The study of economics usually reveals that
the best time to buy anything is last year. ~
Marty Allen
News flash: Economics has been devalued and now is hardly worth anything, at least according to a pedantic pair of university professors, one of philosophy and the other of English and comparative literature, who consider themselves to be philosophers of science (PoSers). Their economics thoughts were published in the august New York Times (actually August 24th) in a provocative article entitled "What is economics good for?" that refuted the value of economics because "the discipline of economics hasn’t helped us improve our predictive abilities." I realize the import of this news is confined to that very narrow sliver of people who care about economics as a means of gaining insights on critical problems facing modern society. But it's my sliver. Thus this blog…
Based on the article, the authors seem
to answer its title's question with, "not much." I strongly disagree.
Because of this alleged failure of economics, the authors state that economics "is
still far from being a science, and may never be." Wow. Perhaps they got
stuck in a 19th century time warp and mistakenly still believe that Say's Law is valid. Talk about wading into personally uncharted waters
without a life-vest of knowledge. I think the authors are completely wet;
they'd be better off sticking to Camus and Cummings.
I have 3 quarrels with the article.
First, the authors fail to distinguish between the 2 important, complementary and
distinct divisions of economics – macroeconomics and microeconomics. In economics,
it is difficult to understand the forest (macroeconomics) without also looking
at the trees (microeconomics). The authors completely disregard microeconomics.
Naughty boys.
Microeconomics examines particular
pieces of the economy – consumers, businesses, and/or specific markets. Micro-oriented
economic policies that are examined and assessed include the minimum wage, rent
control, cap-and-trade environmental rules and subsidies provided to particular
goods like corn, sugar and solar energy. In contrast, macroeconomics examines
the entire economy of a nation (or a State or region). It studies the whole economic
system as well as looks at how macro-oriented policies like federal fiscal and
monetary policies, affect the national economy (GDP).
The authors only talk about their
problems with macroeconomics, which results in a debilitating, narrow vision of
what economics is. Perhaps they have no issues with microeconomics as a science.
Perhaps they just forgot microeconomics because micro's predictive power
actually is quite robust, and wanted to slip it under their rhetorical rug. It
is a glaring omission that does not help their crusade.
Second, the authors state that the
value of any science, be it physics or economics, originates solely from its
ability to accurately predict future events. Precise prediction is certainly
one of several important keystones of a science, but not the only one. Accurate
descriptions of how people and
institutions make choices is a necessary foundation to economic forecasting.
Micro- and macroeconomic theories have evolved to offer commendable records in
explaining and describing the process of how and why economic choices are made.
The authors' perceived value of science is unnecessarily constricted.
Strangely, the authors never define
what they mean by "science." I offer the Merriam-Webster dictionary's
definition: knowledge or a system of knowledge covering general truths or the
operation of general laws especially as obtained and tested through the
scientific method. Using this definition, or really any decent definition of
science you want to pick, economics is a science. It has a long history of
scientific inquiry, commonly thought to have begun formally with Adam Smith's
publication of The Wealth of Nations (1776). Since the late
18th century economics has evolved and refined itself many times
using the scientific method to improve its scope, understanding and
capabilities.
They make another startling declaration,
"None of our models of science [referring to unstated models developed by PoSers]
really fit economics at all." Which apparently is why they dismiss
economics. Why am I not surprised? My response to this is, perhaps you PoSers
shouldn't think of your models as complete
and cast in stone (we economists don't). PoSers instead should modify their
models (like we regularly do as economic scientists) so that they accurately
reflect modern academic and professional reality: that economics and other
social sciences are indeed science-based disciplines. It is not economics that
should be questioned; it is the PoSers' unsuitable models.
Economics is a behavioral science, one that deals with how and why people, firms
and institutions make economic decisions regarding the production, distribution
and consumption of goods and services. As such, it is a thoroughly social,
rather than physical, science.[1]
The behavioral atmosphere that economics (and other social sciences) always
lives in is distinct from physical sciences like physics. Predicting the
movement of planets was not always straightforward, but it is fundamentally less
complicated than predicting, for example, how much a 5% increase in the Federal
Funds (interest) Rate will reduce gross private domestic investment. Why?
Because the change in investment is influenced by decisions made by multiple thousands
of individuals and hundreds of companies and banks that interact in a myriad of
ways in the real-time economy. This complexity does not make economics less
scientific, it makes it more challenging to precisely determine (and forecast)
economic variables of interest. I believe we economists have been very
successful in meeting these challenges.
I would argue that micro- and macroeconomics
proffer a successful record in both describing and predicting market events. Is
this record perfect? Not at all; but it has definitely improved over time,
using the scientific method.
The authors' third lapse is to neglect
and apparently dismiss the improvements that economic theory, models and
practice have continued to achieve. The rise of behavioral economics is a
recent example of how the science of economics has incorporated insights from other
scientific disciplines – in this case psychology and sociology –to strengthen
the understanding of how people make economic and financial decisions.
Similarly, micro- and macroeconomic thinking have evolved and improved over
time as new theories and data become available. And economists haven't had to
rely on impenetrably obscure concepts as Higgs Bosons or 6 "flavors"
of quarks to validate their theories like "true science" physics folks
have. No, economists straightforwardly rely on understandable empirical data,
like employment levels and product prices, to test hypotheses and improve
theory and prediction.
The authors seem to wrongly suggest that
economists rely on static, unchanging theories and are uninterested in
improving them, when they state: "…many economists don’t seem troubled
when they make predictions that go wrong." The authors are completely out
to lunch (which, BTW, is not free). The ivory towers they work in are way too
disjointed from reality.
Economists have frequently engaged in
vociferous, quite public debates about how to improve economic theory and
practice. Economic theory continues to be scientific and fully dynamic. Both
macro- and microeconomics have been strengthened and advanced as a consequence.
Too bad this pair of PoSers cannot fathom it.
[1] In graduate school I took a
class that attempted to overlay Classical Mechanics theory onto economics to improve
economic modeling. While interesting (and fraught by overly-erudite math), it
seemed like a square-peg physical science solution to a round-hole social
science problem.
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