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A turning point?

Something is happening in the field of economics when two people with pretty different worldviews say almost the same thing in their reflections on yesterday’s Nobel Prize:

There was an old tradition of economics that focused on the origins and nature of economic institutions. This tradition was very influential before World War II.

But it proved not at all helpful during the Great Depression. My caricature version is that when the Depression hit, institutional economics, asked for advice about what to do, replied that well, it’s all very complicated, and has deep historical roots, and … Meanwhile, Keynesian economists, using very simple mathematical models, basically said “Push this button — we need more G”.

And this had a somewhat perverse effect. The rise of Keynesian economics also meant the rise of the equations guys (Samuelson in particular), and in the end the equations crowded out institutional economics even as Keynes fell into disfavor.

And this:

Economists…who think that they are doing deep theory but are really just assuming their conclusions, find it hard to even understand what it would mean to make the rules that humans follow the object of scientific inquiry. If we fail to explore rules in greater depth, economists will have little to say about the most pressing issues facing humans today – how to improve the quality of bad rules that cause needless waste, harm, and suffering.

Cheers to the Nobel committee for recognizing work on one of the deepest issues in economics. Bravo to the political scientist who showed that she was a better economist than the economic imperialists who can’t tell the difference between assuming and understanding.

The first is Paul Krugman. The second is Paul Romer (HT: Tyler). One has a Nobel Prize. The other is likely to get one. Both are superb theoreticians and superbly skilled at the formal side of economics. What they are saying that is the same is that economics has taken a wrong turn or at least gone too far in the last sixty years. We’ve lost something important because of an  over-emphasis on formalism.

It is a very sobering time to be an economist and a very exciting one.