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.