The dangerous cult of academic macroeconomics

One positive effect of the financial crisis has been a flowering of efforts to develop more useful alternatives to the dominant macroeconomic models, explains Bloomberg's Mark Buchanan.

Paul Romer, chief economist at the World Bank, has offered a controversial explanation for why the shocking experience of the 2008 financial crisis has had so little effect on academic macroeconomics. The field, he asserts, has devolved into a sort of cult in which loyalty to certain figures of authority matters more than the pursuit of the truth.

Could this really be true? Well, it certainly has precedents in physics.

Consider the early development of quantum theory in the 1930s. The late historian of science Mara Beller has described how the Danish physicist Niels Bohr acquired such extreme authority that many physicists deferred to his views, regardless of how incomprehensible they were. As Beller noted, the obscurity of Bohr's statements were habitually attributed by puzzled physicists to a “depth and subtlety that mere mortals are not equipped to comprehend.”

One anecdote captures the phenomenon. The young but accomplished physicist Carl von Weizsäcker, after discussions with Bohr, found himself bewildered by what Bohr had said. “What had he meant?” he asked himself. “What must I understand to be able to tell what he meant and why he was right? I tortured myself on endless solitary walks.” His assumption was that, no matter how confusing and contradictory it sounded, it must be sensible and profound because Bohr himself had said it.

This is a human phenomenon. Good scientific practice is decidedly subversive, yet people have a weakness for authority figures. How many young economists are today looking at the work of their superiors in the academic hierarchy and asking: “How must I think in order to render this sensible?”

Quantum physics didn't recover quickly or easily. It took the efforts of brave individuals willing to be unpopular. One key figure, the Irish physicist John Bell, worked for decades as an applied physicist at the European Centre for Nuclear Research while doing his real work - on the foundations of quantum theory - part time. He published in obscure journals because most physicists, then still under the spell of Bohr's authority, dismissed the topics Bell was studying as laughable.

Eventually, Bell was proven right. Bohr's authority had caused physicists to ignore crucial questions at the very foundation of their field. The spell broke sometime around 1990, and it again became OK to work on fundamental problems - such as whether quantum theory provides a coherent description of both the sub-atomic world and the more familiar larger-scale world around us. Physicists could even get real jobs doing it, and lots of research since then has focused on topics that were previously considered taboo.

One difference between the episodes in physics and economics: Physics was fortunate in that the theoretical impasse didn't hamper progress in applying quantum theory practically, which brought about the invention of modern electronic devices, the laser and a long list of other technologies. In contrast, the advance of macroeconomic theory could help us all, as it is supposed to be among the most practical and useful of economic sub-fields.

What will happen to macroeconomics? Critics such as Romer have become more numerous and vocal, and the old guard is increasingly on the defensive. Consumers of research could do their part by demanding work built on more realistic assumptions, developed in keeping with normal scientific standards and having more practical relevance. If research funding agencies and central banks stopped supporting the creation of models filled with unrealistic assumptions - what Romer calls post-real economics - the discipline could begin healing itself.

Now would be a good time to act. As James Madison University economist Barkley Rosser has noted, one positive effect of the financial crisis has been a flowering of efforts to develop more useful alternatives to the dominant macroeconomic models - such as so-called agent-based approaches that use computational simulations to create flexible and detailed models of financial markets, banking networks and entire economies. The UK's Economic and Social Research Council has announced a new funding program directly aimed at such work.

Other major funders of macroeconomic research - especially in the US - need to follow suit, lest the authoritarian cult of post-real economics inflict further damage.