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.
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But the real problem is that there was no de facto mechanism to overturn or reject the theory using data.
Exactly.
In physics and chemistry, as well as some areas of biology, you can do controlled experiments, and you can show that variable X is important while variable Y is not (or vice versa). In other areas of biology, as well as geophysics, it is not always possible to do a controlled experiment. Economics is even more extreme: cases where you can do even an uncontrolled experiment without the risk of major alterations to society are so rare as to be noteworthy when they do occur.
Economics has the further disadvantage that often it would be politically convenient for somebody in power if a particular theory were true. There have been a few instances of this problem in science (e.g., Lysenko), but it is endemic to economics. So there is an incentive to stick with an elegant-but-wrong theory even in the face of mounting evidence that the theory is wrong.
As a physicist I'm sort of caught between a rock and a hard place in this argument you're making. On one side, I can certainly see the absurdity of the notion that "beautiful math" (whatever that means) should have some bearing on whether a theory is correct or not. The goal of a scientific theory is not to be mathematically sophisticated but to be correct and useful. It turns out that alot of the correct and useful theories are mathematical (especially in physics) but that is not an condition you set beforehand.
On the other hand I think you may be overplaying this "data" angle. Science is not stamp-collecting, and alot of data in of itself is boring. You need to develop theories based on that data or it's almost useless. The really good example of this that I'm aware of in biology is evolution - a principle by which you can organize alot of data on organisms and at least attempt to predict future changes. Even though it's original formulation isn't mathematical at all, it's an extremely useful model of how to think about living organisms.
Basically at the end of the day you need to have models that work in explaining the data that you have. Models without data and data without models aren't science.
Basic problem is that economics is like the weather...too many variables.. Economics becomes a philosophy, a religion, perhaps. It must be handled on a large, indeterminate scale. Formulas are psalms. Too many Greenspan's intoning garbage to politicians who don't have a clue what he is saying. Nor could I.
Good discussion. I think (some of why) Krugman's article has touched a nerve because lots of us see similar dynamics in our own fields. Economics is certainly an extreme case.
One quibble:
"Krugman ignores the volumes of data that have revolutionized biology"
Didn't he point out the volumes of data which are transforming economics? I got the impression he was making an implicit comparison there.
BTW: To jump back to a previous post... Yeah, CS gives us machine learning which is (probably the most useful) model of complex adaptive systems. I love machine learning.
I like approaching evolution as a big learning system actually, not that that angle has been particularly useful (yet).
I like the idea of applying more scientific methodology to things like economics, especially given the direct effect economics has on our lives. I'm rather sick of politically convenient idealogy that takes extreme views on how they THINK economics should operate rather than paying attention to history. The results of such views whether extremely conservative or liberal are detrimental. I'm a little skeptical if such pragmatism will ever come into effect though given the inherently politically charged atmosphere of economics in general and economic policies being the mainstay of election campaigns. Even if economy is treated more like a science rather than a philosophy, I don't think an economic scientist will be treated any better than typical policy-related scientists. Maybe worse since it's even easier to claim someone as politcally biased if they don't agree with your economic policies than if they're a climatologist pointing out the facts of global-warming.
All theories are approximations, and their predictive value depends to some degree on their assumptions (often themselves approximations), and to some degree on the effects of additional phenomena (including noise). Sometimes the approximations are very good. Sometimes not. The status of theories, and funding for them, in the social sciences and economics are very strongly influenced by personal preferences, including ideology, self-interest, and aesthetics. Krugman points out in his article that those who had other points of view in the academic economics arena were mocked or ignored. Upton Sinclair famously noted that "It is difficult to get a man to understand something when his job depends on not understanding it."
To my understanding, the Friedman and followers have committed the error of taking assumptions that are approximately true in a limited area and applying them to other areas, analogous to using perfect gas theory (assumptions: no interactions between particles except eleastic collisions, long average path between collisions) in trying to predict the behavior of a liquid. The natural history fact is that the particles in liquids have very strong forces between them and are in constant collisons.
I can't recall the source but recently someone on Charlie Rose elegantly defined the difference between true science and the descriptive arts.
It boils down to the tools of measurement. Biological science can make incremental gains because its experiments have units of measure that can be compared between labs without bias (assuming its good science). Without such quantification, observations are no more than opinion. Recently, I believe such tools have been developed in the field of psychology and real progress is being made in understanding why people act the way they do. Similar tools can be and need to be further developed for economics. Over a hundred years ago someone suggested using bacteria to study evolution. It took until the 1980s before Lenski decided that wasn't such a bad idea. And now we can see the invisible hand at work in the test tube.
When I read the Krugman piece it occurred to me, as does your comment, that it seems no one is looking at the effects of our economy on the natural world and it's evolution. If we still accept economic growth as a given, and now humans control or have changed 60% of land on the planet, and with global warming now facing us, why do we not challenge that basic idea about economic growth? Basic math shows us we cannot expand our use of resources. How can we even assume that burning anything, oil or other fuels, is a viable alternative? It seems that so much of what economists assume has little relationship to what those stupid fucking natural history facts are screaming at us.
A friend sent me here through an email heads-up.
I'm not certain I understand why you believe that economists do not collect real world data against which to test our theories. Every single economic interaction is a source of real world data to the economist, just as every single "survive long enough to breed the next generation" event is a source of real world data to the evolution biologist.
Please help me understand what it is you mean when you say, "But the real problem is that there was no de facto mechanism to overturn or reject the theory using data."
Lots of economists were/are shouting in the wilderness that the policies of the previous and current adminsitrations would either just put off or exacerbate the problems, or both. We get treated by politicians in both parties the same way biologists get treated at fundamentalist Christian colleges: Behe's papers get read, the rest get canned.
Also, I don't agree that this question has any more or less merit in economics: "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?"...
...than a similarly worded question would in evo-bio (I'll do my best): "Why do speciation crises occur and why at specific times? Yes, genetic instabilities matter, but why didn't speciation occur three generations earlier or later? After all, the Big Environmental Pressure was pressing in for a while. Food was running low and predation was increasing for years. So why didn't the species collapse happen in 2007?"
I suspect the retort would be that there are so many factors to consider that an evo-biologist cannot predict the exact moment in biological time when a speciation or extinction event will occur. The same is true for an economist wrt economic crises.
It seems that the best evo-biologists can say is, "In the past, when there were these kinds of pressures on a species, we have seen it either dies out, or a new species evolves." And, much later, "Oh look! A new species has evolved sometime in the past." Can evo-biologists point to the very day the new species will or did come into existence? From what I've seen, there is often a lot of debate about whether or not a certain version of an organism really represents a different species than its progenitors until 'way down the line.
Can evo-biologists tell us what species is going to evolve from the platypus and how it will look and act and when we can point to it and say definitively, "This is a new species!"? For example, will the species to evolve from the platypus be more land-bound or spend even more time in the water? Will it evolve live birth, or something in between, such as an extra pouch where the eggs move to, then hatch and the young spend a little time in the protection of this new, womb-like chamber before emerging into the world?
The person above who likened economic science to weather science had a good idea: When the hurricane is occuring, most people agree it's a hurricane. When the pressure and wind are pushing around in the Gulf, there is still a lot of disagreement.
An even more apt comparison is economic science and climate science: Even though the natural history facts tell us what to expect with climate, there are a lot of people purporting to be climate experts who are telling us the facts predict something else.
I would also add that the reason for the current and impending climate crises and the current and impending economic crises is the same: The amount of short-term jimmying of the system without regard to long-term consequences, aka externalizing of costs.
Even looking backwards it is hard to get agreement between economic theories. I once read a commentary on US economic history. One book would say that President X did Y and inflation immediately increased 3 percent. The second would say something like President X realising that inflation was becoming out of control, did Y and inflation only increased 3 percent before getting under control.
I made a typo above. I am not a professor of economics. I am a professional whose livelihood relies on a deep understanding of economics. I hit "tab" too soon. Sorry if I caused confusion.
michael J,
Both of the theories suffer from the same flaw. Both presume some connection between the President's actions and inflation.
Here's a fun little playground:
http://www.data360.org/index.aspx
Why not do some science? Pretend you are an economist in 1980. Look at all the economic data for one of your favorite indicators - GDP or inflation or stock prices, or all of them! - from 1980 backwards as far as you can go. Use that information to develop a theory of economics to make predictions for the next 20 years. Don't cheat! ;)
Now jump to the present and compare your prediction to the natural history facts of the most recent 20 years. How'd you do?
with economics there are three problems relevant here (there are many others):
1. too many variables so models, even when somewhat accurate, are incomplete and don't represent the real world
2. economics assumes that people make rational decisions - they don't
3. panic and the herd mentality - watch it in the securities markets, for instance, and then try to predict when it'll hit. I think there are people that can do that some of the time but I doubt there are many economists among them and certainly no models else there wouldn't have been so much surprise
The theories which everyone keeps referring to are correct. The theories have lists of assumptions - 'rules of the game' if you will - which when violated, have the ability to ruin the game. If the assumptions hold, then the theory is fine. Often the assumptions are not representative of reality however. That is where the problem lies. But because many of the assumptions are so out of tune with the real world (if the real world is left to its own devices), the real world must have some 'rules of the game' which will bring the theory and the reality closer together. For example, the information asymmetry between the originating lenders (who lent money to individuals who could not afford to repay them in the long-run) and those who bundled them together for resale as well as those who bought them meant that high risk was taken on with full appreciation of the level of risk. A simple rule of the game to overcome this would be to impose lending regulations whereby those who cannot afford a mortgage cannot get a mortgage (this limits the risk). Another would be that the level of risk of the individual components of a financial security be clearly revealed in a product disclosure statement that would accompany the security (this would address the flow of information problem).
It is not about inductive or deductive reasoning - it is about bringing the desired (deduced) and the actual (induced) together - that is, the 'rules of the game'.
-The only way of being certain that one will not fall down the stairs is to not get out of bed-
Right everyone, grab a bedpost. We are heading for the stairs.
One problem with economics is that it is the study of epiphenomena - not just the counting of aggregates, but abstractions derived from those aggregates (e.g., purchases made by credit card, rather than who bought what and why).
Another is that the data, more so than those in any other field, are third-hand at best, and each of the parties reporting probably has incentives to distort the numbers in one way or another.
A third is that the models are hopelessly bad, neglecting everything from individual psychology to the hard limits of non-renewable resources. My particular gripe is the problem of externalized costs: if I can run my smelter more cheaply by dumping wastes so that your kidneys and lungs do the filtering, who's going to figure the numbers on that?
Just imagine the difference in society and politics if we did have a functional, accurate, reliable model of economics!
Krugman: "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."
Don't be too sure about that. To a layman, the fact that the U. S. had 50 years of economic stability before financial deregulation began, and has experienced crises since then like we did in the 19th century, culminating in what may still become a serious depression, argues for restoring much of that regulation. Yet economists as a group are hardly raising their voices in favor of re-regulation. You can't remove the handrail if you don't put one up.
Basic problem is that economics is like the weather...too many variables.. Economics becomes a philosophy, a religion, perhaps. It must be handled on a large, indeterminate scale. Formulas are psalms. Too many Greenspan's intoning garbage to politicians who don't have a clue what he is saying. Nor could I.
Although dated, this is a very interesting thread. I agree with many of the points made but, I think you missed THE most important problem with economics today: larger forces in society have absolutely no interest in getting it "right." That is, those economic data/models/explanations that better reflect reality are filtered away by a political and media circus only interested in what's "useful" to commercial/wealthy interests. Academics dumped cold water on supply-side "voodoo" economics decades ago, yet it's still alive and well, providing cover for bad policy decisions in Washington...