davos 2015

Tracking Economic Schools of Thought at Davos—Freshwater vs. Saltwater

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DAVOS, Switzerland — Majority of the academic economists at the World Economic Forum last week in Davos had to cross the ocean: 18 out of 23 came from institutions not based in Europe. The United States, which houses some of the world’s most influential academic hubs when it comes to developing economic schools of thoughts, have sent a clear majority of these economists—17 in total, though most are of international origin, being born from South Africa to Israel to Belarus.

Majority of academics continue with their Ph.D.’s at the same university from which they have obtained their Master’s. Only a few choose to actually stay to teach and research at their alma mater. But despite seemingly jumping universities without a pattern, most of these economists have loyally stuck to the same school of thought.

One could argue that nowadays there is not much disagreement among schools on how modern economics should work, but historical evidence shows the opposite. The “saltwater” school of thought (associated with bicoastal Berkeley, Harvard, MIT, Princeton and Yale) is less dependent on the notion of laissez-faire than “freshwater” school of thought (associated with inland Northwestern, Chicago, and University of Minnesota).

econ school of thought

Economists who have stayed at their alma mater throughout their entire academic careers, starting with the graduate studies, accordingly tend to nurture a clear and consistent approach. For example, Larry Summers has never stepped out of the saltwater’s cloak, completing his Ph.D. at Harvard in 1982, and staying as professor until 1991, before leaving to become Chief Economist at the World Bank and holding various public appointments with the Clinton administration and eventually coming back to become president of Harvard 2001-2006.

These homegrown “saltwater” economists are well-represented in this year’s Davos. The only exception would be the economist of an Belarusian origin, Aleh Tsyvinski. Having received his Ph.D. at University of Minnesota, one of the “freshwater” colleges, he is now teaching at Yale, the mecca of the theory that government has an important discretionary role in stabilizing the economy over the business cycle. Tsyvinski, a political economist, now researches on income redistribution, social insurance and tax systems.

Back in 2006, Gregory Mankiw, professor of economics at Harvard, wrote in his paper, “The Macroeconomics as Scientist and Engineer”, that macroeconomists either operate as engineers (first and foremost, problem solvers) or scientists (whose goal is to understand how the world works). The dichotomy between scientist-macroeconomists, interested in developing analytical tools and theoretical principals, and engineer-macroeconomists, interested in solving practical problems, also reflects the growing divide between the“saltwater” and “freshwater” schools of thought. Especially in debates around how and why recessions occur, the former pride themselves in being pragmatists and latter pride themselves in being neoclassical purists. But according to Paul Krugman, these disagreements, especially heightened in 1985 and 2007, were mainly about theory, not action.

Escalated by structural problems like inequality and the 2008 financial crisis that economists failed to predict, there’s a renewed debate asking,“What’s wrong with economics?”.  The problem is, no matter what school of thought, the models based on the assumptions consistent with the beliefs of their creators fail to comply with the empirical data. As Anat Admati, professor of finance and economics at Stanford, says, all economists are in “deep denial, [and] they all somehow missed an elephant in the room.”

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