Viv Davies: Hello and welcome to Vox Talks, a series of audio interviews with leading economists from around the world. I’m Viv Davies from the Centre for Economic Policy Research, it’s 22 September 2012 and I’m in London talking to Diane Coyle, managing director of Enlightenment Economics about a book she’s recently edited titled What’s the use of economics? Teaching the dismal science after the crisis. The book examines what economists need to bring to their jobs, and the way in which education and universities could be improved to fit graduates better for the real world. I began the interview by asking Diane what, in her opinion, is the use of economics.

Diane Coyle: Those of us who are economists are completely aware of the intellectual rigour and the analytical power of economics, and think it’s a wonderful subject. Almost every economist I know is passionately interested in the state of the world and making it better, and applying that rigour, and applying an empirical approach to understanding the evidence and figuring out how to do things better, how to develop better public policies. So it’s a fantastic subject.

The issue is how does economics respond to the gravity of the financial and economic crisis? That, I think, is where it’s been falling short, and particularly that so many economics aren’t willing to admit, in public at any rate, that the subject will have to change and will have to respond to the crisis.

VD: Could you give us a little bit of background on the book and how it was conceived, and what the basis of it is?

DC: The book is a series of essays that come out of a conference hosted by the Bank of England and the Government Economic Service in February 2012. That in turn came about because I’d been speaking to a number of people over the previous months. Employers, including people in investment banking, were saying: “We don’t find that we can get the kind of graduates that we need in economics. We find that people have too narrow a perspective, and in particular at that time they were saying that young economists don’t have any understanding that there had been a depression in the 1930s, that there had been recessions before, because all their experience had been that very long boom that we had. We had a 13- or 15-year expansion, which was historically unprecedented, so people who’d been trained during that period just had no experience of things going wrong.

One of the strong themes to emerge from the book, and one of the triggers for arranging the conference, was this lack of appreciation of history, of the way in which context changes the way you think about economics.

VD: So, ironically, economic history is making a bit of a renaissance.

DC: Yes, and I myself always thought it was important because my work’s been about technology markets. If you’re looking to understand the kind of transformations that new technologies of the general purpose technology kind can bring about, then actually the 1870s or the 1920s are quite good periods to look at. So I’ve always been an advocate of looking at economic history.

But the crisis was a more immediate trigger. And then I had some conversations with employers, people who were professional, practising economists. I also spoke to a few academics, and found that quite a number of them were also frustrated by the fact that they felt trapped in a system that made it hard for them to change their approach to teaching, that they couldn’t see any room to put any economic history into what they were teaching. And in the way that nobody got sacked for buying IBM in the old days, nobody would get sacked from their job as a lecturer for carrying on teaching the kind of narrow, standard models that had always been taught and not changing, so there are strong incentives not to change. But there was a sense of frustration with that.

VD: So are academics changing their curriculums now, or are they not? Is that a point you’re making in the book, and why aren’t they changing?

DC: I don’t know the answer systematically. We haven’t got a survey of academics to tell us what they put into their curriculums, and of course there’s a whole framework in UK universities for assessing quality and setting the curriculum. But my impression is that some are changing, but not all that many, and that it varies quite a lot between universities and between individuals, and there’s been nothing systematic about it.

VD: So do you think policymakers blame economists for the crisis, for the lack of policy input to inform good policy? Or are they looking to economists to try to explain the way out of the crisis?

DC: I think policymakers, like lots of people, blame economists for creating a worldview that blinded us to some of the signs of the impending crisis in the mid-2000s. That is the worldview of efficient markets, of market forces always being right, of governments not interfering. That certainly gave us the framework for approaching financial regulation, and the assumption that the outcome of markets creating new products all the time in the financial sector would be benign in the end. So I think that’s a perfectly valid criticism.

In the minds of a lot of people, including people in the policy world, economists, economics and all the excesses of financial markets do all meld together, and they’re not as distinct as they might be in the minds of many economists. And a factor now is the whole debate about responding to the crisis and what appears to me to be a lack of consensus or a clear pathway out of it. There’s quite a vigorous argument within the profession that gets refracted through politics into quite a fierce, even bitter, political debate about it as well.

VD: I guess a lot of academics are locked into their long-term curriculums with PhD students etc. and it’s hard to turn the boat around.

DC: As an individual, how could you? You can’t change a whole subject by yourself, so I think it’s very hard. Although there are some online resources, I think they tend to focus much more on making teaching methods livelier or getting more interaction from the students, and it’s very difficult for any individual to look at the content of economics courses and change it by themselves. It’s a real institutional inertia.

VD: I suppose you can’t build a global financial crisis into a macroeconomic model, but what do you suggest should be built in to those model which would help policymakers?

DC: Well I’m not a macroeconomist, I should say, but it seems to me that taking your standard aggregate supply/aggregate demand, or your standard dynamic stochastic equilibrium model and saying, “All we need to do is tinker a little bit here” is a wholly inadequate response to the crisis. Even if you put a financial sector into a model like that, which I know some people are starting to do, it doesn’t actually capture the sociological aspects of the markets, or the institutional aspects of the markets that we know prove to be very important. It doesn’t do anything to capture the lack of competition in some aspects of the financial markets, it doesn’t address the information asymmetries with these new products, it doesn’t address the social norms or the sociology that makes it acceptable for people to pay themselves millions of pounds or millions of dollars in bonuses without any performance measurement of that or any payback when things went wrong. So all of just aren’t captured remotely in these kinds of standard model. And it seems to me that a much more eclectic approach is needed at the moment.

VD: What would you say the message from the book is for academic economists?

DC: I think there’s no single message, but it’s a call to have the debate and to be more open-minded. And that’s partly because there are some economists who think that there’s nothing wrong with the subject and that this should all go away in a little while, and it’s partly about this issue of institutional inertia, and how we should have a collective discussion about whether we want to change the way that students are taught economics.

But I’d say that the message from the employers who’ve contributed is really quite damning. They are saying, these major employers of economists turned out by universities, that [graduates] lack a whole range of skills that they need, and although no sensible employer expects to take someone straight out of university and have them immediately be productive without learning anything, that they don’t have the skills they need to communicate a technical subject to non-specialists, which every economist has to do in their job. They don’t have pragmatic data-handling econometric skills, they’ve been taught in much too theoretical a way, they can’t even handle the standard software packages or understand how to check through data to make sure what outliers are in there, and they don’t have the range of knowledge about context or history that would be useful in many of their jobs, and they have too narrow and abstract an approach to problem solving. When you add all those up I think that’s really quite a condemnation.

Of course, people who’ve got economics degrees are very employable, and the rate of return to an economics is high, so it might look like there’s no market failure there, that it’s absolutely fine, but I think anyone who’s teaching economists ought to read what people who employ economists are saying about the product they’re turning out.

VD: Where to from here then, Diane? You have a Vox debate now on the issues raised by the book, so how can people contribute to that?

DC: Well I hope people will contribute directly to the debate, or just send their thoughts. After the conference we set up a working group which has representatives from the Government Economic Service, the Bank of England, the Royal Economic Society, the heads of university departments of economics, the Society of Business Economists, and so on, as well as individual academics and individual employers. I think there are about a dozen people. We’re meeting in November and we’ll meet again next year to see what kind of suggestions we get, whether there’s any consensus about necessary reforms, and we’ll issue a report, so the timeframe is about another nine months or so for that. And the more feedback we get from people the better.

VD: Diane Coyle, thanks very much.