Greg Clark offers an analysis of the impact of the economic crisis on the market for academic economists. His basic thesis is: (a) Economics has not made any progress for the last eighty years. (b) This will reduce demand for economists. Or perhaps the crisis cuts demand for academic economists directly as endowments decline in value. (c) Even though supply is constrained by the technical complexity of becoming a professional economist, wages will fall.
Greg uses the intellectual apparatus of demand and supply to make his argument. This framework has been around for over a hundred years (or more?) but I associate it most with Alfred Marshall and his work in the early part of twentieth century. I guess this still makes Clark’s argument for him: the canonical framework of economics is part of Econ 1 and over eight years old!
I agree with many of Clark’s comments but have a different analysis – you can never get two economists to agree on anything, another old idea.
(1) Demand: Demand for academic economists comes from business schools as well as economics departments. Demand for assistant professors in B schools is driven by teaching demand. In a medium slump, this demand goes up as more people decide to get an M.B.A. as the job market is tight. So, this is not so bad.
(2) Supply: The trouble is on the supply side.
(2.1) One of the main drivers of wages is the finance market. B school finance salaries reflect what incoming grads could get on Wall Street. As these decline, so do salaries for finance professors as the supply of candidates has gone up. Finance salaries run at a premium compared to econ salaries. This is because you can do more “academic” work in economics and you pay for that with a lower salary. But there is an obvious positive correlation between finance and econ salaries because, if the finance salary premium is high, economists would switch to finance. To keep them, economics salaries have to go up. I’m going to stop belaboring this as I’m sure you can all work it out as it is Econ 1! Suffice it to say supply has gone up.
(2.2) As Clark says, economics is interesting again. Let’s face it was getting bit boring so more and more people were doing “freakonomics” rather than “economics.” Or perhaps this reflected the fact that the questions we have not answered are really hard so we were tackling the ones we can answer. I don’t know. The financial crisis makes it clear that we have to answer them. Whatever went wrong reflected too large a faith in the supposed optimal incentives given by the free market rather than an understanding of the perverse incentives facing lenders, borrowers and A.I.G. To unravel these complications, we will use the tools we have developed in microeconomics since the 1970s: moral hazard, adverse selection and mechanism design. It should attract lots of bring young things to replace jaded old-timers like me. The net implication: supply will go up.
So, I am led to the same conclusion as Greg Clark – salaries are going to be stagnant in academic economics. Because supply will go up not because demand will go down. But I’m more optimistic about scientific contributions – I think incentive theory will be useful. I am more optimistic for the science as a whole as more talented people are going to come in, driven by the desire to explain all the things we do not understand.
Cheap Talk 
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May 18, 2009 at 6:08 am
Dale
“we will use the tools we have developed in microeconomics since the 1970s: moral hazard, adverse selection and mechanism design”
Many of those tools are misconceived in very basic ways. For example, “adverse” selection is not always adverse.
http://tinyurl.com/cgal3g
May 18, 2009 at 6:09 am
Todd
“Whatever went wrong reflected too large a faith in the supposed optimal incentives given by the free market rather than an understanding of the perverse incentives facing lenders, borrowers and A.I.G.”
I’m not sure exactly what you mean by this, but it seems to me that the problem was not too much faith in the “free-market” per se, but possibly the widespread adoption of the erroneous assumption that the market in which lenders, borrowers and A.I.G. operated was, in fact, free. My sense is that most of the perverse incentives to which you refer arose precisely because government interventions past and present imparted a sense of insulation from competitive pressures and genuine market discipline to those in the financial industry. Would Freddie and Fannie really have been so profligate without the (accurately) implied backing of Uncle Sam? Would those two organizations even have existed? Would banks really have been so eager to hold MBS without the incentives provided by the governmentally mandated capital requirements? Would individuals really have been so eager to borrow without the presence of the FDIC or the history of inflation in the 70’s? Maybe the answer to all these questions is yes, but I’ve yet to see a convincing argument that suggests that people at any level were acting on the assumption that they would not be relieved by the government of some significant part of the pain associated with irresponsible action.
May 18, 2009 at 10:19 am
Anonymous
On the supply side there is a countervailing force: the supply of economists is strictly constrained by the number of PhD’s created. Unless departments expand their PhD programs then this number of economists is unlikely to increase dramatically. Furthermore, with more people wanting to become economists the ability of PhD candidates will likely increase, increasing the productivity of economists and perhaps the demand for them.
May 19, 2009 at 1:46 am
mixkore.com
thank you for this