Quote of the Day

From Bill Frezza in Forbes:

If engineers were held to the same standards [Ed.: as economists] , bridges would collapse as often as banks, planes would fall from the sky (if they ever got off the ground), and cyclical blackouts would be a permanent feature of our electrical grid. But at least they would get to visit the White House.

In my view the error is not in the fundamental principles but in an excessive and unjustified belief in the ability to fine-tune.

20 comments… add one
  • Andy Link

    The quote wrongly conflates the hard and soft sciences. Structures in the physical world can be consistently modeled with a high degree of accuracy – the collective behavior of billions of people, not so much.

  • I think that the distinction is between theoretical science and engineering. Economists are theoreticians, not engineers.

    Let’s turn that around a bit. If we want to categorize economists with anthropologists as both practitioners of purely descriptive sciences, I have no problem with that. If economists want to act as engineers, they should be held to the same standards as engineers.

    Let’s compare economics with psychology. Psychology has clinical psychologists and counselors, both of whom operate in the real world and another half dozen or so sub-specialties that are academic in nature. There’s a common core curriculum and then distinct paths of training for clinical psychologists and counselors.

    Does economics have such a distinction? I don’t think so. Actually, we have completely separate courses of training—between economists and MBAs.

  • Yeah, I agree. It’s simply not possible to hold economics to the same standard as the physical sciences and by extension we shouldn’t expect economists to provide solvable proofs for economic problems.

  • Icepick Link

    It’s simply not possible to hold economics to the same standard as the physical sciences and by extension we shouldn’t expect economists to provide solvable proofs for economic problems.

    how about if we just expect them to admit it when they were wrong? Or is that too much to ask of a soft science?

  • What’s the old adage – success has a thousand fathers and failure is an orphan – or something like that?

  • If economists had laws that worked like the laws of physics we’d have as good a track record. Or to put it differently, it was a stupid thing to write.

    Why do we allow these people [economists] to formulate economic policy?

    They don’t, politicians formulate policy. Are economists consulted? But as noted, the economic processes are not like physics. Add to that the desire to cater to special groups of constituents (donors) and even broader groups (i.e. voters) the policy in the end may not be all that great.

    So instead we rely on extremely crude estimates subject to all sorts of biases, the accuracy of which cannot possibly be better than a 10-percent margin. Yet we obsesses over whether the GDP is growing or shrinking by one or two percent, demanding legislative action to fix it. Now.

    This is the fault of economists? Sounds more like it is the fault of politicians who claim to be able to “fix it now,” so that they can get the power they so desperately crave.

    Really, I could ask, why are so many engineers creationists? That kind of critique has about as much validity.

    Thanks Dave, now I know to ignore that guy.

    Does economics have such a distinction? I don’t think so.

    Actually yes. There are macroeconomists, and if you wanted to be one, later on your course work, in graduate school, would be different from the guy who wanted to work in public finance, or the guy who wanted to focus on industrial organization. You wouldn’t go to the IO guy expecting a good answer on Macro stuff, nor would you go to the Macro guy expecting a solid answer on public finance.

    Some of the really brilliant economists of times gone by were able to cross specialties, but that was like 50 or 60 years ago or more.

    When I was in graduate school my focus was on public finance and dynamic modeling for the most part. I spent lots of time looking at Bellman equations and working at problems with externalities, public goods, taxation and rent seeking. My knowledge of international economics, monetary theory, and so forth is considerably more limited. When we first started out we were all in the same classes. We all took micro theory, history of thought, mathematical economics and macro theory. After that we broke up, some were taking econometrics, others public finance, some IO, yet others were in international finance.

  • how about if we just expect them to admit it when they were wrong? Or is that too much to ask of a soft science?

    Wrong about what? Might help if you could, you know, articulate what you have a problem with a bit more precisely.

  • I think the problem is more one of messaging. The economist is called in and asked about the bad economy. The economists responds along the lines of well, we could try X, Y and/or Z. Keep in mind that there is some question of how effective these could be and some might even offset each other.

    Politician and his political advisers huddle and decide on X and Y and go forth and issue statements that X and Y will solve the problem. It will “jump start the economy,” or “put people to work right away,” or “will save N millions of jobs over T years,” and so forth. None of the caveats or margins of error an such are mentioned. Critiques of the approach are completely ignored. And when things go to hell some idiot writes an article that if economists were engineers planes would fall out of the sky.

    Yeah, lets completely ignore the douche bags that actually, you know, set policy.

  • The point I was trying make, Steve V., is that economics is lacking in practicum. Even soft sciences that go out into the real world to solve problems require practicum. But not economics. I think it’s a serious defect.

    That’s why I pay more attention to what Arnold Kling writes about Fannie Mae and Freddie Mac than what, say, Simon Johnson says. Kling worked for Freddie Mac. He was there. But I pay attention when Johnson writes about the IMF.

    My main gripe about economists is the one I’ve mentioned before: the hubris that leads them to support policies that are supposed to fine-tune the economy. That’s just beyond the state of the art.

    In case that’s too vague, consider the now-infamous graph of unemployment with and without the stimulus that the president’s economic advisers stood in front of and defended so ardently. If David Axelrod were the one doing the defending it would be one thing but I believe right to this day that the economic advisers had gotten out wayyyy ahead of the state of knowledge in their science. They were just too unequivocal. I agree with you that was a political act rather than an act as an economist. How do I discern when Christine Roemer is speaking as an apparatchik and when she’s speaking as an economist?

  • The point I was trying make, Steve V., is that economics is lacking in practicum. Even soft sciences that go out into the real world to solve problems require practicum. But not economics. I think it’s a serious defect.

    There are lots of economists that go out and work in the world world. I’m one of them, my supervisor and his manager are two more. Our VP is yet another. Problem is we deal with our respective industry, not the economy as a whole. Those types tend to work at places like the Fed or in universities. And we use their analyses as well. We use the work of Edward Leamer at the UCLA Anderson School. Leamer does a forecast for the U.S. and for California. But like all forecasts it is only as good as the information going into it. So for example, the issues in Europe might not have been anticipated and thus would not be included in the forecast.

    I heard Leamer give a talk about government spending and the economy a while back. Leamer’s position was how policy makers fail. They fail because they tend to follow the policies based on assume the best and plan for the best. Leamer thought it would be more prudent hope for the best, plan for the worst or at least something a bit more realistic. Everybody here would probably agree with that. Now, why in the Hell is that not our policy? And how in the Hell is that the fault of economists? Can anyone take a stab at explaining that?

    My main gripe about economics is the one I’ve mentioned before: the hubris that leads them to support policies that are supposed to fine-tune the economy. That’s just beyond the state of the art.

    I think that traces back to ideology more than economics. Robert Lucas would laugh at the notion of fine tuning. As would Edward Prescott and Finn Kydland. Of course, they are both linked with the “conservative/pro-market” side of economics. Face it, most of the economists that are going to agree about that “fatal conceit” you point too are not going to be found working for the Obama Administration, nor the Bush Administration either.

  • not going to be found working for the Obama Administration, nor the Bush Administration either.

    You won’t find me defending either one of them on economic policy. I thought the Bush Administration was nuts. Practically the only issue in either foreign and domestic policy I ever defended that administration for was the decision not to run away from Iraq in 2005 or 2006. I thought that would not only have been bad strategic policy but inhumane as well.

  • steve Link

    “Face it, most of the economists that are going to agree about that “fatal conceit” you point too are not going to be found working for the Obama Administration, nor the Bush Administration either.”

    By the same token, those opposed to fine tuning seem to be convinced that making government smaller (rather than making it work better) or getting rid of the Fed or going on to a gold standard, believe with near religious fervor that their ideas will provide us with a better economy, but when you look at our history, I am not sure how you can such firm assertions.

    I also remain concerned that prevailing economic theories, let’s leave out the heterodox guys, were generated many years ago. Given the speed with money can now move and how far it can move, I am not sure they are appropriate. How much were these guys affected by their current political environment? I think people keep trying to adopt current circumstances to fit their favored theory when they should be doing the opposite.

    Steve

  • By the same token, those opposed to fine tuning

    I’m not opposed to fine-tuning. I’m also not opposed to perpetual motion. I think that both are impossible.

  • I also remain concerned that prevailing evolutionary theories, let’s leave out the heterodox guys, were generated many years ago.

    There how does that grab you?

    The prevailing theories have been refined, re-thought worked on and so forth. And in fact, some have even brought in some aspects of evolutionary theory into economics. My point is that like evolution, there aren’t many firm predictions one can make. What will be the next stage of evolution for humans?

    I think the idea that if we do X we’ll get Y is a problem no so much with economics but with those who have a partial understanding of economics. That is what you’d see with a well specified econometric model. Most people who have gone through graduate level macroeconomics since the late 1980s have heard of the Lucas critique and what it means for econometric models and fine tuning. Most have heard of time inconsistency and what that means for discretionary policy. But policy makers on the other hand need some policy that they can point too so yeah you get economists toddling off to DC to provide them with a veneer of academic respectability. I imagine that is a hard thing to resist too.

    I think people keep trying to adopt current circumstances to fit their favored theory when they should be doing the opposite.

    Okay guru explain the following:

    California, from a government budget perspective is a mess. Now, if we had, years ago, followed the rule of letting spending increase by the rate of population growth and inflation we would not be in this mess, or it would be quite a bit more tractable. So why didn’t we follow that rule? Why did we spend everything we had and then some? My theory is that this is a function of how we’ve set up our government in California and let it evolve over time. The idea of hoping for the best, but planning for a more reasonable outcome is just not going to happen. Incumbents would be vulnerable to attack by challengers either via cutting taxes or spending the money not being spent. Further given the term limits in CA incumbents have an additional incentive to cater to constituents particularly special interests that might afford later benefits once they have left office.

  • Next update Dave…preview option please. 🙂

  • Icepick Link

    Steve V., how about when economists (including private sector economists) all miss one way on forecasts? (I’m thinking of (I believe) the May BLS employment report and on the Q1 QDP report, amongst many MANY others.) How about when the vast majority of economists DO NOT see the elephant bubble in the room, as in 2006 and 2007? A few did, most missed it. A lot of that has real world implications.

  • Icepick Link

    My point is that like evolution, there aren’t many firm predictions one can make. What will be the next stage of evolution for humans?

    And yet, economists can always be found making predictions that if we just do X, then f(X) must follow.

  • Icepick Link

    See Krugman, Laffer, Goolsbee, et cetera, ad nauseum for examples of economists making predictions. More importantly, they are attempting to give a patina of science to what are essentially political choices with uncertain outcomes. That never seems to get stressed.

  • I understand Icepick, but there is another set of names such as Lucas, Prescott, etc. who would likely not make predictions like you are complaining about. Lucas was once asked what he’d do if he had a job where he could have a significant impact on economic policy, his answer was unequivocal, “He’d quit.” I would suspect a big reason for his answer is his Lucas critique of macro-econometric models, that such models do not factor in economic policy and changes in policy. That is, your model might be fine under current policy, but with a new policy your model has to be changed to incorporate the impact of that new policy…i.e. your predictions will be off. How do you do that, incorporate changes in policy? Good question, whomever figures it out will likely win the Nobel.

    As for bubbles, most economists don’t sit around looking at that stuff. Economists are highly specialized if they are in research positions, if not they tend to be focused on their particular industry.

  • Icepick Link

    I would suspect a big reason for his answer is his Lucas critique of macro-econometric models, that such models do not factor in economic policy and changes in policy.

    Then the least he could do is get out there and tell people that there economists of choice are full of it. But good luck drowning out Nobel Prize winning economist Paul Krugman, to cite one. When I see economists challenging other economists directly in major public places (and not on some minor blog’s comments section with a bunch of rubes) then I will believe that economists as a whole believe it when they say they can’t and don’t predict things.

    In the meantime, you have completely ceded the public spaces to those who claim they CAN predict everything. It would be comparable to most doctors not saying that the anti-vaccine people are nuts that can’t be trusted. You’re not combatting bad ideas from people in your profession, thus giving them credibility.

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