect, but neither advisable, nor perhaps practicable, to use as the sole, or even the principle, guides in the actual conduct of affairs. (Senior 1836: 2-3)

17. The two themes come together • Currently, we are training all economists to search under light posts for keys. • What I argue is that we need differentiated training, in which we train one set of economists to search in the dark with a knowledge of the topography discovered by those who searched under the light post. • Hands-on applied economists need to be trained consumers of theory and econometric work, not producers of theory and econometric work.

18. My goal is to change the economic training so that it is designed to train working dogs, not Academic show Dogs

19. A bias in the training away from hands-on non-technical or messy applied work • Consumers of advanced theory, not producers of advanced theory • Consumers of technical empirical research, not producers of technical empirical research. • Broader knowledge of other related fields • Ability to write quickly, and clearly for non-economists • Ability to translate ideas for non-economists • Knowledge of institutions, and thinking of people in those institutions

20. Peter Swann’s Ten Methods of Hands-on Applied ResearchSeeing Economics as a set of tools • Applied econometrics • Experiments • Surveys and questionnaires • Simulations • Engineering economics • Economic history and history of economic thought • Case Studies • Interviews • Common Sense and Intuition • Metaphor (From Putting Econometrics in its Place)

21. How to Bring about Change • Change will not come from within. Stable equilbirum—controlled by academics for the benefits of academics. • Possible paths to change • Government economists and teaching economists of the world unite, and take over economic organizations • Methods of giving credit for hands-off research created. • Make having done hands-on research a requirement to teach hands on research course. • Make research decisions transparent • Funding agencies change funding methods. • Voucher system of research, where all research • Funding agencies start funding research on interpretation of models.

22. Who should be teaching hands-on econonists—people who do hands-on economics • The problem is they don’t teach, so people come in and have to learn on the job. • Government and Business Economists should have joint appointments with universities, where they both teach and do research. • Some way of offsetting the bias against hands-on research needs to be found. Economists should be given

23. Differentiating Training in hands on Applied Economics (Engineering) and Scientific Economics Doctorate in Economic Engineering • The skills necessary for hands-on and hands-off policy economists are quite different. • The ability to quickly study data and pull out the central elements is much more important than formal statistical analysis of heteroscedacity. T • he ability to write up a two-page analysis that summarizes what economics has to contribute to a policy issue is much more important than the ability to write a journal article. • The ability to communicate with non-economists is much more important than the ability to communicate with other economists. • Some global economics students nonetheless may have a natural ability at hands-on policy, and thus make good hands-on policy advisors. Their expertise in those cases comes from their natural ability or from separate training, not from their training within the global economics program, although some of the skills cross over, and a high level of knowledge of the science of economics is extremely useful for a policy-oriented economist. • Hands graduate training would concentrate not on preparing students to become economic scientists, with ability to use the latest technical, statistical and analytic techniques, but instead, would see its role as preparing students to become hands-on economic engineers, with the ability to bring the insights of economic science to policy, and preparing professors of economics who will train students in hands-on policy. The focus of such branch would then be policy design and implementation. The political economy branch would be more similar to engineering than to science, and would be applied economics not in the sense of being sophisticated statistical analysis, but in the sense of relating economic ideas to real world policy. It would consume, not produce, information in economic science. While this branch will likely pose new questions to its “scientific” counterpart, it will not try to provide scientific answers to them. If traditional graduate programs take on training students as political economists, and not as economic scientists, they can complement global economics programs, and not be in opposition to them.