There’s another article I’d like to recommend to you, Paul Krugman’s article for the New York Times Magazine, How Did Economists Get It So Wrong?. By Dr. Krugman’s standards this article is pleasantly light on partisan acrimony.
In the article Dr. Krugman attributes the failure of economists to appreciate that the financial system and the economy it services were on the brink of a serious recession for a number of reasons:
- The triumph of incorrect econometric models
- Anti-Keynesianism
- Overly optimistic macroeconomists
- The disconnect between macroeconomics and finance
- Ignoring the naysayers
- Failing to embrace the idea of fiscal stimulus through a large spending package soon enough
among others.
There are some things that I think Dr. Krugman does not himself appreciate. Economics is still not a predictive science and it may never be. It is a descriptive science. Its principles are handy for understanding what we see going on around us but we shouldn’t let that seduce us into believing that economists hold the answers to the real life problems that bedevil us.
But even more than that economics is a science of human behavior and, first and foremost, its findings must spring from observing that behavior rather than trying to impose a beautiful mathematics on inherently messy phenomena.
Well lets see. We have (macro) economists who study the economy and we have those who are out there engaged in financial markets. Economists routinely point out that people out there doing that kind of stuff, in aggregate, often have the best information (again in aggregate). Call it the efficient market hypothesis if you want, but when you have your own money riding on an investment you tend to pay more attention that the guy who doesn’t.
So, of Krugman’s list I’d probably say he has a case for
Overly optimistic macroeconomists
The disconnect between macroeconomics and finance
Ignoring the naysayers
Beyond that the rest is just partisan/ideological. And I’d consider the first and third here to be closely related.
This was much better than most of Krugman’s partisan ranting. While you may not believe it has predictive value, everyone treats it as though it does. However, as he points out, even after the fact, neoclassic thought and neo-Keynesian beliefs are at doss with what really happened. Greenspan and other really believed this could not happen. If EMH is correct, we cannot have the crisis we are having or we have to accept it as people not wanting to work. Neither works very well.
I think the macro folks will need to find some better ways to work in the fact that markets, and people, are often irrational and sometimes for extended periods.
Steve
It might be helpful to note that the difference between descriptive science and predictive science is causation. Descriptive science is essentially taxonomy and topology. It describes how thing stand based on observation. Predictive science generates causal hypotheses expressed as invariant relationships of independent and dependent variables, while identifying and isolating confounding variables. Hypotheses are corroborated through well-designed and careful controlled experimentation. The physical sciences are examples of sciences which are both descriptive and predictive, since they not only describe how things stand based on observation, but also result in scientific laws. The behavioral sciences are descriptive only, since they do not have comprehensive theories that generate scientific laws allowing for predictions that actually turn out. In addition, the behavioral sciences are also normative, as anyone who listens to partisan economists debate with each other immediately appreciates. Basically, a lot of economics is a pretend science that still contains a lot of magical thinking, wishful thinking, and denial, concealed beneath a veneer of models and math. As a result, the majority of economists turned out not to have a clue, and the ones that did turn out to be right, didn’t arrive at their conclusions by applying laws.
As Dr. Krugman observes elsewhere, economic models are not laws. They are frames for simplifying very complex data and and tools for approaching real world situations in order to be able to handle them more intelligently. To think that economics does otherwise is to be in denial or magical thinking. Yet, that doesn’t imply that economics is useless. It’s a lot better than throwing darts at a board.
The most important issue is the normative one. Different schools of economics have adopt different norms that are not substantiated through either theory or evidence. In this sense, practically speaking, economics is a subset of politics. There are conservative and liberal economists. This is not so in the physical sciences, where disputes are conducted in terms of theory and evidence, and preference for norms doesn’t enter into it.
I fail to see how a non-predictive science can provide principles “handy for understanding what we see going around us.” I find that most of the stuff in the “economists explain real life” genre of articles to border on the spectacularly obvious.
See the comment above, Alex.
There are several problems with economics. The first, as the comment above aptly notes, is its normative component. You can’t disentangle the ethical component from economics and, consequently, you can’t eliminate the political component.
But, second, the unit of measure is off. At the current state of the art we can’t fine-tune at the level that would be necessary. Newton’s Laws of Motion are extremely useful and handy but we don’t use them for figuring out whether that car coming down the street will hit us or not.
Actually I disagree. Economists do this all the time and you get policy proposals which political are totally inoperable. Case in point Keynesianism. Raise spending/lower taxes during the recession, lower spending/raise taxes during the expansion. We can get the first half, but not the second half. Thus as policy it is inoperable and leads to expanding national debt.
Another would be any economic analysis and policy prescription of Medicare. It would likely note both the perverse incentives in terms of savings and public expenditures. However, the recommended changes would likely mean a reduction in welfare for Medicare recipients that would mean such a policy is going precisely nowhere.
In fact, I think you have it precisely backwards Dave…economists all to frequently ignore the political and even the moral and thus don’t come up with very good policy recommendations. When we do include the political we quickly realize that rational policy is very, very hard if not possible. In fact, it is not because any given actor is irrational, but at each point in time the optimal policy of the actors changes. That is we could have perfectly rational actors (policy makers, voters, consumers, etc.) and yet have an “irrational” policy in the sense of sub-optimality.
Interesting. Over time I’ve come to the conclusion that economics needs to move more away from the “economy as a physical engine” to “economy as an organism”. I say this after learning about evolutionary biology and how some economists have been using some aspects of evolutionary biology to model the economy. For example, how do people come up with various strategies? Do they just pick randomly or do they look around them at others and use what appears to be working? If it is the latter, then the trajectory of the economy might be better described as an evolutionary process as opposed to a mechanical one.
Dammit. This,
should read as,
I think this overstates the case just a wee bit. A quick glance at scientific history will show that this is simply not true. Look at all the resistance to the notion of the atom. Yes, eventually evidence triumphed, but over personal positions and feelings. If you were to ask Lynn Margulies about the Darwinian hegemony in biology you’d likely get an earful…and to be clear Margulies is no creationist. She just had an idea that did not fit into the neo-Darwinian synthesis at the time she initially proposed the idea. Yes, she worked hard and over time she managed to compile evidence that changed minds and now her view is part of the mainstream. The idea that physical scientists are creatures of pure rationality looking dispassionately at the data is laughable.
Astronomy and astro-physics were normative until the 18th century, maybe later. That evolutionary biology continues to be normative in some sense at least among laymen is evident from the creationist retorts.
I think the subject of just how physics became objective science is a rather interesting one and I probably should post on it. I think it took a combination of development of the science, demonstrability, and repeatability.
But those alone weren’t enough. It took a century of practical application by fairly ordinary people.
Back when I took economics which wasn’t all that long ago at least in geological terms econometrics didn’t have the cachet that it does now. In my view some of that is unearned.
However, I still hold to my two base points. First, at the present state of the art economics is mostly descriptive. And, second, economics is a behavioral science that can only be authoritative to the extent that it remains rooted in the observation of behavior. The events always represent whatever it is that they represent. The interpretations may change.
“The idea that physical scientists are creatures of pure rationality looking dispassionately at the data is laughable.”
Wrong, Steve. “..wildly laughable.”