Saturday, February 27, 2010

Is the Dismal Science Really a Science? Is There Really Such a Thing as Free Beer?

Russ Roberts writing in the Wall Street Journal:

"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. 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 exactness.

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. 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."

MP: TANSTAFBeer.

18 Comments:

At 2/27/2010 4:12 PM, Anonymous Anonymous said...

The economy is a complex system, our data are imperfect and our models inevitably fail to account for all the interactions.

Where is Al Gore when you need him?

I don't know if it's a science or not, all I know it that the science is settled.

 
At 2/27/2010 4:17 PM, Blogger juandos said...

"If economics is a science, it is more like biology than physics"...

Actually I think this Russ Roberts is wrong about which science economics is like...

I think its more like meteorology where the butterfly effect is much more pronounced...

 
At 2/27/2010 4:23 PM, Anonymous gettingrational said...

Beware The Ides of March

Why not like use literature also as a predictor of past economic diffuculties and possibly a future one? Shakespearean insight?

Russ Roberts is using his inner Socrates and this is wise.

 
At 2/27/2010 4:49 PM, Blogger QT said...

Is economics any better than any other field of human endevour at predicting future events? Can we even know how accurate statistical models are for actual prospective prediction? Such models are developed and tested only using past data.

 
At 2/27/2010 4:57 PM, Anonymous Lyle said...

AT the micro level (which is of course the foundation to macro economics) we do know in their desire to make economics a neat mathematical science like physics, the economists assumed human foibles away, that we are homo economics calculating machines that weigh everything based on purely economic variables. Even Adam Smith knew better. Psychologists have discovered in small tests that this is not the case, that there is a non economical risk aversion in people, people often are overwrought when the make decisions (Angry, excited, depressed,...) and that people follow the herd and make decisions based upon what worked the last time, or with insufficent information. If the foundation is build on quick sand the whole structure is suspect.

 
At 2/27/2010 5:01 PM, Anonymous Anonymous said...

It depends on what you ask, and what you expect, economics to do.

To establish general parameters and guidelines as to what to do. fine.

To have it fix you tomorrow's coffee. Or predict with precision.
Better look for something else.

 
At 2/27/2010 8:56 PM, Blogger Michael said...

You have 6.5 billion sources of inputs that are constantly changing. How do you model that.

The two schools of thought are you don't, or you use a gun.

 
At 2/27/2010 9:00 PM, Blogger bobble said...

"The economy is a complex system, our data are imperfect and our models inevitably fail to account for all the interactions."

amen. too many variables

 
At 2/27/2010 9:07 PM, Anonymous Lyle said...

To take Bobble a bit further, and the actors do not always behave in a fully rational manner as Greenspan has discovered to his chagrin.

 
At 2/27/2010 9:11 PM, Blogger Marko said...

When I was studying philosophy of science back in grad school, we used to joke that while psychology and economics aren't as 'scientific' as physics, physics isn't even as scientific as physics. Meaning even physics is not as precise a science as popularly conceived. People hold up science and scientists to too high a standard. That is not to say that science isn't useful, or even wonderful, but the cartoon version of science is not the way to judge science.

 
At 2/27/2010 10:37 PM, Anonymous gettingrational said...

" Meaning even physics is not as precise a science as popularly conceived."

One of the most profound books I ever read was The Tao of Physics. This book explained the randomness of of particles colliding in nature and the rancom outcomes. Maybe this should be kept in mind with financial markets and economies -- which may be an arugument for being conservative unless you are a speculator then random is opportunity.

 
At 2/27/2010 11:59 PM, Blogger PeakTrader said...

There has been enormous progress in economics. Yet, it's far from complete, unlike statistics, which is a dead field.

Humans don't have the capacity to create a sound general equilibrium model of a large economy. However, a crude understanding can be achieved by tying-together partial equilibrium models, optimization models, input-output models, contemporaneous models, etc.

Economics, like mathematics, wasn't invented, it was discovered and there's much to learn.

 
At 2/28/2010 1:34 AM, Blogger Michael said...

I know of a fellow at Penn State and a chap across the pond that wished statistics was dead.

 
At 2/28/2010 11:23 AM, Anonymous Square said...

Agree entirely.

So how does this agree with consumer confidence surveys, the Baltic Dry Index, manufacturing surveys, consensus forecasts, leading indicators, Fed predictions of zero probability of recession, and all the other mumbo jumbo we hear about every day?

Macroeconomic prediction, leading indicators, and forecasting are right there with soothsaying, prophesy, tarot cards, palm reading, phrenology, and voodoo.

 
At 2/28/2010 12:07 PM, Blogger PeakTrader said...

Making appropriate adjustments, changes, or choices, given known information, is easier than predicting a dynamic, not static, future.

Economics fails when too many economists too often use economics as politics.

There's more to discover about ancient Egyptian civilization than statistics.

 
At 2/28/2010 1:58 PM, Blogger Michael said...

Ah, Yes. Paul Krugman Syndrome.

 
At 3/01/2010 12:58 PM, Anonymous Chris said...

What the heck is TNSTAFB? Is that the same as TANSTAAFL?

 
At 3/02/2010 11:09 AM, Blogger Adam Freund said...

"Economics fails when too many economists too often use economics as politics."

Amen! The biggest problem we have today with "economics" is the lack of it's use. Ideology (under the guise of Keynesian economics - an oxymoron if I ever heard one) trumps common sense. It's kind of like saying our "health insurance" model is broken because it doesn't "subsidize" people properly.

 

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