Is economics broken?

The science of economics is going through a difficult time, with its credibility and methodologies being questioned by the public, politicians and even economists themselves


When Claudia Goldin won the Nobel Prize in Economics last October, many of her colleagues rejoiced. The prestigious award endows the Harvard University academic with an aura of respectability that few female economists enjoy. At the crossroads of economics, history and gender studies, her work shines a light on the unrecognised value of female labour. “She has brought women to the forefront of economic study, an area that has historically been overlooked,” says Stefania Paredes Fuentes, an economist at Warwick University studying diversity in economics education, adding; “Traditional economic models with representative agents often neglect the role of women in the economy, perpetuating a lack of recognition of gender roles in the labour market.”

One reason why Goldin’s win has been welcomed with enthusiasm is that her accomplishment is so rare. Only three women have ever won the award, all in the 21st century (see Fig 1). Goldin is the first woman to receive the award without sharing it with male colleagues. This reflects the gender gap facing economics, with fewer than one out of four tenured professors in the US being women, compared to 43 percent for other disciplines. “Stereotypical perceptions of economics as a discipline dominated by men from the upper-middle class wearing suits and talking about money persist, which, combined with the scarcity of female role models, deters young women from pursuing economics from the outset,” says Fuentes. Goldin’s recognition, she hopes, could help change that, emphasising that economics is “a discipline centred around studying our society and its people, not just money and banking.”

Rage against the models
As a science, economics has never been more widely read and discussed, occasionally even turning into a pop culture phenomenon. Economists like Thomas Piketty, author of the much-discussed and little-read Capital in the 21st Century, and Yannis Varoufakis, Greece’s former finance minister, are the high-brow equivalents of football superstars, filling amphitheatres with young students hungry for alternatives to runaway capitalism. At the same time, the discipline has never faced more uncertainty and criticism, even from within its own ranks. Following the Brexit referendum, Andy Haldane, then Chief Economist of the Bank of England, acknowledged that the profession faces a crisis, as economists are increasingly blamed for society’s ills, while failing to account for human irrationality. A 2019 YouGov survey for Bristol University found that economists were among the ‘least trusted professionals’ in the UK.

Claudia Goldin, Nobel Prize winner

One reason for the discipline’s unpopularity is its complexity. “Economists have made a point of turning economics into a closed profession with a lot of jargon. People think that economics is beyond their understanding,” says Paola Subacchi, who teaches international economics at Queen Mary University of London. Despite being a social science, economics relies on advanced mathematics to describe a complex phenomenon like the economy. A recent survey of 350 Bachelor’s degrees by the International Student Initiative for Pluralism in Economics, a group including over 100 universities worldwide, found that economics degrees were highly mathematical, with non-mathematical subjects covered by just 2.5 percent of modules, while real-world applications and history were largely ignored. “The way economics is taught in universities does not include half the tools and concepts necessary to understand economic problems. The core of economics teaching is mathematics, statistics, macroeconomics and microeconomics, meaning that there is no pluralism in terms of theories and disciplines,” says Arthur Jatteau, the University of Lille economist who led the project.

Such formalisation is a product of the discipline’s history. Economics started as a branch of philosophy, evolving into a social science in the 19th century. Even then, it was largely free of mathematics. Adam Smith’s The Wealth of Nations includes no equations. Despite its humble beginnings as a ‘moral science,’ the discipline soon adopted mathematical modelling in an effort to wear the impenetrable armour of objectivity that only ‘hard’ sciences like physics can boast of. The turn towards neoclassical approaches, which emphasise supply and demand equilibriums, enabled economists to pass their policy prescriptions as scientific analysis. “Mathiness comes from this pursuit of influence,” says George DeMartino, an economist who teaches at the University of Denver. “It sends a signal to policymakers that they don’t understand what economists do and therefore they must defer to their judgement.” Milton Friedman, the high priest of free markets, famously argued that it did not matter if models made unrealistic assumptions, as long as they accurately forecast the economy’s ups and downs. For many economists, this approach is necessary for the science to maintain its academic rigour.
“Mathematics in economics brings transparency in that it makes assumptions explicit. So the models still work in most cases,” says Jon Danielsson, an economist and co-director of the LSE’s Systemic Risk Centre.

The issue came to the fore recently due to the failure of models to predict the inflation crisis. In an astounding admission, Belgium’s central bank governor Pierre Wunsch acknowledged that the European Central Bank’s models were practically useless. “It was more or less impossible in our models to produce any inflation that would not be temporary,” Wunsch said last year, explaining that they always showed price rises falling under the bank’s two percent target. The issue had broader political repercussions, with central banks taking flak for failing to grapple with the first inflation crisis since the early 1980s. Some economists dismiss these failures as part of the forecasting game. “Inflation forecasting models are notoriously unreliable, but that does not mean other models are unreliable,” says Danielsson, adding; “It’s a complicated problem and anybody trying to solve it would be an economist, whether by training or otherwise.”

For others, however, it’s emblematic of the profession’s shortcomings. “The problem with modelling inflation is that we need to take into account many different components, including some that are not easily quantified, like expectations,” says Subacchi. “We think that people are rational, but human behaviour depends on emotions, which are not easily modelled.” The emphasis on mathematics enhances the profession’s nearly inherent elitism, argues Veronika Dolar, an economist teaching at SUNY Old Westbury. “We push this idea of profit and GDP maximisation to such an extreme that we think everything can be quantified. Sometimes we lose track of the fact that maximising GDP is just a proxy for improving wellbeing,” she says, adding: “This kind of thinking facilitates the self-selection of people who might be excellent academically, but misunderstand the big picture.”

One subfield that questions rational assumptions is behavioural economics, which deploys insights from psychology to explain economic behaviour. Despite its popularity, the field is facing criticism for the controversial data collection and analysis techniques used by many prominent behaviour economists. One of them, the Duke academic Dan Ariely, who has made his name by exploring honesty and its role in economic transactions, has come under fire for using data of dubious credibility in several studies, with other academics being unable to replicate his findings. Another behavioural economist, Francesca Gino, has been put on leave by Harvard University for falsifying results in some of her papers. “In behavioural economics there’s this notion that ‘p-hacking’ {the misuse of data analysis to present non-existing patterns as statistically significant} is not as bad as outright faking or manipulating data. In my mind, presenting what you want to see is data fabrication or manipulation,” says Lakshmi Balachandra, an economist who teaches entrepreneurship at Babson College.

Her own concerns over the methods used by another behavioural economist during her postgraduate studies had been dismissed as irrelevant. One reason for that tacit acceptance of dodgy practices, she argues, is that behavioural economists work with large datasets that can be easily manipulated to produce the desired results, while samples are often selected from specific demographic groups, such as undergraduate students.

An immoral science
While concerns over academic integrity and research reproducibility are not uncommon among other sciences, economics faces a much bigger ethical crisis. One piece missing from its models, argues George DeMartino, author of The Tragic Science: How Economists Cause Harm, is an understanding of the harm that theories can cause, as most economists believe that some collateral damage is the price to be paid for a higher good. The gap separating economists from those who cannot master its advanced mathematics results in a sense of entitlement. “There’s this profound paternalism in the profession that economists know best, and society should defer to our judgement because everybody will be better off,” DeMartino says. “If you take this approach, you find that it’s okay to deceive.” One example is the ‘Shock therapy’ imposed on post-Soviet Russia by a group of Russian and foreign economists, seeking to transform the country into a market economy. The economic argument, DeMartino suggests in his book, was a smoke screen for economists to pursue their agenda. As an antidote to such behaviour, he believes that economics teaching needs to incorporate ethics, notably what he calls ‘moral geometry’: the study of how complex economic policies could affect and potentially harm different groups.

Is economics sexist?

In an era where discrimination against disadvantaged groups is openly discussed, the question of whether economics faces a gender problem is becoming more salient. A 2020 study claimed that inherent biases in the way the discipline is taught make economics students more sexist as they progress with their studies. Some economics textbooks have been criticised for being biased against women, while more than three out of four research papers are written by male economists. Gender disparity starts early on and progresses from A-levels to university, according to Stefania Fuentes from the University of Warwick, who headed a report on the demographics of economics students in the UK. “The lack of female representation can be attributed to the unwelcoming environment women and minorities often encounter in economics,” she says, adding: “This includes documented instances of sexism within economics departments, where women are more likely to experience harassment and face a hostile environment during conferences and presentations. They are also held to higher standards in their academic work: they need to write better academic papers, and are subject to higher standards in general.”

The main problem is not the number of women studying economics, according to Paola Subacchi, but the lack of visible female economists like the Nobel laureate Claudia Goldin. “We need to have more women everywhere in economics, not just women studying women in gender-oriented economics,” she says. For her part, Balachandra from Babson believes that the profession is in for some soul-searching. “We have a white male-dominated network effect. If you’re part of this patriarchal hierarchy, your research is automatically considered better,” she says, adding: “If you’re not from a branded institution like Harvard, MIT or Stanford, your research isn’t considered as good.” Economic policymaking is also dominated by male economists. Currently, only 26 of the 190 IMF member countries have female finance ministers, while just 17 have a woman at the helm of their central bank. Such absence of diversity has broader impacts, says Fuentes: “Diversity among economists is instrumental in policymaking,” she says. “Without diversity, there is a higher risk of groupthink, which hampers thorough analyses of alternatives and consideration of consequences, ultimately hindering the quality of policy outcomes.”

Another reason why economics is becoming an anathema for the public is its sheer power. In the wake of the Great Depression and WWII, a global wave of Keynesian interventionism filled government bureaucracies and international organisations with economists. From an academic discipline, economics transformed itself into a way of governing. When neoclassical economics replaced Keynesianism as the dominant paradigm in the 1970s, a new generation of economists played a central role in market-orientated reforms such as lowering tax rates. This gave rise to what James Kwak, author of Economism: Bad Economics and the Rise of Inequality, calls ‘economism’: an ideology that posed as scientific analysis, aiming to replace post-war planning with unfettered free markets. As the discipline gradually shifted from demand to supply side approaches and monetarism, thinkers like Friedman and politicians like Ronald Reagan imposed a new economic model that emphasised deregulation and a smaller role for the state. “Many prominent economists actively promote the idea that simplistic models should be the basis for policy,” Kwak says, adding: “Economics 101 is taught everywhere in a way that encourages people to remember the simple models and forget all the caveats that come with them.”

Populist backlash
While such ideological commitment has increased the influence of economists, it has also exposed them to harsh critiques. The first shock came in 2008 when the financial crisis gripped the global economy. Mainstream economics was blamed for failing to anticipate the credit crunch and prolonging the subsequent crisis through misguided austerity policies. The backlash was severe. Some attribute the rise of populism worldwide to the failure of economists to grapple with the consequences of their actions. Such disillusionment led to a rejection of economic expertise, a sentiment famously expressed by the British politician Michael Gove in the run-up to the Brexit referendum. Asked about several dire economic forecasts about Brexit, Gove said: “I think the people in this country have had enough of experts, from organisations with acronyms, saying that they know what is best and getting it consistently wrong.” He would later clarify that he was referring to economists. Many other politicians have criticised the influence of economists; Donald Trump was notoriously distrustful of economic experts during his presidency. On the left side of the political spectrum, the rise of inequality is often blamed on economics for providing the vocabulary to defend the status quo, an antipathy some speculate transmuted into a broader distrust of experts, as evidenced by anger against public health officials during the pandemic. “Economics deceived the public about the emergence of market fundamentalism, as if we were all going to prosper,” DeMartino says. “It was never honest with the public about the fact that this experiment would have winners and losers. Those who have been harmed are now getting their revenge.”

One particular target of populism has been central bank independence. Politicians on both sides of the Atlantic have questioned the competence of central bank governors, with their failure to anticipate the inflation crisis rekindling the debate on whether elected politicians should have the final say in monetary policy. “Delegating so much decision-making power to experts is unique,” argues Johan Christensen from Leiden University, a political scientist who studies the role of experts in policymaking. “You don’t see that in other policy areas. What we see now is a rebalancing phase, with growing demands for accountability and more political say over what central banks do.”

The backlash has partly borne fruit, as the pendulum is swinging towards more market regulation. International organisations such as the IMF have acknowledged that markets are embedded in societies, rather than self-regulating institutions. Central bank monetary policy is increasingly influenced by new quantitative models, known as Heterogeneous Agent New Keynesian (HANK) models, which take into account wealth and income distribution. The prevalent sentiment among economists is a need for change, says VeroniKa Dolar from SUNY: “Even mainstream economists trained in neoclassical approaches are arguing that we can’t keep talking about free markets in the current environment, with low taxes and large corporations influencing politics. There is a shift because the world we live in has changed.” Although the neoclassical school is still dominant, its grip is getting looser, according to Christensen. “New insights make their way into policymaking institutions through graduates equipped with a more up-to-date economics education,” he says, adding: “Over time, the perspectives of these institutions change as their staff changes, but there is a lag in the process.”

New paths
Defenders of economic orthodoxy argue that, like other sciences, economics evolves by learning from its mistakes.

Often adopting interdisciplinary approaches, new subfields are refreshing the discipline with a mix of pragmatism and humility, questioning the need for perfect equilibriums in an imperfect world. Borrowing concepts from computer science and cybernetics, complexity economics studies the interaction of economic networks. Evolutionary economics explains economic transformation through the lens of continuous cultural, institutional and technological change.

Contemporary challenges such as the climate crisis are even pushing economists to question some of the profession’s most sacred principles. Perhaps the most controversial among them is ‘Degrowth,’ a school of thought suggesting that undoing economic growth is necessary to hit net zero targets. Its most radical proponents advocate for a deliberate reduction of GDP, a policy that critics argue would lead to authoritarianism and extreme poverty. “Those ideas have been around since the 1960s, but they’re starting to get traction now outside of economics because of the ecological crisis. If the degrowth movement continues to apply pressure and politicians start to adopt it, then the economics profession will start taking it seriously,” says DeMartino, citing Occupy Wall Street as an example of a political movement that changed mainstream economic thinking on inequality.

Technological change is also affecting the profession, with the big data revolution facilitating a shift toward empirical approaches. One example is experimental economics, which relies on empirical research and statistical analysis of controlled experiments and evidence-based randomised control trials to estimate policy impacts. Its most prominent advocates, Abhijit Banerjee and Esther Duflo, who won the 2019 Nobel Prize in Economics, use field experiments to study the causes of economic relationships in the developing world. Critics have raised questions over the scalability of these methods and the credibility of collected data. However, the rise of experimental approaches marks a broader shift, DeMartino says: “Among younger economists there is a move toward empiricism. Rather than deducing policy implications from a blackboard using supply and demand models, there’s a turn to data.”

A precarious future
As a child of the Enlightenment era, economics is characterised by an inherent belief in constant progress, including its own ability to perpetually enhance our understanding of the material world. Such optimism may no longer be topical in an increasingly irrational world where technological progress reigns supreme. The rise of generative AI, threatening to wipe out whole professions, poses new challenges. Economists often appear on top of the list of white-collar professionals expected to be affected by automation. Ironically, the profession’s reliance on advanced mathematics, the tool that gave it the pole position among social sciences, also makes it vulnerable to technological innovation. Tasks such as forecasting and modelling can be easily performed by bots, given the large amount of literature that can be fed to AI tools such as ChatGPT. “Fewer economists will be able to generate much more output by using AI,” DeMartino forecasts.

For the time being, economists still dominate policymaking, even expanding into areas where they had little sway until recently, such as climate policy. One example is the way the UN Sustainable Development Goals are being pursued through policies largely shaped by economists, according to Christensen. However, many think that a challenge of that scale requires more emphasis on urgent action, rather than bean counting. “Until economics recognises its limits in terms of predicting the future, we economists shouldn’t have too much influence in these areas,” says DeMartino, adding: “Economics has aspired to be the physics of the social world for over 100 years. That pretension has to be dropped.”