Philip CrossWriting in the National Post, Macdonald-Laurier Institute Senior Fellow Philip Cross says too many economists are ignoring economic insights from the private sector.

By Philip Cross, May 27, 2015

Today marks the debut of the 49th annual meeting of the Canadian Economics Association, under the oversight of Charles Beach, the professor who most influenced my studies at Queen’s (somehow making Introduction to Statistics interesting).

Analysing the 64-page CEA agenda shows a not very surprising bias to where the CEA thinks knowledge about economics resides in our society. Of the 600 odd papers being presented, 90 per cent are from university professors, while two-thirds of the remainder come from government organizations (mostly central banks). Only 3 per cent of papers come from outside university and the public sector, with a smattering from think tanks and major banks, three from consultants, one token union contribution and none from business firms outside of banks.

There are several dangers in separating economics in universities and government from the business sector. It means a lack of appreciation of risk-taking and the rewards it requires, something fundamental to long-term economic growth. Instead, the dominance of public sector people reinforces their presumption that government is the locus of growth, something on display everytime Ontario Premier Wynne makes a policy pronouncement. Finally, the isolation of academic work increases the odds that, as Adam Smith himself warned, they become “sanctuaries in which exploded systems and obsolete prejudices found shelter and protection, after they have been hunted out of every other corner of the world.” Where else today, outside of public sector unions, can you still find devotees of socialism, never mind Marxism?

So according to the CEA, there is essentially no knowledge in the business sector worth tapping. In reality, there is a remarkable amount of knowledge about economics in the business sector beyond the high profile economics departments of major banks. In many fields the reigning expert(s) in Canada are in the private sector. Dennis DesRosiers is Canada’s foremost automotive guru. At every conference on resources I attend, the smartest people in the room are from the Canadian Association of Petroleum Producers.

No one understands the implications of our aging population better than financial firms, where Malcolm Hamilton of Mercer Associates and Fred Vettesse of MorneauShepell for years have led research about retirement.There are a bevy of housing analysts at firms such Altus Group wrestling with the critical question of whether house prices in Canada have reached bubble levels. The law firm Bennett Jones operates a de facto think tank featuring thoughtful analysts such as former Bank of Canada Governor David Dodge.There always have been very close links between the financial sector and central banks. This makes the decade-long experiment of putting academics at the head of Federal Reserve Board look all the more dubious.

The academic slant to economic research in Canada results in some important policy topics being ignored. To illustrate this, when I was at Statistics Canada, Kevin Page (then at the Privy Council Office) asked to meet to discuss how the middle class was faring, the most important question to all political parties and to average Canadians. The result was one of the shortest meetings I ever witnessed, as a roomful of Statcan’s leading income analysts exhausted their knowledge of the middle class in 15 minutes. Their explanation for ignoring the middle class was that academics only cared about what was happening within the extreme upper and lower tails of the income distribution, and Statcan research catered only to academia (some of these analysts have since left, and Statcan research has a more practical bent).

Perusing the CEA agenda also raises the question of why do we have Canada Research Chairs? They were established in the Chretien years to foster innovation and excellence in universities by attracting the best scholars from around the world. Yet of the six “state-of-the-art” lectures at this year’s CEA meetings, five are being delivered by professors from U.S. universities. So for economics in Canada, when you want state of the art knowledge, you go to the U.S., not our massively-subsidized Canada Research Chair scholars. Doesn’t sound like a good return on the government’s $300-million investment.

Economics can have a powerful influence on our everyday lives. As Robert Litan’s recent book Trillion Dollar Economists observed, the benefit of good economic ideas can be measured in trillions of dollars in recent decades. The deregulation of energy prices encouraged the energy revolution in North America, while changing the royalty structure helped unleash the development of the oilsands. Deregulation of transportation also lowered costs for millions of travellers and consumers. Breaking up AT&T removed a potential roadblock to the growth of the Internet. Buying index funds cut costs and boosted returns for millions of investors.

Of course, some of the people Litan credited for these innovations were statisticians, mathematicians, engineers and others who thought like economists, not PhD’s in economics. In other words, they were practical people searching for solutions to real problems. You are much more likely to find such people working in the business sector than attending CEA meetings. As the saying goes, the academic economist’s job is to explain how something that works in practice works in theory.

Philip Cross is a Senior Fellow at the Macdonald-Laurier Institute and the former Chief Economic Analyst at Statistics Canada.

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