|Wall Street JOURNAL / Feb. 27, 2010.
Is the Dismal Science Really a Science?
Some macroeconomists say if we just study the numbers long enough
we'll be able to design better policy. That's like the sign in the
bar: Free Beer Tomorrow.
By RUSS ROBERTS
For an economist, these are the best of times and the worst of times.
We live in the best of times because everyone wants to understand what
happened to the economy and what's going to happen next.
Is the mess we're in a market failure or a government failure? Is the
stimulus plan working? Would tax cuts for small business spur
employment? When will the job market improve? Is inflation coming? Do
So many questions and so little in the way of answers. And so it is
the worst of times for economists. There is no consensus on the cause
of the crisis or the best way forward.
There were Nobel Laureates who thought the original stimulus package
should have been twice as big. And there are those who blame it for
keeping unemployment high. Some economists warn of hyperinflation
while others tell us not to worry.
[who is in each of these groups?]
It makes you wonder why people call it the Nobel Prize in Economic
Science. After all, most sciences make progress. Nobody in medicine
wants to bring back lead goblets. Sir Isaac Newton understood a lot
about gravity. But Albert Einstein taught us more.
But in economics, theories that were once discredited surge back into
favor. John Maynard Keynes and the view that government spending can
create prosperity seem immortal. I thought stagflation had put a stake
in the heart of this idea back in the 1970s. Suddenly, he's a genius
once again. F.A. Hayek, Keynes's more laissez-faire sparring partner,
is drawing interest. There are various monetarists to choose from,
too. Which paradigm is the "right" way to think about the boom and the
bust? Or are they all wrong?
[Monetarism is pretty discredited, since the "velocity of money" is
unpredictable and the relevant money supply is hard to control. The
Fed, which once was monetarist, rejects that view. Of course, they're
still very conservative, anti-inflation, etc., just like the
monetarists. The dispute between the Fed and monetarism is about
merely technical issues. It's not a political split.]
I once thought econometrics—the application of statistics to economic
questions—would settle these disputes and the truth would out.
Econometrics is often used to measure the independent impact of one
variable holding the rest of the relevant factors constant. But I've
come to believe there are too many factors we don't have data on, too
many connections between the variables we don't understand and can't
model or identify.
I've started asking economists if they can name a study that applied
sophisticated econometrics to a controversial policy issue where the
study was so well done that one side's proponents had to admit they
were wrong. I don't know of any. One economist told me that in general
my point was well taken, but that his own work (of course!) had been
decisive in settling a particular dispute.
[Econometrics was at the heart of the fall of monetarism. BTW, this
guy forgets an important thing about econometrics: it's much easier to
destroy a point of view than it is to prove its validity. The latter
may be impossible. ]
Perhaps what we're really doing is confirming our biases. Ed Leamer, a
professor of economics at UCLA, calls it "faith-based" econometrics.
When the debate is over $2 trillion in additional government spending
vs. zero, we've stopped being scientists and become philosophers. Do
we want to be more like France with a bigger role for government, or
less like France?
[Conservatives always sneak in this big government vs. small
government crap (and almost all of the official media follow this
lead). G.W. Bush, a putative "free market" opponent of Big Government,
was all in favor of Big Pentagon and lots of aid to businesses and the
rich, along with invading people's privacy. It's not the size of the
government that counts, but the quality of the programs and the nature
of its priorities.
[More relevant is the important difference between the Keynesians and
the Hayekians (which is the elephant in this article's room). While
the so-called Austrian school assumes that full employment always
prevails (unless the government messes things up), the Keynesians drop
this assumption and allow a wide variety of levels of employment to
prevail in their models. This difference is pretty easy to test
Facts and evidence still matter. And economists have learned some
things that have stood the test of time and that we almost all agree
on—the general connection between the money supply and inflation, for
example. [This only works for rapid growth of the money supply.] But
the arsenal of the modern econometrician is vastly overrated as a
diviner of truth. Nearly all economists accept the fundamental
principles of microeconomics—that incentives matter, that trade
creates prosperity—even if we disagree on the implications for public
policy. But the business cycle and the ability to steer the economy
out of recession may be beyond us.
The defenders of modern macroeconomics argue that if we just study the
economy long enough, we'll soon be able to model it accurately and
design better policy.
[Incentives matter? what kind of incentives? "Free market" types want
us to believe that only extrinsic incentives, especially those that
come from market prices, are the only ones that matter. But people
also respond to intrinsic incentives, those involving self-reward
(such as for doing the right thing or engaging in craft-type work). If
we bring in intrinsic incentives, the proposition that "incentives
matter" seems tautologically true. Except that it's been found again
and again that extrinsic incentives (those of the market, bureaucracy,
etc.) tend to crowd out intrinsic ones: if someone gets paid for doing
a task which he or she originally did because it was the "right thing"
to do, suddenly that individual expects to be paid in the future --
and for other tasks that were done for moral reasons.
[Trade creates prosperity? what _kind_ of prosperity? Please explain.
Is it only prosperity for those who start with lots of wealth?]
Soon. That reminds me of the permanent sign in the bar: Free Beer Tomorrow.
We should face the evidence that we are no better today at predicting
tomorrow than we were yesterday. Eighty years after the Great
Depression we still argue about what caused it and why it ended.
If economics is a science, it is more like biology than physics.
Biologists try to understand the relationships in a complex system.
That's hard enough. But they can't tell you what will happen with any
precision to the population of a particular species of frog if
rainfall goes up this year in a particular rain forest. They might not
even be able to count the number of frogs right now with any
We have the same problems in economics. The economy is a complex
system, our data are imperfect and our models inevitably fail to
account for all the interactions.
The bottom line is that we should expect less of economists. [in
matters of personal hygiene, too.] Economics is a powerful tool, a
lens for organizing one's thinking about the complexity of the world
around us. That should be enough. We should be honest about what we
know, what we don't know and what we may never know. Admitting that
publicly is the first step toward respectability.
Mr. Roberts is a research fellow at Stanford University's Hoover
Institution, professor of economics at George Mason University and a
distinguished scholar in the Mercatus Center.