By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.
As far as the laws of mathematics refer to reality, they are not certain, and as far as they are certain, they do not refer to reality.
Albert Einstein
Some weeks ago, an economist at the Federal Reserve Bank of Richmond’s Research Department posted an open letter on the web titled “Economics is hard. Don’t let bloggers tell you otherwise.” It generated a tidal wave of criticism that swept the original post off of the web (Still available here.) The criticism is both understandable and justified, with much anger directed at the implicit hubris and its self-serving nature.
However, the criticisms were almost exclusively aimed at the conclusion and little if any attention was paid to the underlying premise or structure of the argument. This is most unfortunate. The argument is based on three assertions:
1. Economics is and ought to be treated as hard science; consequently
2. Macroeconomics is too hard for bloggers and other non-PhD commentators to offer clear conclusions with any degree of confidence, but
3. Macroeconomics is not so hard that PhD economists are unable to offer clear conclusions with high degrees of confidence.
In regard to the first assertion, there are numerous reasons that macroeconomics should not be treated as a hard science. Nonetheless, the author of the post is not alone in drawing parallels between macroeconomics and seismology. However, the choice of this particular hard science to serve as benchmark reflects a wrinkle. The charge had always been that economists had “physics envy,” in particular, “astrophysics envy,” and economists as a group embraced the comparison.
Why “astrophysics envy”? And why did economists embrace a comparison to astrophysics?
Astrophysics is widely accepted as a hard science. It has been very successful in making predictions. Furthermore, it is highly mathematical and model-based, with limited ability to do repeated-controlled laboratory experiments. Given the predictive power and the absence of the ability to do controlled laboratory experiments, economists desiring that economics be accepted as a hard science adopted astrophysics as a research role model/paradigm. (The replacement of astrophysics by seismology as the benchmark to which economics is to be compared may reflect the fact the forecasting record of economics has more in common with seismology than it has with astrophysics.)
There are two possible outcomes: If the result confirms the hypothesis, then you’ve made a measurement. If the result is contrary to the hypothesis, then you’ve made a discovery.
—Enrico Fermi
No amount of experimentation can ever prove me right; a single experiment can prove me wrong.
–Albert Einstein
To be scientific, a discipline must be based on gathering observable measurable evidence (data). On the basis of the observable data and past experience, researchers form a hypothesis. They use that hypothesis as a base to make a prediction or forecast a consequence. The hypothesis is then tested. If the predicted consequence does not come to pass, then the hypothesis has been falsified. One “failure” can prove a hypothesis false, but no number of “passes” can prove a hypothesis to be true. For example, one sighting of a black swan disproved the hypothesis that all swans are white, all the sightings of white swans notwithstanding.
How does contemporary macroeconomics fare when compared to the above description of the scientific method?
Contemporary macroeconomic theory generates policy frameworks/hypotheses predicated on non-observable variables, e.g., expected future values of explanatory variables and various “natural” rates. Furthermore, many variables are subject to significant measurement errors. If crucial variables cannot be observed and/or accurately measured, the hypotheses cannot be truly tested. No falsifiability, no science.
In addition, there are the problems posed by the Lucas Critique (the instability of aggregate macroeconomic relationships) and Goodhart’s Law (policymaker dependent reality).
The man who cannot occasionally imagine events and conditions of existence that are contrary to the causal principle as he knows it will never enrich his science by the addition of a new idea.
— Max Planck
Prior to the onset of the current travails, economists and Fed policymakers repeatedly cited inflation-only targeting as the reason for the “Great Moderation. They dismissed concerns about unsustainabilities in financial markets, asset prices, savings rates, and external imbalances. These variables were not part of their causal model-based policy framework.
We cannot solve our problems with the same thinking we used when we created them.
Albert Einstein
Inflation-only targeting, as reflected in the Taylor Rule, was predicted to result in stable inflation and trend growth. The decision to attach zero cost to the unsustainabilities and the failure to act when they grew, contributed to an economic outcome at variance with the forecast. However despite this failure, mainstream professional Ph.D. economists do not seem to have reduced the confidence they place in the Taylor Rule as a guide to policy.
A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it.
Max Planck
Or Planck’s short version:
Science advances funeral by funeral
In a similar fashion, criticism of the widely-used DSGE model has been limited. Proposed changes to the model have been limited to relatively minor (marginal) adjustments when compare to the near absence of a financial sector and a model that is inherently self-stabilizing.
However, even if economics is not a hard science, that does not imply that economics cannot be useful. Medicine is a mix of art and science. I believe that it is accurate to say that society places a greater value on the advancements in medicine than on all the increased understanding of the cosmos. The net benefit stream is more important than the relative purity of the science.
Economics might profit from replacing physics with medicine as its research role model. Adopting the research discipline of medicine as a role model would imply significant changes for economics.
Medicine acknowledges that risks are attached to virtually all courses of treatment. The medical profession also recognizes that not all treatments work or are as effective in all cases. It recognizes that in some cases negative side effects may preclude the use of a drug or treatment. It practices risk management by weighing the potential benefits against potential costs.
In many, it requires patients be periodically tested to confirm the absence of negative side effects. Evidence of any adverse outcomes not discovered during the trials can be cause to have them pulled or their use proscribed. There are processes and procedures in place to prevent researchers and pharmaceutical companies from ignoring negative side effects or carrying on while suggesting that possible side effects are someone else’s or some other specialty’s problem.
Furthermore, as a profession it is open to the possibility that both the benefits and costs may vary over time and across populations. Pharmaceuticals that were once effective, e.g., antibiotics, are acknowledged to have lost effectiveness. Pharmaceuticals with acceptable benefit/risk ratios in one section of the population may be inappropriate for use in another or because of the existence of another medical condition. It is recognized that a pharmaceutical can be beneficial at one dosage and fatal at another.
Contrast that with the behavior of the highly confident policymakers and macroeconomists.
They posit arguments based on the universality and time invariant quality of their models. Currently, pundits are debating the impact of possible tax changes. They express their conclusions with certainty, but history suggests that the link between changes and tax is mutable. The Kennedy tax cuts are credited with stimulating GDP growth. Clinton’s economic advisors and others have argued tax increases stimulated US GDP while at the same time argued that tax increases in Japan derailed a recovery there.
The link between financial aggregates and the economy has followed a similar path. Some Keynesians (but interestingly enough not Keynes) argued that money did not matter and that fiscal policy could be used to exploit a stable Phillips Curve (which it turned out wasn’t stable). In retrospect, the policy stances came to be viewed as contributing to the inflation of the 1970s. Monetarism was reborn and the back of the inflation was broken. However, high and volatile rates of interest induced a spate of financial innovation. Links between the monetary aggregates and GDP became unstable. Monetary targeting was dropped. With the rise of inflation-only targeting, policy makers chose to treat all financial measures, including debt and liquidity levels, but not interest rates, as devoid of any informational content and inappropriate targets for monetary policy. Post the housing bubble; however, liquidity became a focus of policy as the policymakers took action to prevent the deleveraging of the financial system, i.e., levels of liquidity, debt and leverage were important after all.
Prior to the current recession, policymakers dismissed all the policy supported unsustainabilities in the financial markets and the real economy (think negative side effects) during the run up to the crisis, then laid all the blame for the crisis and its aftermath on the failure of regulation.
Fed policymakers also failed to practice risk management when setting interest rate policy. In response to the slowing of the economy, the Fed eased dramatically starting in late 2000. The target for the Fed funds rate was reduced to 1.00%, where it stayed until mid-2004. The rate was then ratcheted up 25 basis points per FOMC meeting until mid-2006, when the Fed funds rate reached 5.25% and accommodation was deemed to have been removed. According to the CBO, the output gap (as a percentage of GDP) was -0.7, 0.0 and +0.2 for 2004, 2005 and-2006 respectively. In terms of the real economy, how much potential benefit/upside risk was there in accommodate monetary policy 2004-2006?
Economists and others had cited a list of growing economic and financial imbalances prior to and during the period 2004-2006, but the Fed chose to ignore the warnings. We now know with some certainty the minimum size of the downside risks associated with having interest rates too low for too long: an output gap at close to -7% of GDP, a sizable negative output gap that is expected to last for years, a ballooning of the fiscal deficit, the severe crippling of the financial system, etc.
Exposing the economy to those risks in turn for upside potential of less than 1% of GDP was a failure of risk management. The failure stemmed from policymakers’ misplaced confidence in their model and a resulting willingness to dismiss risks without so much as a thought. (If you doubt the veracity of this line of argument, then I suggest you Rajan’s speech and Kohn’s intellectually vacuous reply at the Jackson Hole Conference in 2005.)
In regard to the second and third assertions in the original post, I believe that no one, including PhD economists, has a sufficient understanding of either the real economy or financial markets to be able to forecast or recommend policy prescriptions with anything like the confidence expressed by any of the most widely-read, degree-holding pundits or policymakers. In short, I agree with the second assertion, but disagree with the third.
For all their differences pundits share a position. They all assert with great confidence that there is a riskless low-cost solution to the economic problems we face. They also assert that the solution could be put in place if only correct thinking policymakers are empowered. I differ. I do not think that the best solution will be riskless or will be low cost. However, economics can make a significant contribution to economic well-being, but only if it recognizes that it will never be able to make predictions (and propose policy) with anything like the confidence of a hard science.
However, to my mind the most objectionable and ironic aspect of the original post isn’t the claim that only professional economists can comment on economics and economic policy with confidence, but rather that the conclusion itself reflects really bad economics.
The original post cited a number of reasons that analysis performed by PhD economists has more merit and is more valuable than analysis or commentaries by both non-PhD economists and non-economists. They are
1. Ph.D economists are bright (although not the only bright people),
2. They have devoted years to study of economics, and
3. They have expended enormous efforts.
This is to say that economics done by professional Ph.D. economists embodies more human capital and is therefore superior to economics done by those who have not devoted the same amount of resources e.g. time and effort. This is ironic beyond belief. It is nothing more than a very crude labor (quality adjusted?) theory of value. A theory of value found to be wanting at least a hundred years ago by Jevons, Walras, Menger, Marshall et al.
It is of course possible that the author was aware of the failure to predict the worst recession and financial crisis since the Great Depression, but did not mention the failures in order not to undermine his own argument that economics is a hard science. While this explanation would explain the apparent retreat to a labor theory of value (totally ignoring the usefulness of the output, demand side), it only does so by emphasizing the profoundly unscientific and anti-intellectual aspects of the argument.
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2. Macroeconomics is too hard for bloggers and other non-PhD commentators to offer clear conclusions with any degree of confidence
This is always the Big Lie of fraudulent “expertise”, when in fact the intellectually difficult part is as a rule the wonkish details, not the big picture.
On the contrary, the problem there is more often moral than intellectual. For example, as idiotic as the vast majority of economists are, they’re not so abysmally stupid that they can’t comprehend physical resource limits. They’re simply so morally corrupt, such prostitutes for the rentiers of “growth”, that they systematically seek to destroy knowledge and truth rather than serve it.
3. Macroeconomics is not so hard that PhD economists are unable to offer clear conclusions with high degrees of confidence.
Yes, they’ve offered plenty of conclusions and done so with monumental arrogance.
Of course every single one of those conclusions was wrong to the point of criminality, even if they really had been concluding in good faith, which they were not.
That leads us to the unpleasant fact that analyses like this are really too forgiving and nuanced for practical use by now. There’s simply no practical utility and no moral validity in pretending what’s going on with economists is any more complex than their alleged “expertise”.
Economists as a class are simply hired thugs. They’re part of the intellectual leadership of organized crime. That’s all they are. (There are individual exceptions, of course, but that doesn’t affect the rule.)
Every analysis of theirs is an analysis of how the banksters can loot more prodigiously, while every conclusion and prediction is meant to falsify the past and obscure the present, to ensure a more larcenous, more tyrannical future.
I suppose in theory that if we could redeem civilization, we could create a cadre of political economists (reuniting this artificially splintered discipline, restoring it to humanism, would be an element of redeeming civilization itself) who would truly analyze and conclude based on reason and sapience, always in the service of the public interest. Such would be the only economists worthy of respect.
But the existing criminal cadre must be written down.
Yes attempter Plato was wrong.
When he designed the Republic, he should have let the poets in, but kept the economists out.
At least tales poets tell are entertaining and offer insights into the human condition, even if they stir the emotions in ways that sometimes run amok.
The tales told by economists are entertaining, but only as slapstick comedy, and even then, only if you’re a real wonk-head.
bowahahahahahah
In the Platonic demonology economists would rank among the Sophists, and according to his claims they too would have no place.
Of course Plato himself was usually more of a sophist than the Sophists themselves, and we’re all too familiar by now with his notorious doctrine of the Pious Lie, a stock in trade of economists and all other types of system hack.
So we’re left to wonder how much sophistry would in practice be excluded from Plato’s perfect society. Perhaps not as much as he claimed.
So it’s hardly surprising he wanted to purge the poets. Throughout history authoritarians have never trusted artists even where they wanted to use them. (And that’s in spite of the fact that artists too have usually happily served tyranny. Just look around in modern times.)
I wonder what kind of art would be necessary for a transformative political movement….
“So it’s hardly surprising he wanted to purge the poets. Throughout history authoritarians have never trusted artists even where they wanted to use them. (And that’s in spite of the fact that artists too have usually happily served tyranny. Just look around in modern times.)
I wonder what kind of art would be necessary for a transformative political movement….”
All forms of human externalization, including art, are in reality trans-formative deceptions created to get needs met so as to sustain the organism making the externalizations. One man’s tyranny is another man’s heroic effort. One man’s psychopath is another man’s average citizen. Perceptive Iraqis, rightly, view scamericans as evil psychopaths.
All organisms have a base amoral cannibalistic ‘psychopathic’ nature. They must prey upon other organisms for sustenance. In order to ‘rise above’ that cannibalistic nature (it is impossible), you must first recognize it, and then create a morality to ‘overcome’, control and regulate it. That morality will be a morality of alliances, where two or more organisms agree to combine their deceptions and turn them on others. In the process they create an agreed upon ‘morality’. The key to maintaining the ‘morality’ of alliances, once made, is trust.
The history of human civilization is a history of the ‘morality’ created to effect alliances and the breakdown of those alliances. The base forces are the powers of perception and deception of each individual organism.
Poets are purged or praised — both deceptions — depending on the perception of the individual creating those deceptions.
Deception is the strongest political force on the planet.
Actually, I would turn Athreya’s argument on its head, and say that academic economists, especially young unestablished ones, are LESS likely to have worthwhile things to say about the economy than well-informed and thoughtful bloggers, because academic economics (including central bank research papers) is made unnecessarily hard by the use of mathematical models which seldom add more rigour or insight than a descriptive, diagrammatic approach (unlike econometrics, which I do think is essential for unravelling and quantifying various influences). The result is that academic literature is so time-consuming to read and write that researchers have to focus on working on a specialised niche in a stylised framework to produce enough journal publications to survive, and their work is too inaccessible to be reviewed by most practitioners. Unfortunately though, even insiders cannot buck this way of working, because mathematics in economics has become a virility test, casting aspersions on those who question its use.
“mathematics in economics has become a virility test”
Has it? Or is it only that the use of certain types of mathematics, and their associated hieroglyphics, are necessary for entrance into The Club. Some economists, like Steve Keen, are quite critical of the lack of mathematical knowledge, or certainly the lack of mathematical breadth, of most economists. For example, he claims that most economists know nothing about differential equations. That’s odd for people who study inherently dynamic phenomena.
“For example, he claims that most economists know nothing about differential equations. That’s odd for people who study inherently dynamic phenomena.”
Keen is very intelligent and I enjoy reading him. That said, requiring economists to understand and employ differential equations into economic models is ludicrous. It is akin to having a Mayan priesthood that understood math and developed an very advanced calander only to see their society crumble due to weather patterns changing for a few decades. The Myan priesthood was expensive to maintain but could at minimum wow the king and peasants with the prediction of an eclipse years in advance of the event…they had a knowledge that was a closely held secret.
In current Western society our economists are expensive to maintain and have been wrong far more than they have been right in their economic predictions…’sub prime has been contained’, ‘we do not anticipate a recession’, ‘green shoots abound’, ‘this TARP thingy will cure all ills’, etc.
Besides, the urging of Keen for economists to have advanced math skills and at the same time be experts in psychology, sociology, anthropology, history, etc, might cause a problem for right brain/left brain dominant economists.
Perhaps the field of economics is too wide and needs more specialization?…but first, it needs a cleansing of those economists that are simply pushing an economic policy for a political agenda in order to maintain their own cushy jobs.
If economics cannot be divorced from politics then listening to economists is a waste of time…hell, they can’t even tell me when the next lunar eclipse will occur.
“requiring economists to understand and employ differential equations into economic models is ludicrous”
Why? If the math is appropriate then it’s appropriate. It’s not even all that esoteric a form of math. Engineers typically learn basic differential equations in their sophomore year.
“It is akin to having a Mayan priesthood …”
No. People who can’t remember a single equation from high school physics still know something about neutron stars and novas. The problem with the Mayan priesthood is that they kept their knowledge a secret from outsiders, not that it required some specialized study to get into the nitty gritty details. I don’t know how to calculate the date of the next eclipse, but I could find out online or at the library.
“[the Mayan priesthood] understood math and developed an very advanced calander only to see their society crumble due to weather patterns changing for a few decades.”
No one profession can save us from all possible disasters.
“The Mayan priesthood was expensive to maintain …”
But modern economists aren’t. The problem is that they make political/ideological statements that impoverish many people, not that the training or compensation of economists is so exorbitant.
“In current Western society our economists are expensive to maintain and have been wrong far more than they have been right in their economic predictions …”
The best rule for non-experts to follow when trying to decide which experts to believe is to go with the winners. Dean Baker, for example, called the housing bubble in 2002.
“Perhaps the field of economics is too wide and needs more specialization?”
It already is specialized. There’s nothing new about the need for specialization or inter-disciplinary approaches in many areas.
“but first, it needs a cleansing of those economists that are simply pushing an economic policy for a political agenda in order to maintain their own cushy jobs.”
More than agreed. Ridiculing anyone who takes them seriously seems like a good start.
Mayan numerical notation was a complete mess. Base-60 stuff, and it got worse from there.
Mathematics doesn’t calculate human emotions.
Psychologists use math all the time to describe emotional reactions. Same with behavioral economists.
I have seen differential equations applied in economics – in discussions of debt dynamics for example. For me, the key question is what is the purpose of the mathematics. If the maths provides a good description of the system under analysis, which can be parameterised and used to make predictions, as differential equations might be used in ballistics, for example, good. If it is being used to represent some notional economic tendency such as a utility function, for the sake of describing that behaviour mathematically in explaining how economies work, without attempting to attach realistic values to the parameters, bad. Much of the progression in economics from school to graduate level is largely about applying increasingly sophisticated mathematical techniques to essentially the same ideas about how the economy works.
If I am not mistaken, the first quote is by Bertrand Russell, not Albert Einstein.
While I am general agreement with the tone of the piece, I think it is obvious that if economics is a science at all, it is a social science and to be gathered within the penumbra of sociology, anthropology, and social psychology, among others. Moreover, as with certain areas of sociology, ethical considerations, having to do primarily with issues of economic policy, need to be included, and which encompasses more that simply ‘moral hazard’.. It is not, therefore, far-fetched, to conclude that the ‘science’ of economics, “when grown up”, would be an interdisciplinary enterprise.
As for physics as a model, the mathematics underlying this perspective, except for a small area, is non-explanatory as it fails to include what Kant referred to as the ‘knowing subject’. Soros tries to do this albeit a little unsatisfactorily (but that is not to denigrate his attempt).
As for the picture of science described, it is seriously simplified, though this may have been felt to be necessary in the context. Theoretical tests are not quite as straightforward as the author says. For example, an experimental, or other, test of a scientific theory must take account of the Quine-Duhem problem, where in any given test, the hypothesis can be saved by locating an auxiliary culprit, such as the experimental conditions.
These caveats do not detract from a general conclusion one can take away from Alford’s argument, that economics is highly ideological in character and its ties with its evidential base sometimes quite tenuous. Even this conclusion must be qualified a little – the field of economics has not yet reached a stage where there is an overall consensus about an overarching framework of interpretation as is found in standard physics. It still consists of schools, as in areas of psychology. One problem with economics is that the field appears to be in denial about this.
Agree with all points, particularly:
Environmental studies curricula have been interdisciplinary for at least 30 years.
Now if the Swedish Supreme Court were to rule, as the US Supreme Court has recently ruled, that corporations are “persons” having the same rights as human beings, then the Nobel Prize committees for all of the hard sciences, from physics to chemistry to medicine, will probably no longer limit the number of Nobel science winners to three per prize per year, but expand it to an unlimited number of winners as long as they meet the legal definition of a corporation. And as scientific experiments in the hard sciences continue to push the limits of technology to the point where individual physicists, chemist, and physicians can no longer afford to conduct their experiments by themselves, even with significant financial help from fairly well-funded universities, it will soon be the case that only very wealthy donors in the form of corporations will have the necessary funds to conduct the necessary experiments enabling them to win any type of Nobel Prize in the hard sciences. In fact, I predict that in the not-so distant future, corporate research centers will decide which theorists have developed the most viable theories in the hard sciences, be it in physics, chemistry and medicine, and purchase the rights to use their theories and then fund the experiments in hopes of confirming their truth-worthiness. In short, I predict that an arms race will occur in the race to win Nobel prizes in the hard sciences. And if my prediction proves to be true, then I should be awarded the Nobel prize in economics.;~)
But because economics is so soft in terms of adhering to the scientific method, expensive technology isn’t needed to conduct experiments to either confirm or deny the truth-worthiness of economic theories. A laptop computer, containing relatively up-to-date software in statistical analysis, is about all the technology that’s needed to accomplish this. This is why, in my view, economics is the closest thing to being political science without actually being political science, which is the softest of the soft sciences. This is what makes me theorize that there are really only two kinds of economists, as it is for political scientists: ones that fudge the numbers for the rich, and others that fudge them for the rest of us. So if I don’t get the Nobel prize in economics for predicting that corporations will soon be awarded Nobel prizes in the hard sciences, I should at least get a Nobel prize in economics for theorizing the economics behind economics.;~)
You’ve got my vote.
You have my vote also.
While I agree with the general drift of your argument, I have a few quibbles.
First, preconceptions play a far larger part in hard science than you have made out. Without Einstein’s General Relativity, observations of light from distant stars being “bent” by the sun’s gravity would have been written off as equipment faults. With it, the same observations became confirmations. Secondly, scientific theories have commonly — routinely — been “rescued” from contradictory experimental evidence by adding auxiliary assumptions. Think of Aristotelian epicycles, or “dark mattter/dark energy” in current cosmology, or the plethora of sub-atomic particles added piecemeal to shore up “particle physics.”
One couldn’t really blame economists for doing the same, if they were actually “doing science.”
Second, you’re blurring the distinction between economics-the-research-enterprise and economics-policy-advice — the “positive” and “normative” activities, as they are generally called. The fact that the “original post”-er was doing the same, and nearly everyone else does too, doesn’t alter the fact that it is a bad idea. As I understand matters, many “positive” economists could see the crash coming; psychology and sociology explain why advisers ignored them.
Third, medical research is a bad model for positive economics. Economists study the behaviour of people in groups. There are several rigorous disciplines that also do this: psychology, sociology, geography, history, anthropology. Economists need to accept that they have a lot to learn from these disciplines.
(In return, sociology could use some mathematical help. But, in general, economists don’t know enough (kinds of) mathematics, and many don’t seem to understand the mathematics that they (over)use — they give a strong impression of having operational knowledge but no understanding.)
Economists have been accused of practising a cargo cult rather than science. They produce graphs and perform statistical tests, et cetera — everything has the appearance of science, but there’s no substance to it. The “original post’s” argument is: we were chosen as acolytes; we have remained long in the cloister and passed the tests for priesthood; we pray mightily and perform the rituals. It’s not even bad economics: it’s no economics at all.
I think that people keep missing that this is faith based economics that aligns itself with the faith based religions.
Trust us and have faith because we are the chosen is always BS.
Taleb’s comment was that economics was religion without the aesthetics.
Since Alford used the field of medicine as the most logical comparison to the field of economics I believe it is fair to weigh the good and ill the two disciplines have wrought on society. I do not use the field of earthquake prediction because it is an infantile sience compared to economics and medicine.
I frame the question this way: Do the benefits of economic policy applied to the economy of a society outweigh the harm caused by economic policy applied to the economy of a society? By ‘society’ I include every member of the society, not only the rentier class.
A PHD in economics or history is not necessary to answer the question.
The post cited Max Planck’s famous line that “science advances funeral by funeral”, but economics may be worse than that. Sometimes economics regresses funeral by funeral. For example, the watered down and forced into an unnatural straight jacket version of Keynesianism that’s often used lacks many of Keynes’ important insights. “Keynes without the uncertainty is like Hamlet without the prince”.
Historically economists where philosophers who spouted their BELIEFS of how the economy worked, the addition of mathematics was a fairly recent event. Unfortunately most economists only attempt to use mathematics to prove their beliefs and fail to realize that the real world is not anything like their beliefs.
Overall an excellent post but I do have one quibble. While stability concerns should certainly be taken into account by the Fed, I don’t think that inflation targeting was the biggest problem during the “Great Moderation”. Rather it was using CPI as the definition of inflation. What about asset inflation?
Prior to the early 80’s the purchase price of a home was included in the CPI, but they switched to strictly using rent as a proxy for purchase price. That may have been at least partly political, as IIRC the cost of buying a house was high then due to high interest rates. In all fairness though rent as a proxy has historically been a good measure. The problem was that when the purchase-price/rent-price ratio greatly increased in the 00’s (itself a sign of a bubble) the Fed could claim that inflation was low when in fact, and as measured by the old system that used purchase price directly, it was quite high.
Not that that exonerates the Fed in any way. They have plenty of people who know how CPI is measured, and what the limits of those measurements are, but the CPI gave them political/intellectual cover.
Well said. The corruption of the basic statistics quoted to the general public, CPI and unemployment rate most prominently, is worthy of a minor banana republic.
Deceptonomics …
This is a deceptive and assumptive title;
“Alford: What Kind of Science Should Economics Be When It Grows Up?”
It would be more correct and informative if it read;
“Should Economics Even Be Considered A Science?”
Then you could get to the nub of it and decide to place economics — or not place it at all — on the badly needed, ‘Relative Hardness Of Science Scale’.
The relative ‘hardness’ of a ‘science’ is proportional to how easily it is co-opted for personal gain, and, the value of co-opting it. The ease of co-option is a function of how many concrete vs abstract values the discipline being rated utilizes (real quantifiable measurable shit as opposed to bullshit — the smoke and mirrors “art” component) and how cleanly those concrete values are separated from the ‘theory’ of the behavior of the abstract values in practice.
Given that in ‘economics’ the units of value are predominantly limitless ever shifting arbitrary units and many non existent bullshit decoy abstractions that derive their meaning from propaganda, e.g., supply, demand, free markets, capitalism, private property, cost of living, human capital, rule of law, etc., and the theory of their use is never cleanly separated from the abstractions themselves (and in fact intentionally intermixed with them so as to be purposefully deceptive), I would not even give ‘economics’ a place on the ‘Relative Hardness Of Science Scale’.
In fact I would give it a name change, simply calling it Deceptonomics, and put it on the top of the Relative Ponzi Rating Scale.
Then we could get focused on the real work of kicking all of these deceptofatzi thieving gangster rich bastards in the balls.
Deception is the strongest political force on the planet.
‘Given that in ‘economics’ the units of value are predominantly limitless ever shifting arbitrary units …’
Fiat currencies, in other words. As I’ve said here before, imagine if the units of mass, distance and time were constantly, arbitrarily shifting due to ‘inflation.’ Hard science would collapse.
No truth can be discerned in a world of politicized money illusion.
The study of Economics is a missnomer. It should be the study of political economy. It’s logical place is within the family of anthropological studies.
As to who can do it? Anyone with average intelligence, what ever that means.
Is this question worthy of consideration? Yes and no. We should be concerned that there is afoot this motivation to style the study of political economy as a science. That motivation is a cause undertaken to establish veracity and justification for tenure.
After all, How can the Phd economists extract rents for their opinions and forecasts. In the realm of forecasting, it is true that some economists fare well for moderate periods of time; but then comes the inevitable forecasting flop and their guesses are revealed as such.
And as to why we should not give consideration to this question; what ever we might conclude, it will be disregarded and our lack of concern will go with us to our grave. Planck has it exactly right. Moreover there is much beauty to observed and experienced in the exquisite fact of our existence.
“The study of Economics is a missnomer. It should be the study of political economy. It’s logical place is within the family of anthropological studies. ”
That’s exactly how I feel. An economoy is a byproduct of society and culture not a force of nature. There is no such thing as an economy outside of humanity. You can use mathematics to better your understanding of economics but you will never be able to achieve the formal rigor and stability of something like physics because of the human component.
Well said.
Seconded
Thirded.
An economy is not a machine. It’s a ecology of living, breathing, “emotional” people. How does a bureaucrat make the rainforest “better”? Where do you began, or do you simply leave the rainforest alone? That is what Richard Maybury said on his YouTube channel. The stimulus is really a toxic asset in itself. Americans don’t need to consume more, or get into more debt. Obama’s toxic stimulus is exacerbating the problem. Trade deficit grew. Imports increased, and exports decreased. In 09, the consumer grew to 71%. The economy is shaped by the legal system, which is unfortunately shaped by politics, and everybody should know how productive politics is by now…
Are you saying that you believe in laissez faire?
Am I a proud Austrian school subscriber? Sure. Austrian school is about the ecology of the economy. The economy is shaped by the legal system which is shaped by politics. A economist would say the problem is debt deflation, but doesn’t point out that debt in itself is the problem. Americans already have a lot of debt. House hold debt. During the peak of the boom savings rate was below zero. When you are broke, you are broke. The answer isn’t more spending. The stimulus is about spending. The trade deficit grew in the month of July close to 50 billion. The economy is made much more dysfunctional because of the legal system, and politics. A central planner can’t plan the economy adequately that takes millions of individuals to shape. Low interest rates, increase money supply = illusion of wealth. Interest rates were too low for too long. Simply check out the historical chart of Federal Funds Rate. Interest rates have been on the downward trend since the 1980’s to nearly zero of what it is today. Abandonment of the gold standard, inflation of paper money saw dramatic increase of interest rates, wild, and erratic as well. But after that interest rates were in the downward trend. US dollar has been on the downward trend as well for the past 30 years. What regulations do you need? THOU SHALL NOT STEAL. The ten commandments pretty much covered everything in 10 sentences regarding civilized law. The economy is shaped by the legal system, and the chickens have come home to roost. US economy has been receiving stimulus for a very long time. George Bush cut taxes, deficit spending, low interest rates to fight the NASDAQ bubble, going to war, expanding Medicare funded by debt, and IOUs. Clinton cut taxes on home sales. Fact is, the legal system has an impact on decisions on market players.
“A economist would say the problem is debt deflation, but doesn’t point out that debt in itself is the problem.”
Minsky was no Austrian.
“When you are broke, you are broke.”
Exactly who or what is “you”?
“Abandonment of the gold standard”
If you think gold has such a wonderfully stabilizing effect on banks and the economy, please explain say, the Panic of 1837 or the Wildcat Banking Era. Bonus points for others, like the Panic of 1907.
“What regulations do you need? THOU SHALL NOT STEAL.”
Define “steal”. For example, what’s the threshold for fraud? Everything is simple until you get down to the details in practice. See, for example, the Babylonian Talmud.
You question has already been answered. THOU SHALL NOT STEAL. Fractional reserve banking is legalized theft, and embezzlement. Do you understand what stealing is?
Under the gold standard, the USA was the largest creditor nation, and much more of a export economy. Under fake money (fiat currency), and floating exchange rates USA is the largest debtor nation, and the largest consumer economy that goes into debt to consume the goods of others. Interest rates were more stable, and lower under the gold standard. Not all economic disasters are attributed to Federal Reserve. The government can create booms, and bust with it’s interventions as well with regulations, tax code, and subsidies. Government is just a bureaucracy that gets fatter, and slower as time passes by because politicians want to get re-elected. The economy is highly dysfunctional and if you believe the government is the oracle of truth, you need to examine more. In World War 2, Americans sacrificed for the entire economy. The war was “paid” for by war bonds. So Americans didn’t have money to spend, rationing of consumer goods for the war effort. They were lean, and mean. This time around, Americans are in debt owing money to others. So it’s not just the government that is in debt, the american household is in debt as well. Spending doesn’t create factories, and other capital intensive productivity. Spending is spending. If you want to build a car, you need to save money first to buy the necessary equipment, and space, then hire employees to mass produce cars. Simply extracting money from a hat for the “multiplier effect” doesn’t produce products like it’s magic.
I like the idea of using medicine as the research role model, but if we do that what we find is that economics is stuck in the era of faith healing, bleeding and hucksters of cure-all potions like Panacea.
Do you really think that most economists are that advanced or ethical? Those approaches may have killed the patients, but generally didn’t kill the people around them. Many contemporary economists are more like people who’ve learned to heal by sucking the disease from the bodies of the politically influential and then injecting the disease into others. Imagine a shaman who claimed that killing the rank-and-file to save the chief was a necessary and unavoidable measure, which ultimately benefited everyone.
Don’t doctors make some kind of an oath to “do no harm?”
Too bad it’s not within the code of ethics of economists to do the same.
Richard Alford’s analogy between economics and medicine is a good one. Read some books on nutrition written by physicians: some claim that fat and animal protein are bad, carbs are good. Others claim exactly the opposite. Despite the high-tech capability to do gene-splicing, medicine still can’t answer basic questions such as: What proportions of fat, protein and carbohydrates constitute a healthy diet? What explains ‘diseases of affluence’? Why is there an obesity epidemic? And so forth.
Likewise, economists as a group have never forecasted a recession. The money multiplier theory — universally taught and believed, as far as I know — is questioned by Ed Harrison in a link posted above. Economics cannot bear comparison to astrophysics, because economics remains mired in a pre-Copernican cosmos, unsure whether we’re in a geocentric or heliocentric solar system.
Besides the absence of basic understanding, economics is largely static and linear. Cyclicality is omnipresent, but economics lacks all but the simplest dynamic models — again suffering in comparison to astrophysics, which can at least predict where planets will be.
Nothing does more to undermine the reputation of economics than putting a clown posse of PhD Econs in charge of fecklessly day-trading the economy at the Federal Reserve, on behalf of a plutocratic bankster cartel. Having whored themselves out, economists can hardly object to the jeers and brickbats of a disgruntled public. Propitiate the gods, say I: hurl Greenspan into a volcano, and perhaps your errant profession will be spared a fiery doom.
Worth repeating …
“Nothing does more to undermine the reputation of economics than putting a clown posse of PhD Econs in charge of fecklessly day-trading the economy at the Federal Reserve, on behalf of a plutocratic bankster cartel. Having whored themselves out, economists can hardly object to the jeers and brickbats of a disgruntled public. Propitiate the gods, say I: hurl Greenspan into a volcano, and perhaps your errant profession will be spared a fiery doom.”
Deception is the strongest political force on the planet.
Economists have always frustrated me because they pride themselves on objective models but obviously come from different “schools” of thought that color their views. Just acknowledge that economics is subjective already! It’s not that frightening of a word.
As a sociologist I think we have a better grasp on the intersection between personal troubles and social issues. We take the lived, human experiences within macroeconomic forces as the REAL economic indicator. We also consider ourselves activists who envision less oppressive social structures. Sociologists have had science envy too, but most get over it when they stare at the data, which always starkly reveals the consequences of perpetuating economic injustice. Do economists even read C. Wright Mills? Do they use their complex models to better the human race?
An economist’s assertion that he’s a ‘scientist’ is akin to the similar claims once made by alchemists and astrologers…
They use lots of charts and formulas and made great successes out of themselves by understanding that their most important task was pleasing their patrons.
This doesn’t mean that there aren’t things in economics to be studied… nor that there aren’t fundamentals upon which to base opinions and proposals… [like the ignored effects of altruism’s boundaries in scaled human decision networks and the misplaced ‘faith’ that ‘exchange tokens’ (currencies and their proxies) can sufficiently represent social energy*]
*Social energy is the net sum of individual and collective decisions within a social body. A ‘decision’ is an idea + an action.
Credit Creation and the Building of Sustainable Economic Ecologies
http://culturalengineer.blogspot.com/2010/02/credit-creation-and-building-of.html
Decision Technologies: Currencies and the Social Contract
http://culturalengineer.blogspot.com/2010/07/decision-technologies-currencies-and.html
Ayn Rand & Alan Greenspan: The Altruism Fly in the Objectivist Ointment
http://culturalengineer.blogspot.com/2009/10/ayn-rand-alan-greenspan-altruism-fly-in.html
Building a sustainable global ‘social metabolism’ … for a species now with a biomass hundreds of times larger than any previous land animal…
Requires DIFFERENT models and assumptions than those which demand continuously increasing consumption and intense resource and energy utilization.
Moreover the global specialization through ‘free trade’ model inhibits the sort of resiliency offered by multiple ‘metablolisms’ each with autonomous survivability.
Hence, in evolutionary terms… the model for the global organism should more closely resemble the early move from unicellular life to multi-cellular organisms.
There is an intermediate stage of ‘partially’ inter-dependent cellular collections similar to a sponge. (where each cell can, if necessary function independently).
This suggest the need for additional mechanisms for ‘currency creation’ and banking in general which is the underlying ‘scheme’ behind the Individually-controlled/Commons-dedicated Account concept, btw.
I could be wrong. I’m no scientist. But some fresh thinking, one would hope, could have some value. It’s time to try some things…
Complaining is cheap and requires little sacrifice. Building solutions requires much more. I speak from my own experience.
What is perhaps most frightening is how ideologies in both politics and economics (which are essentially claims to ‘certitude’) are giving rational analysis a bad name.
What’s left is then superstition and appeals to mysticism. This often leads to demagoguery.
Rational skepticism seeks solutions with an understanding that none is certain… and none may even be possible… but we keep trying nonetheless.
Be all that as it may, we have decisions to make. Should we ignore the economists in deciding on more stimulus?
Well, we could always ignore the economists who are opposed and cite those economists who are in favor. Or the reverse.
I’m inclined to think that stimulating a hollowed out post-industrial economy is not like stimulating an industrial economy, myself, but that might mean bringing in messy historical contexts and that would probably upset the unsubtle overly mechanical claims of both camps.
That’s in addition to the valid claim that there are no economists, only political economists.
We need jobs -tens of millions of jobs urgently -ASAP.
Reducing the issue of job creation to a one word meme called ‘stimulus’ is not helpful. The problem is that, should another $Trillion dollars be printed, those currently in power presiding over their jobs deficit low-income banquet are not creative thinkers; au contraire, they are psychopathic bankster-led slobs, criminals and gangsters.
It is the fundamental responsibility of this administration; indeed, this entire society to mobilize America’s resources for the creation of tens of millions jobs ASAP. It is criminal of every one of us to continue to leave an entire generation including those now in their 30s, 40s and 50s to the economic horrors currently in place to worsen at the hands of barbaric American traitors and power grabbers as we have permitted these last 30 years.
Honestly, if you don’t have a “stimulus effect,” ie., the capacity to jump-start things that are potentially productive and which will become self sustaining rather than forever dependent on the beneficence of the government, then you may as well acknowledge that conservatives and teabaggers everywhere are right– that you are merely permanently growing the welfare state.
So, until this creativity you cite appears, I am all for cutting the welfare checks, but without the government controlled work farms which merely mask the larger truth.
Keynesianism is broke, but the “Keynesian-by-day” and “neoliberal portfolio watcher-by-night” economists have yet to fess up.
Why is that?
Meanwhile, YOU go take that minimum wage job down on the farm.
“A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die and a new generation grows up that is familiar with it.” I read once about a psychologist who studied Planck’s hypothesis that old scientists are curmudgeonly nay-sayers who are never persuaded and simply die off. He found it to be untrue. So there you are: hypothesis, observation, falsification. Clearly psychology is a science of a sort.
Adam Smith started as a philosopher, his first best seller was a philosophy book. Economics is still a philosophy, which like Confucius is a “near religion”.
For comparison purposes Economics is to science, what astrology is to astrophysics.
Quote myself from an earlier post on the subject:
“To be clear, my criticism is not directed at every INDIVIDUAL economist, rather it is directed at those who either support or remain silent while others provide highly complex technical reasons for barbarous behavior. Much of economics today isn’t about truth or near truth, it’s about
justifying the rape of less fortunate and the planet itself. Religion once filled this role, but tiring of the indefensible, they’ve turned the dirty work over to “Economics”.
Along these lines I have been banned from commenting on Mark Thoma’s site because I ridiculed a quoted economist, one David Warsh who supported Alvin Roth’s supposition that economists predictions and designs were as reliable as an engineers In the banned remark, I said, “The economics profession would need to go through the equivalent of a Copernican revolution before this would be true”. Apparently, not only are the high priests of this religion often wrong, they are also pretty thin skinned.”
I agree that economists, for the most part, provide cover for the rich and their corporate front. The ones that continue to push faith based economic policy are traitors to all but a few of their species. Their insistence that theirs is a hard science just studying what is rather than the changeable existing social structure is the only cover for their faith based “theories”.
There is an ethical problem with economics, but it also affects scientists as well. If you are a scientist, falsifying data and lying are career ending moves. Lying or falsifying data is a career ending move for a scientist whether he is publicly or privately employed. The ethical standards are higher because scientists are trying to ascertain truths or come to a deeper understanding of reality. Contrast that with economists. Private sector economists spout cheerful forecasts publicly despite evidence to the contrary because their jobs depend upon it. The incentive to be truthful and honest is overridden by the self-interested financial incentive. There is no penalty for lying or promoting conventional wisdom that is really conventional foolishness.
That said, there are economists who have made accurate predictions. Dean Baker is one of them. Steve Keens is another. Baker analyzed historical tends accurately to make his prediction. Keens makes testable models using commercial modeling software. The problem is that these men are in the minority when they should be in the majority. Economists should be emulating the methods of those men who got it right, but instead they are ignoring them at best and marginalizing them at worst (see link below). Since there is no penalty for being wrong, Summers, Bernanke, and Greenspan were all promoted or kept their jobs after failures at current or previous positions for example, then there is no incentive to reform the field.
Link:
http://www.nea.org/assets/docs/HE/TA09EconomistGalbraith.pdf
It seems there are two kinds of economics. Historical (the past) and – uh – hmmm – another one (the future).
The other one is just opinion. And, like the joke goes: options are like assholes, everybody has one.
If economics is a science, I’m god.
I have written an extensive critique of Athreaya’s ‘scientist’ approach to economics here:
http://www.acting-man.com/?p=4234
Economics is a social science – the use of mathematics in it strikes me as entirely superfluous (and i say this as someone who has received the requisite training). The tautologies expressed in econometric equations really are not saying anything at all. Hayek referred to the tendency toward employing econometric methodologies as the ‘pretence of knowledge’ – he rightly feared that it would be misused for attempts at central economic planning, which indeed has happened, and continues to happen. ‘Economic data’ – this is to say, economic history – are not a substitute for a correct economic theory, which by its very nature is a theory of human action. It is not a natural science like physics, and the attempts by economists to make their science look more like physics have been a complete waste of time and talent. The practical failure of the vast bulk of mainstream economists to foresee the crisis should really count for something. It is after all proof positive of the failure of the ‘scientist’ approach to economics.
Athreya’s paper meanwhile is a failed attempt at controlling social debate. It is very gratifying that it has backfired so badly. One must of course consider why this attempt is being made. In a truly free market, there would be very little need for the profession of ‘macro-economist’. Only the best and brightest – people who really advance economics as a science – could hope to receive financing from the private sector. Today’s macro-economists are mostly employed by the State – and their foremost concern is not to bite the hand that feeds them. Thus the widespread support for economic interventionism, in spite of its long history of failure.
Economist should “first do no harm”!
Economics is not a science. It is a haven for charlatans, fraudsters, and above all propagandists. As attempter pointed out in the first comment of this thread, the business of economics is to provide a rationale for looting. And no, this does not preclude the possibility that there are a few honest economists out there.
The poster seems to ignore that some economists and many non-economists, including this one, did predict the housing bubble, the recession, the spike in oil prices, and the meltdown. Nor was it that hard and that, despite the fact, many of us do not have access to or experience with the inner workings of the markets. Just being aware that where the math or logic makes no sense, there is a problem was sufficient.
I am not familiar with Goodhart’s law but d’uh, the nexus of politics and economics is critical to an understanding of how markets function. I mean does anyone outside the charlatans really think that markets function autonomously?
Also the poster seems to buy into the fallacy that GDP is the “objective” measure for what we should be looking at since he couches all of his arguments in terms of it. Such a focus misses the paper economy entirely, as well as the systemic problems of looting, political and economic corruption, fraud, and the maldistribution of wealth. You take these factors into account and what happened and what will happen become a lot clearer.
“…d’uh, the nexus of politics and economics is critical to an understanding of how markets function. I mean does anyone outside the charlatans really think that markets function autonomously?”
Economists seem analogous to the emperor’s tailors—expert at counting, measuring, weighing, and assaying golden eggs for those who hoard them, yet they haven’t a clue about the physiology or health of the goose that lays them. And so their hermetic math and logic assures them that strangling the goose will produce more eggs, and so it does for a while, but gutting it will produce a veritable windfall.
And this is what they have wrought.
Interesting Mr. Alford reaches for Medicine as a new model for Economics. In The Fragile Species Lewis Thomas writes about medical nihilism in the 19th century. That is, someone finally did an outcomes study on the medical practice of the time (1840’s) and discovered that more patients recovered without rather than with a doctor’s care. That is, the mortality rate was far greater from the attentions of the medical science of the day than by letting nature take its course. So, for the next fifty years or so, most people with illness were made comfortable and allowed to recover.
In a later chapter, Lewis also notes that the undoubted improvement in health in the western world has nothing to do with the expansion of medical knowledge. By and large, it’s a matter of plumbers and engineers keeping the water supply clean and getting sufficient food from the farms to the people. So while the glass bead game rolls along, a handful of practical, prosaic measures keep things going. Similarly, fair trade, protectionism, estate taxes, graduated income taxes, public works, socialized medicine, etc. are abhorrent to theory, but have a measurably positive effect on the economy and lives of the people.
Economics comes from a theory of society, not from the laws of the universe. We take it back or it takes us.
Actually economics has gradually become a lot more like physics than it used to be. Not because economics has become more of an exact science — but because physics has become less of one.
Classical physics was an exact science, but once its scope was broadened (both into the macro and the micro dimension) structural uncertainty was introduced as a formal quantity.
At the forefront of research, physics today is in a rather sad state with very little consensus, competing theories and schools of thought, and almost religious wars. And, in some respects, some mainstream physical theories have entered the realm of the occult (check the Wikipedia article on “Quantum mind–body problem”).
Which is to say — the “hardness” of a science really depends on the complexity of its subject matter. The Newtonian world was simple (within the range of its variables that were observable in the everyday world) but when it started extending that domain it ran into problems.
It’s not so much what sort of science economics should/will become, but how complex, really, is its subject matter. (Not only structurally complex, but also behaviorally). Because reductionism fails to offer effective tools for very complex systems, and it may be necessary, at some point, to accept that some behaviors cannot be modeled, predicted, or channeled to a specific end.
If economists were to ask my advice, I’d advise them to constrain their theorizing by the principles of reasoning. Today, this rarely happens. Let me explain.
A scientific model (aka scientific theory) is a procedure for making inferences. Each time an inference is made, there are many alternatives for being made. Which of these inferences is correct? The model builder must decide!
Logic is the science of the principles by which the one correct inference can be identified. These principles are called “the principles of reasoning.”
In the deductive branch of logic which was left to us by Aristotle, an inference is correct if it conforms to the form called “modus ponens” or the form called “modus tollens.” Aristotle’s work left identity of the principles of reasoning for logic as a whole as an unsolved problem. The problem of solving this problem became known as the “problem of induction” after “induction,” the process by which one generalizes.
The problem of induction remained unsolved for 24 centuries. In this period, model builders coped by employing intuitive rules of thumb called “heuristics” in deciding which among the inferences that were candidates for being made by a model was the one correct inference. However, in each circumstance in which a particular heuristic identified an inference as the one correct inference, a different heuristic identified a difference inference as the one correct inference. In this way, the method of heuristics violated the law of non-contradiction. Non-contradiction was the cardinal principle of logic.
Today, we know that an inference possess a unique measure. This measure is called the “entropy” of the inference. Its entropy is the missing information in the inference for a deductive conclusion.
Over a period of about 4 centuries, it was realized that existence and uniqueness of the measure of an inference had significance for the problem of induction. The significance was that this problem could be solved by optmization. In particular, that inference was correct whose conditional entropy was minimized or whose entropy was maximized under constraints expressing the available information. In short, for the whole of logic the principles of reasoning were “entropy minimax.”
By the year 1975, a procedure had been developed and reduced to practice for the construction of a model under entropy minimax; the resulting models excelled. Thirty five years later, economists continue to employ the method of heuristics. Academia continues to turn out PhD-level economists who know of no logical method for construction of a model from economic data.
ECONomics or homo religiosus.