BOOK REVIEW
BY ROBERT E . WRIGHT
How Economics Professors Can Stop Failing Us : The Discipline at a Crossroads
By Steven Payson Lexington Books , 2017 372 pages $ 110
Readers are undoubtedly familiar with the principle of caveat emptor , or buyer beware , which especially holds true when buying securities or insurance . But what about caveat lector , or reader beware ? Scientific findings , it turns out , are not ironclad truths , but claims about the real world that may be overturned as new evidence comes to light or as better theories imbue new meaning on old data . ( The most delicious example of this phenomenon may be the scientific understanding of chicken eggs , which went from being nearly poisonous to a super food during my lifetime .)
As veteran government economist Steven Payson shows in How Economics Professors Can Stop Failing Us , economists also publish findings of dubious merit or limited longevity . While the basic tenets of economics — supply and demand , opportunity cost , and so forth — remain safe for the present , conclusions reached in the rarified world of theoretical economics , which is often leveraged by policymakers and investors to guide difficult decisions affecting millions of people and billions of dollars , are hardly immutable . Many articles , especially those published in top economics journals , are , Payson explains , written solely to impress search , tenure , grant and prize committees , not to expand knowledge of the real world or to improve economic theory .
Economists know this , Payson claims , but note that they have no incentive to challenge the status quo and , like the naked Emperor and his advisors in the Hans Christian Andersen story , fear being labeled simpletons if they do not fall into line and comment on how resplendent or elegant a model is , no matter how silly or irrelevant the exercise .
It used to be that economists had too many arms ( they were always telling President Truman “ on the other hand this , on the other hand that ”), but now they have too many dubious models , which proliferate because journals do not effectively screen out arcane or inane submissions . Most peer review is de facto single blind , Payson explains , meaning that the editors and reviewers know the identities of submitters . Publication decisions , therefore , do not need to be based on the objective quality of the submission but can be , and Payson believes often are , decided upon the basis of the author ’ s professional connections and quid pro quo arrangements .
The evidence , he says , is in the articles themselves , many of which hinge on unrealistic assumptions , rely on tests of statistical significance instead of real world significance , omit crucial variables and employ junk or even fake data . Authors purposely employ fancy mathematics to hide the charade , but most of the econometric heavy lifting is simply adapted from earlier work .
Thankfully , no knowledge of advanced mathematics is required to read Payson ’ s book or to understand his examples , which he carefully and artfully explains with words and pictures . Payson ’ s tone is often playful and irreverent . Clearly , he has had enough of the situation , which he considers a socially expensive game . Not only are intelligent people wasting inordinate amounts of their time on frivolous problems , like the economics of sport , as well as the time of the naïve people who read their work , many economists are essentially perpetrating a fraud on their employers , students , policymakers and funding sources , from the NSF to the Koch Foundation . Payson calls on economics departments to self-regulate and for individual economists to spend more time thinking about the ethical implications of their bogus economic model building and pseudo-scientific hypothesis testing .
Until reforms are implemented ( and if past experience is any indicator , they never will be ), investors and policymakers always need to remember to think for themselves . If an argument , conclusion or model seems off , it may very well be , even if it was written by some economic demigod in the most prestigious journal in economics , whatever that may be . ( Payson has some choice words for journal rankings as well .)
Some theoretical economics articles may help investors to beat the market or policymakers to prevent another financial meltdown but many , even most if Payson is right , are simply exercises in applied mathematics with little discernible connection to the actual economy . That is why most economists were taken aback when crisis struck a decade ago . Caveat lector !
Robert E . Wright is the Nef Family Chair of Political Economy at Augustana University in South Dakota and a member of the Financial History editorial board . He is the co-author , with MoAF Chairman Richard Sylla , of Genealogy of American Finance ( 2015 ) and the author of several hundred other articles , books , reviews and talks about business , economic , financial and policy history .
40 FINANCIAL HISTORY | Winter 2018 | www . MoAF . org