Economics is driven by the wrong incentives

I returned from the EADI conference in Norway last week. EADI is the European Associations of Development Research and Training Institutes. Several articles relating to the event will appear on the website soon. In this post, I want to get something of my chest that bothered me. I found some of the presentations given by economists profoundly boring – but the scholars concerned obviously felt they were delivering insights of great relevance.

I won’t name names because I don’t know much about the work of the persons concerned, and it would be unfair to bash them for a single presentation I did not like. I’ll just give one anonymous example.

It is deeply frustrating to hear an economist discuss as an exciting new insight that identities are something fluid and not fixed permanently at birth. To sociologists like me, that was obvious 25 years ago, and no, even back then, one did not need cutting-edge research to understand that. People choose identities, and most people have multiple, overlapping identities. A quarter century ago, it was already quite well known that persons’ ideas of themselves change in the course of their lives – often, but not only, in response to changing circumstances.

Accordingly, it has long been something of a platitude that identity politics is normally manipulative and all to often becomes abusive. Especially when identity politics mobilises a dominant majority against marginalised minorities, the goal is to blame and attack scape goats. Leaders who take that approach want to marginalise people and all too often will not shy away from inciting violence. Anyone who claims to be a social-science expert should be aware of this. It is essential to understand just how destructive authoritarian populists are.

I’ve expressed my fundamental criticism of economics before on this blog. An essential point is that homo economicus, the rational, utility-maximising individual much economic theorising is based on, is a fiction. Real people are guided by emotions and senses of belonging. Another important point is that the mathematical precision of models that are based on unempirical phantasies do not reveal any empirically relevant truth. Such precision, however, is what economists excel in and what sets them apart from other social scientists.

I briefly discussed my frustration with Henning Melber, who has written many essays for D+C and is the new EADI president. He is not an economist, but used to direct an institute that employed economists. He laughed and said he always told these colleagues that a model is only ever as good as the assumptions it is based on.

This is an important point. Identities matter because they affect senses of belonging. At the same time, identities are a matter of choice. Homo economicus does not exist. If economists paid more attention to the insights of the other social sciences, they’d be able to design more relevant models. To do so, however, they’d have to give up the pretence that their models are what reveals the truth.

The issues of economic modelling was brought up once more by Achim Steiner during the conference’s final plenary session. Steiner is the new top leader of the UN Development Programme and former head of the UN Environment Programme. His topic was the transition to green economies and green finance. His speech was excellent. It is documented on Youtube and definitely worth watching. He made the remarks I am relating to here near the end.

In regard to mitigating global warming, Steiner said that a lot of time has been lost because some economic models have been treated as something “like the laws of gravity”. For two decades, debate revolved around whether climate protection was affordable or not, with precious little attention being paid to whether the impacts of climate change are affordable. The impacts, of course, are not affordable so there is no real-world alternative to climate protection.

According to Steiner, who is an economist by training, economics is not a science, but a way to design models. Those models should serve people to make prudent decisions and set the right incentives. They can prove thus useful, but they do not reveal any kind of eternal, super-human truth.

I couldn't agree more. I'll happily acknowledge that I know many economists who are doing good work. Some of them contribute to D+C/E+Z, and I am glad that they do. They all appreciate that economic modelling has limits and that empirical reality is always more complex than a model.

The problem, however, is that this healthy attitude is not generally encouraged. I discussed my frustration with a British economist, whose name I won’t publish here because I’m not sure he would want me to. His outlook was bleak. In his eyes, economics is inherently insincere.

His point was that economists’ careers are built on mathematical modelling, even though it is well understood that some of the underlying assumptions – including the utility-maximising homo economicus – are empirically false. He said that students understand this, but as they progress in their studies they get used to the notion. Young economists have to do the modelling if they want to publish research. If they do not publish, however, they will academically perish. In the British economists’ eyes, some economists are cynics while others have become so used to the standard fallacies that they are not aware of them anymore.

To summarise things in simple terms, economics is a discipline that should serve people to get incentives right but unfortunately is driven by the wrong incentives itself. It has become a quest for mathematical precision rather than empirical relevance. Policymakers would do well to seek advice elsewhere.

P.S.: It so happens that today's Financial Times includes a comment on this topic today too. Diane Coyle, who is an economics professor at the University of Manchester, argues that her academic discipline is male-dominated. Spot on. The FT uses a paywall, however, so I guess not all of you will have access