Economists as Worldly Philosophers

By Robert J. Shiller and Virginia M. Shiller

In his influential 1953 book The Worldly Philosophers: The Lives, Times And Ideas Of The Great Economic Thinkers, Robert Heilbroner gave an inspirational account of what economists do, an account that was assigned as supplemental reading to countless beginning economics students over decades. Heilbroner wrote that he chose the term “worldly philosophers” because of the breadth and moral depth of economists’ inquiry. The appellation stuck, and for many years it was common to refer to economists as worldly philosophers. The inspiration of that book has contributed to the desire for many to go on to become economists, and to productive lives as researchers.

But, while the volume of research turned out by economists is most impressive, there are questions whether “worldly” and “philosophical” are represented as much as they should be in economic research. Has economics as a profession substantially lost sight of the idealism that existed in earlier decades? Has the strong impulse to pursue narrow specialization in order to propel research to the frontier led to some loss of moral perspective?

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Encouraging Saving: Lessons for Developed and Developing Countries

By Robert J. Shiller in the Yale Journal of International Affairs

Adam Smith’s 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations had an explanation for the great diversity of economic outcomes across countries. Some countries save more than others, and thereby accumulate more capital, that is, more productive resources. This, Smith argued, was a big part of the picture in explaining why some nations are rich and some are poor. His conclusion has intrigued economic theorists ever since. There has been much interest and dispute about his conclusions.

As developed and developing nations recover from the financial crisis and begin to set new directions for the development of their countries, it will serve them well to heed the words of Adam Smith on the importance of saving and capital accumulation. Indeed, promoting the savings rate is no longer simply an ambition of developing nations, but has also become a major goal of developed nations, especially those in Europe that face aging populations.

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Yale Q6 Fall 2009 Q&A with Dr. Shiller

Decades of economic research have assumed people pursue their goals in a rational manner, discounting the effects of emotion, bias, error, and other irrational forces. Robert Shiller argues that economists need to take a closer look at how people make decisions.

Q: How important is it to understand what people are thinking and feeling when you are trying to understand the economy as a whole?

That's been a controversial question in economics for a long time. Milton Friedman wrote a collection of essays in 1953 called Essays in Positive Economics, in which he argued that you shouldn't try to infer what people are thinking because people really can't tell you what they're thinking. If you ask people why they did something, they will give you a conventional answer or mislead you. The idea was that the essence of economics is to look at the constraints that people have and assume that people are behaving rationally, subject to those constraints, and interpret economic data as reflecting that rational behavior. That is the defining characteristic of economics as a discipline — as opposed to psychology as a discipline — that, in understanding something as massive as the economy, it's best to look at people's actions, not their ostensible reasons. There is some appeal to that. I just wish it were more right.

I can get enthusiastic talking about this theory because, in some respects, it is good. To give an example, suppose you are trying to understand the seasonality of food prices — why they go up in the winter and down in the summer. Well, it's pretty obvious that it has something to do with the weather as a constraint, but you better think it through, because we live in a global economy, and when it's winter up here, it's summer down south. Obviously they'll ship food from one hemisphere to another. That puts a limit on seasonality. This is pure economics, and I'm sure it's right, because the seasons occur year after year after year, and you have people whose job is to ship fruits and vegetables and food around. They're going to find the best pattern of shipping, given all the costs. It wouldn't make a lot of sense to ignore that. Thinking that people get emotional in the summer, or something like that, would probably be wrong.

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They Called Him Mr. Bubble

by David Leonhardt in Yale Alumni Magazine:

Sometime in the mid-1980s, Robert Shiller and John Campbell '84PhD created The Chart. It wasn't especially complicated. It showed average stock prices, relative to corporate earnings, going all the way back to the late nineteenth century. Wall Street analysts produce charts along these lines all the time. The measure is called the price-earnings ratio, and it is the single most common analytical yardstick of the stock market.

The yardstick that Shiller and Campbell created, however, came with a twist -- a twist that transformed their little chart into The Chart. Today, The Chart stands as one of the signature pieces of economic research of the past generation. It is rigorous enough to have appeared in the Journal of Portfolio Management and simple enough to be understood by those of us who are behind on our Portfolio Management reading.

Anyone who heeded the central lesson of Shiller and Campbell's analysis -- as well as the lesson of a subsequent chart, created by Shiller, on the housing market -- could have avoided some of the worst pain of the financial crisis. If Alan Greenspan had taken The Chart seriously during the late 1990s, Greenspan's reputation might be in better shape today. So might the United States economy. Nouriel Roubini, the doomsday-prophesizing finance professor at New York University who has lately become a media darling, credits The Chart for much of his clairvoyance.

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Surveying the economic horizon: A conversation with Robert Shiller

From The McKinsey Quarterly:

In this video interactive, economist Robert Shiller discusses four aspects of the current crisis: regulating for financial innovation, reducing trust in models, redesigning institutions, and the time line for turnaround. His perspectives are informed in part through his research that psychology—particularly an understanding of human irrationality—can play a key role in explaining economic breakdowns and exploring effective solutions.

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