Home > The Economics Profession > Thought for the day: what not to read

Thought for the day: what not to read

from Merijn Knibbe

The American Economic Review has existed for 100 years. It has published a list of the, according to a league of elderly gentlemen, 20 most important articles published during this century (in fact: published between 1929 and 1981). According to me, a peculiar aspect of economics as a science is its lack of attention to conceptualizing, defining and measuring data. In many sciences, the definition and discovery of ‘new facts’ is the road to fame (DNA, the humane genome, ancient texts, exo planets, …).  Am I right and is this otherwise in the science of economics? Or do these articles contain lots of information on concepts, discoveries and measurement? I consulted the conclusions and some of the footnotes of all articles and asked the next questions:

  1. Do the authors use existing data in an analytical way?
  2. Do they conceptualize, define and/or measure or discover new data or facts (including systematizing data from scattered sources)?

The results: of the 20 articles, 11 do not even use existing data in any kind of analytic way, 9 others do (most notably: Cobb and Douglas, Kuznets and Shiller). Of the twenty articles, only four pay real attention to data related concepts and definitions of variables: Hayek, Mundell, Friedman and Kuznets. Krueger and Alchian/Demsetz might be given the benefit of the doubt though they are clearly not familiar with this kind of work and their articles fall short of even mediocre standards. Also, Mundell’s concept of the optimal currency area can be measured in real life, but he does not try to do so. Giving everybody the benefit of the doubt, only 4 present new ‘facts’ (Friedman, Kuznets, Modigliani/Miller, Shiller), though only two of these (Shiller, Kuznets) are good enough to stand up against the empirical rigor of statistical institutes like Statistics Canada or Eurostat (Friedman’s ‘natural rate’ is an ill named hodge podge of different kinds of structural unemployment). Especially articles using the neo-classical defined concept of ‘utility’ stand out as being of little to no empirical avail. So, unfortunately, I cannot dismiss my hypothesis: main stream economists consider the conceptualization, definition and measurement of data and the discovery of new facts to be of minor importance. Of course, quite some economists are doing this kind of empirical work and the greatest achievement of twentieth century economics might well be the development of a consistent system of economic measurement (unemployment, the current account, the flow of funds, those kinds of things) – but contrary to the situation in other sciences measurement seems to be a second rate business (though the blogosphere seems to improve this situation).

Let me, being an economic statistician, end with two quotes, the first one from Hayek (at that moment a professor of political economy and statistics), which I consider to be very stimulating, the second one from Ross which exemplifies what is wrong with neo-classical economics.

Friedrich Hayek (1945):

“Any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assumption that people’s knowledge corresponds with the objective facts of the situation, systematically leaves out what is our main task to explain. I am far from denying that in our system equilibrium analysis has a useful function to perform. But when it comes to the point where it misleads some of our leading thinkers into believing that the situation which it describes has direct relevance to the solution of practical problems, it is time that we remember that it does not deal with the social process at all and that it is no more than a useful preliminary to the study of the main problem”

Stephen Ross (1973), who should have taken Hayek more serious:

The format of this paper has been such as to allow us to only touch on what is surely the most challenging aspect of agency theory; embedding it in a general equilibrium market context




  1. February 11, 2011 at 4:14 pm

    In my humble opinion, so called “economics” is more of a cult than a science.
    And cult members usually occupy a tea cup, unable to peek over the rim of the cup.

  2. Peter Radford
    February 11, 2011 at 9:28 pm

    I downloaded those papers too. I treat it as a forensic exercise: how did economics get so far off-track? There seems to be no effort to engage reality; indeed the real world seems to be an intrusion into the purity of thought these folks all want to wallow in. They may be “economists”, but they are not theorizing about economies. They are playing giant mind games up in the air. Data would mean they have to walk the earth like the rest of us. So they avoid it at all costs. Their models seem to be beautiful and intricate, complex and intellectually daunting pieces of art. They should be hung on the wall and admired. They are not scientific.

  3. Geoff Davies
    February 12, 2011 at 4:57 am

    Neoclassical economics is not a science. It is pseudo-science. Science requires testing your basic assumptions and conclusions against reality. Key assumptions: we can all foretell the future, there are not third-party (social) interactions, there are no economies of scale (“beyond an ill-defined point of diminishing returns”, people have complete information, for free, and they can digest it all, etc. etc. All blatantly contrary to ready observation, each with fundamental implications for the behaviour of the system being described. Prediction: equilibrium. Then there would be no market crashes in the absence of any external disasters. Conclusion: the theory has no relevance to modern economies. Move on.

  4. February 12, 2011 at 4:32 pm

    “beautiful and intricate, complex and intellectually daunting pieces of art.”

    When I asked for the data to back up the model of comparative advantage which was presented to us in the international trade module (Essex 1982), that is just what the lecturer gave as answer.

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