Where Are the Responsible Economists? Experiences from a PhD (5.9.2018)

5.9.2018 

Blogitekstin kirjoittaja: Mikael Homanen, tohtorikoulutettava/PhD Candidate, Cass Business School 

Where Are the Responsible Economists? Experiences from a PhD 

Throughout my PhD, I have struggled to understand the seemingly limited focus on externalities of the fields closest to me, specifically, finance and economics. Modern capitalism is creating negative externalities, such as tax evasion, corruption and climate change on a tremendous scale and while society is struggling to resolve these global economics challenges, there seems to be little incentive for mainstream financial economists to pay attention. Natural disasters are causing 520 billion dollars in damages annually (http://www.worldbank.org/en/news/press-release/2016/11/14/natural-disasters-force-26-million-people-into-poverty-and-cost-520bn-in-losses-every-year-new-world-bank-analysis-finds) and over 20-30 trillion dollars remain hidden in tax havens (https://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_Revisited_120722.pdf). But still, discussions of these topics rarely come up when talking to fellow researchers. Though major advances are taking place across economic fields and many academics aim to have societal impact [1], I argue that there remain three areas for further improvement for academics in making progress to participate in these debates; 1) Academic Culture 2) More Multidisciplinary Research and 3) Inflexible Models. 

1) Academic Culture – Most Finance and Economics PhD students are told to pursue research in well-established fields and to refrain from looking into new cross-disciplinary topics to maximize their prospects in the job market. And even within faculties, there exist few rewards for tackling research beyond the established.  Before Richard Thaler won the Nobel Prize, Behavioral Economics, which draws on findings from other fields such as psychology, was merely seen as a less worthy subfield even though it offered surprising new insights into the human decision-making process. Why is then difficult for us to appreciate and venture into the unknown? 

“Do not pursue this research. You will not get a job once you finish the PhD. Do something standard and then, once you are an established professor, you can pursue these fringe topics.” 

The quotation above is one that was addressed to me and remains a standard mentality that still exists to this day. Until you reach full professorship, there exists little incentive to tackle out-of-the-box issues because the job market rarely rewards it. Furthermore, by the time you make it to full professor and the risk associated with looking at these issues becomes lower, it might be too late. As an example, the arctic is expected to be ice-free by 2040 (https://www.nature.com/news/2006/061211/full/news061211-1.html), but unfortunately, it will take until around 2037 that my generation of PhDs will become full professors. While top-institutions say that they are always searching for new and brave ideas, practically, this can sometimes translate to; “though please keep it exciting within my own research interests”. Fortunately, our fields are slowly changing and diverse departments and institutions with wide-ranging objectives are setup. Nonetheless, in order to tackle modern world challenges we need to continue pushing towards fostering a more open and dynamic research culture. 

2) More Multidisciplinary Research – Economics and business fields include a range of inter connected disciplines from Accounting to Management and from Marketing to Environmental Economics, yet, we rarely collaborate. Why? While some of this behavior can be explained (publication processes provide little reward for cross-disciplinary work), few make little practical sense. Leading scholars like Thomas Piketty have admirably said that French economists need to inspire both economists as well as sociologists for their work to be important. Unfortunately, this type of cross-disciplinary appreciation tends to be an exception rather than a rule. Currently, leading researchers in the field of environmental economics, have criticized their own field’s recent divergence away from important findings made in physics. This type of cross-disciplinary self-reflection can be great for progress. Interestingly, environmental economists have recently started asking, where is Finance? While on aggregate, we know a lot about the economics of climate change, we actually know very little about the real-world obstacles of financing a long run sustainable growth path. Perhaps it’s time for financial economists and environmental economists to collaborate? 

3) Inflexible Models – Economists have spent decades building and developing complex models to understand and explain real economic behavior. This has extended our understanding and knowledge in tremendous ways but as with all large structures, they can sometimes seem inflexible to new ideas. As an additional challenge, it takes years of knowledge and rigorous quantitative training to achieve and understand the models that have been pre-established. Once you have mastered this domain, it becomes difficult to question the foundations and objectives of your field. For example, in the past, our main objective was to maximize GDP with little regard to its distributional or long term consequences. Recent developments at the US senate urging the Bureau of Economic Analysis to report GDP growth with information on how it is distributed along the income scale is a great step towards the right direction.  

Recently, Renée Adams perfectly described some of my field’s fundamental ways of thinking. Though she tackled gender imbalances in her recent article (https://promarket.org/comes-gender-imbalances-academias-ignorance-self-serving/?mc_cid=ba8e3022e1&mc_eid=08b181a65c), her views on our difficulties to challenge the status quo are reflected by one simple quote; 

“Finance and economics may be worse than other fields because economists believe in market efficiency—which may seemingly justify the status quo and inaction. But just because a market is in equilibrium does not mean it is efficient.” 

We often have a tendency to model reality through very specific and detailed, yet limited lens. After the financial crisis of 2008, even Alan Greenspan, the former chairman of the Federal Reserve, began contemplating the limitations of neoclassical economics and the fundamental assumption that “people act in rational self-interest” (https://www.ft.com/content/25ebae9e-3c3a-11e3-b85f-00144feab7de). As a result, he too began a new quest for knowledge by reading behavioral economics, anthropology and psychology. While we assume rational behavior is optimal, we have a tendency to give it a very limited definition (i.e. a very financial one). We need to continue pushing ourselves towards greater understanding and thereby become more open to questioning the fundamentals of our fields. We need to find a way to systematically solve tougher puzzles and not just the quantitative kinds. These include asking positive questions “Is it our job to only describe reality” and more importantly, the normative questions “Or perhaps, we should advocate how things should be”. In the end, what more is economics than a simple tool for us to coordinate? If we are not coordinating efficiently, perhaps it is time we get back in the driver’s seat and take a little more responsibility? 

What’s Next? 
To go from here, we need a much better understanding of how current global challenges can be examined in the context of our fundamental models and use them as opportunities to either improve them or completely renew our approaches. Some of our academic obstacles are natural. If you are going to do something new, by construction, you will be alone for a while. In addition, some fields like sociology are, by design, better equipped via their established methodologies to venture into new and unknown fields. It will be up to us to change our respective fields and begin a collective pursuit for the creation and establishment of new ideas. If something is beyond our field, the fact that we do not understand it, should be a motivator for us. 

Mikael is a Finance PhD student at Cass Business School. His research examines the intersection of externalities and financial markets, focusing on banking and investor ESG (Environmental, Social & Governance) policies. He has visited and collaborated with numerous universities and advocates for more cross-disciplinary collaboration. 

[1] To be clear, there has been tremendous progress and development in the economic fields. Academics such as John List, Thomas Piketty, Kate Raworth, Joseph Stiglitz, Jean Tirole, Luigi Zingales, just to name a few, have pushed our fields to re-evaluate our objectives and to understand the extent of our limitations. A lot has been done, but I argue, there remains much around the mainstream of our fields where we can push for further development.