Wednesday, September 11, 2013

No, Economics Is Good for Lots of Things

Survey Research at Work
Perhaps the greatest intellectual casualty of the 2008 financial crisis was the credibility of economics as a science. "Why didn't economists foresee the crisis?" people asked, and this lingering suspicion came to a head in a recent NYT editorial blasting economics as a scientific discipline. On first pass, I thought it was just one of those silly articles that crops up on occasion, but the more that I thought about the editorial, and compared it with some of the economic insights I have absorbed as a student, the more I was angered. And thus, I felt compelled to rant.

What should be kept in mind is that, like engineering, economics is a broad discipline that covers many different fields. Just as some engineers study computers and others study nuclear reactors, some economists study taxes, other study financial markets, and still others study how psychological biases should change the design of policy. So to use the chaos in financial markets as a reason to discredit all of economics is analogous to discrediting all of engineering on the count of a Fukushima disaster. While portions of macroeconomics may be made up of smoke, mirrors, and misleading standard errors, even a brief introspection can reveal why that is not representative of economics as a whole.

In economic models, people do whatever maximizes their self interest. However, this leaves no room for intellectual growth -- any new insight or strategy would have already been discovered by the omniscient agents! But people are of finite intelligence. As a result, their self-interest can be up for reinterpretation.

In this area, economists play the important role of introducing new *ideas* about policy. Precisely because people are not as omniscient as the agents in economic models, it's important that governments have a solid foundation on ideas to conceptualize and defend policies from critics. By introducing a new framework or a new empirical fact, economists can cast policy into a different light and redirect the conversation and agenda.

Let us first consider the canonical example of auction theory. Game theorists have been remarkably effective at designing auction mechanisms. The late Ronald Coase famously argued that the U.S. should auction off spectrum rights. Yet in his Congressional testimony, he was met with disbelief, with a congressman asking "is this a joke"? Later on, when the FCC changed its mind, it fell to economists (game theorists, no less!) to design the details of the auction. Designing such an auction is not a trivial task. Since it's advantageous to have radio frequencies in geographically contiguous areas, what a company is willing to bid on one spectrum in an area is dependent on whether it can win in other areas. Moreover, there are a host of protections you need to design. How do you stop firms from colluding? How do you make sure firms can't manipulate the bids to pay extremely low prices? When these issues were ignored in the Australian and New Zealand auctions, many hundreds of millions of dollars were lost.

Economists have also managed to change the way we talk about poverty policies in the United States. A common misconception is that impoverished people are just lazy, and that nothing can be done for them. And as a result, welfare just represents an unproductive transfer from the makers to the takers. However, survey data from the Survey Research Center at the University of Michigan has shown that poverty is most often a transitory phenomenon, and that no, welfare is not about Cadillac queens or subsidizing sloth, but rather about providing insurance for a wide range of people who live on the threshold of poverty. The fact that the national conversation sometimes forgets this point is a reminder that economists do have an important role to play in shaping the welfare policy debate, and that neglecting this can have serious human impact.

And when we take a look at the the role of economists in analyzing aid and development, the impact is even larger. The foundations of international finance and the study of capital flows explains what kinds of aid are better than others, and why it's important not only to provide money but also personnel and expertise. On a micro level, pioneering experimental work, as popularized by Esther Duflo and Abhijit Banjeree in their book titled "Poor Economics", has added an additional subtlety to the design of development policy. By integrating insights from psychology and political science, development economists like them have gone on to revise how to better provide fertilizers to farmers or how to limit the extent of patronage politics. These are all critical issues in the task of economic development, and it has fallen to economists to address them.

So far, I have focused on micro topics. But there are actually a surprisingly robust set of results about how emerging markets should handle capital flows. Stephen Salant (who is teaching me applied micro modeling this fall!) laid the foundation for speculative attacks on stockpiles of resources, such as oil or food. His model later led to Krugman's pioneering work on how currency crises happen, and the lessons from the literature on currency crises showed why external debt could be so harmful for developing economies. Anton Korinek has also made great contributions outlining the welfare arguments for avoiding external debt and currency crises. Indeed, those economies who had large stocks of external debt relative to foreign reserves were precisely the ones who suffered the most during the financial crisis. While it may not be a direct result, it is now clear to all emerging markets that a combination of external debt and exchange rate pegs can be extremely dangerous. And the absence of those two fault lines has put the emerging markets on much more stable footing during the current sell-off.

Even in the controversial field of monetary policy we're doing better. Back in the 1920's, it was thought that monetary policy should ease during the boom and tighten during the bust. This was called the Real Bills Doctrine, and ended up amplifying the business cycle. Doubt about the effect of Quantitative Easing is not equivalent to ignorance about money's effect on the macroeconomy. We might not be clear on magnitudes, but we at least know which way goes up and which goes down.

From a methodological standpoint, economists are valuable because we are trained to think about social issues through a quantitative and empirical framework. While other social sciences such as sociology and psychology are also known for their increasingly quantitative measures, economists are special because the variables we are interested in -- income, prices, population -- are easily measured and interpreted quantitative measures.

(As a digression, I was surprised that this notion of economics as socially applied statistics was completely missing from the conversation about economath. Without the work in mathematical statistics, economists would have been unable to do the measurements that we do, and the empirical studies that I describe above would not have been possible. I remember Miles Kimball joking with me that empirical macro is all about interpreting measurement error, yet without the work of generations of econometricians, we would not know of how to do that kind of analysis.)

From a personal standpoint, I will also be contributing towards this kind of research this year. Since University of Michigan is a state school, we are of course very concerned about how all of our students -- across socioeconomic classes -- are doing. And therefore I will be heading a project to design a survey instrument and analysis methodology to measure how students are doing in the off campus housing markets and to identify the potential severity of this kind of socioeconomic segmentation. (See picture). While it may be true that my project will have various flaws, I still think of it as representative of the power of empirical economics. Identify problems. Collect data. Make lives better. Wash, rinse, repeat. And at least from personal experience, this mode of analysis -- of looking at bivariate relationships, of thinking about longitudinal effects -- is not as common among my fellow social scientists from psychology or political science.

This explicitly empirical tack built into modern economics is important because the alternative to a world with economists is not some non-partisan paradise. Rather, it will be filled by the Keith Olbermanns and Sean Hannities of the world, who rely instead on cheap rhetorical tricks instead of well grounded theory and empirics.

Yet in spite of my strong conviction that economists do create value for society, I do recognize that economics, on the most part, is not an experimental science. But that should not necessarily be seen as a flaw. Economists are tasked with evaluating policies that can play such a large role in the welfare of the masses. And once you know that a certain policy is harmful, it would be a profound breach of ethics to repeatedly apply such failed policy so that you could "replicate" and make the results "scientific".

I want to wrap up this post with a joke.
A physicist, a chemist and an economist are stranded on an island, with nothing to eat. A can of soup washes ashore. The physicist says, "Lets smash the can open with a rock." The chemist says, "Let’s build a fire and heat the can first." The economist says, "Lets assume that we have a can-opener..."
The punchline suggests that instead of solving problems, economists just assume them away. But the real work of economics actually comes after the initial assumption. A real economist goes "..then if we had a can opener, we would be set. So let's go make a can opener." The joke misrepresents the work of economists by focusing on "opening a can" -- a task that has neither ambiguity nor great subtlety. On these issues, of course the hard sciences will be superior. But what if we asked a different question such as "how should we reduce carbon dioxide emissions"? In this case, there is no clear answer. But the economist would go "let's assume there were a price to carbon. Then the first welfare theorem means there's no inefficiency. So let's go price carbon!"

The big social problems of our day -- long term poverty, global warming, the middle income trap -- have few direct solutions, and any solution will affect portions of society in largely differing ways. And without economists to help work out the theory and empirics, how do you plan on tackling such dilemmas?


Update: Indeed, long term unemployment is a more severe problem than just an intellectual scruffle. But it really does seem that after the Great Recessions, economists are (perhaps rightly) viewed with more skepticism.


  1. I'd argue the Economist would say, "Let's make an agreement - the designer of the most effective method will get a reward in the form of the largest bowl of soup. Now let's get to work!"

    1. Anonymous8:21 PM

      And after the Physicist and the Chemist had slugged it out to prove their most effective system, the Economist would say, "There you go, I get the largest bowl of soup!"

    2. Anonymous2:20 PM

      Beautiful. A+. I might use this version of the joke sometime.

  2. Brett, that would include 3 people working on a single solution. Horrible waste of limited effort. You're optimising utility from a limited amount of energy(No food to replace depleting reserves) so you assign jobs to the person/persons with the lowest effort cost to each task. Or instead of assigning, have an auction for the proportion of soup you will give up/require to open/not open the can. Or interrupt after the Physician as smashing it with a Rock is a satisfying solution. Or...

  3. Isn't blogging reinforcing that ? Look at the most popular blogs, most of them are macro. Maybe the public wants that or maybe it's juste that macroeconomists are better publicists. Anyway, I find it difficult to blame the journalist from the NYT (I haven't read his piece).

  4. Anonymous7:38 AM

    I'm sorry but I don't know why you object to the NY Times editorial. The article is written by two philosophers of science who specialise in economics. As such their views need to be taken seriously.
    As far as I can see, their ideas are bang on. Economics is not a predictive science (except in a narrow sense)and probably never will be so. The best success that economists have had so far is in designing institutions and revising bad policies. None of your examples argue otherwise. In fact they cite the spectrum auctions in *support* of their case.
    Your recipe: " Identify problems. Collect data. Make lives better. Wash, rinse, repeat. " looks suspiciously like Rosenburg's claim that Economics is a craft rather than a science. Where have the big theories gone?
    So, in conclusion, I don't think that the post is any kind of antidote to the NY Times editorial. Quite the opposite: your examples simply reinforce their conclusions

    1. Perhaps our views are closer than I previously thought. But I guess I wrote my rant more to justify why economic theory is nonetheless important -- especially in the way that it can guide our policy discussion and create more effective institutions. It seems that this issue has been forgotten in the debate, and I wanted to bring it back up.

    2. Having read the editorial, I must admit I'm rather against taking them seriously. The arguments presented are sloppy and the examples used don't actually demonstrate the points their trying to make.

      The only example of a science in the piece is putting an orbiter around Mars, which is impressive... if you don't remember that some Mars missions failed. In fact only 42% of all missions to Mars succeeded.

      This weak example also illustrates a more serious error in their arguments. The bulk of the argument pushes the science/craft distinction. This, the episteme/techne, distinction is well known and goes back to Plato. At the end of the editorial they do something quite obviously wrong. They switch from episteme/techne to episteme/ars(art). This conflation of techne and ars ought to be quite obviously wrong to anyone with even a passing familiarity with the Classical Greeks, since the distinction between ars and techne is at least as well attested as the distinction between episteme and techne. This conflation is absolutely required for their final conclusion, a good Fed Chair uses a feeling for the economy rather than algorithms. Putting a satellite into orbit around Mars is definitely a techne and it certainly isn't a predictable endeavor.

      There are also several other issues in the editorial, though they are more complicated than the failures I've noted thus far.

    3. Nathanael3:19 PM

      There are small sections of economics which have made predictions and been correct.

      They are baby steps, admittedly. Economics now is where physics was before *Newton* -- a bunch of separate theories, some of which work in limited domains. Plus various "grand unified theories" which are all wrong.

  5. "Perhaps the greatest casualty of the 2008 financial crisis was the credibility of economics as a science."

    Your innocence and immaturity make your enthusiasm for economics cute. But after an opening like that, it's hard to do much but remember back twenty years to my own inchoate perspective.

  6. Anonymous9:03 AM

    "Perhaps the greatest casualty of the 2008 financial crisis was the credibility of economics as a science."

    Not the millions of long-term underemployed or unemployed people? Really?

    1. No, you're correct. The plight of the unemployed is definitely more serious than some intellectual scruffle. I have amended the first sentence as a result.

  7. "Why didn't economists foresee the crisis?" Because their forecasting models are based on erroneous economic theories, like Keynesianism and Monetarism. If you take a fundamental common sense approach to economics, like Rothbard and Mises did, then you can ultimately forecast better, even though your timing may be very early. For a historical example of this, see here:

    Now Schiff, who is hated by many economists and academics, could foresee the housing bubble because of his understanding that centrally planned and regulated economies always develop bubbles, and that the housing market had all the signs of such a bubble. He looked like a fool in 2005 and continued to look like a pessimistic gadfly until it became apparent that the housing market actually was crashing. Bernanke, a highly educated and respected economist, did not see this bubble until it had already burst.

    And so it is today. There is now another bubble that Bernanke doesn't see. But again, Schiff has been warning about it. And one day it will burst. He will, of course, look like a fool and an idiot until it becomes apparent that is has burst. This time, however, the bubble is not confined to the housing and banking sectors. The bubble now exists in the money itself; the very currency in which we all get paid and conduct our business. When it bursts, the entire world monetary system will crumble.

    When you want to get an idea of the value that modern mainstream economists offer to society, simply watch the video again.

    1. If Peter Schiff was right, why hasn't there been a hyperinflation since 2008?

      If Mises and Rothbard were right, why hasn't there been a hyperinflation since 1971, or 1932?

      One of the most key elements of science is being able to create testable and falsifiable theories. Misesians and Rothbardians reject testability and falsifiability. They embrace making shit up, or as they more fancily refer to it, "praxeology". That isn't science.

    2. Also, if Peter Schiff was right, why did he lose a higher than average percentage of his clients' money during the crisis?

    3. As I said, predictions based on fundamental economic common sense can be made very early; early enough to make you look like a crack pot until it actually happens. Schiff was predicting a market crash in 2005, and likely even before that, yet the market crash resulting from the housing bubble didn't occur until mid-2008. We are talking about the entirety of the world's monetary system currently being in a bubble. It is likely going to take much more time for something of such epic magnitude to finally burst. But the evidence of the brewing crisis exists in the permanent sub 0.25% Fed funds rate and the ever expanding Fed balance sheet, or constant QE.

      Mises said that the crisis could be delayed through further credit expansion, a policy which is now in progress. The end result though is a currency debacle. Destoying the world's reserve currency takes time; even decades. How much time, nobody knows for sure. The system has only existed in its pure fiat form since '71, like you said. How many pieces of straw can you place on a camel's back before its back breaks? No one knows for sure, but if you keep piling them on, is there any doubt that the camel will eventually collapse?

      I think if the Fed can raise the funds rate and begin to shrink its balance sheet without crashing the stock market, and before consumer price inflation becomes a problem, then I may have to eat a lot of crow. But until then, I'm betting on severe inflation long term.

    4. Well, I'm not suggesting that Schiff made the best intermediate term investments during the crisis, just that he predicted the housing bubble where Bernanke didn't. I do believe his businesses are still doing quite well though.

    5. My question to Neil is:

      What would it take for you to be convinced that Austrian economics is wrong with regard to central banking and macroeconomics? It seems like no matter how much evidence is piled against you, you hold on to Austrianism, as if it's part of your identity, or as if being wrong will cost you something dearly.

      I'm not too surprised to witness this, it's consistent with psychological literature (See, "Backfire Effect").

      Anyways, here are some helpful links that should set you in the right direction:

    6. Jeff, didn't you read my comment? I said "I think if the Fed can raise the funds rate and begin to shrink its balance sheet without crashing the stock market, and before consumer price inflation becomes a problem, then I may have to eat a lot of crow. But until then, I'm betting on severe inflation long term." So if I'm going to be convinced that Austrian economics is wrong, then this is what will have to happen. It's not too tall of an order, is it?

      My identity with free markets and sound money is no more important to me than your identity with centrally controlled economies and fiat currency is to you.

      I have no problem being proven wrong in my assumptions. My goal is to learn from experience. But I am not convinced by short term fluctuations in economic data points. I look at the big picture; the grand scheme. Austrian economics probably appeals to me because it seems based on common sense and logic. It also contains the principle that there is "no free lunch" and that everything is paid for in some way, by someone. The idea that printing money saves the economy from disaster seems ridiculous to me. But it probably has a lot to do with the values with which I was raised; the ideas that nothing is free in this world, and that you have to work hard to get what you want. I can see if you were raised on either government welfare, or as a spoiled rotten kid who always received what he wanted simply because he asked for it, how your view of economics would be different. After all, if your parents didn't work, but still managed to feed, clothe and shelter you, it makes sense that you would believe that handouts and free stuff is an integral and beneficial part of how society functions.

      Now maybe you were raised with the same values and ideas that I was, with hard working parents who taught you responsibility, prudence, and frugality. Maybe you were just taught all of that Keynesianism in college by people like Bernanke, who, as you can see in the video, does not understand how bubbles are formed in the economy. If that is the case, then your excuses, in my view, are very limited as to why you think the U.S. economic situation is sustainable.

      The U.S. has two choices: Let most of the big banks and homebuilders go bankrupt, (and yes, that will also require letting many of those bank depositors lose money), or they can bail everyone out and destroy the dollar, which will buy them time, but ultimately result in a debacle of even greater magnitude. Since the 2008 crisis, they have embarked boldly down the latter road. Any reversal of policy, meaning actual monetary tightening, (selling central bank assets and raising the Fed funds rate), is a step down the other road, leading to bank bankruptcies. But that isn't really an option is today's world. They showed their hand in 2008.

    7. I was going to write a long post, but I decided to get to the main point and keep it simple.

      1) Your last paragraph is a false dichotomy. I don't know how you ended up deciding that those are the only possible outcomes, perhaps it's derivative of Austrianism. So, I'll avoid taking my pic and move on to point...

      2) OK, so you say you'll eat your crows, let's take a look at "severe inflation in the long run".

      2.1) Define severe inflation.
      2.2) Define long run.

      Because without a working understanding of either concept, your theory isn't falsifiable, which is to say, there's no situation under which you can be wrong, and hence, your theory cannot be tested.

      Inflation hawks have been screaming this for years, and have yet to be correct (but they always say "just wait!").

    8. I see what you mean about my theory not being falsifiable. The problem is that the time span in which I am investing is too broad for me to make concrete predictions, but I assume this is true for anyone. Nobody can predict with certainty what the world will be like two years from now. Two years from now, the world may be very similar to what it is today. But three years from now, the world may completely different from what it is today. Economic transformation can happen quickly. The world in October of 2007 was very different from the world in March 2009. A lot happened in those 18 months. I suspect the next crisis will also unfold very quickly. But can I tell you when it will happen, or the exact magnitude of the crash? No. I simply expect that when it does happen, the prices of the things we buy on a regular basis will be rising very quickly. And if I had to bet on it, I would bet that it will happen within the next eight years or so. The U.S. dollar became a pure fiat currency in 1971. For a currency like that to last 50 years is actually not too bad, but I don't think it'll last much longer than that.

    9. Nathanael3:15 PM

      China had a pure fiat currency which lasted a couple of hundred years *before* the first inflation crisis (which was caused by a *foreign invasion*). It lasted for another 100 years *after* that crisis, too, before it started actually falling apart.

      And that's all before the Mongol issues, which were not well-managed.

    10. Nathanael3:17 PM

      In short, Neil, we have a historical example of pure fiat currency operating without hyperinflation for 200 years, and then for another 100 years. The hyperinflation only happened due to a *foreign invasion*.

      I think your model of inflation is way, way, way off. If we get invaded by foreigners, I would expect inflation, certainly. Do you think that's going to happen?

    11. I get the sentiment, Neil; economics is hard. But that isn't an excuse to be, in Noah's words, a "Nostradumbass". Your prediction is a little clearer when you say 8 years, but it still verges on "One day it will rain".

      There's courage in being able to state clearly the magnitude of what you think will happen, and when it will happen, within some margin, and with a likelihood. And if you're just, you just come out and say it with the best explanation possible.

      Btw, this is a reason economists like math - it allows them to make educated guesses with likelihoods and time frames instead of being relegated to soothsayers.

      On a last note, Nathanael beings up the important point: A fiat currency may fail, but it's not enough to not explain why, then conclude intellectual victory. Context matters.

  8. "Then the first welfare theorem means there's no inefficiency."

    For a suitably nutty meaning of efficiency.

    1. Seriously, quoting the welfare theorem(s), and in that situation, really weakens your case. I thought it must be satire.

    2. I see that just maybe it was satire. If that is the case, it is very subtle - well done! (Of course the problem is we don't know your history and well Poe's law.)

  9. You would starve to death before you got the can opener made.

  10. Disregarding the more substantive (for a suitably nutty meaning of substantive) criticisms (and Neil forgot one of the first laws of the Intertubes and didn't put the ;) after his delightfully satiric post..), this, "And without economists to help work out the theory and empirics, how do you plan on tackling such dilemmas?", in the classic words of Brave Sir Robin, is easy - ideology rules, baby! (Try to say that sentence in one breath!)

  11. Anonymous11:51 AM

    "Game theorists have been remarkably effective at designing auction mechanisms."

    I have meet this claim many times, but where does it come from? The only person that I know of that has A: said anything about it and B: personally know people who have worked with it, is Ariel Rubenstein - and he seem to be very skeptical about whether their theory work did them any favors in the creation of those actions.

    1. Would you mind posting some of those links? At least in the design of the FCC spectrum auctions, many economists came together for some of the leading telecommunications companies to push the eventual dynamic and simultaneous auction structure. I'm always interested in the economic history if you have it, though.

    2. Anonymous3:59 PM

      At a recent conference on the future of game theory applications was a focus of discussion. Presenters included a colleague of Rubenstein at Hebrew University:

  12. cahuenga11:56 AM

    You came ever so close to hitting the problem in a nutshell...

    In economic models, people do whatever maximizes their self interest, [including making economic models].

    1. Nathanael3:12 PM

      There are some disturbing studies showing that economics professors seem to be more selfish than normal people -- and therefore more inclined to make self-serving models.

      I haven't seen this broken out between "classical" types and "Keynesian" or "heterodox" types, though. I would suspect that the classical types are worse.

  13. Anonymous12:25 PM

    "Identify problems, collect data, make lives better". I used to do this. We called it "consulting", and we got paid much more than economists. Perhaps you should change the name of the discipline.

  14. James Galbraith names names:

    1. Nathanael3:10 PM

      Galbraith's article is a good summary of the existing macroeconomics traditions which are worthy of continuation.

  15. By far your most effective point is that if it weren't for economists, political economy would be left up to rhetoricians like Hannity and Olbermann. This rings very true to me; while economics may not be an entirely scientific science, and while it may not be an entirely successful science it is — even in its present form — better than just making shit up.

    And I say that as someone who is deeply uncomfortable with very many of the assumptions in modern neoclassical economics. I think one of the problems economics may face going into the future is getting away from the idea that we are rational utility maximisers. A lot of work in cognitive sciences, behavioural economics, and even neurophysiology suggests that that is not the case. I wrote something on this earlier this year —

    1. Nathanael3:09 PM

      Modern neoclassical economics *IS* "just making shit up".

      That's what's wrong with it.

      We know for a stone cold fact that people do not behave remotely like the "rational money maximizers" assumed by neoclassical economists.

      (I say "money maximizers" rather than "utility maximizers" because none of them ever does actual utility computations; the neoclassical types all assume money is utility. Which is also proven false by one of the strongest results in the whole history of economics, the "declining marginal utility of money", but they ignore that.)

  16. Anonymous1:23 PM

    Employment always rapidly returns to full employment! Prominent economic models make that false assumption.

    Are the models that make that false assumption a joke?
    Are the economists who apply those models to today's economy a joke?
    Is policy based on the assumption of full employment a joke?
    Are the consequences for malefactors of great wealth and their lapdog economists who promote bogus economic theories a joke?

    Hey Unemployed!!! The joke is on you!!! Bwaaaahhhhh!

    An economist and an unemployed person were locked in a food pantry with only canned food and no can opener...... Ha Ha Ha

    -jonny bakho

  17. Anonymous1:25 PM

    The big social problems of our day -- long term poverty, global warming, the middle income trap

    and the Great Recession....

    The economics profession has had 60+ years to study the Great Depression, and there were many conflicting views about what to do with the latest economic crisis. Many economists were saying that the problems with employment were structural, that fiscal policy is really contractionary, that austerity is leads to job growth, and that low interest rates are causing the recession.

    If I was sick and went to 10 different doctors and got 10 different answers, many contradictory, I would think HOLY SMOKES there is a problem with medicine. Now when you have the biggest economic crisis in 50 years and you get 10 different answers form 10 different economists. Something is wrong...

    The problem is economics is too big of a tent. And there is no way for economics to distinguish between useful models of analysis and voodoo. Economics needs to find a methodology that allows it to sluff off the dead weight. In a science there is no use finding the right answers when you can't eliminate the wrong ones.....

  18. Well, my respect for economists would increase, if they didn't write articles like "Defending the One Percent" (N. Gregory Mankiw, June 8, 2013). He may be right (I'm totally unequipped to analyze that), but it does not increase my respect for the profession. There seems to be a great lack of moral sensibility.

    But as a lay-person I have no right to talk about things I don't understand :-)

    1. "He may be right "

      he's not.

    2. "But as a lay-person I have no right to talk about things I don't understand :-)"

      Oh - think you're special, do you! Well, let me tell you, it's our God-given right not just to talk about things we don't understand, but to force other people to listen it as well!

  19. "In this area, economists play the important role of introducing new *ideas* about policy."

    Thank god. If we hadn't had economists to introduce the economic ideas behind fascism and communism, think of all the great 20th century novels that would never have been written!

  20. That spectrum auction thing... yeah, it's a good example. But it's a very worn example, and it's one which always gets trotted out when this subject comes up. If you're picking examples that are 25+ years old you're sort of conceding a lot of ground to the critics. What useful things has economics done lately? Shown that Sumo Wrestlers cheat?

    I actually think Macro is in a better state than lots of Micro here. At least we know what should be done in a liquidity trap, and can offer useful advice along those lines, even if no one listens to us.

  21. analogous to discrediting all of engineering on the count of a Fukushima disaster

    Fukushima was not an engineering disaster. It was a very small part, hysterically over-hyped, of a natural disaster. No one has been killed by the radiation leaks at Fukushima, and any increase in future cancer deaths caused by that radiation will be undetectable. Radiation hysteria is what Fukushima was all about. See here:

    1. Nathanael3:05 PM

      Absolute nonsense. Fukushima *was* an engineering disaster, because the GE Mark I design *sucked*, and putting it next to an active fault line *sucked more*, and putting the diesel generators below flood level *sucked even more*.

      You shouldn't discredit all of engineering because the people who designed Fukushima, decades ago, did a bad job, of course.

      And it's going to poison the local crops for a long, long time. You "no one has been killed" idiots are dishonest hacks: nobody is necessarily "killed" when a whole bunch of people get cancers which they wouldn't gotten before, but *it sucks and should be prevented*.

    2. Nathanael3:06 PM

      If you disagree, I have some dioxins and other carcinogens for you to eat! They're unlikely to kill you, but you'll have lots of fun medical experiences! But you think that doesn't matter, I'm sure!

  22. Anonymous1:00 AM

    As an engineer, I too see a lot of similarities between economics (at least the economics dealing with Macro and this financial crisis) and engineering. Many times in engineering, you have to proceed ahead and build something even if you don't have complete knowledge of the system that you are working with (due possibly to time constraints, budget constraints, or complexity of the problem). Yet, we are charged to carry on even in the face of these problems. And if we mess up, we are held legally responsible for the mistakes and can possibly lose our ability to practice. Even with this deterent to ensure we behave responsibly, we also have to go through peer reviews and have legally defined safety factors that we must abide by. For the amount of risk that engineers take, they are vastly undercompensated (FYI - any readers would do well to send their kids to study medicine or high finance versus having them become engineers)

    Contrast this with economics, where the ten years before the onset of the crisis saw some of their brightest stars recommending that the safety factors protecting the financial system be ever lowered. And these economists were rewarded so well for this work that our children will no doubt be reading about their grandchildren's antics in the tabloids in 30 years. And we were assured that if the unthinkable did ever happen, that the economics profession had progressed so much that they would easily be able to fix whatever had broken. Essentially, all the changes made to regulations

    You want to compare this to the Fukushima disaster, I see. Think about this . . . a nuclear power plant built decades ago that suffered one of the worse tsunamis in modern history. This is a manmade device used to provide electricity for millions of people for decades, and it was exposed to one of the most devastating natural disasters that the earth can create, and it almost was good enough. This is like comparing yourselves to the engineers of the world trade center, who somehow didn't anticipate somebody dumping hundreds of gallons of jet fuel into the upper floor of their building.

    No, a better analogy for you guys would be the engineers in charge of the BP Gulf drilling back a few years ago. Totally man-made disaster created by people with conflicts of interest that were cutting corners for short term economic gain, all with the assurance that they knew what they were doing.

  23. Anonymous1:07 AM

    You didn't get the joke. Economists often use unrealistic assumptions or unmeasurable parameters to make their modeling easier, ensuring the models have no real-world applicability or falsifiability. E.g. if you assume there is a can opener, you're going to be "not even wrong".

    1. By the way the solutions proposed by the physicists and the chemist are also both also lousy. Both carry with it a great danger of spilling or ruining the precious food.

    2. reason, they're just first approximations which will be fine-tuned as new data become available.

  24. One should be careful about giving too much credit to economists and game theorists for designing spectrum and other types of auctions. I have great respect for this work, and have been involved in many auction design projects myself, mostly in gas and electricity markets. But these multi-stage, multi-product auctions, often with complementarities, take us beyond what we know from theory alone, and so we have no way of knowing how close or how far from "optimal" auction designs we are. Government agencies and thier economists (including me) always declare their auctions to have been a great success, but against what criteria? Maybe 95% of the advance was simply in deciding to auction spectrum rights rather than allocate them via some ad hoc procedure, and 5% in intelligent auction design.

    1. Nathanael3:21 PM

      Perhaps the worst way to allocate monopoly rights is to give them to whichever private profiteer had them last year -- a "benefit the incumbent" method.

      (This, unfortunately, is what is still done with mineral royalties in the BLM lands.)

      This was done with a lot of spectrum in the past. Having an auction is likely to be an improvement on outright favoritism to incumbent interests.

  25. Nathanael3:01 PM

    The real problem is not that economics is useless. Well-done economics is useful.

    The problem is that there are an awful lot of economists who are promoting garbage doctrines. There is a lot of money and a lot of power devoted to promoting lies within the economics profession, *and it works*.

    As an earlier Anonymous wrote:
    "No, a better analogy for you guys would be the engineers in charge of the BP Gulf drilling back a few years ago. Totally man-made disaster created by people with conflicts of interest that were cutting corners for short term economic gain, all with the assurance that they knew what they were doing. "

    That's the problem with the economics profession. Would I trust an independently wealthy economist working pro bono for Greenpeace? Or an economist who had a strong record of fighting against big business? Yeah, probably.

    Would I trust your average economics professor? No way in hell: most of them have proven to be intellectually dishonest to the point of defrauding their students, and doing so on behalf of big businesses (Gregory Mankiw is a good example).

  26. Anonymous10:20 PM

    As an economics graduate student who just started grad school just barely over a month ago I sometimes struggle with the assumptions that are made in class. This is particularly the case when on the first day of macro class I see on the board "Spoiler alert: all of these models are false".

    Seeing that is discouraging. But then I think back to a conversation I had with one of my professors years ago. When I asked about the applicability of these models he stated (and I'm paraphrasing): Suppose we had a map from Toronto (A) to Montreal (B). If our map contained every possible detail along the way, where every tree was, every stop sign, every speed bump, etc. it would be utterly useless. All we really need is the direction from A to B. And this is the case with macroeconomics. If our models contained every little detail they would be significantly more useless than the current models based on assumptions. There would have to be so many variables and factors in our models to account for that results would only hold if they met every single condition. What we have now, general models that although make simplifying (and seemingly ridiculous) assumptions, direct us from A to B.

    As well, I too have been following this ongoing debate of the validity of economics as a science since the financial crisis. I think one factor that is often overlooked when examining the field of economics is the very basic nature of an economy. In the hard sciences: physics, biology, chemistry, the information is before our very eyes. When a theory is wrong, it is because the scientist/ researcher misinterpreted the information or the very problem itself. The world was never flat despite people thinking that is was. Gravity existed before it was "discovered". The very nature of an economy is that it is stochastic and always changing. The stochastic element of economies, the fact that the very nature of them are always changing, make it much more likely that theories become useless. So unlike physics where the facts remain the same whether or not the theory is correct, economic theories are subject to the ever-changing dynamic of an economy. Accordingly, the validity of theories can fall apart much more easily than in the hard sciences.

    Another idea mentioned above and one that I continually struggle with as well is the idea that individuals are 100% rational, and both utility and profit maximizing. While of course there are situations that this would be applicable too (regardless of how many) I think it's safe to say that this is not the case for most humans in general (just spend an hour with my mother and you will meet the epitome of a 100% irrational profit maximizer!)

    I think finding a way to incorporate irrational beliefs into even the most basic of economic models is going to be the next major paradigm shift in economics. I firmly believe that without the addition of irrational behaviour into models, economics will not be able to take a step forward. This is no easy task; if it were than a brilliant mind like Keynes or Krugman would have come up with an answer (no I am not saying Krugman is the Keynes of this generation it's just an example!). Obviously game theory has not sufficiently come up with an answer to this question either yet.

    (Aside: I am a lowly graduate student who started school just over a month ago. Maybe I'm talking out of my ass and someone will read this and think that I'm just an optimistic fool. And maybe I am. But at least I am willing to put my ideas out there for you all to agree with, disagree with, or shit all over and tell me why I'm such a fool. Regardless, I hope that this gets read and some further insight is provided to me.)

    1. Anonymous5:06 PM

      Your skepticism of the dominant economic models taught in graduate school is, at least to my mind, well founded. I had a similar experience in my grad program back about a decade ago when it seemed to me that many of the models taught were not only wrong, but that the predominant acceptance of them as good guides to policy and market behavior was dangerous. There is still an important role for economic statistics and empirical observation - I find that economics is best approach an observational science (much like other non-experimental sciences such as paleontology and archaeology). That approach, however, needs to be accompanied by an admission of uncertainty and humility in the face of matters on which we simply do not have enough data to draw absolute conclusions. This is the case in archaeology and paleontology, and the communities there survive well with debates that extend for decades. In economics, however, the debates and uncertainties intersect directly with national policy and business interests. In this context there is a significant incentive to profess greater certainty than is merited by the evidence. If you remain interested in economics, I would encourage you find ways to contribute through genuine empirical observation into important new questions (not necessarily questions posed by your predecessors) and through the use of new techniques (algorithmic semantic analysis, network visualization, etc). This approach worked well for me.

    2. Anonymous1:20 PM

      Poster here: Thank you for that. Seriously, it's people like you that encourage me to continue in this field.

  27. Your professor's name is Stephen Salant, or Steve Salant, NOT Steven Salant. Is this a classic economist error in assuming away reality?

    1. Anonymous10:42 AM

      Huh? I didn't see that name(s) anywhere in the poster's writing. Could you elaborate?

  28. Anonymous4:08 PM

    No that is not my professors name. But maybe that's who told him the idea. When did I even say Steven?

  29. I'm pretty sure that there is a well known cure to "long term poverty" -- jobs.

    In particular, jobs NOT aid. Aid creates more comfortable poverty, jobs allow those individuals to, sometimes only very slowly, escape from poverty.

    Of course, if the behavior of American individuals who remain in long term poverty cannot be honestly studied or reported, like having sex and children outside of marriage as one of the major behavioral causes, then neither economists nor any will be able to minimize poverty.

  30. Anonymous4:54 PM

    Decent rhetoric in defense of economics. But even the 'canonical example' of the contribution of economists to the FCC spectrum auction is a lot less clear cut in terms of the 'added value' of the economists involved than implied here. Read, Edward Nik-Khah's “A Tale of Two Auctions.” Journal of Institutional Economics, 4(1): 73-97.

  31. That article was a blog, not an editorial. An editorial is an unsigned statement that represents the official position of the newspaper as represented by its editorial board. Big difference between that and a blog.

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  33. "And without economists to help work out the theory and empirics, how do you plan on tackling such dilemmas?"

    Well, in South Korea that successful industrial policies were largely engineered by lawyers. And in when developed countries rose to prominence economics barely even existed.