At City Journal Gene Epstein provides a rather harsh critique of prize-winning economist Joseph Stiglitz (note: there is no Nobel Prize in economics; that’s a folk rendering; it’s a mistake I’ve made myself from time to time):
Stiglitz is a figure to be reckoned with, not just for his past impact on policy but for the influence that he might wield in future Democratic administrations. University Professor at Columbia, former chairman of President Bill Clinton’s Council of Economic Advisers, former chief economist at the World Bank, and author of more than 30 books, Stiglitz has been publicly associated with New York mayor Bill de Blasio and Senator Elizabeth Warren of Massachusetts, both of whom might bring him along if they win higher office. But how could an economist with his presumed sophistication publicly endorse the disastrous policies of Hugo Chávez?
Much of his criticism has to do with Dr. Stiglitz’s misdirected support for Hugo Chávez and the Chavistas in Venezuela but I want to concentrate on this:
As Stiglitz stressed in his Nobel lecture, “perfect competition is required if markets are to be efficient” (italics his). He was right that by challenging the idea of perfectly competitive markets, information economics signified a paradigm shift. But perfect-competition theory is so abstract that only economists blinded by their own mathematical proofs could possibly subscribe to it. Any institutions created and run by fallible human beings are bound to fail. Then again, these same human beings run the governments in which Stiglitz places such trust.
since it highlights my own views about economics and economists.
Economics is a science of human behavior. It’s not like physical sciences of physics or chemistry and it’s certainly not mathematics. Adam Smith, David Ricardo, and John Maynard Keynes weren’t mathematicians (although Keynes apparently had some talent for math). They were observers of human behavior. Observing human behavior dominated economics for its first 200 years.
In the 1970s economics took a turn, in my opinion a wrong turn. Econometrics came to dominate the field. Econometric is the branch of economics that uses mathematical notation, modeling, and statistical analysis.
The problem is that knowing a lot of economic theory, a little mathematics, and a little statistics doesn’t necessarily make you a good economist if you’re missing the observation and understanding of human behavior so necessary for the field. Your models can be completely internally consistent but if they don’t actually represent what happens in the real world, they’re useless.
The additional complication is that neither classical nor Keynesian economics deals well with very short timeframes or very small changes.
We can have pretty good confidence in some of the conclusions that classical economics has given us. People do respond to incentives. That doesn’t tell us how quickly they respond or how much they respond.
Additionally, there is absolutely no way to separate economics from politics.
So back to Mr. Epstein’s observations about Stiglitz. How much inefficiency does a tiny bit of imperfection introduce into markets? We have no idea. That’s something that can only be determined empirically and for some reason, like the Greek philosophers of old, economists seem to have an abhorrence of physical measurements. You can understand why. They’re terribly difficult to make.