Economists are divided on both fiscal and monetary policy, the most important economic issues of the day. The divide is on the direction of policy, not on some detail. A field cannot be more lost than to be clueless on its most important issues. This is the equivalent of Lewis and Clark disagreeing on whether they are going to the Mississippi or the Pacific. When you don’t know east from west, you are lost.

The fiscal policy question is the impact of government deficits and debt on the size of the economy. A concrete fiscal question is to determine the impact of an additional dollar, or trillion dollars, of spending and debt by the US federal government. In economic parlance if the government spends an additional $1, and borrows the $1, what is the impact on the economy?

The answer depends on whom you ask. Keynesian economists believe the $1 of extra spending is ‘stimulus’ that gets multiplied to become something more than $1. On the other extreme, some economists believe that the $1 has to come from somewhere. If the government uses the $1 to create, for example, an IRS Star Trek video (click here), then the additional spending makes the society poorer, because the $1 would have been used better by the private sector.

This intellectual disagreement over the impact of fiscal decisions has spilled into the public domain with the fight between Nobel Prize winner Paul Krugman and the Harvard Duo of Carmen Reinhart and Kenneth Rogoff. Here is the letter written by Reinhart and Rogoff labeling Krugman‘s comments on their work as “spectacularly uncivil behavior.” The spat is over the impact of debt on economic growth.

So what is the impact of an extra $1 of government spending? The answer, according to leading is economists, is somewhere between +$5 and -$5.

I want to repeat this to make the point clear. Economists do not know if government “stimulus” makes the economy bigger or smaller.

The battle over monetary policy is perhaps even more vicious than the battle of fiscal policy.

Federal Reserve Chairman Ben Bernanke stands at one extreme of this debate. According to “Helicopter Ben”, The Federal Reserve can make us richer by loose monetary policy. The first step in this approach was to cut interest rates to zero, the second step was to undertake “quantitative easing,” under which the Federal Reserve has purchased trillions of dollars of bonds, and is continuing to purchase more bonds at the rate of an additional $1 trillion a year.

What is the impact of monetary looseness? Chairman Bernanke states that economic growth is “being supported” by quantitative easing and low interest rates; Federal Reserve Vice Chair Janet Yellen is more specific in stating that loose monetary policy has “raised private payroll employment by about 3 million jobs.”

In sharp contrast to Chairman Bernanke and Vice Chair Yellen, many economists believe that the Federal Reserve’s actions have hurt the economy. One of the most prominent critics is Stanford Professor John Taylor, inventor of the “Taylor Rule” of monetary policy. Testifying to Congress in April 2013, Professor Taylor argues that “these (Federal Reserve) policies have been a drag on the recovery.”

What is the impact of Federal Reserve policy? It ranges from having created 3 million jobs to have decreased the number of jobs.

Again, let me repeat the current state of economics. Economists do not know if monetary “stimulus” makes the economy bigger or smaller.

During the Manhattan project there was some debate about whether an atomic explosion would burn the atmosphere and end all life on earth. The scientists convinced themselves that life would not end, and continued with the program. The physicists of the Manhattan project were intellectually honest in admitting that the outcome of novel actions cannot be known.

Even without consensus on direction of impact, economists have taken historic actions. Recent US fiscal deficits are the largest in history outside of World War II. Similarly, monetary policy is in uncharted territory. Prior to 2008, the Federal Reserve had never undertaken quantitative easing.

If economists were honest, they would acknowledge that no one can know the impact, of the first-time-in-the-history-of-the-world policies. Reasonable people can debate these issues. What is not debatable is the field does not have a unified view on the most central economic issues.

Economics is a lost field.

Let me end this section with three less serious symptoms of the sorry of state of economics.

1. The best-selling economic book explains Sumo, but not economics.

Freakonomics has sold more than 4 million copies making it one of the best-selling economic books in history. It tells us, for example, that Sumo wrestlers are likely to throw matches when their opponent is in danger of losing status with a loss. Freakonomics is, however, silent on monetary or fiscal policy. This is not negative statement about the book or the authors, but it is a negative statement on the field. Where is the best-selling book that correctly explains how to grow the economy?

2. Nobel Prize winner Professor Harry Markowitz does not use his own theory.

Professor Harry Markowitz won his Nobel Prize for a theory on how to make investments. When investors decide to buy stocks or bonds, for example, Professor Markowitz’s theory argues the optimal mix requires examination not only of historic risk and return, but also the correlation (or co-variance) between returns.

Does Professor Markowitz use his theory when he buys stocks and bonds? No. He splits his money 50-50. He is quoted as saying, “I should have computed the historical co-variances” but through psychological introspection he instead just split his money equally into stocks and bonds.

3. Nobel Prize winners Professor Myron Scholes and Robert C. Merton did use their own theory and almost blew up the world.

Q: What is worse than an economist who doesn’t use his Nobel prize winning theory?
A: Economists who do use their theory (and almost collapse the world economy).

Professor Myron S. Scholes and Robert C. Merton won the Nobel Prize in 1997. Both men were principals in the hedge fund Long-Term Capital Management (LTCM). Soon after their Nobel Prizes, LTCM went bust. The NY Times says the LTCM went bankrupt because of it “made a number of unsound, esoteric bets.” The bets were so large that the US government had to rescue LTCM. Then Federal Reserve Chairman, Alan Greenspan defended the action by stating to congress, “failure of LTCM … could have potentially impaired the economies of many nations, including our own”.

Economics is a lost field. More than 200 years after Adam Smith wrote the Wealth of Nations, economics has no answer to the most important economic questions. Fields go through periods of growth and periods of stasis; I believe we are in a period of prolonged stasis in that we do not know more than we did 10 or 100 years ago.

Furthermore, I fear that this is a dangerous time to be ignorant of economic realities. The financial crisis is not over, and, consequently, it would be good to know what policies to pursue.

Is there any good news on the state of economics? Yes. There are two meanings of lost. One is a permanent outcome such as the Soviet Union lost the cold war. The second is a temporary state of being confused about location and direction. I am optimistic that economics is lost in the second, temporary sense. Economics has great elements, and many great people. It has the ability to find its way, and that will be the subject of a separate article.

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Published On: June 25, 2013

Terence Burnham

Terence Burnham

Terry Burnham is an economist who studies the biological and evolutionary basis of human behavior. He is Associate Professor at Chapman University. He has a Ph.D. in Business Economics from Harvard University, a Masters from the MIT Sloan School with a concentration in finance. HIs undergraduate degree is in biophysics from the University of Michigan.Terry was a professor at the Harvard Kennedy School, the University of Michigan, and the Harvard Business School. His non-academic experiences include working for Goldman, Sachs & Co., being the chief financial officer for Progenics Pharmaceuticals and being the director of Portfolio Management for Acadian Asset Management, a quantitative equity manager. Visit his blog.


  • Larry Capra says:

    What never gets in examined in economic discussions is how many high paying private sector jobs are created by our government investing in infrastructure.

    Construction firms don’t just go ahead and start building bridges and highways.  They need their biggest customer, the American people, who pool their money at the IRS.

    It’s a self perpetuating system and a no brainer to comprehend.

  • David Magda says:

    Perhaps if the people in field of economics actually admitted they were wrong and followed models that made accurate predictions (like “real” sciences do), then you would not have to write these types of posts:


    Keynesians (among whom Krugman is just one) have predicting things fairly accurately over the last few years:


    There is a model that works well, it’s just that folks are ignoring it because… well, you’ll have to ask them, because I can see no logical reason:


  • Dmitr says:

    As a Master of Economics, I totally agree with the article. Although you should mention the growing field that does make verifiable forecasts, IMO: game theory and it’s use in Microeconomics. Hopefully, in 50 years this will be a usable tool.

  • Mark Hahn says:

    calling Fed Reserve policy “economics” is worse than equating Sumo and Judo!  FR policy is mainly about psychology and politics; the economics is just there for show and rhetorical purposes.

    I guess that’s why I don’t think it’s a lost field – it used to be, but is gradually finding itself in the form of large-scale, numeric behavioral sociology.

  • Georgi Popov says:

    There is no right or wrong in Economics, as there is no right or wrong in History or Philosophy. To know what an extra dollar of government spending does, you need to know what every single person would do with certainty. And people in general are not famous for their predictability.

    To address the specific question of government spending, I would point to a different direction – politics. You don’t have to answer with precision what an extra dollar of government debt would do to the economy. All you need is to ask who in society needs help and who needs to provide that help. There are several different answers: in Sweedish people trust their government to deal with public transport, education and healthcare; American people don’t. Both live in advanced societies and in rich countries. There is no “right” answer.

  • Edward Morbius says:

    Economics has a great many holes in it.  Burnham’s seen a few of the smaller ones, but he’s still swept up in the bigger errors, from what I can tell.  I’m no PhD, but I did study the subject and get a piece of paper from a fine program.  I’ve since come to consider much of what I was taught as “economic woo”.  Carl Sagan’s description of astrology could as well be applied to economics:  “Astrology developed into a strange discipline.  A mixture of careful observation, mathematics and recordkeeping, with fuzzy thinking and pious fraud.”

    And so it is with economics.  As you’ve noted, economists are largely blind to the relationship of industrial and financial interests to political power and influence, even though this is a topic Adam Smith spilled much ink on.  This passage from chapter II (“Of restraints upon importation from foreign countries of such goods as can be produced at home”): is typical:

    “Were the officers of the army to oppose, with the same zeal and unanimity, any reduction in the number of forces, with which master manufacturers set themselves against every law that is likely to increase the number of their rivals in the home market; were the former to animate their soldiers. In the same manner as the latter inflame their workmen, to attack with violence and outrage the proposers of any such regulation; to attempt to reduce the army would be as dangerous as it has now become to attempt to diminish, in any respect, the monopoly which our manufacturers have obtained against us. This monopoly has so much increased the number of some particular tribes of them, that, like an overgrown standing army, they have become formidable to the government, and, upon many occasions, intimidate the legislature. The member of parliament who supports every proposal for strengthening this monopoly, is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more, if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services, can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists.”


    Economics and political science used to be joined, of course, as “political economy”.  I was somewhat surprised recently to learn reading Lester C. Thurow’s Wikipedia entry that his 1960 degree from Williams College was in the same study (it mostly died out in the 1800s).  Others comment on the relationship of economic and financial interests to power.  _Confessions of an Economic Hit Man_ would be a recent popular treatment.  Jonathan Nitzens Capital As Power: A Study of Order and Creorder is a comprehensive (if rather dense) exploration (I’ve skimmed it lightly, but plan to revisit it).

    The other aspect most contemporary orthodox neoclassical economics misses is the central role energy plays in not only economic growth, but social and political growth and complexity.  Hold with me for a couple more sentences.  The withdrawal of cheap and ready energy from a civilization (as is beginning to happen to ours) triggers a rather predictable set of events.  Joseph Tainter explores thes in The Collapse of Complex Societies.  Blogger John Michael Greer identifies one phase as “catabolic collapse”, a phase of the life-cycle in which a civilization starts to turn inward and eat itself—expressed in part as the increased financialization and rent-seeking Krugman’s essay describes, but also as the corruption of the political process which you’ve been looking into over the past several years.  Both are, as Michael C. Ruppert notes, paraphrasing von Clausewitz, part of politics as the continuation of economics by other means.

    Think about that.

    The role of energy in economics is recognized in a number of heterodox economic movements:  thermoeconomics, ecological economics, industrial ecology.  Robert Ayres, Charles A.S. Hall,  Robert Costanza, Herman Daly, H.T. Odum, and others.  It also conforms with the principles which guide a great many other systems from bacteria to ecosystems—another long-standing complaint I’ve had against neoclassical economics is its exceptionalism in this regard.

  • Hugh Caley says:

    Doesn’t Keynesianism work pretty well?  It correctly predicted how to end the Depression, it made the US the most powerful nation in the world.  What it failed at was finding a reason for Stagflation.  But throwing the whole thing out for that reason (as happened when Carter lost to Reagan, even though Carter’s financial guy finally broke stagflation) is like throwing out the Standard Model because it doesn’t predict gravity.  It works just fine on things it does include.

  • Hugh Caley says:

    And BTW, Krugman predicted pretty handily what was going to happen to the economy when the really inadequate stimulus of 2009 was used; the economy teetered and then crawled back, very slowly.

  • Julian Smith says:

    This argument boils down to the economics of the Australian school and Ludvig Von Mises are correct and the facade that is central banking government parasitic market manipulation is craft not of the ecoconomics discipline but but of force, violence and the attempt of total control.

  • Situagent says:

    How seriously can we take in article when the author does not know the difference between economics and finance, and blames economics for the failings of Merton and Scholes?!  They are two different disciplines, answering different questions using different methods!

  • Min says:

    Not to disagree with your thesis, but you oversimplify peoples’ positions to the point of misrepresentation. The reality is bad enough.

  • aninternettroll says:

    # of times the word ‘evolution’ appears in this article: zero

  • .i. says:

    There is a “right” answer. Friedrich Hayek & Austrian School of economics. Also get rid of the Fed & central banks of the world. We need credit unions & no government interventions what-so-ever!

  • Dan Evan says:

    Loved the article, but I wholeheartedly disagree that economics is dead.

    Economics is changing as a result of the global digital network/economy.

    It is an exciting time to be an economist.

    1) The US Fed has pegged unemployment to inflation.  I’d love to know what decision system they used to determine that level of guidance.

    2) Despite all of the economic stimulus in the US, job growth remains pathetic.  Some can claim that regulation is the cause, but could it be that industry has become so efficient as a result of technology that we truly are on the verge of an ever decreasing human labor utilization that cancels out the effects of monetary policy?  The implications of this effect are staggering for not only the US but the world.

    3) Never in the history of capital markets has socialized risk ,“Too Big To Fail” been so prevalent.  The global bank bail out of 2008 will probably have negative repercussions for decades to come.

    No, economics isn’t dead.  The field is more important than ever, but our leadership wants to resign (Ben Bernanke) and the public would rather hear about Sumo than think about their own middle class job prospects.

    Love the photo.

    Live in the now because the future is coming at our field very fast and in full force.

  • Peter C says:

    Economics is a lost field. Only a few economists have a proper scientific attitude and are honest about their ignorance. Last century Keynes was frequently honest about having been wrong and was frequently criticized for changing his views, criticism to which he’d reply “When I find that I am wrong, I change my mind. What do you do, sir?” Unfortunately, even Greenspan after very briefly admitting he was wrong after the global meltdown, didn’t change his mind. Indeed, after not too long a time the only mistake he now concedes is that briefly after that meltdown he erred in thinking that he’d been wrong. His behaviour seems the gold stand for economists on both sides of most debates.

  • David Airth says:

    “Economics Is A Lost Field”

    I think that is a silly statement.

    Economics guides us to what works and what doesn’t in production and distribution. The field helps us achieve sustainability. In the case of the Greek economy it tells us why it is a basket case and what needs reforming. It also gives us an insight into speculative bubbles and how to avoid them. The monetary policies that have evolved within it have helped us avoid a reoccurrence of the Great Depression.

  • Graham Lovell says:

    Economics is not a lost field, it has just unquestionably accepted the wrong theory. Where is the examination of Ricardo’s comparative advantage theory? It is has manifestly failed every nation that has taken it on board. Yet every apparently “unresolvable problem” can be better fixed with direct action via Managed Trade.
    The UK gave up its premier position to the USA, while the latter implemented its “American System”.
    Having abandoned its “System,” the USA is in the process of giving up its premier position to China, while the latter uses managed trade to build a diverse economy with jobs for people of every skill and education level.
    What can we say about Japan? Almost exactly the same.
    Economics is failing as a discipline as it tries to fix the problems in national economies with remedies that only touch on the fringe of the problem.
    Indeed there is nothing wrong with the discipline of economics that could not be fixed by a bit of rigorous examination of this one failed premise.
    Every nation, developed and under-developed and emerging, will have a happier future if it adopts Managed Trade. There will be plenty of work for economists to do in conducting studies to show how to manage trade without run-away wages, and building uneconomic work centres.
    Good luck!

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