In the later years of his long life, Ronald Coase, one of the most influential members of the conservative Chicago School of Economics, began to lament how economists in the 20th century had gone down the rabbit hole of focusing on price sensitivity. He said that, rather than studying real-world wealth creation, as early economists such as Adam Smith sought to do, their successors had focused on building mathematical models of the world and probing datasets to find correlations consistent with the models. Coase didn’t consider such work to be empirical, dismissing it as ‘blackboard economics’.
In the past two decades, there’s been a turn against ‘blackboard economics’. Some younger economists have made careers out of going out and studying the world as it actually is, and deriving an economics – insights, conclusions and solutions – based on this empirical work. The Massachusetts Institute of Technology and the University of California, Berkeley have been especially prodigious in producing such economists.
After generations of ‘blackboard economics’, Berkeley and MIT are leading a return to economics that studies the real world
For the workers who are curious why their wages have not increased in the past decade – while the incomes of some, such as footballers, have soared – the Bank of England’s website has a reassuring message: ‘There is a method to this madness: the economic theory of supply and demand’.