Ronald Coase published his career-making paper, “The Nature of the Firm,” 75 years ago. He won the Nobel prize for economics in 1991. In a lecture in 2002, he argued that physics has moved beyond the assumptions of Isaac Newton, and biology beyond Darwin. (Not that he knew them.) But economics, he said, had failed to advance past the efficient-market assumptions of Adam Smith. This year Coase, a professor emeritus at the University of Chicago Law School, is attempting to start a new academic journal ambitiously titled Man and the Economy. The premise: Economics is broken. Coase’s journal is still just a plan, but his frustration with orthodox economics has energized his followers.
The financial crisis forced economists to confront the limitations of their profession. Former Federal Reserve Chairman Alan Greenspan admitted as much when he told Congress in October 2008 that markets might not regulate themselves after all. Coase says the problem runs deeper: Economists study abstractions and numbers, instead of firms and people. He doesn’t believe this can be fixed by tweaking models. An entire generation of economists must be encouraged to think differently.
The idea for the journal stems from his collaboration with Ning Wang, an assistant professor at the School of Politics and Global Studies at Arizona State University who grew up in a rice- and fish-farming village in the Hubei province of China. Coase, 101, began working with Wang in the 1990s at the University of Chicago. Neither has a degree in economics; the two understood each other. “We’re not constrained by a mainstream, orthodox view,” says Wang. “A lot of people would see this as a weakness.” Coase declined to be interviewed.
When Coase and Wang hosted a conference on China in 2008, they noticed that many Chinese academics had never talked to either policymakers or entrepreneurs from their own country. They had learned only what Coase calls “blackboard economics,” sets of theories and mathematical relationships between bits of data. “I came from China,” says Wang. “We have a lot of nationals come here; they’re taught game theory and econometrics. Then they’re going home … without a basic understanding of how the real world functions.”
In an essay published on Nov. 20 in Harvard Business Review, Coase argues that in the early 20th century, economists began to focus on relationships among statistical measures, rather than problems that firms have with production or people have with decisions. Economists began writing for each other, instead of for other disciplines or for the business community. “It is suicidal for the field to slide into a hard science of choice,” Coase writes in HBR, “ignoring the influences of society, history, culture, and politics on the working of the economy.” (By “choice,” he means ever more complex versions of price and demand curves.) Most economists, he argues, work with measures like gross domestic product and the unemployment rate that are too removed from how businesses actually work.
The solution for Coase and Wang is a journal that presents case studies, historical comparisons, and qualitative data—not just numbers but ideas, too. In top economics journals, says Wang, “people think as long as you have a big data set, that’s enough. You can do all kinds of modeling and regression, and it looks scientific enough.” Julie Nelson, chairwoman of the economics department at the University of Massachusetts Boston says economists want the kind of immutable laws that physicists operate under. But Adam Smith’s 1776 idea that people are driven by self-interest is not the same as the law of gravity. “Ask an economist if they’d like to be thought of as a sociologist,” she says, “and they’ll look at you with terror in their eyes.”
Christopher Sims, a professor at Princeton University who won the Nobel prize last year for his work in macroeconomics, recognizes the problem. “We’re always abstracting and hoping that the resulting abstractions capture enough of the truth so that we know what’s going on,” he says. The kind of work that Coase and Wang are interested in, he says, is “not fashionable now. It’s hard to make it a science.” Where Coase and Wang see too little demand for new ideas, Sims sees too little supply. Both he and Nelson, who studies how economics is taught, describe a process at graduate schools that selects for economists inclined to focus on abstract modeling.
This is a new version of an old argument. In the late 19th century, German-speaking economists disagreed on whether to work from theoretical laws or from actual, observed history. A century later Robert Fogel, an economist at the University of Chicago, won a Nobel in 1993 for applying quantitative methods to historical data. He says that economists need to reexamine their assumptions as the real world presents new problems. He offers as an example his surprise when Barack Obama won reelection, despite a high jobless rate. “It tells me that’s not the only problem people see.” Fogel believes Coase can still pull off a new journal. “Ron’s an exceedingly good entrepreneur,” he says.
Coase and Wang are still talking to university publishers about supporting Man and the Economy. The University of Chicago Press considered it but found other publications with the same approach, for example the Real-World Economics Review, an online journal started in 2000 by young French economists. They had originally titled it the “post-autistic economics newsletter.” Papers published this summer by the Review include “Rethinking macroeconomics in light of the U.S. financial crisis” and “Neoclassical economics: A trail of economic destruction since the 1970s.” Even if Coase never launches his journal, he’s already helped inspire a generation of economists. One of the quotes on the home page of the Review reads: “Existing economics is a theoretical system which floats in the air and which bears little relation to what happens in the real world.” The source? Ronald Coase.