Empirics and Psychology: Eight of the World’s Top Young Economists Discuss Where Their Field Is Going

Empirics and Psychology: Eight of the World’s Top Young Economists Discuss Where Their Field Is Going

The past few years have been tough on economics and economists.  In a searing indictment written one year after the collapse of Lehman Brothers, Paul Krugman concluded that

the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.  Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong.  They turned a blind eye to the limitations of human rationality…to the problems of institutions that run amok; to the imperfections of markets…and to the dangers created when regulators don’t believe in regulation.

Last August, Graeme Maxton published a book arguing that “modern economics has failed us,” and this April, the New York Times hosted a roundtable “about how the teaching of economics should change in light of the financial crisis.” 

This soul-searching has led to the establishment of organizations such as the Institute for New Economic Thinking and invigorated discussions about alternative metrics for gauging countries’ welfare (last July, in fact, the UN General Assembly adopted a resolution asserting that “the gross domestic product indicator by nature was not designed to and does not adequately reflect the happiness and well-being of people in a country”).

To get the pulse of a field in flux, I asked eight of the world’s top young economists to identify the biggest unanswered questions in economics and predict what breakthroughs will define it a decade or two hence.  


NICHOLAS BLOOM

Stanford University; 39

Why are developing countries poor?  In terms of impact on mankind globally, this strikes me as probably the biggest and most important current economic question.  I think the answer is complex and linked to a combination of factors around history, geography, luck, etc.  I am personally working on management practices: people in developing countries are poor because wages are low, and wages are low because firms are very unproductive, and firms seem to be unproductive in large part because of bad management.  An Indian worker makes in one week what an average U.S. worker makes in a half a day.  One big factor seems to be that factories in India are frankly very badly managed: equipment is not looked after, materials are wasted, theft is common because inventory is not monitored, defects keep occurring, etc.  In a recent project with the World Bank, we found in randomized experiments that giving simple management advice to Indian factories increased productivity by 20%, and I suspect that a number like 200% would be possible in the longer run. 

Developed countries’ biggest question now is probably: how do we restart growth?  There are a lot of issues here around innovation, curbing entitlement spending, etc.  The area I know best is the short-run side of this, controlling policy uncertainty.  A big factor that politicians and the media are pushing heavily right now is that growth is getting crushed by how policy has induced uncertainty.  Basically, firms and consumers in the U.S. and Europe are holding back from spending until they know what is going to happen with taxes, spending, and (to a lesser extent) regulations over the next year or so.  In the U.S., we have the November 2012 election generating a massive cloud of policy uncertainty, and in Europe, a rolling wave of elections and collapsing governments.  

I do not think that any one single breakthrough will happen.  The progress is likely to be heavily empirical—simply because more and more data is becoming available, and it is easy to analyze with fast computers (so empirics is now advancing faster than theory)—and spread across many hundreds of topics.  So economics has gone from Victorian science, where one genius in his shed could invent the steam engine over the weekend, to industrial science, where innovation comes in thousands of tiny steps made by dozens of research teams.

RAJ CHETTY

Harvard University; 32

Many economists are concerned with two broad questions: how can we increase the rate of economic growth and overall well-being, and how can we reduce the rate of poverty?  Countless policies—taxation, education, healthcare, etc.—have been implemented in an effort to achieve those objectives.  One of our biggest challenges is to distill each policy’s unique impact so that we can understand which ones actually work and which ones do not.

The traditional state of economics is captured by the joke about ten economists, each of whom has a different theory of how the world works, none of which is directly tested or verified.  Looking ahead, I am most excited about the prospect of having clear, evidence-based answers on which policies have the most beneficial economic impacts.  I am especially optimistic that the expansion of access to large administrative datasets, such as earnings data from social-security records or student-achievement data from school districts, will yield sharp, quasi-experimental evidence that allows us to test theories and estimate key parameters of economic models.  While theory will play an important role in guiding this research, its assumptions and conclusions will increasingly be empirically founded.

Within this broad area, I plan to pursue research on two sets of projects over the next few years.  The first will try to identify the determinants of intergenerational mobility, with an eye towards finding policies that increase equality of opportunity.  Should we be focusing on increasing access to higher education?  Changing the structure of elementary schooling?  Revamping the tax code?  A second set of projects will explore the implications of behavioral economics for policymaking.  Although we have accumulated considerable evidence showing that people do not always behave rationally, we do not have as good a sense of how they actually do behave and what this means for policy.  I hope to make progress on this front, focusing on how we can design cost-effective policies that encourage people to save adequately for their retirement—to give just one example.

GAUTI EGGERTSSON

Federal Reserve Bank of New York; 37

I think the recent world economic crisis has firmly put back on the map basic macroeconomics: that is, the study of traditional questions, such as how to use monetary and fiscal policy to eliminate unemployment and control inflation.  It was actually becoming quite unfashionable within economics to study these types of questions, even though they remain unanswered to a large extent.  People even graduated with PhDs in economics with little idea about what role, if any, the government plays in stabilizing business cycles, the role of regulations, and so on.  Instead, it was becoming increasingly fashionable to tackle smaller but more manageable questions for which data is rich and answers clear. 

My guess, therefore, is that if one looks back 20 years from now, one will notice that a shift occurred towards studying the basic, big-picture, policy-relevant questions of macroeconomics—e.g., optimal currency areas, bank runs, fads and herding in financial markets, and automatic stabilizers—that have the power to change the course of history.  I think there have been two comparable events that shaped the field in this way.  As a discipline, macroeconomics was born in response to the Great Depression, giving rise to Keynesianism; the rational-expectations revolution in macroeconomics was born in response to the great inflation on the 1970s.

Perhaps somewhat under the radar, the past two decades have witnessed the integration of the macroeconomics that came out of the 1970s and 1980s with basic Keynesian models developed in the wake of the Great Depression.  I suspect that the current crisis will accelerate that development, with models integrating financial frictions that were clearly central to its emergence. 

XAVIER GABAIX

New York University; 40

The most central open question in economic theory, as I see it, is how to model realistic economic agents.  Traditionally, economists have relied on the rational-actor model, but it is clear that it is just a rough caricature.  It has been greatly enriched by behavioral economics in the past 30 years.  Still, we are far from a unified, versatile, believable alternative to the rational-actor model.  I am hopeful, though, that this might be overcome—in part because of progress in the sister disciplines (psychology and neuroscience) and basic modeling, and also because empirical anomalies are forcing the economic profession to be more open-minded.  Contributions by computer scientists and physicists will help inject new perspectives into economics.

The largest concrete questions in economics are, arguably, how to increase growth—particularly in developing countries—and how to avoid economic disasters and financial crises.

Progress in understanding limited rationality will lead to progress on answering the concrete questions.  Low levels of growth are in part due to misapplied cognitive heuristics that lead people to be timid, inert, and gullible.  Regarding disasters, during the unfolding of the crisis, traditional macro-financial factors (bank runs, deleveraging, etc.) have arguably been more important than behavioral factors.  However, behavioral elements seem to have been paramount in the buildup of the current crisis (in particular, the neglect of tail events by financial actors and by the architects of the euro), as perhaps they are in most crises.  The modeling of agents with bounded rationality will help us build economic models (in particular, macroeconomic and financial models) and institutions that better take into account the limitations of human reason.

GITA GOPINATH

Harvard University; 40

All countries wish to pursue sustainable growth without large boom-bust episodes.  How exactly one accomplishes this remains a challenge that has been made starker by the current crisis.  In an increasingly globalized world, the search for answers will necessarily require a much deeper understanding of three areas that interest me.  One, we need a better understanding of the interlinkages across countries in trade, finance, and macroeconomic policy.  The crisis in the Euro area brings this to the forefront.  The complex ties across the member countries via trade, via banks, and through a shared monetary policy are central factors behind the ongoing sovereign debt, banking, and growth crises in the region.  While trade interactions are better understood, financial flows remain a challenge.

Two, understanding the global economy requires a greater appreciation of the differences across economies.  In the past, research mainly focused on analyzing interactions across economies that were similar in terms of their stages of development and their economic institutions.  The most interesting questions today, however, concern interactions between developed economies and fast-growing developing economies, and between countries with diverse economic institutions.  Questions on so-called global imbalances, currency wars, and capital controls have to do with interactions across diverse countries.

Three, understanding asymmetries in the international monetary system—with the prominence of the dollar in trade and financial transactions—will be crucial to understanding the propagation of shocks across economies.  In my research, I find that international prices, regardless of what currency they are set in, respond very little to exchange rates.  Since the dollar is the predominant trade currency, this implies that exchange-rate movements have a much smaller impact on U.S. import price inflation than they do on inflation in other countries.

Addressing these areas will require breakthroughs in theory and empirical work, with more micro-level datasets on prices, trade, and capital flows being brought to bear.

PETER LEESON

George Mason University; 32

My candidate for the biggest unanswered question in economics is the status of the rationality postulate: the decision to analyze actors as utility maximizers with consistent preferences.  If we view economics as an “engine” for understanding the world, the rationality postulate was that engine in nearly all of economics until quite recently.  The rise of behavioral economics has challenged the usefulness and, in a more subtle but radical way, the legitimacy of the rationality engine.  While only a minority of economists would describe themselves as “behavioralists,” behavioralism has affected many more by influencing the kinds of questions economists consider important to ask and influencing the kinds of answers to those questions they consider illuminating.  These influences have the potential to profoundly affect the way economics is done, and thus what economics is able offer our understanding of the world.

At the moment, most behavioralism avers merely to “fine tune” the rationality engine rather than replace it.  But even such tuning can have and, as I intimated a moment ago, I think has already had, a noticeable impact on how a growing number of economists and those following them interpret society.  To the extent that economists’ view of, say, markets as reflecting rational vs. irrational systems—or, more specifically, their interpretation of economic crises as the product of markets responding rationally to poor policy vs. the product of endemic irrational decision-making—either directly or indirectly influences public policy, the way in which the status of the rationality postulate is resolved will not merely shape what economists are doing.  It will shape the kind of society we inhabit.

GLEN WEYL

University of Chicago; 27

In his famous 1945 article, “The Use of Knowledge in Society,” F. A. Hayek argued that despite their inequity and inefficiency, free markets were necessary in order to allow the incorporation of information held by dispersed individuals into social decisions.  No central planner could hope to collect and process all the information necessary for social decisions; only markets allowed and provided the incentives for disaggregated information processing.  Yet, increasingly, information technology is leading individuals to delegate their most “private” decisions to automated processing systems.  Choices of movies, one of the last realms of taste one would have guessed could be delegated to centralized expertise, are increasingly shaped by services like Netflix’s recommender system.  While these information systems are mostly nongovernmental, they are sufficiently centralized that it is increasingly hard to see how dispersed information poses the challenge it once did to centralized planning. 

Information technology thus fundamentally challenges the standard foundations of the market economy.  For many years to come, economists will increasingly have to struggle with this challenge.  Some will harness the power of the data and computational power provided by information technology to provide increasingly precise and accurate prescriptions for economic planning.  Others, who value the libertarian tradition that has often been associated with economics, will be forced to articulate other arguments, perhaps based on privacy, that are not susceptible to erosion by the increasing power of centralized computation.

JUSTIN WOLFERS

University of Pennsylvania; 39

Economics is in the midst of a massive and radical change.  It used to be that we had little data, and no computing power, so the role of economic theory was to “fill in” for where facts were missing.  Today, every interaction we have in our lives leaves behind a trail of data.  Whatever question you are interested in answering, the data to analyze it exists on someone’s hard drive, somewhere.  This background informs how I think about the future of economics.

Specifically, the tools of economics will continue to evolve and become more empirical.  Economic theory will become a tool we use to structure our investigation of the data.  Equally, economics is not the only social science engaged in this race: our friends in political science and sociology use similar tools; computer scientists are grappling with “big data” and machine learning; and statisticians are developing new tools.  Whichever field adapts best will win.  I think it will be economics.  And so economists will continue to broaden the substantive areas we study.  Since Gary Becker, we have been comfortable looking beyond the purely pecuniary domain, and I expect this trend towards cross-disciplinary work to continue.

Follow Ali Wyne on Twitter and Facebook.

Photo Credit: JFunk/Shutterstock.com

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Problem-solving skills are in demand. Every job posting lists them under must-have qualifications, and every job candidate claims to possess them, par excellence. Young entrepreneurs make solutions to social and global problems the heart of their mission statements, while parents and teachers push for curricula that encourage critical-thinking methods beyond solving for x.

It's ironic then that we continue to cultivate habits that stunt our ability to solve problems. Take, for example, the modern expectation to be "always on." We push ourselves to always be working, always be producing, always be parenting, always be promoting, always be socializing, always be in the know, always be available, always be doing. It's too much, and when things are always on all the time, we deplete the mental resources we need to truly engage with challenges.

If we're serious about solving problems, at work and in our personal lives, then we need to become more adept at tuning out so we can hone in.

Solve problems with others (occasionally)

A side effect of being always on is that we are rarely alone. We're connected through the ceaseless chirps of friends texting, social media buzzing, and colleagues pinging us for advice everywhere we go. In some ways, this is a boon. Modern technologies mediate near endless opportunities for collective learning and social problem-solving. Yet, such cooperation has its limits according to a 2018 study out of Harvard Business School.

In the study, participants were divided into three group types and asked to solve traveling salesman problems. The first group type had to work on the problems individually. The second group type exchanged notes after every round of problem-solving while the third collaborated after every three rounds.

The researchers found that lone problem-solvers invented a diverse range of potential solutions. However, their solutions varied wildly in quality, with some being true light bulb moments and others burnt-out duds. Conversely, the always-on group took advantage of their collective learning to tackle more complex problems more effectively. But social influence often led these groups to prematurely converge around a single idea and abandon potentially brilliant outliers.

It was the intermittent collaborators who landed on the Goldilocks strategy. By interacting less frequently, individual group members had more time to nurture their ideas so the best could shine. But when they gathered together, the group managed to improve the overall quality of their solutions thanks to collective learning.

In presenting their work, the study's authors question the value of always-on culture—especially our submissiveness to intrusions. "As we replace those sorts of intermittent cycles with always-on technologies, we might be diminishing our capacity to solve problems well," Ethan Bernstein, an associate professor at Harvard Business School and one of the study's authors, said in a press release.

These findings suggest we should schedule time to ruminate with our inner geniuses and consult the wisdom of the crowd. Rather than dividing our day between productivity output and group problem-solving sessions, we must also create space to focus on problems in isolation. This strategy provides the best of both worlds. It allows us to formulate our ideas before social pressure can push us to abandon them. But it doesn't preclude the group knowledge required to refine those ideas.

And the more distractions you can block out or turn off, the more working memory you'll have to direct at the problem.

A problem-solving booster

The next step is to dedicate time to not dealing with problems. Counterintuitive as it may seem, setting a troublesome task aside and letting your subconscious take a crack at it improves your conscious efforts later.

How should we fill these down hours? That's up to you, but research has shown time and again that healthier habits produce hardier minds. This is especially true regarding executive functions—a catchall term that includes a person's ability to self-control, meet goals, think flexibly, and, yes, solve problems.

"Exercisers outperform couch potatoes in tests that measure long-term memory, reasoning, attention, problem-solving, even so-called fluid-intelligence tasks. These tasks test the ability to reason quickly and think abstractly, improvising off previously learned material to solve a new problem. Essentially, exercise improves a whole host of abilities prized in the classroom and at work," writes John Medina, a developmental molecular biologist at the University of Washington.

One such study, published in the Frontiers in Neuroscience, analyzed data collected from more than 4,000 British adults. After controlling for variables, it found a bidirectional relationship between exercise and higher levels of executive function over time. Another study, this one published in the Frontiers in Aging Neuroscience, compared fitness data from 128 adults with brain scans taken as they were dual-tasking. Its findings showed regular exercisers sported more active executive regions.

Research also demonstrates a link between problem-solving, healthy diets, and proper sleep habits. Taken altogether, these lifestyle choices also help people manage their stress—which is known to impair problem-solving and creativity.

Of course, it can be difficult to untangle the complex relationship between cause and effect. Do people with healthy life habits naturally enjoy strong executive functions? Or do those habits bolster their mental fitness throughout their lives?

That's not an easy question to answer, but the Frontiers in Neuroscience study researchers hypothesize that it's a positive feedback loop. They posit that good sleep, nutritious food, and regular exercise fortify our executive functions. In turn, more potent executive decisions invigorate healthier life choices. And those healthy life choices—you see where this is going.

And while life choices are ultimately up to individuals, organizations have a supportive role to play. They can foster cultures that protect off-hours for relaxing, incentivize healthier habits with PTO, and prompt workers to take time for exercise beyond the usual keyboard calisthenics.

Nor would such initiatives be entirely selfless. They come with the added benefit of boosting a workforce's collective problem-solving capabilities.

Live and learn and learn some more

Another advantage of tuning out is the advantage to pursue life-long learning opportunities. People who engage in creative or problem-solving activities in their downtime—think playing music, puzzles, and even board games—show improved executive functions and mental acuity as they age. In other words, by learning to enjoy the act of problem-solving, you may enhance your ability to do so.

Similarly, lifelong learners are often interdisciplinary thinkers. By diving into various subjects, they can come to understand the nuances of different skills and bodies of knowledge to see when ideas from one field may provide a solution to a problem in another. That doesn't mean lifelong learners must become experts in every discipline. On the contrary, they are far more likely to understand where the limits of their knowledge lie. But those self-perceived horizons can also provide insight into where collaboration is necessary and when to follow someone else's lead.

In this way, lifelong learning can be key to problem-solving in both business and our personal lives. It pushes us toward self-improvement, gives us an understanding of how things work, hints at what's possible, and, above all, gives us permission to tune out and focus on what matters.

Cultivate lifelong learning at your organization with lessons 'For Business' from Big Think Edge. At Edge, more than 350 experts, academics, and entrepreneurs come together to teach essential skills in career development and lifelong learning. Heighten your problem-solving aptitude with lessons such as:

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