Dismal returns of micro-men

May 2, 2003

Forget the low pay of its academics, economics is in trouble because it is failing to shed light on everyday dilemmas, argues Alan Shipman.

Economics can explain the demise of wheelwrights, weavers and wallpaper hangers - technical progress dispelled the first group, globalisation the second, changing preferences the third. The "dismal science" has more difficulty accounting for its own disappearance. But the downward trend in UK economics has persisted too long to be dismissed as a mere correction after momentary excess.

Home-student entry to PhD courses has fallen to "dangerously low levels", according to Royal Economic Society research published in 2000. Two of the country's top institutions - the London School of Economics and Nuffield College, Oxford - attracted no new UK doctoral students in that year.

The RES gives a predictably economic explanation for the flight from higher degrees. "Relatively low pay and unattractive working conditions in academia" persuade high-fliers to seek more lucrative returns on their instructional investment. Writing before stock markets stumbled, report authors Stephen Machin and Andrew Oswald noted that economists working in the City could earn up to five times the salary of their academic counterparts. Jobs in senior management, consultancy and the civil service also offered basically qualified economists pay higher than that of the professors who taught them. At Oswald's Warwick University, the proportion of first-class honours students staying on for further study dropped from 80 per cent in 1983-85 to 33 per cent by 1995-97.

But if this was the only explanation for decline, demand for more basic economic qualifications would have held up. In reality, the PhD numbers plunge is the culmination of a fall in interest all along the line.

Shrinking postgraduate entry to economics follows the steady slide in undergraduate and taught masters interest, which is mirrored in the final school years. The number of entries for economics A level fell from more than 32,000 in 1993-94 to fewer than 20,000 in 2000-01.

The American Economic Association has dug more deeply than the RES for explanations of its declining undergraduate enrolments, which peaked in 1990. AEA research suggests that the fall is due not just to discontent with the economic rewards of staying the course, but disillusionment with the way the subject is structured and taught. Into the 1960s, economics was a historical and literary field whose journals could be understood by non-specialists. Now, however, the subject's "mainstream" research has become submerged in mathematical modelling and statistical analysis. A shift in assessment methods from essays to exercises and multiple-choice tests further opens the subject to mathematicians who have never read the economic "classics" while closing it to those who have studied nothing else.

By "formalising" past ideas into stylised models, economics has become a narrow problem-solving exercise that denies students the big picture that they expect it to provide. With dialogue confined to a shrinking range of specialists covering the same formulas, the subject's past power to clarify everyday dilemmas has been reversed.

"Many college seniors who have taken an economics course still show a lack of understanding of basic economics," laments the latest AEA survey of economic literacy by William Wallstad and Sam Allgood, echoing recent UK results. Though adept at deducing a rational agent's optimum consumption bundle, new graduates are often baffled by practical questions - what happens when an exchange rate falls, who sets monetary policy, what can be done to fend off a recession?

Detachment from reality is especially off-putting to women and ethnic minorities, whose second-class status is confirmed in other RES surveys. In the UK, women comprise one-third of PhD candidates and hold almost the same proportion of fixed-term lecturers in economics, but they account for only 17 per cent of permanent lectureships and 4 per cent of professorships.

Although family-unfriendly faculties are part of the explanation, the earnings gap for unmarried women (14 per cent below male counterparts) is greater than that for married women ("only" 9 per cent). Similar discrimination was found for ethnic-minority economists, who on average earned 8 per cent less than white counterparts even after adjusting for their relatively greater youth and resultant shorter experience.

Reviewing these results, RES president Partha Dasgupta and women's committee chair Carol Propper looked across the Atlantic for salvation.

From a strong PhD market, they inferred that "clearly US economics continues to generate innovation and intellectual excitement". When, as end-century chair of the Cambridge economics faculty, Dasgupta led a radical redesign of its undergraduate course, he had little hesitation in swapping "Cambridge tradition" for the North American approach. Cambridge's new course, whose final phasing-in this year will coincide with the 100th anniversary of the original one, downgrades Keynesian demand deficiencies, business cycles, capital debates and income distribution effects in favour of more statistics and mathematical modelling. Supporters say the bigger technical toolkit will restore the subject's relevance to those who bypass it for business studies or other social disciplines.

However, critics charge that narrower focus and procedural prescriptiveness are what have stifled interest, just when the spread of everyday economic problems - from growing global inequality to underfunded personal pensions - should be reviving it. A reductionist search for optimising "micro-foundations" neglects economies' "emergent" properties, which are produced by individuals' interactions and not predictable from their actions. Economists build an unrealistic "micro" picture, based on well-informed rational choices that even statistically trained subjects seem incapable of making. They thereby lose the "macro" picture, denying (or ascribing to state interference) such awkward phenomena as persistent unemployment and growth-rate differences because the models point to "equilibrium" and "convergence".

In his just-published Reorienting Economics, Dasgupta's Cambridge rival and leading "realist", Tony Lawson, goes beyond the usual arguments about what to measure and how to model and traces the economists' troubles to the way they view the world. He accuses the mainstream of twisting the economy to fit mathematical analysis by treating it as a "closed" mechanical system, ignoring complexities caused by the reflections and reactions of people, businesses and other social groupings and their need for social institutions to help them. Economists' search for surface "event regularities" displaces concern for the more relevant underlying tendencies and structures, whose surface manifestations resist statistical disentanglement. The mainstreamers' mistake, Lawson says, is to mimic 19th-century natural scientists in "inducing" general principles from superficial observation, or "deducing" them from axioms, when all they can truly do is "retroduce" the deeper reality from surface effects.

Instead of arguing, in a classic example, whether the sighting of a black swan negates the universality of white swans, realists want to refocus on the mechanisms that generate and change swans' colour. Many alternative views are demanding admission into the mainstream. Evolutionists emphasise the path-dependent nature of technological and industrial change.

Institutionalists deny the reducibility of all social structures to individual decision-making and voting. "Austrian" theorists point out how markets can coordinate choice by interdependent individuals with scattered and limited information, which inverts the textbook depiction of fully informed and independent individuals. And "post-Keynesians" want to return aggregate demand to explanations of economies' short-run cycles and reinstate income distribution to accounts of their long-term growth.

Calls for a rethink in the UK have found strong resonance elsewhere in Europe, notably the "post-autistic economics movement", which disgruntled French students launched in 2001. As the PAE's Crisis in Economics manifesto hit the press one month ago, the plea for pluralism reached the "other" Cambridge, where 700 Harvard University students rallied behind the campaign by professor of economics Stephen Marglin for a broader introductory course. Colleagues' rejection of his eclecticism drove home the dissenters' point.

Machin and Oswald speculate at the end of their 2000 study that shrinking supply will eventually cause a jump in economists' salaries, until their soaring pay brings students flocking back to their courses. But loss of intellectual initiative to more inclusive disciplines could thwart that recovery. Non-mainstream staff and students displaced from economics faculties have often found more fertile ground in business schools and other social-science departments.

In an accompanying survey of minority representation, David Blackaby and Jeff Frank interpreted the high proportion of expatriate staff in higher-ranked economics departments as confirming the UK's entry into a global market for top economic talent. But the dearth of home-grown high-fliers suggests that this import of labour to fill local skill gaps owes more to the pattern of the National Health Service than that of football's Premier League.

Economists used to joke that they had solved the unemployment problem - for economists. For much of their subject's history, this could be done without any professional entry restriction. As chroniclers Keith Tribe and Alon Kadish have shown, pioneering courses at London and Cambridge faced a long struggle to attract students. Most continued to see classics, history, law or moral philosophy as firmer career foundations, or they preferred to keep their elegant mathematics unsoiled by social concerns. A century on, that attitude seems to be returning. Economics that continues to sidestep reality could soon be downsized for good.

Alan Shipman is a freelance economist, affiliated lecturer in the faculty of social and political sciences, Cambridge University, and author of The Globalization Myth (Icon Books, £6.99).

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