From Where I Sit - Appliance of the dismal science

March 29, 2012

Anyone who has studied or taught economics is aware of the highly theoretical nature of the subject. For some, this is its appeal. Indeed, my old professor in the discipline once told me that the field of management demanded a direct link with the real world, which he preferred to avoid.

However, not everyone is so fond of abstract models. The financial crisis has led many German professors and students to question the value of economic theory, which has proven incapable of either predicting or eradicating the problems.

In Germany, the self-styled "Working Group on Post-Autistic Economics" and other like-minded real-worlders are causing quite a stir.

This controversial use of the word "autistic" certainly hammers home some serious criticism of the discipline. Members of the group complain that "economic theory revolves around itself". These highly vocal revisionists complain that equation-riddled neoclassical models dominate university teaching but simply do not apply to a world of avaricious, amoral and uncontrollable bankers.

Heiner Flassbeck, chief economist at the United Nations Conference on Trade and Development, has openly criticised economics for failing miserably in the crisis.

Given that the mainstream discipline extols the virtues of free markets and the efficiency they allegedly provide, the failings of the financial services industry implies a need to teach about the rampant abuses and weaknesses of the system.

Fortunately, the market for economic theory is reacting. For instance, Felix Bierbrauer, chair of finance at the University of Cologne, has integrated the financial crisis into his teaching. Although he warns against expecting too much too quickly from the field of economics, he accepts the need for the theory to move with the times.

At the University of Mannheim, Germany's leading higher education institution for business and economics, the students themselves have organised a practically oriented seminar on behavioural economics. This pays close attention to the often irrational psychology that drives the stock markets.

The German polytechnics (Fachhochschulen), which were always more practically oriented, are moving even further in the direction of applied economics. At the University of Applied Sciences Osnabruck, for instance, programme administrator Harald Trabold has stated an explicit objective of "finding a new way ahead for economics and doing it differently to the universities". These attempts to liven up the discipline are proving extremely popular.

Nonetheless, Thomas Straubhaar, director of the Hamburg Institute of International Economics, laments that such progressive change remains hampered by an inflexible university system.

Professors who want to get ahead still need to publish in "top" journals, which tend to adhere to the intellectual status quo. Those who deviate from the mainstream have fewer opportunities to publish in the right places, hence creating a career barrier.

Thus, academic economics itself seems to be confronted with an ironically practical manifestation of a familiar problem from the literature, namely systemic rigidity.

All the same, even if the academic market is slow to move, the pace may hot up and we could soon be studying and investigating models that deal directly with the mentality and systems that led to financial meltdown.

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