Even Economists Deserve a Little Respect

Economists and their profession suffered a black eye when all but a handful of the relatively few economists who attempt to forecast the future missed the onset of the financial crisis and the Great Recession that followed. This was just a worse example of a problem that has plagued economic forecasters since this particular branch of the profession became established after World War II: both the formal economic models and their less formal counterparts have trouble foreseeing turning points in the economy, whether positive or negative.

But forecasting is not what the vast majority of economists do for a living. Most attempt to understand how “the economy” and its constituent actors—businesses, consumers, and government—work. Others develop ideas to help firms work even better, by being more efficient or by discovering better ways to price their products and services. Those of us at Brookings and at other think tanks focus especially on policy prescriptions to improve the functioning of the overall economy, but we cannot function effectively without being aware of and using the insights from theoretical and empirical economists who spend their time theorizing or conducting empirical studies.

Over the summer I was fortunate to be asked by the organizers of TedEx of Kansas City, an independent TED spinoff like many other TedEx’s around the world, to talk about how economists helped build the Internet economy, both directly (through their design of ad auctions on website) and indirectly (through their impacts on the deregulation of transportation and the breakup of AT&T). Yes, it’s all true, and for those readers who have not previously seen the video highlighted on the Brookings website, they can see on Youtube.

The talk in the video is based on a much larger project in which I have been involved over the past two years: documenting the hugely positive impact that economists have had on U.S. business. The results are contained in a new book, Trillion Dollar Economists, published on September 23.

Without giving away the contents of the book—why would I want to do that?—here are a few takeaways that readers can find discussed in much greater detail in the book:

  • Economists have been instrumental in implementing and designing auctions in a variety of companies that collectively have market values in the hundreds of billions of dollars
  • Economists built the mathematical backbone for minimizing costs in much of the transportation industry
  • Statistical techniques developed and refined by economists are increasingly being used throughout the sports industry
  • Economists have contributed to a growing “matchmaking” industry, of human organs, of people in jobs, and in marriage.
  • Economists and their insights helped spawn the growth of index investing and financial options contracts (collectively involving several trillion dollars)
  • Without the deregulation of the transportation industry and the breakup of AT&T, events in which economists played prominent roles, Internet retailing would not exist on nearly the scale that it does today, if at all
  • Economists also played prominent roles in encouraging the deregulation of the prices of oil and natural gas without which energy firms would not have had the financial incentives to make the technological breakthroughs that have dramatically increased U.S. oil and gas production, reversing the “energy pessimism” that overshadowed the country and world since the early 1970s.

And this is not at all. Economics ideas, already developed, are waiting in the wings to be applied in business and to be implemented as policy, which as economist-inspired policy changes in the past have done, will serve as future platforms for new businesses and the growth of existing ones.

The great British economist John Maynard Keynes famously wrote “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” That statement remains as true today as it was when it was written roughly eight decades ago—with one amendment: many of the economists who have had and are still having important impacts on U.S. business are still very much alive.