ISET

ISET Economist Blog

A blog about economics in the South Caucasus.

Do Economies Need Economists?

According to a rumor circulating among economists, there exists an econometric study which shows that the economy of a nation is doing worse the more great economists it produces. While this may be a myth, casual observation suggests that the correlation between the economic performance of a country and the quality of its economics profession is indeed unclear. The United Kingdom was home to the greatest economists of all times (Adam Smith, John Maynard Keynes, and David Ricardo, to name just a few), yet throughout great parts of the 20th century, the British economy was lagging behind its European competitors. Japan, on the other hand, has not produced any internationally renowned economists, but until 20-25 years ago, everybody in the world feared Japanese economic power. So, better doing without economists? No premature conclusions, please!


WHAT MAKES AN ECONOMIST

Economists usually have acquired a combination of skills and knowledge that makes them highly competitive in the job market. Their quantitative education is not as rigorous as those of mathematicians, but they learn a good deal of applied math. In some subfields of economics, like game theory, it is even common to state results in the proposition-proof format, usually reserved to mathematics. Moreover, economists learn a lot of applied statistics, or the economic version thereof, called econometrics. The teaching of econometrics and statistics includes the practical work with statistical software packages like STATA, SPSS, or Eviews, so that an economist can do statistical analyses with real data right out of university.

In addition to quantitative analysis, economists are trained to reason analytically and to generate arguments in support or rejection of economic standpoints. Thereby they learn to make use not only of genuine economic ideas, but to draw on various other subjects, like sociology, psychology, history, political science, and even philosophy. From all these disciplines, economics filters those concepts that are relevant for analyzing and understanding economic matters.

Within core economics, a prominent and somewhat controversial area is economic theory. Economic theory could be described as the use of models, usually mathematical ones, for understanding social phenomena. This methodological approach was brought to perfection by economists, and it was even exported to other fields – there are “economic theories” of politics, crime, marriage, domestic violence, gender equality, and even religion, to name just a few. These theories apply the economic methodology to non-economic matters. Even in theoretical biology and computer science there is now a huge body of literature that uses game theory, an offspring of economic theory.

The purpose of economic theory if frequently misunderstood. Its models are typically based on blatantly unrealistic assumptions, boldly simplifying reality and ignoring many important aspects. Students who start studying economics think that economic models should make predictions or at least realistically describe reality, and they are often alienated by these unrealistic models and find all of this very strange. This experience makes many economics freshmen abandon the subject and learn something else instead. However, this is an unfortunate misunderstanding, as economic theory does not intend to make predictions or describe reality. Rather, economic models help to generate sound arguments in support of certain positions. Every experienced economist knows that it is much easier to develop a reasonable and consistent standpoint on any economic issue if one can base one’s arguments on a theoretical model.

This is illustrated by the fact that economic theory was very influential in shaping people’s world views; many politicians use arguments derived from economic theory without even knowing about it. Somebody speaking about macroeconomics more often than not draws on John Maynard Keynes, somebody speaking about international trade usually makes use of David Ricardo’s ideas, somebody arguing in favor of markets typically clings to ideas of Adam Smith, and those who criticize markets usually deploy arguments that were invented by Karl Marx. Keynes famously wrote: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”


WHERE DO THEY WORK?

By their very nature, economists are all-rounders that can be employed for many purposes, ranging from conducting statistical analyses to setting up mathematical models to writing texts about the history of the Georgian vine industry. In the public sector, these skills are sought by central banks, regulatory authorities, and ministries. In the private sector, economists are often employed in departments concerned with quantitative analysis and political lobbying. Political parties and political interest groups also like to hire economists for providing economic support for the positions they already have.

Some labor economists believe that most employers are not really interested in what graduates have learnt at university. According to this theory, the primary purpose of obtaining a university degree is to signal in the job market that one is a smart and diligent person. Indeed, somebody who is capable of obtaining a master’s degree in economics (or in any other difficult subject to this effect) has crucial skills that can be used for multiple purposes. Such a person can work hard and independently, has power of endurance, and can deal with difficult and demanding material. So, even though companies might not be interested in the very knowledge about microeconomics and macroeconomics, they might still want to hire an economist for these secondary skills.

Somebody who succeeded to study at a place like ISET sends a strong signal in the job market. In the first year, students learn the core subjects of microeconomics, macroeconomics, mathematics, and statistics/econometrics, as well as academic writing in English. In this time, students need to attend several hours in the classroom every day and afterwards work in the library until the evening. After 7 weeks (one “mini-term”) of extremely intensive learning, there is one exam week. Nobody who did not learn throughout the mini-term has realistic chances to pass the exams. This goes on for the whole year. Somebody who gets through this phase is extremely diligent and very smart, and as not everybody has these character traits, about half the students who are admitted drop out of the program very soon. And this is the case even though admission is highly competitive (just a small fraction of applicants is admitted) and many of those who enter ISET belong to the best students in their age cohorts. In the second year the pressure decreases, courses are a bit less intensive, and students can select a portfolio of courses according to their own interests. However, they have to write a serious master thesis in this time.

The chart shows where ISET graduates have found employment. ISET was founded in 2006 and produced almost 200 graduates so far, and only two of them are unemployed. The greatest share of our graduates goes to the public sector, in particular ministries and central bank, where several ISET economists have made it to leading positions (head of departments, lead analysts etc.)


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The second largest group consists of those who continue their education in a Ph.D. program. ISET graduates can be found in the world’s best Ph.D. programs like Stanford, Chicago, New York University, and University of Pennsylvania, and in many second-tier US places like Penn State University, Georgetown University, and McGill University. They are also studying in various European programs like Warwick, Leicester, Toulouse, Prague (CERGE-EI), Bielefeld, and Halle. In economics, it is easier to study abroad than in most other social sciences, as the core content of economics is the same everywhere in the world (with the possible exceptions of Cuba and North Korea). It does not play a role whether one learns microeconomics in Berlin, Jerusalem, or at ISET, because everywhere is taught the same material.

21% of ISET graduates work in the private sector. This does not tell us so much about the private sector, but something about the preferences of economics graduates. Somebody explicitly interested in working for a private company will arguably not study economics but opt for the sister discipline of business administration. The motivation to study economics is often grounded in some concern for the well-being of the society, and in that case the public sector is a natural employer. In future, it is to be expected that the share of economists going to the private sector will increase, as better development will induce companies to pay more for specialists and qualified personnel, and this may overrule whatever noble intention a student had when they started to study economics.

14% of our graduates head for non-government organizations (NGOs). These are typically run and funded by foreigners. Besides the analytical skills of ISET economists, definitely appreciated by NGOs, it may be useful that after two years of studying all our graduates speak English fluently.


DOES GEORGIA NEED THEM?

The practical contribution of economics to a society is not restricted to the ideas of outstandingly brilliant minds like Keynes and Smith. Just a minority of economists is working in jobs that are exclusively open to economists. Rather, economics is a qualification useful in a wide range of contexts.

Taking all this into account, a country without economists faces severe difficulties to substitute for this group, and one does not say too much if one calls economics a key profession with overarching strategic significance for a country’s development. One of the problems of the Soviet Union was that their “economics” was in fact the study of Marxist-Leninist ideology. If the Soviet Union would have had an effective and scientifically independent economics profession, developments that finally led to the downfall of the whole system might have been prevented (as in China).

In Georgia, the economy is extremely fragile and many things can be spoiled through bad economic policy. Relying exclusively on foreign expertise is not a solution, as foreigners are lacking the commitment to this country only native Georgians can have. If things in Georgia turn out badly, foreign economists will just move on to another country, and the failure will not be overly painful for them. In the end, only Georgians really care for Georgia, and the country needs Georgian economists who received state of the art education in the field.

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Guest - Randy Filer on Tuesday, 08 April 2014 05:24

A generally good essay but I must object to one assertion. In contrast to the authors, who state "economic theory does not intend to make predictions or describe reality," predictive accuracy is the ONLY valid test of economic theory. If a theory does not make predictions, it is useless. Best stated by Milton Friedman "if we are to use effectively these abstract models and this descriptive material, we must have a comparable exploration of the criteria for determining what abstract model it is best to use for particular kinds of problems, what entities in the abstract model are to be identified with what observable entities, and what features of the problem or of the circumstances have the greatest effect on the accuracy of the predictions yielded by a particular model or theory." (The Methodology of Positive Economics, 1953)

A generally good essay but I must object to one assertion. In contrast to the authors, who state "economic theory does not intend to make predictions or describe reality," predictive accuracy is the ONLY valid test of economic theory. If a theory does not make predictions, it is useless. Best stated by Milton Friedman "if we are to use effectively these abstract models and this descriptive material, we must have a comparable exploration of the criteria for determining what abstract model it is best to use for particular kinds of problems, what entities in the abstract model are to be identified with what observable entities, and what features of the problem or of the circumstances have the greatest effect on the accuracy of the predictions yielded by a particular model or theory." (The Methodology of Positive Economics, 1953)
Guest - Florian Biermann on Tuesday, 08 April 2014 18:29

No question, the role and aim of economic theory is a controversial issue. Many people will disagree with our point of view. I had frequent discussions with Sanjit Dhami on this question, and he also insist on empirical validity/predictive power as the only criterion for evaluating a theory.

However, as a matter of fact, theories in the social sciences usually do not have the predictive power of, say, theories in physics. One reason are the repercussions of theories on actual behavior. The atoms won't behave differently because we describe their movements, but people may indeed act differently because we describe their behavior. In economics, most relevant theories will either be self-fulfilling or self-refuting. In such a situation, "predictive power" is to my mind a not a useful criterion for measuring the quality of a theory.

I also do not endorse your view because it looks to me as if empirical economics in many cases is not capable of deciding what the empirical truth is. Regarding many empirical questions, for example in macroeconomics, adherents of contrary views find support in empirical studies. In many empirical estimations, there are many free parameters, and the empirical researcher can "choose" from a menu of possible results without doing anything methodologically unacceptable. When we do not know what the empirical truth is, we cannot use it as a criterion for evaluating a theory.

Finally, I think that economic theories are very useful even if one accepts my view. As I mention, such theories can be very effective in the formation and support of consistent economic standpoints.
In the humanities, the predictive power of a theory is not the primary criterion, and also in sociology, many theories are not really predicting anything. I think that economics is not downgraded if one considers it to be closer to the humanities and to sociology than to the natural sciences.

No question, the role and aim of economic theory is a controversial issue. Many people will disagree with our point of view. I had frequent discussions with Sanjit Dhami on this question, and he also insist on empirical validity/predictive power as the only criterion for evaluating a theory. However, as a matter of fact, theories in the social sciences usually do not have the predictive power of, say, theories in physics. One reason are the repercussions of theories on actual behavior. The atoms won't behave differently because we describe their movements, but people may indeed act differently because we describe their behavior. In economics, most relevant theories will either be self-fulfilling or self-refuting. In such a situation, "predictive power" is to my mind a not a useful criterion for measuring the quality of a theory. I also do not endorse your view because it looks to me as if empirical economics in many cases is not capable of deciding what the empirical truth is. Regarding many empirical questions, for example in macroeconomics, adherents of contrary views find support in empirical studies. In many empirical estimations, there are many free parameters, and the empirical researcher can "choose" from a menu of possible results without doing anything methodologically unacceptable. When we do not know what the empirical truth is, we cannot use it as a criterion for evaluating a theory. Finally, I think that economic theories are very useful even if one accepts my view. As I mention, such theories can be very effective in the formation and support of consistent economic standpoints. In the humanities, the predictive power of a theory is not the primary criterion, and also in sociology, many theories are not really predicting anything. I think that economics is not downgraded if one considers it to be closer to the humanities and to sociology than to the natural sciences.
Guest - Eric on Tuesday, 08 April 2014 19:24

Given my rather limited knowledge of applied sociology, I think it has tons of predictive power concerning behavioral patterns. Being born to certain parents in a certain environment does say a great deal about the type of education people are likely to get, the kind of car they're going to drive, political views, smoking, drinking and consumption habits, types of jobs and income, etc. On average, that is. People are actually making money using the predictive power of sociology.

Economics is also pretty good at predicting simple things - if the Ukrainian economy is in trouble, the price of wheat is likely to shoot up. If a third provider enters the Georgian telecom market, services will improve and prices will drop. A boom will be followed by a bust (but God knows when).

Economics is really bad at predicting turning points and financial crises, that is the very things people really care about. It is also really horrible (that is *systematically* wrong) at predicting individual behavior whenever this involves instincts, emotions, morality, pride, altruism, inertia, nervousness, intellectual laziness, etc. In other words, all these things that distinguish humans from "econs".

Given my rather limited knowledge of applied sociology, I think it has tons of predictive power concerning behavioral patterns. Being born to certain parents in a certain environment does say a great deal about the type of education people are likely to get, the kind of car they're going to drive, political views, smoking, drinking and consumption habits, types of jobs and income, etc. On average, that is. People are actually making money using the predictive power of sociology. Economics is also pretty good at predicting simple things - if the Ukrainian economy is in trouble, the price of wheat is likely to shoot up. If a third provider enters the Georgian telecom market, services will improve and prices will drop. A boom will be followed by a bust (but God knows when). Economics is really bad at predicting turning points and financial crises, that is the very things people really care about. It is also really horrible (that is *systematically* wrong) at predicting individual behavior whenever this involves instincts, emotions, morality, pride, altruism, inertia, nervousness, intellectual laziness, etc. In other words, all these things that distinguish humans from "econs".
Guest - Randy Filer on Thursday, 10 April 2014 05:06

"The atoms won’t behave differently because we describe their movements." Heisenberg would disagree

"The atoms won’t behave differently because we describe their movements." Heisenberg would disagree
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