A Quick Revisit to the “Is Economics a Science?” Debate

September 1st, 2013 at 11:38 am

I posted on this last week and the NYT has some interesting back-and-forth today on this question of whether economics is a legitimate science.

The original piece on this claimed that since its variables are social, not physical, constructs, economics is generally unable to make reliable predictions that test, reject, or advance its theories.  I added the point that in addition to—in fact, because of—that limitation, economic conclusions that serve a particular interest group are bought and sold on the marketplace, often at great cost to millions of un- and underemployed people (see “deficit alarmism leading to austerity” or “self-regulating market hypotheses that lead to bubbles”).

I’m sorry, but anyone who doesn’t see that simply isn’t paying attention, and it is a strong indictment of the way economics is practiced and abused today in many corners.  Though, to be fair, as a commenter pointed out, there’s no shortage of junk physical science too.

Still, let’s look at some of the pushback, much of which comes from economists, including a few Nobelists, no doubt protecting those medals they wear around their necks.

Eric Maskin, a Nobel laureate, makes the case in the second link above that economics isn’t just about prediction, it’s also about explanation, and it’s good at that.  To me, that doesn’t compute.  If a discipline can accurately explain the interactions of its variables—when and why bubbles form, where GDP and jobs are headed, how economic agents will react to a price change, and so on—then it should have a much better prediction track record.

As one of the respondents to Maskin succinctly puts it, “The ability to predict is both what makes our explanations useful, and what confirms that our explanations are correct.”

Paul Krugman is more specific, though he’s oddly dismissive of the underlying case—“odd” in the sense that he’s constantly (and correctly and compellingly) pointing out the types of devastating economic mistakes I note above.  But here he points out that the application of monetary policy in the downturn (at the “zero-lower-bound”) worked in much the way intermediate macro would predict.  It’s a valid point; his use of IS-LM in the liquidity trap (where deficit spending has no impact on interest rates but increases GDP) has been consistently insightful and correct, and it provides a good example of an economic model that works.

But perhaps because he’s in a defensive crouch (there’s that medal, again) he’s missing the larger point: scads of other economists, including other Nobelists, have not only ignored Paul’s insights, they swum in the river de-Nile, arguing that according to their models, interest rates and inflation are about to bust out all over, evidence to the contrary be damned.  And they’ve arguably won the day, both here and even more so in Europe.

Why were they able to do this?  Because, as the original article pointed out, in my own words:

Because economics both poses as a hard science and fails to generate reliable predictions, establishing economic facts is an elusive exercise.  Battling statistical analyses come to opposite conclusions on the impact of fiscal stimulus, changes in tax rates, wage mandates, regulations, and so on.  Into this void steps money and power, such that today we find ourselves with think tanks staffed by economists who provide their clients with the answers they seek.  And since those with the deepest pockets can buy the results that best serve their goals, it is increasingly difficult to generate the wealth of evidence needed to offset market failures, inequities, and even existential threats.

The fact that Paul and others (me too, sometimes!) use its tools effectively shows that economics can be and often is useful.  I stressed in my earlier post the extremely valuable role economists can play by citing market failures.  But to say, “hey, I used economics and I got something right!” is a very incomplete defense.

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24 comments in reply to "A Quick Revisit to the “Is Economics a Science?” Debate"

  1. Stephen Weinberg says:

    It is unfortunate for economics that our most public face–macroeconomic forecasting–is one of our weakest areas. It is also unfortunate for our reputations that some of our most settled issues, where there is the greatest agreement among economists, are the least likely to be debated (although the Republicans have a bizarre wing of their party determined to resurrect the gold standard).

    Let’s put forward the health care reform as a better test of economics. Both liberal and donservative health economists agree that a no-mandate guaranteed issue law of the sort NYS had on its books would be devastatingly bad for the individual market. That the ingredients of ObamaCare will greatly reduce the uninsurance rate without crippling premium hikes is a fairly mainstream prediction of health economics. Let’s see if we got it right.

    Meanwhile, the design economists are racking up victory after victory. See Al Roth’s Nobel Prize speach.

    In industrial organization, the work of Ariel Pakes and others has dramtically increased economics’ ability to make useful predictions about the results of significant strategic decisions by companies.

    As for financial markets, the primary mainstream prediction of financial market theory is that it cannot predict short-run changes in asset markets. That theory holds up pretty well, and millions of people would be better off if they trusted it more than the crank media.

    These areas are much better settled than macro, which is still at the scientific historical analog of debating whether the sun went around the Earth. And even then there was one major branch of astronomy that was on the right path….

    • Jared Bernstein says:

      Thanks–those are helpful nuances to bring to the broader argument.

    • Barry says:

      “It is unfortunate for economics that our most public face–macroeconomic forecasting–is one of our weakest areas. It is also unfortunate for our reputations that some of our most settled issues, where there is the greatest agreement among economists, are the least likely to be debated (although the Republicans have a bizarre wing of their party determined to resurrect the gold standard).”

      The ‘bizarre wing’ includes Feldstein (austerity, destruction of Social Security), Cochrane (austerity, fraudulent predictions of inflation), Mulligan (the ‘Great Vacation’ theory), Mankiw (austerity, and flip-flopping due to partisan reasons), and others who are in good repute. The gold-bug wing is a true fringe movement, and doesn’t really matter.

      • Stephen Weinberg says:

        Yes, but if goldbuginess were to warrant serious public discussion, the economics profession would show a great deal of uniformity on the issue! But the stuff economists mostly agree on is rarely in the news. The utter fringiness of the goldbugs was my point.

        As for the people you named, I have no interest in defending Cochrane or Mulligan, but I consider Mankiw and Feldstein to be sane, decent men and economists.

        Mankiw is actually quite thoughtful on the political/academic divide, and is certainly NOT a partisan hack on environmental issues. I’ve retained a lot of respect for him, not least because he taught me most of what I know about macroeconomics, and he was quite fair in how he taught the liberal side of it.

        I’ve retained a similar respect for Feldstein, my first ever economics professor, who inspired me to become an economist because I was sure he was wrong in lecture one day. He must have been doing a good job on the underlying issues to teach my stupid college freshman self enough to be able to disagree with him. Similarly, in graduate school, he taught me his model of social security privatization clearly enough for me to know exactly where I think his parameters are too optimistic. It’s a coherent model, though, and defensible. I can disagree with the man without considering him “bizarre.”

  2. Tom in MN says:

    I would counter the “if you can explain it you must be able to predict it” comment by pointing at chaos theory. In the study of deterministic but non-linear systems many are so sensitive to the initial conditions that predicting the system state later on is very hard even when you completely understand how and why the system reacts at any given instant.

    There are examples in science of simple cartoon models working very well to predict a large amount of a system’s behavior, yet attempts to dig into the micro-scale aspects of the system to develop an improved model prove very difficult.

    I think science is about the process used in the inquiry, but as it turns out falls more in the “I know it when I see it category” than having an exact definition. The idea of the scientific method seems well established until you try to find a definition.

    • Jonathan says:

      Don’t bother trying to find a definition. Analytic philosophers spent approximately the first half of the Twentieth Century trying, then gave up. The reasons for the failures were summed up by Israel Scheffler in an article title “Prospects of a Modest Empiricism.” The article was published (in Review of Metaphysics, for those who want to dash off to the nearest research library and look it up) in 1957.

  3. Dave says:

    RE: “Battling statistical analyses come to opposite conclusions”

    I would argue that this is true, and this applies with varying degrees across the different areas of study within economics.

    But the most controversial areas of study involve macroeconomics: trade, full employment, inflation, inequality, and lifestyle**.

    Often the statistics of macroeconomics are packaged in a paper that seeks only to be relevant in certain circles of economists. External to all of these cases is a very basic belief system that provides the foundation for one’s view of economics in general. Very often the appropriate rebuttal to a statistical model is to say internally, “but that is just to immoral to consider.”, and so this is where the groups drop out of each other’s discussions.

    I think the field has been completely off track for far too long. There are actually many ideas out there, backed up by statistics, that are absolutely scientifically falsifiable, but the problem is that nobody has the time or initiative to spend hours and hours disproving that which is clearly irrelevant. I can be done, but isn’t often done because nobody wants to do that kind of work — it is boring and carries no inherent reward for those skilled enough to do it.

    This is how economics differs from the hard sciences: in the hard sciences, everyone in the discussion has every reason to disprove the disprovable. That is the very basis of the discipline. However, in economics, very few have any reason to disprove the disprovable if they already know it to be wrong. Why? Because they know the people who believe it can achieve a following because the RESULTs (as opposed to the methods) appeal to different groups in different ways.

    In the hard sciences, nobody involved is interested in controversial results because nobody benefits from them. In economics, controversial results always benefit someone, so they are actually a good thing to many.

    So even though I believe there are SOME (fairly few) elements of macroeconomics that are almost as scientifically hard as the hard sciences, there almost never exists the proper quorum of participants to do the work required to prove it so.

    The problem is on the consumer side rather than the producer side of the game. Many economic findings are very scientifically verifiable, but too many consumers of the information don’t want it to be so.

    But that also leads to another problem, which is that economists who often work with very scientifically-proven results tend to become too sure about other areas of study that are not so scientifically provable. To err is human.

    **Only one group seems to care about this aspect.

    • Jared Bernstein says:

      I agree with much of that, but give us a few of the elements of macro that are pretty hard…I’m collecting concepts in economics that I think serve us well. EG, opportunity costs, counterfactuals, yes…Riccardian equivalence, deficits crowd out, not so much.

      • Dave says:

        The most important ones, the ones that provide the most insight, are actually accounting identities:


        And then separate saving and investment into separate groups: government guaranteed (explicit or strongly implied via private insurance) and at risk. The former is S and the latter is I.

        There’s not much more to it than that. This is scientifically provable to the extent that mathematics is provable.

        Now to unproven but provable ideas:

        There are many psychologically-provable ideas about how people value material things and situations in which they value these material things over social arrangements and when they don’t. Nobody runs these tests because there’s no money in it. All the money is in market efficiency.

        Prove these physiological phenomenon , which have previously been regarded as intangible, in statistical terms and you have the basis for creating a savings/consumer tradeoff. What causes financial and economic stability is an excess of savings. Show the division of groups, incomes, net worths, and determine if there is any statistical differences in their propensities within this group to save/spend with regard to the proven baseline. Most likely there isn’t.

        Do these things and you can scientifically prove that income disparity and the excess desire to save by those on top is to blame for economic instability.

        • Dave says:

          “What causes financial and economic stability ”

          Should have been ‘instability’ rather than ‘stability’.

  4. Dave says:

    Perhaps a statement that cuts through what I just said with better clarity is this:

    There are many lucrative reasons to create economic studies with controversial results. There are few if any lucrative reasons to create economic studies with provable results.

    This says nothing about the inherent scientific basis of the field, because it isn’t about the field itself, it is about the people who practice the field. And this is so in economics perhaps more than any other field of study, probably even more than psychology.

  5. Perplexed says:

    Well said Jared! But is economics standing as a “science” really the right question we should be asking? No doubt there are examples of where the “science” of economics has made considerable achievements in its ability to explain and predict as Krugman (and others) point out. But isn’t the real problem from the standpoint of “we the people” not so much economists inability to explain and predict as it is their protestations that they can? Isn’t this where the real damage gets done? If engineers did this bridges and buildings would regularly fall down and people would no longer believe that claims of engineers that they “know what they’re doing” were credible. We keep track of which engineer designed which bridge so that that we identify which engineer exceeded his ability to understand how to build a sound bridge and pull his license to prevent further damage. There is no similar accountability for economists, even though they do considerably more damage. The public has no way to differentiate between statements by economists which are based on a fairly sound understanding and those which are based on theories with little or no predictive ability. If economists refuse to “police” themselves because the incentives are too alluring, perhaps what “we the people” need in order effectively manage our economy is a new field of mathematicians that “audit” the proposals of economists and reject those with no sound basis for a predictive capacity or clear scientific understanding than those of the guy at the other end of the bar. Is there a way for the public to use what economists actually know while protecting themselves from the damage that accrues when economists less than scientific claims are used as “scientific” support for special interest groups that can afford economists?

    The poor and less politically powerful (quite the coincidence its the same people in a representative democracy isn’t it?) can’t afford economists to make their political arguments as the wealthy and powerful can. Their only protections against the wealthy and powerful (another curious coincidence in a representative democracy) and their “hired gun” economists is their democracy. Now that that’s been bought out from under them, the damage is accelerating. “We the people” need to know what the rents are in order to make sound economic decisions that are in the interest of “we the people.” The reason we don’t know it is that the oligarchs, their paid-for politicians and their their hired gun economists have determined for us that its better that we don’t know what they are. Regardless of the debate surrounding “economics as a science,” “we the people” are in need of field that can objectively inform us of what is really going in our economy and “economics” is really not about fulfilling that need. If economics can’t or won’t try to be the “field” that supplies that, we need an alternative; and we need it quickly.

    • Jared Bernstein says:

      Yes, it would be good if there were some sort of oversight–though pretty hard to imagine. The peer-reviewed journals were supposed to play that role but it hasn’t really worked out that way (eg, the Rogoff debacle paper was not peer reviewed–so while much peer reviewing is probably useful, it does not play a gate-keeping role).

      My point is that one uber-problem we have is that since econ gets passed off as a science, people make all kinds of BS claims about how if we do X, then Y will happen. And they’ve got some math, stats, and decimal points to prove it!

      • Barry says:

        Start with policing the most blatant abuses, such as Reinhart and Rogoff’s paper (http://www.nextnewdeal.net/rortybomb/researchers-finally-replicated-reinhart-rogoff-and-there-are-serious-problems).

      • Perplexed says:

        Agreed, I think we know pretty well now how the self-regulation story ends. We’ve learned a lot about quality control over the last 30+ years and can fly jumbo jets all around the world with an incredible record of safety (and still few have any idea who Demming is http://en.wikipedia.org/wiki/W._Edwards_Deming, success is now defined by the ability to establish monopoly profits and other rents, not really his skill-set). Independence is a necessary condition, accountability probably is too.

        -“My point is that one uber-problem we have is that since econ gets passed off as a science, people make all kinds of BS claims about how if we do X, then Y will happen.”

        I agree, and more often than not its a political argument to benefit some some (usually wealthy, or at least wealthy enough to have economic hired-guns) special interest “group” cloaked in “economic science” terms. “We the people” need a credible “institution” (for lack of a better word) that can separate the wheat from the chafe, expose the political arguments (and their proponents) for what and who they are, while still being able to benefit from what economists can tell us with a high degree of confidence. I doubt that its beyond our capabilities to do, and I also doubt that developing measurements and statistics on rents is beyond our capabilities to do, but they are both beyond the will of those in power and benefiting from not doing them to do. The most pragmatic solution is to have a democratic republic that can mitigate the incredible harm that continues to accrues in the absence of measures to control the quality of “economic prognostications” that the current system generates. “We the people” need to demand that what we need to know to manage our economy (and politicians) (think rents) be measured with the best available tools and not be told by those benefiting that its not important (or “impossible” to do) so “we’ll decide what you need to know.”

        All of which is what makes what Larry Lessig is trying to tell us so incredibly crucial. If we would all (or even just a lot of us) agree, as Larry very cogently argues both in his book, and here: http://www.ted.com/talks/lawrence_lessig_we_the_people_and_the_republic_we_must_reclaim.html,, that while this may not be the “most important issue,” it is the “first issue,” the issue that is a necessary condition of successfully resolving the most important issues. Our choice to ignore this, and it is a choice, may well be our most serious, and possibly fatal mistake. “A republic, if you can keep it” (Benjamin Franklin) was not just a description, it was a warning, a warning we have ignored at our peril and are now seeing the consequences of. Welcome to life in Lesterland.

      • Perplexed says:

        It also seems that the name Reinhart comes up considerably more often than chance would predict. Have you seen this posting? http://www.voxeu.org/article/bernanke-theory-versus-bernanke-practice

        Democracy at its finest right? Millions, probably 10’s of millions (maybe hundreds of millions?) of lives devastated by “processes” and unelected officials with enormous power to inflict damage and accountability to no one. So what’s the argument again for FED independence? Is it so that whoever gains control of it can chose to serve whichever of “We the People” they choose to without restriction or accountability, or is this this damage is just the uncontrollable “collateral damage” of an economy managed by our “best scientists”? Quite the prize for those who can manipulate elections in any way possible and make those appointments. And, of course, “economic
        science” is completely baffled about how all of this wealth and income concentration is occurring right? Wealth GINI .87 and growing, nothing to worry about right? Just the “natural” outcome of a modern, global economy.

  6. Dave says:

    Oh, and of course, I’d prefer it if people would use my new web site (coming back up in new and improved form within a couple of weeks) at http://www.rationalconversation.com to discuss the results. It will not be renamed blog sync at this time. I’m going to name it back to Rational Conversation to see how that goes.

    Much of the problem of disseminating information accurately lies in the propensity of information purveyors to control consumers beyond what should be controlled. You do not and should not have to control what others say about your ideas if you want to appeal to voters. The question is whether people are trying to appeal to voters, or whether they are only trying to appeal to wealthy information consumers.

    This is the fundamental failing of old media, and this is what new media can fix. And the best way to achieve that goal, of informing voters accurately, is best achieved with new technology such as my web site.

    It is psychological in basis. Old media created unnatural psychological barriers (not necessarily monetary barriers) to information dissemination. I fixed that.

  7. Dave says:

    Just another quick fundamental:

    psychological phenomenon that affect economics tend to be scientifically-statistically valid with regard to micro (individual choice) and applicable, therefore to macro, only through statistical groupings.

    Macro-psychological effects such as macro expectations, confidence and the like are just inherently on shaky scientific grounds. Why? macro entities just don’t have such thing as a brain. Their behavior doesn’t conform to psychological ideas we dream up.

    However, groups can display individually and statistically-describable propensities to certain psychological behaviors.

  8. Dave says:

    In other words, it makes sense to extend a psychological tendency to a macro description only if that psychological tendency has a quantifiable effect that can be aggregated in a meaningful way within the economic system rather than psychology.

    In other words, you cannot sum up confidence into a meaningful macro entity. You cannot sum up individual expectations into a meaningful macro entity. However, you can sum up individual economic effects due to those parameters, but to do so requires that you actually test individuals in each of their individual situations.

    So it is much better to use psychological ideas to create relative propensities, find the economic effect of that relative propensity within the individual, and then sum those economic effects. Don’t try to sum propensities because it won’t work.

  9. smith says:

    Science for the following reasons:

    It passed the test of predictions in 2008-2009, partly because the experiment we ran in 1929 – 1932, not saving the banks, and not passing stimulus, proved what doesn’t work. Moreover Great Depression stimulus measures and effects of WWII proved theories of what would work. Please note the actions of 2008-2009 were much more reliant on economic theory, the government treating the situation as one that could reliably be accessed and then acted upon in accordance with known science vs. New Deal legislation and WWII appropriations that were new and thus less well grounded. But even the New Deal had models and theories. Tarp was passed by a Republican president with Republican support. If a Republican won in 2008, Republicans would have voted for stimulus too. Do not cast aspersions on the the field by conceding it lacks science because a large segment of the profession is corrupt, ignorant, delusional, rich, smug and spoiled, or some combination thereof.

    Any idiot could see there was a housing bubble (as early as 2004) and an impending collapse, and possible recession. What was hard to predict was the massive disruption due to fraud, greed, deregulation, and politics. That doesn’t negate science.

    Two heart specialists look at the same patient, same diagnostic tests, and propose different operations. Still lots of science involved even though proposed treatments can be radically different. Is medicine more art than science? Hardly. But there is data missing, the system can be chaotic, there is an art to it too, but no one denies also tons of science.

    Science without predictions? Evolution can’t predict the next dominant species, astronomy can’t predict the universe’s collapse or infinite dispersion.

    But economic science led to a broad consensus of how to avoid another Great Depression. What further proof do you want? Only politics and self interest prevent further progress. Resorting to blaming the state of knowledge demonstrates how reality based economists need to sharpen their debating skills. The opposition would never concede that point.

  10. David Gold says:

    This has been a fruitful exchange. I wonder, however, whether the science vs not science dichotomy is too sharp. As Eric Maskin pointed out, there are numerous instances in the physical and biological sciences where weaknesses bring them closer to the “not sciences.” The strength of science is often thought to lie in their ability to run controlled experiments, whether in labs, in clinical trials, in data collected via repitition (such as the earth’s rotation around the sun). This, in turn, can lead to the discovery of important constants, such as the speed of light, gravity, combinations of molecules, etc. So long as underlying conditions hold, these constant can help with other discoveries and with predictions, such as with major storms. But change the conditions, such as leave the earth’s atmosphere, and these constants can become variables.

    With economics, political science, etc., underlying conditions frequently change, as people learn from the past, institutions evolve, political power shifts, etc. The speed of light may be constant but government spending multipliers aren’t. One size fits all models are inherently unreliable. Models that cast light on specific circumstances, such as the liquidity trap, turn out to be much more useful. All economists should study history. It might help introduce a touch of humility into the profession.

  11. Pam says: