John Maynard Keynes wrote in 1930 that “if economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.” Almost a century later, he’s getting his wish.
Economists tend to be a grandiose bunch. They advise presidents and billionaires. They are generally unashamed about offering semi-professional opinions on everything from moral philosophy to politics to family life. Their models make sweeping assumptions about the future of technology, and leave out huge things like norms, values and emotions. I once joked that scientists might like to play God, but economists simply write down some equations for God and calibrate His parameters.
But there are signs that some economists are now embracing a humbler role. Instead of holding forth on policy issues or the welfare of nations, many are working with companies to create the kind of ideal markets that were previously confined to the pages of their academic papers. In other words, Keynes’ dream of economic dentistry — or, more accurately, economic engineering — might at last be coming true.
Econ has had very mixed success tackling big problems like poverty, recessions and growth. But over the decades, the massive effort that economists put into modelling those problems has produced a lot of valuable spin-offs — kind of like the space program. The highly simplified models economists made to try to study real-world markets ended up being very useful for creating artificial ones.
One good new book that chronicles this process is “The Inner Lives of Markets,” by economist Ray Fisman and author Tim Sullivan. It is a quick and entertaining pocket history of microeconomics. Although it lingers a bit too long on the usual political questions of whether markets are a good way of organising society, much of “Inner Lives” tells the fascinating tale of how economic theorists have helped create systems for online auctions, online advertising, organ donations and the like.
These systems are essentially algorithms, and the economists who create them are really just applied mathematicians and engineers. Google’s AdWords services, which makes it possible for advertisers to pay only when users click on their online banners, uses a generalised second-price auction, developed by economists like William Vickrey and applied by others like Hal Varian. Organ donors and recipients are often matched using algorithms developed by economists such as Al Roth.
These are two classic examples of economic engineering, but real-world applications go far beyond basic insights like these. In reality, auctions and online platforms are subject to all sorts of problems — collusion, cheating — and all kinds of strategic interactions outside of the artificial market itself. The number of problems for economic engineers to solve is therefore very large. And of course, part of the job is using careful data analysis to tell what’s working and what isn’t.
So although economists were traditionally thought of as policy advisers, these days you’ll find a lot of the best ones going to work for Silicon Valley. Stanford’s Susan Athey, a formidable economic theorist who also works with machine learning, recently explained why tech companies are rushing to hire talented young economists:
Every week I am contacted to help fill a position, or I hear about a new hire by firms like Airbnb, Netflix, Pandora, Uber, etc. Amazon has built the biggest team, and has been actively hiring both senior economists and new Ph.Ds ... More junior economists have a wide variety of roles in tech firms. They can take traditional data science roles, be product managers, work in corporate strategy, or on policy teams.
Athey goes on to explain why economists, trained to think about things like equilibrium, supply and demand, and what-if questions, usually complement rather than directly replace software engineers and data scientists. In other words, macroeconomists are becoming just another kind of engineer — a valuable ingredient in the industrial mix.
Eventually, this is bound to change the public’s attitude toward me and my colleagues. Instead of a guy on TV in an ill-fitting suit arguing about regulation or taxes, “economist” will mean a smart engineer-type working in your office, helping to design, measure and improve the products that your company sells. Gradually, the grandiose pronouncements of the econo-philosophers will give way to the testable, marketable inventions of the economic engineers — and the result will be an increase in prestige for a profession that has taken a pounding since the financial crisis of 2008.
The spread of economic engineering should also come as a wake-up call to “heterodox” economists who spend their lives trying to chip away at the mainstream consensus in fields like macroeconomics. The methods of rationality, individual optimisation and equilibrium may not have solved all the problems of the world, but they created a lot of useful technology that is being put to work all across the economy. Opponents of this paradigm should ask themselves if their own ideas could create spin-offs of equal value.
