Mike the Mad Biologist

I’ve decided to take a break from hate-mongering. Instead, I want to discuss two interesting posts about the state of economics by Brad DeLong and Tim Duy. Before I get to them, for those who wonder why I discuss this stuff, I find it fascinating that such an important discipline has had such little attention paid to some fundamental philosophical issues, such as whether economics is a ‘hard’ or social science, whereas there are philosophers who focus entirely on the physical sciences (I don’t claim to be one at all, for the record). Philip Mirowski, whom I mentioned in a different context, would argue that the philosophers and historians were purged from economics because they challenged economic orthodoxy. Bad decision, in hindsight.

Anyway, economist Brad DeLong drops this (italics mine):

One of the dirty secrets of economics is that there is no such thing as “economic theory.” There is simply no set of bedrock principles on which one can base calculations that illuminate real-world economic outcomes. We should bear in mind this constraint on economic knowledge as the global drive for fiscal austerity shifts into top gear.

Unlike economists, biologists, for example, know that every cell functions according to instructions for protein synthesis encoded in its DNA. Chemists begin with what the Heisenberg and Pauli principles, plus the three-dimensionality of space, tell us about stable electron configurations. Physicists start with the four fundamental forces of nature.

Economists have none of that. The “economic principles” underpinning their theories are a fraud – not fundamental truths but mere knobs that are twiddled and tuned so that the “right” conclusions come out of the analysis.

The “right” conclusions depend on which of two types of economist you are. One type chooses, for non-economic and non-scientific reasons, a political stance and a set of political allies, and twiddles and tunes his or her assumptions until they yield conclusions that fit their stance and please their allies. The other type takes the carcass of history, throws it into the pot, turns up the heat, and boils it down, hoping that the bones will yield lessons and suggest principles to guide our civilization’s voters, bureaucrats, and politicians as they slouch toward utopia.

Not surprisingly, I believe that only the second kind of economist has anything useful to say. So what lessons does history have to teach us about our current global economic predicament?

The second kind of economist uses what I’ve called those stupid fucking natural history facts. That economist also understands the limits of deductive theory, namely, it can only tell us how the world should work given a set of assumptions. Ultimately, theory needs to challenged with data. Tim Duy, discussing an post from 2006 by Elizabeth Warren (yes, that Elizabeth Warren) “What is a Fact?“, writes:

Anyway, this is what Warren’s post is about-how people think that logical inferences from unrealistic assumptions somehow produce “facts.” And it isn’t just first-year law students. I’m reminded of Frank Easterbrook of the Seventh Circuit asserting that sophisticated investors ensure that prices are set rationally, protecting unsophisticated investors-on the basis of a single, purely theoretical law review article (those in the legal world will appreciate the italics).

This is, in a nutshell, why the field of economics has been able to do so much damage in just a few decades-at the same time that economic thinking itself has become much richer (think Akerlof, Stiglitz, Kahneman and Tversky, Ariely, Levitt-Wolfers-Ayres-Donohue, Duflo, etc.) and probably better as well.

Without a reality check, you wind up in the position of having to argue ridiculous propositions:

Can anyone seriously claim that we’ve lost 6.7 million jobs because fewer Americans want to work? But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.

Deduction alone, without any checks, is a weird way to think, albeit politically convenient. It has the advantage of being ‘clean’, internally consistent (how could it not be?), and supposedly rigorous (especially if you hook up lots of math to it). It’s not a very good way to organize a society, however.

Comments

#1 Mike
August 2, 2010

I just want to quibble with this one quote.

“if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.”

I thought it was established that recessions, especially if small, are desirable. During a bubble in the run up to a recession, capital and labor are allocated to things that are less than optimal. To reallocate that labor and capital to more productive things, production must decline temporarily. That decrease in production is a recession.

Take the current Great Recession. I thought it was shared by many that the US had devoted too much capital, labor, and government subsidies into producing and purchasing housing.
#2 bob koepp
August 2, 2010

One gets the impression from your recent posts that you think using models (deductive structures) that incorporate the assumption that humans act so as to maximize their perceived self-interest (i.e., selfishly) is in some sense an endorsement of selfishness. I think that conflates idealizations and ideals.

Some economists of my acquaintance do use models where homo-economicus is reduced to “rational self-interest.” But none of those economists think that individuals _should_ behave “perfectly selfishly.” So what’s going on? Well, according to the models, individuals behave perfectly selfishly, but only in the absence “external” factors that cause deviations from perfect selfishness. What’s the payoff of using a model that incorporates such an idealization? By noting when and how individuals deviate from perfect selfishness, the modelers hope to gain insight into what factors incline people to non-selfish behaviors. Call it physics envy, but that seems to be how idealization works all across the empirical sciences.
#3 Left_Wing_Fox
August 2, 2010

Recessions are an inevitable consequence of overproduction, not a desired outcome. We can consider recessions to be a sign of an inefficient market, much the way an uncontrolled population goes through boom and bust cycles in ecology. The boom and bust of debt-fuelled and speculative cycles are potentially disastrous, causing real long-term economic hardship for many, but also resulting in major opportunities for the very wealthy and very lucky to accumulate those deflated assets.

The there is a moral judgement being made in economics that the opportunities for the few outweigh the hardship for the many. When these moral judgments are mixed into the fundamental assumptions, then used to proscribe policy, we get something akin to Eugenics; a self-justifying set of policies based on unexamined assumptions, with real-world negative consequences when applied.
#4 eNeMeE
August 2, 2010

By noting when and how individuals deviate from perfect selfishness, the modelers hope to gain insight into what factors incline people to non-selfish behaviors. Call it physics envy, but that seems to be how idealization works all across the empirical sciences.

Which doesn’t matter, since any physicist who decided to set up a model with assumption(s) known to be false according to data and then said they gained “insight into what factors” affect reality would be laughed at.

I could set up a model that incorporates aether in the absence of external forces – studying what happened to my model would not give me insight into how the universe actually behaves. It’s futile, and totally ignores those “stupid fucking natural history facts” that we already have available.
#5 bob koepp
August 2, 2010

eNeMeE – Have you never encountered Newton’s first law of motion? In case population genetics is more to your liking that physics, have you never encountered the Hardy-Weinberg law? Do you not understand the difference between an idealization and “a model with assumption(s) known to be false according to data”? Apparently not.
#6 eNeMeE
August 2, 2010

Have you never encountered Newton’s first law of motion?

Yeah, use it frequently when appropriate. Do you understand that understanding reality requires dealing with it, not examining idealizations that are known to be in error? Apparently not.

Trying to understand planetary motion using Newtonian physics is not a good idea, and leads to introducing all sorts of idiotic external forces (angels, in that case).
#7 Mike the Mad Biologist
August 2, 2010

Bob,

It’s not a matter of conflation of ideas and models, it’s that the models do not make sense in the context of data. There’s nothing wrong with a model that fails when confronted with data–we learn a lot when this happens (e.g., deviations from Hardy-Weinberg or neutral theory). The problem occurs when a model is taken as the way things actually are.

The other issue occurs when models limit our thinking about what the appropriate indicators of economic health and failure are–although that is also a normative question, even though some economists will deny that.

I do have issues with economics as practiced by many in that they conflate normative statements with positive ones, but that’s a separate issue.
#8 Walter
August 2, 2010

One thing I cannot ever get someone to acknowledge is the prevalence of social Darwinism in our economic systems. I think #3 Left Wing Fox said it perfectly well.
I do not know why we are so hesitant to admit that we, as a society, believe in social Darwinism. We believe it is moral to let the majority suffer so that a minority can have an opportunity to wealth. We all hope to be part of that minority, but most of us will fail. My right to get rich is more important than your right to dignity. That is the essence of our economic system, the essence of our moral dimension, and the pillars of our society. I hate it, but that is how it is. We have to acknowledge that, and then change if we want to, or continue the same as before, but either way we have to recognize the social Darwinist pillars of our society.
#9 Tyler DiPietro
August 2, 2010

I think DeLong is being a bit too harsh. Neoclassical theory may not be strictly true, but I’d hardly call it a “fraud”. Laws like that of diminishing marginal utility and scarcity, while not self-evident, are fairly predictive of economic behavior, at least at the micro-scale.

The problem is that economists have always tried to extend neoclassical micro to macro situations. After Keynes illuminated the effects of liquidity preference on large-scale economic phenomena, this approach largely fell out of favor. But it came roaring back starting in the late 70′s, largely due to stagflation falsifying one of the key premises of Keynesianism (the long-run trade-off between inflation and unemployment). Krugman describes the situation rather well: macroeconomics is a mess because because certain economists keep trying to derive a neoclassical equilibrium model that can explain involuntary unemployment. When they fail, they either add epicycles until the theory is a muddled mess, or flat out deny that involuntary unemployment even exists.

The problem is not that economic models are “frauds”, it’s that a certain segment of macroeconomists keep trying to reach an unreachable conclusion. And they do this for ideological, not scientific, reasons.
#10 Tyler DiPietro
August 2, 2010

(I find it funny that many of Krugman’s detractors try to argue as if he is an economist that is losing his credibility. Almost to a man, such people predicted that increasing the monetary base would lead to massive inflation and the stimulus would lead to a surge in interest rates that would choke off growth. Instead, core-inflation remains at its lowest level in four decades [deflation is a far greater danger] and interest rates are still lingering near the zero-bound, all while the economy grows, albeit too modestly. Krugman was once again far more prescient than the freshwater folks he loves skewering.)
#11 Troublesome Frog
August 3, 2010

Tyler,

Of course, if you predict inflation and higher interest rates without any time horizon, you can always claim to be vindicated when they eventually happen. It’s sort of like the fact that the Austrians have been “predicting” our current crisis for the past few generations.
#12 JonJ
August 3, 2010

Actually, there are quite a few philosophers who study the “soft sciences,” economics in particular. Aside from the contemporary ones, there was a German guy back in the 19th century, almost forgotten today, but one who I think had a few interesting insights. What was his name, now? Karl something, if I recall? Had a big beard.
#13 blf
August 4, 2010

Trying to understand planetary motion using Newtonian physics is not a good idea, and leads to introducing all sorts of idiotic external forces (angels, in that case).

Citations, please. Also explain how Uranus and Neptune’s existence was deduced and positions calculated prior to ever being observed if “using Newtonian physics is not a good idea”.

You are correct that Newtonian motion did not account for all of Mercury’s orbital antics. That discrepancy was one of the things which lead to Einstein’s theories—an example of an observed error not being wished away or eventually leading to a better understanding.

In none of these cases were angels involved, and, as far as I know, never even proposed.

So: Citations, please!
#14 Bill Stepp
August 4, 2010

Re: you’re last statement. Society is not organized by anyone; it’s a product of spontaneous order but not rational design, of human action but not of human design, as F.A. Hayek put it.
I suggest reading Murray N. Rothbard’s treatise _Man, Economy, and State_, and supplementing the part of money and banking with George Selgin’s book _The Theory of Free Banking_.
#15 Tax Lawyer
August 5, 2010

OK, we now have the “Great Recession”, and we once had the Great Depression. How long into the Great Depression did it take before people began labeling it as such?

What makes people think than now we are not in the “Greater Depression” rather than the “Great Recession”, other than blind optimism?