What should (chief) economists do?

In a 1964 article Nobel Laureate James Buchanan famously asked, “what should economists do?” He was concerned by a trend for economic analysis to focus too much on attempting to solve technical problems, and losing sight of the methodological underpinnings of the discipline. He encouraged economists to…

concentrate their attention on a particular form of human activity, and upon the various institutional arrangements that arise as a result of this form of activity. Man’s behaviour in the market relationship, reflecting the propensity to truck and to barter, and the manifold variations in the structure that this relationship can take; these are the proper subjects for the economist to study.

As a business school professor it can be hard to explain the relevance of economic insights to managers and executives. When they take their finance, marketing, or HR modules, they can see how those concepts and tools directly map into their org chart.

However Managerial Economics tends to be a foundational subject. It’s something that everyone learns because it’s seen to cut through the entire organisation. In my 2020 textbook, Economics: A Complete Guide for Business, I made the case that instead of hiring economists, managers need to become one themselves. Therefore my own courses cover key insights — such as the economic way of thinking, opportunity cost reasoning, and price discrimination — and encourages participants to internalise those concepts and apply them on a daily basis.

Of course some organisations do hire economists. Central banks and finance ministries are full of academic appointees. The most notable Chief Economists worked for international organisations such as the IMF or World Bank, or in the private sector at commercial banks. There, the role of a “chief economist” has traditionally been focused on providing economic and financial analysis. Their job was to prepare reports and to brief senior management. It was a narrow, technical brief and although it required the skillset and familiarity with academic literature that a PhD would entail, private sector economists are often proud that they live outside of an ivory tower. Without the pressures and inefficiencies of peer review they can perform their work unencumbered. But by and large their work didn’t draw upon, or influence, their colleagues throughout the org.

However there’s an interesting trend in how companies are utilising economists as a key internal resource.

A great overview of this tend is Alison Griswold’s article, “Uber’s secret weapon is its team of economists”.

She outlines a chronology of the links between professional economists and corporate settings:

• In the 1960s AT&T and Bell Laboratories hired some academic economists to provide internal advice on regulatory issues.
• In 2002 Hal Varian began consulting with Google. He was instrumental in devising the AdWords auction method that contributed to Google’s core business model, and also initiated internal prediction markets as a decision making tool.
• In 2006 Yahoo hired several academics as the job market became increasingly competitive and tech firms began poaching talent from each other. By now Microsoft and IBM had chief economists with strong academic reputations.
• In 2016 Uber hired University of Chicago Professor John List (who then left in 2018 to join rival Lyft).

Griswold also points out that the role of Chief Economist at Uber is not only integral to the business model, but closely tied to academic legitimacy:

Its wide-ranging mandate includes studying the consumer experience, testing new features and incentives, supporting Uber’s public policy needs, and producing peer-reviewed academic research.

The rise of big tech companies was in part driven by specialist economists, and by 2019 only the Federal Reserve hired more economists than Amazon, and there are several major upsides for economists who leave academia. Salaries are almost certainly higher, and you avoid having to teach pesky students and grade exams. Then there’s all that data! For a market design enthusiast it’s a perfect lab.

Uber’s more than 3 million drivers provide roughly 15 million trips, globally, every day. Uber’s researchers can test vital questions about driver pay, customer satisfaction, and urban transit with tiny tweaks to the company’s algorithms.

In a Harvard Business Review article, Susan Athey and Michael Luca provide two main reason why tech firms are hiring so many economists. The first is that economists have a well developed toolkit for investigating empirical relationships. Of all the social sciences, economics is arguably the most scientific. And the second reason is that “economists have spent decades thinking about the design of markets and incentives”. Traditionally companies would operate on one side of a transaction — buying inputs from suppliers, and then selling final goods to their customers. But online platforms mean that companies take on the role of an actual marketplace. Economists have the professional training to create and operate these types of market.

So the role of chief economist is changing, and companies should be looking to economists as a key managerial function. But to echo James Buchanan, a chief economist should not be a central planner, making decisions on how to allocate resources within an organisation. Rather, they should attempt to understand and explore a theory of markets and how it relates to their firm. This can be done externally, in terms of learning about sources of value creation, reducing transaction costs, and familiarity with regulatory models. But it can also be done internally, in terms of setting up marketplaces for employees to share information and pool their collective intelligence. All managers need to become economists. But it’s the job of the chief economist to nurture the institutional environment that permits market exchange.