Bryan Caplan  

The Decline of Economic Theory

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Two Basic Macro Questions... The Great Substitution...
When I started my Ph.D. in Princeton, pure economic theory was king.  Economists with stellar math skills were high in status and high in demand, even if their knowledge of the real world was... slight. 

In the following eighteen years, however, something big seems to have changed.  Some of this could admittedly be my selection bias - mathematicians masquerading as economists were never big at GMU, and it's hard to see how they could do well in the blogosphere either.  But the pattern is much bigger.  The top journals now run very few pure theory articles - and top departments don't seem to hire many pure theorists.  My econjobrumors insider tells me that its countless trolls are largely frustrated theorists who feel cheated of the respect they think the profession owes them.  Speculation, yes, but speculation born of years of study of their not-so-silent screams.

All this leads us to two questions:

1. What is the best way to measure the status of pure theory in academic economics - and has it really fallen as much as it seems?  Nothing on this topic googles for me.

2. Assuming theory has taken a nose dive, why did it happen?  It's not like the field was ever particularly fruitful.  Was it just a case of preference falsification - of tens of thousands of economists pretending to value pure theory a lot more than they did, in order to seem smart and "rigorous"?  Or what?

Update: Thanks for lots of good comments.  Quick replies to two:

JCE writes:
Bryan I would be very interested to know your views on the value and use of econometrics. which questions does it help economists answer? for which questions is it less useful?
how important is it for the intuition of an economist?
I'd say it's about half as important as most economists think, which still means it's very important indeed.  It's very useful for understanding basic facts and relationships, and tipping the scales for questions where common sense provides little guidance.  See e.g. my notes on voter motivation here, here, and here.  It's not so useful when it's used to test common sense itself - see e.g. the bizarre literature on "the price puzzle" - whether printing money really causes inflation.

Theory Man writes:
The only people who think theory is in decline are non-economists and the fringe of the academic community. Theory is alive and well, people; Caplan doesn't know that because he doesn't have any in his department. Then again, GMU is barely part of the academic community in economics in the first place.
Maybe I'm wrong, but have you got any data?  And what's the cash prize if I identify one well-published economist at a top-ten school who agrees that theory is in decline? :-)


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The author at floodingupeconomics in a related article titled Is Economic Theory in Academia on the Decline? writes:
    I just came across an interesting post discussing the difficulty that Economics grad-students who specialize in the study of pure economic theory are facing in the academic job-market. Click Here for the Original Post I wonder what has caused this supp... [Tracked on March 8, 2011 6:09 PM]
COMMENTS (29 to date)
Cole writes:

I think there could be a glut in the job market for pure econ theory. Not too difficult to measure, just determine the number of people graduating with degrees that would have qualified them for the field, and determine the number of available job openings at a university level for such jobs. If the ratio has drastically changed over the years then that would appear to be a simple answer.

Perhaps a simpler proxy measure would just be to look at salaries for such positions, and compare them to the salaries of other professors. That might be a lagging indicator for most universities, especially universities that don't suffer from as many budget constraints.

Perhaps the reason for the change has to do with public perceptions of an economics PhD. If employers perceive economics to be a challenging mathematical degree, and there are places where students can get a degree that isn't as hard as is commonly perceived then students will flock to that degree. The opposite is true as well, if employers see economics as a wishy-washy social science when it is a challenging mathematical degree then students will flock away from it.

Ultimately it seems degrees are shaped by public perceptions of their difficulty (using the signaling model you have proposed). So perhaps what has changed is the public perception of economics, and the profession is just shifting to reflect the changed public attitude.

Jon Leonard writes:

A potentially related change is that computer-assisted statistical work has gotten much, much easier.

In times past if you had a neat theory, you could certainly verify the assumptions and make predictions, but you couldn't (with reasonable effort) compare it to the mountains of data that are available now. So it gets harder to publish theory now: You reject previously publishable hypotheses just because they don't match the actual data. Conversely, it has gotten easier to do interesting empirical work.

Is there much necessary beyond economists responding to changed incentives?

Scott Wentland writes:

To answer #2, I'd say one reason is the rise of computing power, data availability, and decline in the price of a regression.

Empirical studies become less costly, we get more of them.

I'm not so sure there's as simple of an explanation for #1. Opportunity cost might help explain status a little. I could be wrong, but there has been a rise in demand for empirical economists (or, economists with a lot of econometrics background) in the non-academic market over the last 20 years. So there is a sizable non-academic market for empirical economists, but not so much for theoretical economists (unless they are from the best of the best departments), therefore, this might help explain the relatively low demand and status for theorists.

MikeM writes:

I submit that economics, and academic fields in general, have become more popularized by the internet in 18 years. Most prominent economists are not necessarily the ones who can construct complicated statistical models anymore, but who can publish and relate interesting empirical work that is easier to understand to the general blog reader. Granted, it's a specific niche, but new ideas and trends sweep the blogosphere faster than the academic journal articles that were the previous trend trackers.

All of this is to say that demand is up for economists who can take interesting new ideas and put a few words together in a sentence and demand is down for economists who construct complicated models.

RD writes:

I think it is undeniable that you had preference falsification, but that still doesn't explain why it shifted -- I suppose it could just take a critical mass of people who didn't want to do it anymore

Doc Merlin writes:

"2. Assuming theory has taken a nose dive, why did it happen? It's not like the field was ever particularly fruitful. Was it just a case of preference falsification - of tens of thousands of economists pretending to value pure theory a lot more than they did, in order to seem smart and "rigorous"? Or what?"

Because the main dueling ideas needed empirical support, so the students formed into camps and started launching dueling regressions. If you weren't part of that, you missed the main conversation.

Paul Ralley writes:

Nice use of the word 'googles'

ed writes:
it's hard to see how they could do well in the blogosphere either.

Don't you know about Jeff and Sandeep at Cheap Talk? They seem to be theorists, and their blog is good.

Michael Labeit writes:

What's pure theory? What qualifies as pure? Must it be bereft of empirical data?

[login url removed--Econlib Ed.]

Peter Twieg writes:

My guess is that low-hanging fruit had been plucked, and that the frontiers of theory have sufficiently low practical value that emphasis has been shifted towards empirical methods to test and refine theories. Theory lept forward in the 50-80s and it couldn't go further without real data. Kinda like particle physics needs the LHC.

I suspect that there might be a swing back towards theory when people get tired of seeing disconnected behavioral results with contradictory implications that need to be reconciled somehow. However, the theory that emerges from this may be less analytical and more computation-based, which is not something that most economists are trained in. (I don't claim to be an expert on analytical behavioral models, but it seems like most of them are of very limited applicability. Exceptions like prospect theory and QRE abound, however.)

Nick Rowe writes:

Theorist: noun.

1. Someone who develops a theory to try to explain some observations about the world.

2. The opposite of 1.

B writes:

If by theorist you mean someone that comes up with ridiculous new game theory equilibrium concepts or talks about functions and topological spaces. Then ya, I think that's faded somewhat. And rightfully so.

I like how my friend coined what he and I do: applied general equilibrium analysis. Three cheers for applied work!

Steve Roth writes:

I wonder if this might provide part of the explanation:

http://www.amazon.com/Debunking-Economics-Emperor-Social-Sciences/dp/1856499928

Maniel writes:

Bryan,
I commend you for considering these questions. This is my take (NB: I’m an engineer, but I find economics extremely interesting).
1 This is something (research) mathematicians don’t spend too much time worrying about; they are out there trying to prove the latest hypothesis, explain the latest anomaly, or develop a whole new line of reasoning. Boolean algebra, for example preceded the development of digital computers. And, that is the point: whether it’s string theory or chaos theory, mathematicians have centuries of examples of how advances in their field were put into practice by physicists, chemists, engineers, and even economists. There is even a field known as “applied mathematics;” that’s what we engineers normally study, since all we care about is how to use their results.
2 Which brings us to why economic theory may (or may not) be withering. Unlike certain academic, self-perpetuating fields such as philosophy – not a lot of people hiring applied philosophers these days – economics can and (I daresay) should be applied, primarily in the area of public policy. However, to do this successfully, economists must set forth the “laws of economics,” an agreed-upon set of principles and axioms (my words). Borrowing from physics, you won’t hear a lot of disagreement from practitioners with the assertion that Force = Mass x Acceleration (except maybe from Einstein, who not only had special insights, but had the courtesy to extend Newton’s model to accommodate those insights). Likewise, most people who have thought about it will agree that, in a free market, Price is the mechanism which brings Supply and Demand into balance. However, with so-called economists like Paul Krugman on the loose, awarded space in the NY Times to assert that, “Free-market fundamentalists have been wrong about everything” [19 Dec 10], agreement on the most fundamental principles of economics has clearly yet to be achieved. Taxpayers are desperate for governance, at all levels (Fed, State, Local), based on fiscally sound policies. If economists can rally to show the way – with analysis that shows which public policies will work or not, and why – economic theory should experience a rebirth.

Evan writes:
2. Assuming theory has taken a nose dive, why did it happen? It's not like the field was ever particularly fruitful. Was it just a case of preference falsification - of tens of thousands of economists pretending to value pure theory a lot more than they did, in order to seem smart and "rigorous"? Or what?

I think you've got it here. I think theoretical economics was in some ways a cargo cult that tried to copy the success of physics by aping certain physics methodologies. Psychology had its own form of this in Behaviorism.

Physics attained a lot of big, spectacular triumphs in the 40s, 50s, and 60s, what with the A-bomb and space travel and such. Everyone else wanted to be like physics and thought "Well physics has a lot of math, so if we have a lot of math too we'll be as successful as physics was." Everyone who disagreed falsified their preferences to avoid taking status from their fields.

You can see this mindset in some of the science fiction that was written at the time, there was lots of talk about how "The social sciences haven't advanced as far as the physical sciences" and there were a lot of stories portraying scientists who developed equations that could model psychology and sociology as accurately as physics could model matter and energy.

The problem with this attitude was that they were treating the lesser of advancement in social science as result of some sort of moral failing on the part of the social scientists. There's a grain of truth to this, since social science results are often distorted by political ideology. But the main reason social science hadn't had the same spectacular advances as physics did was simply that mathematically modeling large groups of sapient creatures is far more difficult than modeling the behavior of dead matter.

Eventually, people seem to have realized that copying the ultramathematical approach of physics was silly and not really working. That might be partly because the more recent successes of physics haven't been as spectacular as the ones in the middle of the twentieth century, so there's less pressure to ape it. Or we might just have realized that modeling humans is much harder than modeling particles and orbits.

agnostic writes:

Go to Google's Ngrams site, which lets you search their digitized book collection for a key word and find out what percent of books in a given year contain that word. (Not linking here because the comment will get eaten.) Make sure to reset the final year to 2008. You can also test British vs. American English books.

"economic theory" shows a peak in 1992 and a sharp drop after through 2008.

"econometric" peaks in the early '80s and falls steadily after, although "econometrics" peaks around '94 and falls steadily after. Guess they never found a way to take the "con" out.

"envelope theorem" peaks around '94 and falls afterward.

To be more refined, you could search JSTOR. They let you look just at economics journals. To find out the total number of articles in a given year, they won't let you search for "the," but if you do a wild card for "the*" it will work.

You'd have to crunch the numbers and plot the data yourself, but it would be more on-point.

John Voorheis writes:

There's a tie in to The Great Stagnation here, I think. It was much easier for someone of average math ability (for an economist, anyhow) to discover interesting theoretical results in, say, 1920 (or 1950, or 1970 even) than it is now. Most of the low hanging fruit of neo-classical economics has been picked at this point, and further advances are basically impossible for anyone not in the far right tail of the math ability distribution. Maybe someone will come up with a new paradigm in the next decade that will usher in a new golden age of theory.

Theory Man writes:

The only people who think theory is in decline are non-economists and the fringe of the academic community. Theory is alive and well, people; Caplan doesn't know that because he doesn't have any in his department. Then again, GMU is barely part of the academic community in economics in the first place.

econ student writes:

"stellar math" is alive and well in economics, it's just migrated to other fields. just look at any graduate macroeconomics syllabus, or page through the popular textbooks of the field (stokey, lucas, & prescott, lundqvist & sargent). dynamic programming, contraction mappings, bellman equations... that's what it takes to do "serious macro" these days. needless to say, this is also a large reason why macro has become so disconnected from current events

JCE writes:

Bryan I would be very interested to know your views on the value and use of econometrics. which questions does it help economists answer? for which questions is it less useful?
how important is it for the intuition of an economist?

Eric Falkenstein writes:

I remember more than one economist in grad school say the envelope theorem was the most important insight in micro....

Consider finance (Hilbert Spaces for APT theory), set theory for micro (Debreu), Game theory (math on steroids), dynamic programming in macro (Lucas's Recursive Methods in Economic Dynamics)...I don't think these have been fruitful at all in answering interesting questions, and so with these recent experiences, economists aren't too excited by the latest model that is very amenable to mathematical tools w/ merely the potential for solving problems...there's a higher bar: solve an interesting problem first, then we'll learn all the math.

hacs writes:

Assuming that it is true.

Is it good? Is it a sign of vitality? You can compare Economics with other sciences.

On the other hand, it can just be an accommodation. As you said, Economic Theory was king, but should it have been king?

hacs writes:

Or, it can just be an example of counterfactual reasoning.

adrian writes:

Mr Caplan claims econometrics is important because the majority uses it...haha. He wrote a book making arguments against majority rule. Uh oh...contradiction. Econometrics is a folly, Robert Murphy is the economist people with any sense of economic discipline should read and do read.

David Friedman writes:

At only a slight tangent ... .

My daughter decided not to major in economics at Chicago after taking an econ course and concluding that it was mostly math, not economics. I reported that result to a senior member of the faculty of whom I have a high opinion, and he agreed.

Does this mean that the undergraduate economics curriculum is lagging the field--training students with the skills that were needed ten years ago instead of those that will be needed ten years hence?

Paola Tubaro writes:

I do agree that mathematical economic theory is in decline these days; empirical approaches (experiments, simulation, econometrics, etc.) are instead increasingly popular.
One reason for this is internal to the development of theory itself. Arrow and Debreu's General Equilibrium Theory, the highest achievement of mathematical economics after World War 2, failed to deliver all its promises despite its initial successes. It built a purely abstract world that sacrificed realism in the name of rigour, logics and elegance -but ironically enough, it ended up with inconsistencies and incompletenesses. This has to do with impossibility to prove stability and uniqueness of equilibrium under standard microeconomic assumptions (i.e. equilibrium exists as a mathematical concept but there is no assurance that the market system will endogenously converge towards it). Though this difficulty has been known since the mid-1970s, its implications became clearer in the 1990s after a few decisive attacks (Kirman's, Ingrao and Israel's).
Yet the fascination with mathematics has left permanent traces. Today's empirical approaches are all somehow based on some form of mathematical reasoning: economists have maintained a taste for symbols, equations, charts and matrices, and still prefer to provide formal rather than verbal accounts of the behaviour they explain. "Literary" economics as existed with Adam Smith, is no longer found today. The needs to generalise, simplify, and extend theories in new directions –what economic theory gained from mathematics according to Debreu– are still widely felt and require, among other things, reliable measures of empirical phenomena, appropriate observation protocols and control of auxiliary conditions -and rigorous thinking.
Formalisation has left its indelible mark on the discipline, and all evidence indicates that its influence is here to stay.

ajb writes:

I'd say that theory is even more important than before. It's just masquerading as "applied work." Macro -- esp the DGSE variety -- has become so technical that it excludes anything resembling common sense. And game theory is not advancing, but it's now taken for granted as de minimis in modeling political economy, labor, IO, etc. Moreover, the top products of Stanford GSB, or Harvard/MIT Theory still get top jobs. The strongest evidence of all is that the very top schools still pick students on the basis of their technical math skills. Almost no one gets in who doesn't laugh at real analysis as too babyish to be worth worrying about. It also remains the easiest way to get tenure at a top place. But your theory still has to be "interesting." And who decides this? Why, the theorists of course.

JCE writes:

"And what's the cash prize if I identify one well-published economist at a top-ten school who agrees that theory is in decline? :-)"

are you thinking about ricardo caballero by any chance? i read him recently critizing DSGE models

John Newport writes:

Tubaro displays a common misconception of the Debreu-Mantel-Sonnenschein result. It does not say that equilibria are not unique and stable, it says they may not be. First, instability under tatonnement is a far cry from instability under any adjustment mechanism, so that critique is simply wrong; who knows how prices actually get adjusted to reach Walrasian equilibrium. Provided one such mechanism exists, we're fine; in fact, recent work on zero-intelligence traders suggest that it isn't hard at all to get convergence. Second, the really strange implications of DMS require very strong wealth effects, which are hard to detect in the data. Just because something in principle can happen does not mean that it happens in a model whose elasticities are restricted to be reasonable empirically.

Non-theory people (by which I mean people who are hostile to formalizing their economics using math) often make these mistakes because they don't really understand what they're criticizing. Caplan is one such person.

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