A dissertation committee member who will remain nameless once told me, “Mike, in the end, it all comes down to those stupid fucking natural history facts.” This might have been the only worthwhile thing said committee member ever told me. More about this in a bit.
Anyway, I bring this up because I think much of the commentary on Paul Krugman’s recent NY Times piece about the problems with the current state of macroeconomics is missing the real problem. The problem wasn’t with the theory.
Well, alright, the theory was bad. But the real problem is that there was no de facto mechanism to overturn or reject the theory using data. Since the theory was internally consistent and intellectual popular, it would take, I dunno, something on the order of a global economic meltdown to show its weaknesses (think of this as the Mother of All Kuhnian Paradigm Shifts). That, to me, is the real problem.
So, onto those stupid natural history facts. A physicist friend, whose wife was a biologist, once told me, “I could never do biology. You [biologists] spend all your time focusing on the noise.” What he meant was that all of the genetic and environmental variation is not something to be eliminated*, but is, instead, the object of study. To a considerable extent, this is shared by economics. Krugman:
My point right now is that because the basic methods are similar if not identical, economics and evolutionary theory are surprisingly similar. It is often asserted that economic theory draws its inspiration from physics, and that it should become more like biology…. try to explain a simple economic concept, like supply and demand, to a physicist. You will discover that our whole style of thinking, of building up aggregative stories from individual decisions, is not at all the way they think.
As I discussed, I think Krugman ignores the volumes of data that have revolutionized biology, but his observation of modes of thought is important. It’s not that mathematical models aren’t important–hell, I’ve published a modeling paper**–but, at least, in biology, their greatest utility is when seemingly coherent models fail. That is, when confronted with those stupid fucking natural history facts, the theory lacks explanatory power and need revision or rejection (or one can do what some economists do, which is conclude that the data are wrong). Failure of models can reveal something about how the real world works.
The other point (while I’m here) is that, by themselves, models aren’t taken too seriously. What I mean is that they are typically good at generating hypotheses that drive experimental research programs into particular systems. But biologists aren’t only trying to derive general principles, they’re also trying to figure out how organism- or system-specific processes work.
To use a very macabre example, we are interested in a how a gun fires a bullet–and in a controlled environment, we can estimate very precisely how that bullet will travel. But, a biologist is also faced with the task of trying to figure out what happened on the grassy knoll in Dallas. The study of ballistics is necessary, but not sufficient. At the risk of completely tasteless overkill, does anyone view September 11th primarily (or even entirely) as a structural engineering problem? Those stupid natural history facts matter too. Understanding and predicting particular events also requires a knowledge of phenomena that can not be generalized and reduced to simple general theory.
It would appear to me that economics should also be interested in these types of questions. Why do economic crises occur, and why at specific times? Yes, structural instabilities matter, but why didn’t the meltdown happen three months earlier or later? After all, Big Shitpile was shitty for quite a while. Households were overextended on credit for years. So why didn’t the collapse happen in 2007?
So to sum up these meanderings, it seems the challenge facing economics isn’t a matter of good or bad theory, but what Barry Eichengreen concludes:
The late twentieth century was the heyday of deductive economics. Talented and facile theorists set the intellectual agenda. Their very facility enabled them to build models with virtually any implication, which meant that policy makers could pick and choose at their convenience. Theory turned out to be too malleable, in other words, to provide reliable guidance for policy.
In contrast, the twenty-first century will be the age of inductive economics, when empiricists hold sway and advice is grounded in concrete observation of markets and their inhabitants. Work in economics, including the abstract model building in which theorists engage, will be guided more powerfully by this real-world observation. It is about time.
Should this reassure us that we can avoid another crisis? Alas, there is no such certainty. The only way of being certain that one will not fall down the stairs is to not get out of bed. But at least economists, having observed the history of accidents, will no longer recommend removing the handrail.
*Obviously, biologists do attempt to eliminate certain sources of variation in order to make things somewhat more tractable, but there is a widespread understanding that if we’re not careful when doing so, this can lead to spurious results that have little to do with actual biology.
**Although it did have some original data in it too.