How should academic economics cope with ideological bias

This question was prompted by this study by Mohsen Javdani and Ha-Joon Chang, which tries to show two things: mainstream economists are biased against heterodox economists, and also tend to favour statements by those close to their own political viewpoint, particularly on the right. I don’t want to talk here about the first bias, or about the merits or otherwise of this particular study. Instead I will take it as given that ideological bias exists within mainstream academic economists (and hereafter when I just say ‘academic economics’ I’m only talking about the mainstream), as it does with many social sciences. I take this as given simply because of my own experience as an economist.

I also, from my own experience, want to suggest that in their formal discourse (seminars, refereeing etc) academic economists normally pretend that this ideological bias does not exist. I cannot recall anyone in any seminar saying something like ‘you only assume that because of your ideology/politics’. This has one huge advantage. It means that academic analysis is judged (on the surface at least) on its merits, and not on the basis of the ideology of those involved.

The danger of doing the opposite should be obvious. Your view on the theoretical and empirical validity of an academic paper or study may become dependent on the ideology or politics of the author or the political implications of the results rather than its scientific merits. Having said that, there are many people who argue that economics is just a form of politics and economists should stop pretending otherwise. I disagree. Economics can only be called a science because it embraces the scientific method. The moment evidence is routinely ignored by academics because it does not help some political project economics stops being the science it undoubtedly is.

Take, for example, the idea - almost an article of faith in the Republican party - that we are on the part of the Laffer curve where tax cuts raise revenue. The overwhelming majority, perhaps all, of academic economic studies find this to be false. If economics was merely politics in disguise, this would not be the case. This is also what distinguishes academic economics and some of the economics undertaken by certain think tanks, where results always seem to match the political or ideological orientation of the think tank.

There is a danger, however, in pretense going too far. This can be particularly true in subjects where empirical criticism of assumptions or parameterisation is weak. I think this was the basis of Paul Romer’s criticism of growth theory and microfoundations macro for what he calls mathiness, and by Paul Pfleiderer for what he calls ‘chameleon models’ in finance and economics. If authors choose assumptions simply to derive a particular politically convenient result, or stick to simplifications simply because it produces results that conform to some ideological viewpoint, it seems absurd to ignore this.

Romer’s discussion suggests that it is at least possible for ideological bias to send a branch of economics off in the wrong direction for some time. I would argue, for example, that Real Business Cycle theory in business cycle macro, which was briefly dominant around 40 years ago, was in part influenced by a desire among those who championed it to look for models where policy had little role. In addition, it showed up economists tendency to ignore other social sciences, or even common sense, at its worse. [1] It didn’t last because explaining cycles is so much easier when you assume sticky prices, as most macroeconomists now do, but it may be possible that other aspects of mainstream economics may be ideologically driven and persist for a much longer time (Pareto optimality?), and mainstream economists should always be aware of that possibility. One of my first posts was about the influence of ideology on the reaction of some economists to Keynesian fiscal stimulus.

The basic problem arises in part because empirical results are never clear cut and conclusive. For example the debate about whether increases in the minimum wage reduce employment continues, despite plenty of empirical work that suggests it does not, because there is some evidence that points the other way. This opens the way for ideology to have an influence. But the political implications of academic economics will always mean that ideology plays a role, whatever the evidence. Even when evidence is clear, as it is for the continuing importance of gravity (how close two countries are to each other) for trade for example, it is possible for an academic economist to claim gravity no longer matters and gain a huge amount of publicity for their work that assumes this. This is an implication of academic freedom, although in the case of economics, I still think there is a role for an organisation like (in the UK) the Royal Economic Society to point out what the academic consensus is.

Does this mean economics is not a true science? No, because ideological influence does not trump data when the data is very clear, as in the case of the Laffer curve or gravity equations, although ideology and academic freedom may allow the occasional maverick to go against the consensus. That in turn means that it is important for any user of economics to be aware of possible ideological bias, and always establish what the consensus is, if it exists, on an issue. Could ideology influence the direction particular areas of economics take for some time? The evidence cited above suggests yes. So while I have no quarrel with the pretense that ideology is absent from academic economics in formal discourse, academics should always be aware of its existence. In this respect, some of the points that the authors of this study mention in the discussion section of their paper are relevant. 

[1] This reflected the introduction of a microfoundations methodology which soon began to dominate the discipline, and which I have talked about elsewhere (e.g. here and here).

On not being politically partisan

This may seem a little introspective, but there are some general points here about how economists deal with the political implications of what they say.

I guess it is inevitable that as the UK election gets closer more comments on this blog accuse me of being partisan and writing propaganda. Let me start by saying what I think a partisan economist would do, and then contrast that with what I try to do. [1]

Suppose a government does some economic related things well and some things badly. A partisan opponent of the government (in a party political sense) would focus on the bad things, and hardly mention the good things. They would do the opposite for the opposition. I can think of one or two UK academic economists who appear partisan in this sense, on both sides (pro or anti-government), but they are very much the minority. Among the US macroeconomists I know the same is true.

Part of the motivation for writing this blog in the first place was a belief that the UK, along with the US and Eurozone, where making a fundamental mistake in turning to fiscal austerity in 2010. It happens to be the case that this move is associated with the political right, and it is inevitable that I would speculate on the reasons for that. However the IFS has recently reminded us that Labour’s plans for fiscal policy from 2010 were not so very different from what the Coalition actually enacted. If Labour had remained in power and if (a big if) they had stuck to their plans I would be writing much the same critical stuff about the Labour government. (See this post on the European left, for example.) In my NIER piece on the Coalition government’s record, I praise two out of their three major innovations: it’s just unfortunate that their third (fiscal austerity in 2010) is a mistake which dwarfs the other two. 

When I first started the blog at the end of 2011, I always knew I would occasionally stray beyond macroeconomics. I have always had an interest in poverty and inequality, but my first post on that was hardly political - indeed it started off praising the UK Prime Minister. At the end of March 2013 that changed. I wrote “Surely it should now be clear that this is a government with at least as strong an anti-state, anti-poor ideology as Mrs Thatcher, but with rather less honesty about what it is doing.” The first ‘anti-state’ claim came from a realisation by that stage that the drive for austerity was about more than reducing deficits. The second ‘anti-poor’ claim was justified in two following posts: the first documented work by the IFS showing how government policies would lead to a steady increase in poverty, and that and a second talked about how sections of the press went out of their way to denigrate welfare recipients, and how some (not all) politicians went along with this. [2]

Is this partisan propaganda? I certainly think it would be good to reduce both poverty and the incomes of the top 1%: the latter view can come from understanding that recent growth represents a huge market distortion, which economists naturally abhor. I also believe in treating those unfortunate enough to be claiming benefit with respect, so what I write follows naturally from those positions. As the chronology makes clear, I did not choose to write about poverty because it allowed me to be negative about the government, which is what a partisan would do. Another issue I feel very strongly about is climate change, and again I cannot help it if the current government contains many who deny the proposition and acts with - to put it mildly - some ambivalence towards the problem.

So this blog is not partisan. However it is also not ‘balanced’, in the sense of framing everything in ‘shape of the earth views differ’ style, or avoiding saying the obvious because it has political implications, as in this classic BBC headline. If the logic of a position or argument is that one political party has it right and another wrong, why avoid saying this? Nor will I avoid expressing an opinion on voting behaviour: it seems abundantly clear to me that a future Labour government would produce outcomes that are closer to the views expressed in this blog than a future Conservative government, and that those on the left who argue that ‘they are both the same’ are seriously misguided. This is issue based politics, and we need more of it.   

So I do not worry too much about accusations of being partisan or too political, but as ever I'm open to criticism that I'm failing in my objectives. I do worry more about something related, however, but not for the reason you might think. In May 2013 I wrote something I had not imagined I would do when I started the blog, which was a post essentially just about politics. It compared UKIP and the Tea Party, in part because the dominant narrative seemed to be that the rise of UKIP represented the consequences of the Conservatives abandoning right wing views, which apart from certain ‘social’ issues seemed simply wrong and analogous to arguing that the Tea party had arisen because the Republicans had moved to the left! I have subsequently written a few other ‘political’ posts in this sense. In each case I try to write them as any good social scientist should, which is trying to explain political developments, rather than to give an evaluation of whether they are good or bad given my own views. This can be difficult, and you have to choose your language with particular care, as I note in this post. But my main worry when I write these posts is that I will be displaying my ignorance of political science.

So what do you do if you want to read this blog for the macroeconomics, but do not like some of the political implications that I draw? There are hundreds of reasons to vote for a particular political party, and I would hope there are many Conservative voters out there who nevertheless worry that this government’s macroeconomic policy is misguided, and who are also concerned about some other directions of travel. I wrote this post for those Conservative voters, and I want them to keep reading.

[1] Propaganda is information, especially of a biased or misleading nature, used to promote a political cause or point of view. I have never written anything that I know to be biased or misleading.

[2] Here is a more recent IFS assessment of the impact of past policies. At about the same time Margaret Thatcher died, and I wrote this short evaluation of her macroeconomic record, which I do not think anyone can read as partisan.

Bond market fairy tales part 2

In part 1 I contrasted the way I think about how different speeds of deficit reduction in the UK or US today will influence interest rates on government debt with how at least some people in those markets say they think about the same issue. That was a particular example of a more general phenomenon. The macroeconomics coming from economists attached to financial institutions often seems to be rather different to the macroeconomics of academic economists. When it comes to an issue involving financial markets, then it seems obvious who mediamacro should believe. Those close to the markets surely must know more about how those markets work than some unworldly academic. This post will suggest a more nuanced view.

As is often the case in macroeconomics, it all depends on the time horizon. Are we talking about what may happen over the next few days or weeks, or are we talking about what will happen over the next few years?

In terms of very short term prediction, financial market economists beat academic economists hands down. The only thing most academic economists can usefully tell you is that it is unlikely you will outsmart market opinion. If you really want to try then you need lots of short term information and a good nose for how that short term information is interconnected. Most academics (there are exceptions) just do not have time to do that work. I always remember the reply an academic member of the Bank of England’s Monetary Policy Committee gave to some MP who asked him about the implications of some latest data. I must have been doing some marking (grading) at the time that came out, was the reply.

Perhaps more surprisingly, those working in the markets are not as concerned about the longer term (what might happen in three or five years time) as you might expect. That is because money is made in predicting short term movements, and knowledge of where things are going over the next few years is a relatively weak guide to what might happen over the next few days. When I first started doing work on ‘equilibrium exchange rates’, I got a lot of queries from those in the markets, but the interest largely disappeared when I told them that ‘equilibrium’ meant where rates might be in about five years time.

This may surprise you because economists attached to financial market institutions often tell longer term stories, and sometimes they even produce detailed numerical forecasts of the type produced by central banks or governments. (See the list that the UK Treasury compiles for example.) But as I have often said, macroeconomic forecasts are only slightly better than guesswork. So it is only really worth putting any significant resources into producing a macro forecast if you are taking or seriously influencing decisions - like setting interest rates - where the costs of getting things wrong are extremely large. My suspicion is that financial sector macro forecasts are mainly there to give the impression of expertise to the institution’s clients.

I also suspect that economists working for financial institutions spend rather more time talking to their institution’s clients than to market traders. They earn their money by telling stories that interest and impress their clients. To do that it helps if they have the same worldview as their clients. Getting things right over the longer term seems less important, as Paul Krugman keeps complaining about in the context of those who have been predicting rapid inflation as a result of Quantitative Easing. 

It is also useful if they leave their clients with the impression that they have some unique insight into how the markets work. So instead of suggesting - as an academic would - that markets are governed by basic principles, it is better to suggest that the market is like some capricious god, and they are one of a few high priests who can detect its mood. Now in the short term the market really can behave in volatile, unexpected and sometimes mysterious ways, but over the longer term there are some basic rules that markets obey.

The incentive system for academics is very different. They are judged by their peers. If they present stories to the media that differ greatly from conventional wisdom about theory or the empirical evidence, they will be given a hard time by their colleagues. They need to have an idea about how markets work to do good macroeconomics. They want to be more like scientists than high priests. (This has an unfortunate by-product. Most academics would rather not lose precious research time talking to journalists, particularly if the quotes they give may fail to contain the caveats normally demanded in academic work. In contrast talking to the media is part of a city economist’s job description.)   

So who should journalists trust on the economy? If you want to know about the latest retail sales numbers or where the economy might be heading over the next few months, with a few exceptions financial economists are better bets than academic economists. If you have a more long term question, like how alternative speeds of deficit reduction will influence interest rates, then perhaps surprisingly you may tend to get a more reliable answer from academics. Like most things in economics, this is a tendency: there are some seasoned city economists who I would trust over many academics.

There is an important implication about political bias as well. Academic economists are no saints on this, but I do not think there is a clear average bias among academic macroeconomists towards the left or right. However partly because financial economists need to be good at telling stories that their clients find sympathetic, their worldview tends to be one where a smaller state is good for the economy, higher taxes on top incomes are a bad idea, markets are generally efficient and regulation is harmful.

If you think this is just self-serving conjecture, look at this evidence. The question of whether, in the UK, the 2013 recovery vindicated 2010 austerity was a no-brainer. Anyone who thinks about the logic for a moment will realise the answer is no, even if they think austerity was a good idea. To suggest otherwise would be to argue that it was a good idea to close half the economy down for a year, because growth in the following year would be fantastic. To answer yes to this question probably indicates political bias rather than lack of thought. When the Financial Times asked this question, only two out of twelve academics gave the answer yes. About half the city economists who were asked said yes.