Stanford University; 39
I do not think that any one single breakthrough will happen. The progress is likely to be heavily empirical—simply because more and more data is becoming available, and it is easy to analyze with fast computers (so empirics is now advancing faster than theory)—and spread across many hundreds of topics. So economics has gone from Victorian science, where one genius in his shed could invent the steam engine over the weekend, to industrial science, where innovation comes in thousands of tiny steps made by dozens of research teams.
Progress in understanding limited rationality will lead to progress on answering the concrete questions. Low levels of growth are in part due to misapplied cognitive heuristics that lead people to be timid, inert, and gullible. Regarding disasters, during the unfolding of the crisis, traditional macro-financial factors (bank runs, deleveraging, etc.) have arguably been more important than behavioral factors. However, behavioral elements seem to have been paramount in the buildup of the current crisis (in particular, the neglect of tail events by financial actors and by the architects of the euro), as perhaps they are in most crises. The modeling of agents with bounded rationality will help us build economic models (in particular, macroeconomic and financial models) and institutions that better take into account the limitations of human reason.
George Mason University; 32
My candidate for the biggest unanswered question in economics is the status of the rationality postulate: the decision to analyze actors as utility maximizers with consistent preferences. If we view economics as an “engine” for understanding the world, the rationality postulate was that engine in nearly all of economics until quite recently. The rise of behavioral economics has challenged the usefulness and, in a more subtle but radical way, the legitimacy of the rationality engine. While only a minority of economists would describe themselves as “behavioralists,” behavioralism has affected many more by influencing the kinds of questions economists consider important to ask and influencing the kinds of answers to those questions they consider illuminating. These influences have the potential to profoundly affect the way economics is done, and thus what economics is able offer our understanding of the world.
University of Chicago; 27
In his famous 1945 article, “The Use of Knowledge in Society,” F. A. Hayek argued that despite their inequity and inefficiency, free markets were necessary in order to allow the incorporation of information held by dispersed individuals into social decisions. No central planner could hope to collect and process all the information necessary for social decisions; only markets allowed and provided the incentives for disaggregated information processing. Yet, increasingly, information technology is leading individuals to delegate their most “private” decisions to automated processing systems. Choices of movies, one of the last realms of taste one would have guessed could be delegated to centralized expertise, are increasingly shaped by services like Netflix’s recommender system. While these information systems are mostly nongovernmental, they are sufficiently centralized that it is increasingly hard to see how dispersed information poses the challenge it once did to centralized planning.
Information technology thus fundamentally challenges the standard foundations of the market economy. For many years to come, economists will increasingly have to struggle with this challenge. Some will harness the power of the data and computational power provided by information technology to provide increasingly precise and accurate prescriptions for economic planning. Others, who value the libertarian tradition that has often been associated with economics, will be forced to articulate other arguments, perhaps based on privacy, that are not susceptible to erosion by the increasing power of centralized computation.
[As an aside, this argument recapitulates the discussion we've been having about how the ubiquity of information changes our economic paradigms]
University of Pennsylvania; 39
Economics is in the midst of a massive and radical change. It used to be that we had little data, and no computing power, so the role of economic theory was to “fill in” for where facts were missing. Today, every interaction we have in our lives leaves behind a trail of data. Whatever question you are interested in answering, the data to analyze it exists on someone’s hard drive, somewhere. This background informs how I think about the future of economics.
Specifically, the tools of economics will continue to evolve and become more empirical. Economic theory will become a tool we use to structure our investigation of the data. Equally, economics is not the only social science engaged in this race: our friends in political science and sociology use similar tools; computer scientists are grappling with “big data” and machine learning; and statisticians are developing new tools. Whichever field adapts best will win. I think it will be economics. And so economists will continue to broaden the substantive areas we study. Since Gary Becker, we have been comfortable looking beyond the purely pecuniary domain, and I expect this trend towards cross-disciplinary work to continue.
Definitely seems that the subject is due for a disruption.