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.