Donnerstag, Oktober 23, 2008

Best Analysis of the Economics Profession As It Exists Today...

Arnold Kling puts it beautifully here.

Let me quote:

I have always thought that the issue of the relationship between financial markets and the "real economy" was really deep. I thought that it was a critical part of macroeconomic theory that was poorly developed. But the economics profession for the past thirty years instead focused on producing stochastic calculus porn to satisfy young men's urge for mathematical masturbation.

If you don't do econometrics professionally - it's my everyday work - then you have no idea how accurate this is.

The first thing I tell students (we employ them) and customers when they come in for training is that the most critical thing for model-building is model specification and the importance of having the models make economic sense. We spend most of the time teaching them how to think in terms of dependency relationships and causal chains, and first then do we talk econometric techniques.

I've had a few run-ins with those with what I call the econometric fetish, where equation results serve to replace thinking, where econometric tests replace reasoning. Don't get me wrong: I use econometrics each and every day of my working life (spent the day today working on average Russian industrial wages per worker, thank you very much), but the critical thing is to realize that it is only a tool to get the economist where they want to be, which is to understand what is going on and what are the economic relationships and forces driving any sort of economic activity.

Hence: what he said. Too many economists have effectively taken the blue pill and prefer to live in a world that is, ultimately, meaningless and self-indulgent, rather than in the realm of the real, as Morpheus describes it to Neo.

It is also part of the reason why there are so few economists left employed by industry outside of the forecasting houses and the big banks: it is because they slowly became irrelevant, so in love with their models and equations that they lost sight of the reason why they were there, to advise, for instance, the board of directors as to what impact events would have on that company and what should be done. Once they failed here, the lawyers and accountants filled the vacuum, and we know how that ends.

In tears.

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