A Research Program For PhD Students

Arnold Kling with a research agenda for PhD students in economics:

[I]f I had a platoon of Ph.D students, my suggestions for research would be based on what I see as the following shortcomings in mainstream economics.

1. Too much emphasis on characterizing equilibrium conditions in mathematical terms. Not enough emphasis on the processes of economic and institutional change.

2. Too little role for entrepreneurs. In Austrian economics, entrepreneurs can be arbitrageurs/equilibrators (Kirzner) or creative destroyers (Schumpeter).

3. Too much knowledge attributed to economic agents. Mainstream economics misses the role of markets as a learning mechanism; instead, it posits economic agents who have little or nothing to learn.

4. An assumption that when incentives are poorly aligned (aka "market failure"), government involvement is necessary and sufficient to address the problem. As a result, mainstream economics does not allow for institutional entrepreneurs--entrepreneurs who develop new solutions to incentive problems.

With that as background, let me suggest some research avenues.

1. Institutional change. Douglass North has focused on this. But there is a lot more to be said about the conditions that give rise to institutional change, the actors who bring it about, and so on. The work of Vernon Smith and others on institutional design is also relevant, but I am more interested in how the market goes about creating new institutions than in how an economist would advise someone to design an institution.

2. Long-term growth. Yes, plenty of people look at this issue. But as Robert Lucas famously said, once one sees the magnitudes involved it is hard to think about anything else. And it's fair to say that de Soto, North, William Lewis, William Easterly and others have only begun to develop theories and evidence on this issue.

3. Employment fluctuations. We have much more interesting data now, with statistics on gross flows in the labor market, which are much larger than the net changes in employment and unemployment. This data ought to be exploited by researchers who think in terms of disequilibrium, market learning, and creative destruction.

4. Innovation, especially financial innovation. Again, there is a lot of room for useful work to be done in a framework that does not start by assuming away the main problems--local knowledge and the need for trial-and-error learning. Local knowledge, in my view, is the key to understanding financial markets--and why "transparency" is a false goal. Even outside the financial sector, the innovation process is poorly understood. Amar Bhide and William Baumol have made useful contributions, but there is much more useful work to be done.

This is an excellent list. Interest in long-term growth is certainly what got me interested in economics. I "discovered" economics much later than most people in the field -- after having traveled around the world and visiting many developing nations. The disparity between living standards around the world is truly tragic. As Lucas says -- once you start thinking about this, "it's hard to think about anything else."

At GMU, I have been studying public choice (economic analysis of politics), economics of religion, and law and economics (including getting my law degree) in hopes to better understand how formal and informal institutions allow/prevent institutional change and encourage/inhibit individual actors from discovering new avenues for opportunity, innovation, and change. I don't think these issues can be fully understood without looking at the political, legal, and cultural contexts in which they take place.

Now if I could just figure out a way to put it all together....