Economics to non-economists, Part I

Here is some confusion for thought… Click here for the original.

Economists are not Like Physicists

There’s been some debate in economist circles about how to improve the field and apply a more empirical approach.  For instance, Noah Smith says:

“what I actually propose is to create an econ “lab sequence” just for empirics, similar to what they do in physics.

I also think that there should be two versions of intro econ – one for econ majors, which is more advanced and mathematical, and one for people who just want to learn some economics ideas. This is also similar to how physics departments and math departments do things.”

This sounds great in theory.  But the problem is that economics is nothing like physics.  In physics you have an agreed upon set of general principles which form a basis of understanding.  From there, physicists can use these principles to perform experiments on unknown hypotheses building on empirical evidence that has already been developed.  In economics you have competing sets of general principles and various economists performing experiments using data that is generally useless (due to small or inapplicable data sets) to try to prove what is generally a political position.

[The emphasis (red, bold) is mine.  Why?  Because this is nonsense.  I know a lot of (real) economists, and I will tell you that 99.9 percent of them agree on the existence of a knowledge base upon which the profession is built and research undertaken.  The economists you read in the Wall Street Journal, New York Times, and many other major publications may demonstrate a significant political bias in their attempts to convince the public readership of their point of view; MANY of them DISTORT the theoretical, philosophical, and mathematical underpinnings of the profession in order to profess their political viewpoint.  HOWEVER, 99 percent of economists spend more time focusing on their particular fields of research and using the (well established) “general principles” of the field of economics.]

This is why undergrads are upset with economics.  Yes, there’s a lack of empirics, but more than that, it’s a lack of agreed upon general principles that give the appearance of a science that comes across more like political pandering than anything else (primarily because the various “schools” and their set of principles are built around political views more than empirical views).

[This is also nonsense.  The various schools of economics are built around competing high level theories of macroeconomics, most of which are ill-understood by the public (and many of which are ill-understood by professional, PhD trained economists).  The basic foundations of economics, such as its microeconomic underpinnings, are well established and empirically/econometrically proven.  The links between microeconomics and macroeconomics are very challenging, and are under considerable debate.  So when the esteemed author discusses the disagreements between economists and the lack of a “general knowledge base,” I can only assume he is referring to the topics of economics that are still under debate.  But making the assertion that undergrads are disenchanted with economics because of a lack of empirics or “agreed upon general principles” is wrong.  I have yet to meet an undergraduate who is “upset” with economics.]

I generally agree with Thomas Piketty who said:

“To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences. Economists are all too often preoccupied with petty mathematical problems of interest only to themselves. This obsession with mathematics is an easy way of acquiring the appearance of scientificity without having to answer the far more complex questions posed by the world we live in.”

This obsession with math and trying to perform experiments like the hard sciences can be problematic because there isn’t even an agreed upon set of general principles from which economists work.  Frankly, I don’t know if there will ever be a time when economists all agree on general principles to the same extent that physicists do.  The natural biases and lack of reliable data makes it very difficult to formulate an agreed upon set of general principles.

[Professor Piketty seems to be a well-spoken, well presented intellectual (I am in the middle of his book Capital in the 21st Century) and he makes what appear to be compelling arguments about the direction of the global macro-environment.  He totally ignores a discussion of microeconomics and incentive systems, which to my reading undermines some of his assertions, and he also appears to make some unexplained assumptions; but, I will finish reading the book before commenting further.  The real problem with lambasting economics as excessively mathematical is that the math makes it rigorous, applies tested and well known theories to new information, and can tell us about the reliability of our data.  I totally disagree that there is a lack of reliable data.  In fact, the world is full of great data waiting to be turned into interesting information.]

What is money?  What causes inflation?  What causes unemployment?  These are questions that one would think should form the basis for a set of general principles, but modern day economists simply do not come close to agreeing on the answers to these questions.

As a non-economist trying to objectively view the field with constructive criticism I think this is a big problem because the inability to agree on a set of general principles means the rest of the discussion is mostly a waste of time that falls more along party lines than scientific lines.

[The author is clearly a non-economist who fails entirely to judge the field from an objective perspective.  Economics has various answers to all of the questions above.  The author falsely assumes that because economics as a scientific discipline is incapable of predicting the future or answering questions with perfect precision, it must be a failure.  Quite frankly, I find financial advisers to be subject to the same critique: why don’t you know exactly what will earn me the highest returns over the next thirty years, and how did you not predict the market crashes that set me back?  Answer: because time is linear and perfect foresight has yet to be invented.  To my recollection, there is still ongoing discussion and disagreement about quantum physics and the nature of the universe.  Should we all argue that physicists are a bunch of hacks because their field is not satisfactorily progressed?  Economics, like every field, is progressive.

I don’t know any economists who are desperate to become physicists (but I have known exactly the opposite).  Maybe it is time for non-economists to stop judging the discipline; after-all, you wouldn’t tell your medical doctor that they were wrong if you had no medical training.  What makes everybody think they are fit to judge an entire discipline of which they are not a member?]

 [As an aside, the author of the original article is not an economist – his company offers fee based portfolio reviews of other people’s financial conditions.  At the risk of committing an ad hominem fallacy, I would point out that he operates a business in which he has no stake in the client’s outcome and in which he takes no risk.  He is thus immune from any poor judgement on his part.]