In past years our approach to economics has undergone change. Up to the 1970s economic policy was dominant, which was also understood by advisors outside of universities. Its weakness was its often frightening lack of theory. Then the mathematisation of economics hit Germany’s shores and took over entire university faculties. The discipline of economic policy was pushed aside. In the meantime many economics graduates are largely unable to work with concepts such as Ordnungspolitik – the framework conditions set by the state to preserve, adjust and improve the economic order. The current methodological debate that began with an appeal in the Frankfurter Allgemeine Zeitung and in Handelsblatt is useful as it helps us adjust our approach to doing economics. The two appeals contain good ideas that both sides should mutually take into consideration. What the discussion ignores, however, is the institutional knowledge that was once the strength of the German historical school. Economic findings are often only possible after studying historical events and the underlying legal mechanisms. To be taken seriously, economics must be a balance of theory, econometrics and knowledge of institutions in order to provide policymakers and the public with well-founded recommendations.
Ifo Viewpoint No. 108: The Triad of Theory, Econometrics and Knowledge of Institutions, Jul 6, 2009.