A not-so-dismal “science”
Noah Smith has some thoughts about a “world without macroeconomists” – a spin-off from a Twitter discussion a few days ago:
So does this mean that macro research is useless for policymaking? No! Not at all!! Because here’s an interesting thing about policymaking: No matter who advises the policymakers, policy is going to get made. That includes economic policy. So if there were no academic and Fed macroeconomists around to advise policymakers, who would policymakers listen to on economic matters?
This is the key point from his post, economists exist because they fill a critical gap in human knowledge. I should note that I don’t, in the least, qualify his definition of an economist:
Of course, the definition of “economist” is fuzzy; if you make a chart of past GDP growth rates on your home computer just for fun, does that make you an “economist”? So I’ll assume that “economist” means “academic economists, or economists working at government research institutes.” In other words, paid econ researchers.
I’m much closer to the dork that plugs in GDP data on my home computer, but I’ll give a shot at my thoughts anyway. For one (it’s just “Turtles all the way down”, skip below if you’re not interested), I don’t believe a “world without” conversations have much salience. Everything exists for a reason – some underlying cause within our worldview. An economist might say that I believe their profession is endogenous to our world. It’s like asking what the world would exist without Christianity. People act like it came from the Heavens and was exogenous to human events. However, a particular thread of action, however complex brought rise to these events.
We can’t hope to understand what these were but the discussion we’re about to have is entirely unreasonable. Consider Christianity:
- Say a particular world “State”, A, gives rise to Christian foundations.
- Say A is biconditional with the origins of Christianity
- To assume a world without Christianity would be to assume a world that never hit state A.
- But we know state A existed. So the tenor of our question is ultimately reduced to “Imagine a world that never achieved state A”.
- But we know that, because A did, indeed, occur – some other arbitrary State S gave rise to A.
- You can see where this is going. As Stephen Hawking might say, it’s turtles all the way down.
This is a really verbose way of saying that there was some intellectual gap that necessitated the formation of economics as an academic discipline. This gap, considering the preponderance of mainstream economics across academia, still exists today. So rather than answering the question a “world without economists”, it might be easier to wonder what would happen if all living economists suddenly died. Sad, I know.
Let’s consider why rich central banks were granted powerful independence in the postwar era. Fairly long-sighted governments understood that they would propagate boom-and-bust cycles coincident with national elections knowing full-well that budgets would not be passed on economic virtue but political necessity. This would emphasize increased spending and decreased taxes.
While neither of the above sound so bad in our austerity-saturated world today, economists know that aggregate supply isn’t always flat, and such stimulus can overheat an economy creating all kinds of problems. The drive to divorce central banking from politics is at the heart of why economics “deserves to be”, if you will.
Think about administering the United States of America: a set of over 300 million people earning about $50,000 a head. That’s $15 trillion, an unimaginable sum of money. A few people might say that we should let the pure and hot “free market” allocate capital in an efficient way. (Most) economists will tell us this isn’t particularly bright.
This leaves some need for central allocation of goods. Sure, not to the same extent a Marx would have imagined, but certainly a far cry from purely classical liberalism. This necessitates a bureaucracy responsible for economic administration. This entity can either be dictated by political whims or guided, if fallibly, by those who “understand” the allocation of scarce resources. (In some sense, all economists believe in central allocation, without which their profession is useless).
Naysayers will be quick to harp that we don’t need “economists” for this job. Smart lawyers and scientists could do the trick. But Richard Feynman’s thoughts on physics apply to economics, too: “If you think you understand quantum mechanics, you don’t”.
Just like quantum mechanists tell us it might be possible to build a computer that solves intractable problems in polynomial time, or transport photons economics has taught us that some very unintuitive principles are true:
- Currency does not (and should not) need to be “backed” by anything. The gold and silver standards were highly intuitive to humans, brilliant scientists and technocrats included. Currency as only paper sounds, to anyone before the past century of economic innovation, ridiculous.
- Deficits are not a bad thing. This is, again, a very counterintuitive notion.
- Nominal shocks can have real effects. (Just printing more money today can increase economic output).
- No honest man can beat the market.
Try telling a Roman that replacing his bullion-backed currency with fiat money would actually help his economy. The idea that printing paper can, in certain circumstances, make us live better is beautifully counterintuitive.
Indeed, some annoying goldbugs are known to criticize Krugman or Bernanke by saying something nutty like “Ask a three year old how printing paper can make us richer. We need to get back to first principles”. Good economics does not have easily perceptible principles.
This is why Keynes’ General Theory was such a landmark work. It destroyed any semblance of intuitive understanding in economics, thereby converting it into a mature discipline.
We also take too much economic data for granted. The silent, apolitical, econometricians that staff the American government have collected such rich and high-quality data of economic trends across the world. Just browse through the wealth of information our FRED database contains.
Imagine the intellectual and bureaucratic infrastructure needed to calculate gross output, employment, or capital investment? The marriage of economics and statistics has generated some of the most valuable data in the world. Available for free. These are silent economists telling us what is. While the normative dominates op-eds in time of crisis, it is the positive that makes the economics discipline profound.
Estimating the entrepreneurial activity of 7 billion people is tantamount of measuring grand physical constants like the mass of this Earth or Newton’s Gravitational Constant. Economics is very much a science, in this sense. We commentators take this huge collection of macro-level data on an unimaginable scale to be granted. But the machine behind this is just about as intricate as any scientific endeavor.
And all this is ignoring the intellectual fertility economics has provided for philosophy, politics, and law. From Locke’s Two Treatises to Smith’s Wealth of Nations economics has underpinned political thought. The advent of sophisticated economic thinking is coincident with some of the richest works of political value including, yes, the Declaration of Independence itself.
And this doesn’t even begin to touch the kind of work done by the likes of Esther Duflo who tells us which policies, specifically, work in the direst of areas.
All this makes me sound like a cheerleader for the discipline. That I am certainly not. Recent computational advances have made me hopeful that economics of my generation will be far more effective at making the world a better place than the useless analytical models of the past.
I don’t think the sterile mathematics of analytic economics has added any value. (Finance is a different story, underpinned by probability and statistics: far more effective tools than the rigid models found in its parent discipline of economics). I don’t think we’re any the better for having a “dynamic stochastic general equilibrium”. I think utility curves are nonsense. I think the idea of perfectly transitive ordered preferences equally ridiculous.
I also don’t like Noah’s comparison with the past history of “other” scientific disciplines:
However, here’s an interesting thing about research, and about science: Past discovery is no guide to future discovery. Chemists were basically a joke for centuries before they stumbled on a few key principles, and rapidly turned into the most reliable discovery-factories in all of science. Biologists had an even longer history of uselessness before they became incredibly useful thanks to new technologies. So someday, macroeconomists might learn how to forecast the economy extremely well. We really just don’t know. A breakthrough in forecasting power would yield huge payoffs to society.
For one, he doesn’t include physicists. Either because he was trained as one (?) or because they were just too damn good. More importantly, just because “past discovery” (or, in this case, lack thereof) doesn’t mean anything about what might happen in the future. This is his point, but using his logic we might also justify homeopathy and astrology for having some “future” breakthrough. But even chemists and biologists don’t deserve to be included in the intellectual mess that is so much of economics. Economists disguise their work under the pretense of some “scientific method” that is “falsifiable”. But if something goes wrong they point to flawed agents in the real world, as Unlearning Economics points out:
I’m actually not entirely happy with this argument, because it implies that the economy would behave ‘well’ if everyone behaved according to economist’s ideals. All too often this can mean economists end up disparaging real people for not conforming to their theories, as Giles Saint-Paul did in his defence of economics post-crisis. The fact is that even if the world did behave according to the (impossible) neoclassical ‘ideal’, there would still be problems, such as business cycles, due to emergent properties of individually optimal behaviour. In any case, economists should be wary of the as if argument even without accepting my crazy heterodox position.
Sometimes arguing against a mainstream economist is like arguing god doesn’t exist. You can’t prove them wrong because their assumptions aren’t testable. (Except with modern behavioral empirics which disproves so much previously believed crap).
All said and done, we might think economists are nuts. But just think about all the crap people thought about money and finance before they came around. It’s just about as ridiculous as believing the world is flat. As I’ve said before, I’m all for expensive computational projects that would save the discipline from its mathematico-analytical backwash, to real, high-quality science.
Economics is a young discipline and has a lot of the hallmarks that the old sciences used to have. For example, there was aether, an imaginary substance (*cough* utility); epicycles, which used a basic framework that, if enough tweak were made, could explain *anything* (DSGE); and before evolution/genes, biology couldn’t really explain much except a few stylised facts (that’s my impressions, anyway) – sort of like economics now
Obviously, economics is different since we are dealing with people, so maybe the accuracy of the physical sciences is unattainable. But surely it can get better.
I’m very hopeful that the changes you’re talking about are already underway. Check out “Origin of Wealth” by Eric Beinhocker (http://www.amazon.com/Origin-Wealth-Evolution-Complexity-Economics/dp/1422121038).
Economists’ biggest conceit was the idea that human action can be modeled by analytical models. Theoretically, I suppose if NP-completeness wasn’t an issue, DSGE could handle enough frictions to actually work. But I’m very confident that a mix of behavioral economics informing us about microfoundations applied on computational algorithms leaves a rich future.
It can absolutely get better as soon as economists get rid of Walrasian or “Jevonic” hubris that you can export physical models to economics.