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

The following article was written by Ali Wyne and features BB&T Professor for the Study of Capitalism at the Mercatus Center Peter Leeson

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 theInstitute 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.  

Below is the response from Peter Leeson. Find responses from the remaining economists here. 

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.

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