Arnold Kling


Require Internships for Economists

February 11th 2018
Finally, and I know this is a long shot, there may be a chapter or two in here that inspires some economists to change the way they teach the subject, by relating at least some economic ideas to their practical uses or consequences in business settings.
Robert Litan, Trillion Dollar Economists: How Economists and their Ideas have Transformed Business, p. 5

Most economists undertake research that generates nothing of value. The papers that they publish contribute neither to economic understanding nor to social improvement.

But, as Robert Litan’s book illustrates, some economists have made major contributions to our well-being by developing and applying concepts in practical settings. Their ideas have proven valuable in the real world of business and regulation. They have influenced airline seat discounts, online dating service algorithms, Google’s ad system, Amazon’s fetish with conducting experiments, Uber’s pricing methods, the FCC’s approach to spectrum regulation, and more.

I believe that more economists would have keener insights and contribute greater social value if they were required to spend time as interns in businesses or at regulatory agencies. Just as we believe that educators and medical professionals benefit from internships, so too would economists.

Economists out of touch

I am not arguing for internships because I believe that applied work is better than theoretical work. The main reason that I believe economists need internships is that much of economic theory has lost touch with reality.

  1. Classical economics was developed to describe businesses that transform tangible inputs into tangible outputs. Today, mental-cultural factors are clearly important.
  • Many goods that provide utility to consumers, such as Google Maps, are non-rival and not-easily excludable. According to classical economic theory, this makes them public goods. Yet they are provided by private firms. So we need to find a way to talk about public goods in a market economy.
  • Many determinants of the income of firms and workers are intangible. These include knowledge, strategic choices, teamwork, business relationships, reputations, credentials, and more
  • Beliefs held by individuals affect their choices of occupation and consumption, business decisions, and asset selection.
  • The process by which beliefs spread among groups affects the process by which innovations diffuse throughout the economy and the evolution of regional economic differences.

2. Before the Industrial Revolution developed momentum in the mid-1800s, economic change took place slowly. Now, the nature of economic activity changes every few decades.

  • The economy has become more complex and specialized. The economic concept of “labor” treats workers as interchangeable with one another. This may have been approximately true in 1800, but it is completely inappropriate today. Farming and manufacturing production work, which accounted for three-fourths of the American labor force one hundred years ago, account for less than one tenth of all workers today. Many people work in occupations that did not exist even forty years ago.
  • The textbook picture of the entrepreneur, as someone who makes decisions about allocating capital and labor and choosing the level of output, is now hopelessly out of date. Business strategy today is highly complex and multi-faceted.
  • The process of creative destruction operates much faster than it did throughout most of human history. Today, people have had to put much more time and effort into adapting to economic and technological change.

Naive and anachronistic

Because economists do not spend time in the real world of business or regulation, they approach their discipline with concepts that are naive and anachronistic.

Economists continue to describe entrepreneurs as solving problems of resource allocation, when in fact business executives worry internally about talent development and culture. They worry externally about strategy in a complex environment.

Economists continue to describe the distribution of economic rewards using marginal productivity theory. But value is created jointly by teams and value is captured by strategic interactions among firms. In most of the economy, it is impossible to isolate and measure any one person’s marginal product.

Economists have a stunted picture of the financial system, one which ignores the vast majority of financial instruments and strategies that have been developed since 1950. For example, repurchase agreements have been at the core of real-world securities markets and monetary policy implementation for more than forty years, but most economists did not know what a “repo” was until the financial crisis of 2008, when Gary Gorton and Andrew Metrick explained its role.

Economists’ main measure of economic performance, GDP, was designed for a world where value resided in forms of output that could be counted. Today, consumer wants are satisfied by goods and services that are not quantifiable or even tangible. Health care, education, and finance make up an increasing share of spending and employment, but we do not know how to measure output in those sectors. Also, for services like Google Maps or Facebook, we have no idea how much value they provide, because consumers are not charged.

Ph.D programs in economics need to get out of the 19th century and into the 21st. I think that requiring an internship in the world of business or regulation would help.

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