The macroeconomics wars

by John Q on September 17, 2009

Paul Krugman’s piece on “Why did economists get it so wrong” has attracted a vitriolic response from John Cochrane, reproduced here. Krugman’s piece was strongly worded, but the reply ups the ante, and I expect further escalation. Economics conferences in the next few years are going to be interesting events.

Given that, as Krugman himself notes, disagreements between economists were notably mild until the crisis erupted, what is going on here?

I’m visiting Berkely at present and just had a chat with Brad DeLong. These are some of the thoughts I had about the great macroeconomics wars as a result.

One important element that can’t be ignored is the effect political partisanship, which is much more bitter in the US now than in most other places. It’s not so much Republicans vs Democrats as Republicans vs anti-Republicans. Krugman has been a leading figure in rejecting the idea that the Republican party represents a serious viewpoint that should be accorded respect, even in disagreement. Not surprisingly, the members of the intellectual class still associated with the Republican Party (relatively few, these days, but still dominant in the Economics Department of the University of Chicago) intensely dislike Krugman’s writing for the NYT.

But more important, I think, is the hole in the intellectual landscape opened up by the crisis. As regards macroeconomics, the pre-crisis near-consensus described by Krugman included a lot of “freshwater” macroeconomists whose intellectual roots go back to the New Classical/Real Business Cycle literature of the late 1970. This literature initially suggested that there was no possible role for monetary or fiscal policy unless people had mistaken expectations and drew the implication that a sufficiently credible and determined government could eliminate inflation without any serious cost in terms of output and employment, a theory tested to destruction by the Thatcher government.

Given the empirical difficulties encountered by strong forms of these views, most of the freshwater economists were prepared to make some concessions. As regards monetary policy, they were willing to accept some use of interest rates to target inflation, while arguing against “fine tuning” designed to stabilise the economy – during the Great Moderation it was easy enough to conclude that macro instability was a problem of the past, a claim made explicitly by Robert Lucas.

Similarly, it was easy enough to accept the implication that, in certain extreme circumstances like those of the Great Depression, the standard tools of monetary policy might prove ineffective necessitating direct use of fiscal policy to expand the money supply. In the absence of any perceived risk of a Depression, it was easy enough to make this concession while arguing against any use of active fiscal policy.

In the wake of the crisis, this position was untenable. If you supported fiscal policy at all, it was clear that a massive stimulus was needed. In fact, the arguments of Barro and others that Keynesians had overestimated the multiplier effects of fiscal stimulus implied that the required stimulus was even larger than Keynesian estimates would suggest.

Moreover, there is, as Brad DeLong and others have pointed out, no coherent position under which fiscal policy is totally ineffective while monetary policy is at least partly effective. And the only plausible conditions under which policy is totally ineffective is if the macroeconomy is always in (or close to) equilibrium. So, it’s essentially impossible to believe in recessions and unconditionally oppose fiscal policy.[1]

So we see Cochrane forced all the way back to Say’s Law, the claim that it is logically impossible for (planned) supply to exceed (planned) demand, since willingness to supply, say, labour implies willingness to demand goods. Cochrane accuses Krugman of wanting to scrap the macroeconomics of the last forty years[2] but then makes it clear enough that he wants to dump Keynes and everything that has been written since.

Arguments about Say’s Law are unlikely to be resolved by logical disputation. The only way to address them is to look at the historical record of the economy over the last couple of centuries. If you see stability, interrupted only by the occasional ill effects of government policies, you’ll accept Say’s Law. If you see regular crises, except for a few exceptional periods when macroeconomic stabilization policies have appeared to work, you’ll reject it.

fn1. Except for those who can always find some government program or another to blame, even for a case as clear cut as the 1890s Depression in Australia.

fn2. This charge is broadly correct, but I think the correct answer is the one anticipated by Cochrane. Economics did indeed take a wrong turn in the 1970s, responding to the breakdown of (one version of) Keynesianism. We need to find a new and better response, and much of the work of the past 40 years will have to be be discarded or reinterpreted as a result.

{ 40 comments }

1

Thorfinn 09.17.09 at 4:51 am

If you read Cochrane’s piece:
http://faculty.chicagobooth.edu/john.cochrane/research/Papers/fiscal2.htm
it’s clear that he doesn’t believe in Say’s law; he just prefers QE over fiscal policy.

2

John Quiggin 09.17.09 at 5:33 am

The money quote “Paul’s Keynesian economics requires that people make plans to consume more, invest more, and pay more taxes with the same income.” is Say’s Law in a nutshell.

3

nickhayw 09.17.09 at 7:38 am

Forgive my ignorance but…I really don’t understand that ‘money quote’. Why would Keynesian economics require people to consume over and above what they earn? Isn’t the point of Keynes that people consume less then what they earn, exercising their time preference, and so the government steps into the breach to make up for lagging demand?

One thing that troubles me about Cochrane’s paper, skimming through it, is that he makes an awful lot of claims to the effect of: “Keynes and fiscal stimulus are presented in textbooks as ridiculous; therefore they are”. I’m sorry, what?

4

mpowell 09.17.09 at 11:43 am

It is becoming increasingly apparent that if the best defense of your theory of macroeconomics relies on rational actor models, your theory should not be taken seriously. I think that is the relevation (at least that I have had, I think others have already realized this) that will continue to be the most underappreciated within the profession. There is a better chance, I think, that the partisans will be marginalized. But even with folks like Delong, I see an unwillingness to more closely examine their underlying assumptions when it comes to their favorite policies (in Delong’s case that could be free trade, for example)

5

Charlie 09.17.09 at 12:04 pm

Well, I’m not able to comment effectively on much of what’s in the Cochrane piece, but I did find that I couldn’t easily move past this passage:

In economics, stimulus spending ran aground on Robert Barro’s Ricardian equivalence theorem. This theorem says that debt-financed spending can’t have any effect because people, seeing the higher future taxes that must pay off the debt, will simply save more. They will buy the new government debt and leave all spending decisions unaltered. Is this theorem true? It’s a logical connection from a set of “if” to a set of “therefore.” Not even Paul can object to the connection.

This seems to conflate (logical) validity with truth. To me, the truth of “people, seeing the higher future taxes that must pay off the debt, will simply save more” seems thoroughly empirical.

Later on, Cochrane says this:

… the problem is that we don’t have enough math. Math in economics serves to keep the logic straight, to make sure that the “then” really does follow the “if,” which it so frequently does not if you just write prose.

Uh huh.

6

Dan 09.17.09 at 12:52 pm

Charlie,

The very next sentence of Cochrane’s makes it pretty clear, to me at least: “Therefore, we have to examine the “ifs.” And those ifs are, as usual, obviously not true.” He’s saying that the reasoning in the argument is valid, so any dispute regarding its soundness must thereby focus on its premises.

7

Brian 09.17.09 at 1:15 pm

Professor Quiggin, you note that “the members of the intellectual class still associated with the Republican Party (relatively few, these days, but still dominant in Chicago) intensely dislike Krugman’s writing for the NYT.” Please do not confuse two dozen economists (and not even all of them, e.g., Heckman) at the University of Chicago with the rest of the University, which has the same view of the U.S. Republican Party as most of the civilized world.

8

Charlie 09.17.09 at 1:37 pm

6: Then he should have written something along the lines of ‘this theorem leads those who accept these premises to this conclusion …’. That would steer clear of any accusation that some (desired) conclusion had been smuggled in.

9

John Quiggin 09.17.09 at 2:09 pm

@Brian #7: Or, for that matter, those in Chicago but not at the University. I’ve actually seen this particular metonymy used to deceive and I meant to be more precise, but I obviously forgot. Fixed now, I hope.

10

Thorfinn 09.17.09 at 3:01 pm

@ John Quiggin,

If you keep reading (the link, anyway), he says things like:
“A monetary argument for fiscal stimulus..”
“if money demand increases dramatically…”
“aggregate demand has fallen.. deflationary pressure…”
Sure, hastily written condensed posts aren’t the best place to conduct discussion. But if you look at any more extended or professional pieces (such as his working paper on fiscal and monetary policy), it’s clear that Cochrane is more sophisticated than you give him credit for.

11

Chris 09.17.09 at 3:59 pm

@4: I’ll go even further and predict that when the dust settles from the current crisis, rational-actor-based economics will be accorded all the academic respect of young-earth creationism, and this outcome is fully deserved.

Rational actors are as thoroughly refuted as phlogiston and the luminiferous aether, and they have been for years. Anyone still clinging to them values arrival at a preordained policy conclusion above his own intellectual integrity.

Economics can’t be a science until it banishes the pseudoscientists from its ranks.

12

belle le triste 09.17.09 at 4:06 pm

(It saddens me that phlogiston and the luminiferous aether have become the poster children for pseudoscience, merely because they had excellent and poetic names)

13

The Raven 09.17.09 at 4:21 pm

I take this as an ethical issue: that in the final reading, the freshwater economists ignored two core ethical practices of science: that theoretical argument must give way to experiment, and that, and that scientific consensus on theory is to be built on the evaluation of experimental work. There’s a lot more to be said about this. I suspect this is the kind of failure that will lead to many books of analysis, philosophy, and defense like the one you have excerpted here.

More of my thoughts on the ethical failings of that school of economics on my blog. (I don’t want to be pushing my own blog, but rerunning a two page column in comments is discourteous.)

14

The Raven 09.17.09 at 4:23 pm

Ooof! Correct link. (“Didja check the links? Didja?”)

15

Rabbi 09.17.09 at 4:41 pm

One of the Chicago crowd ( I’m too lazy to look it up) wrote recently that the real arguement against regulation isn’t that the market is perfect, it’s that the government is worse; that even as a regulator government will only make things worse.

The theoretical grounds for this are in Public Choice Theory. The reason to believe it is gut hatred of government. What the actual emperical evidence (if any) is I don’t know. I would be glad to be point to some.

The reason for the strong feelings is that the window dressing for the anti-government sentiments has been blown away. With it has gone the means to pursuade those not as committed to loathing the government as the Chicago crowd to accept the policy preferences of those who are.

The people frequenting this site, including me, say (when being polite) something like “too bad.”

16

Neel Krishnaswami 09.17.09 at 6:28 pm

I take this as an ethical issue: that in the final reading, the freshwater economists ignored two core ethical practices of science: that theoretical argument must give way to experiment, and that, and that scientific consensus on theory is to be built on the evaluation of experimental work.

This critique doesn’t merely cast doubt on freshwater economics; it rules out the very possibility of any form of social science, as a scientific enterprise. The reason is the world is too complicated, and there is not ever enough data to identify a model.

Let’s pick an example less controversial than economics — in particular, basketball. So, suppose we want a theory of basketball, which we want to use to predict the outcome of NBA games. We’ve got plenty of statistics on each player, so it should be possible, right? Suppose we make the not-unrealistic assumption that how well a player plays depends not just on his statistics, but also upon his interactions with his teammates and the specific behavior of the opposing team. Suddenly you have hugely more variables in your model than the number of players, and the amount of data you need to identify a model with good statistical confidence blows up — you will need more data than any player will ever generate in his whole career.

So we have no choice but to make use of qualitative insight to prune the space of models, in order to make it small enough that statistics can tell you anything useful. You cannot commit to building only on experimental data because there can never possibly be enough.

You can see the two faces of this problem in macroeconomics. The real business cycle theorists tried to build up models from microfoundations, and ended up with models with so many tunable parameters that they lacked the data to rule out anything out. This meant that their models couldn’t rule out the possibility that the Great Depression happened because scientific knowledge magically fell by a third. Qualitatively, this is absurd, but we don’t have enough quantitative data to rule it out statistically. The Keynesians are no better shape, though: they have no single story, but rather have a family of models all of which contradict each other. So they can design models to take advantage of qualitative insights (e.g., there was no mass outbreak of laziness in 1929), but there’s no way to falsify their general approach, because you can always add another tweak.

17

sclimatus 09.17.09 at 6:31 pm

As someone who is actually familiar with the Chicago economics department, I find all the vitriol it is getting somewhat frustrating. True, it spawned the “Chicago school”, but this was originally an interesting approach that was, perhaps, preferable to the Keynesianism of the time (an argument that Minsky sort of makes as well). The Chicago economics department is certainly more conservative than most, but I would say it’s more dominated by neoclassicism than by republicanism. Some of the most demonized figures at Chicago, such as Cochrane and Fama, are in the business school rather than the econ department. And most of the respected voices in the econ dept, such as Lucas, Myersen, Hansen, etc, are ideologically flexible, although they haven’t changed their message as much as Krugman might advocate.

18

Chris 09.17.09 at 8:24 pm

@12: They weren’t pseudoscience when they were science. But adhering to them after the evidence refuted them very much is.

@16: The problem is not whether you prune by qualitative insight, but whether you *refuse* to prune empirically, or accept empirical pruning as epistemologically superior to qualitative meditations. If the data underdetermine the models, speculation is fine. But once more data come in and refute some part of the previously-acceptable model space, you have to move out of that part or you’re no longer doing science.

@15: Public choice theory is *also* based on modeling individual actors as rational interest-maximizers. You can’t use it as an instrument to save freshwater econ when it’s the fruit of the same poisonous seed. And even if government and corporations are both flawed tools, corporations are *explicitly plutocratic* so the reasons to prefer the former as a starting point are obvious and strong. (Unless you are very rich.)

19

Cranky Observer 09.17.09 at 11:44 pm

> As someone who is actually familiar with the Chicago economics
> department, I find all the vitriol it is getting somewhat frustrating.
> True, it spawned the “Chicago school”, but this was originally an
> interesting approach that was, perhaps, preferable to the Keynesianism
> of the time (an argument that Minsky sort of makes as well). The
> Chicago economics department is certainly more conservative than
> most, but I would say it’s more dominated by neoclassicism than
> by republicanism.

This is a problem that people who associate themselves with the Republican Party, its owners and factors, and its libertarian and hard radical right wings tend to have a lot…

Cranky

20

Keith M Ellis 09.18.09 at 7:31 am

It saddens me that phlogiston and the luminiferous aether have become the poster children for pseudoscience merely because they had excellent and poetic names)

It saddens me because they weren’t “pseudoscience”. Both were products of modern empiricist scientific culture—they were as scientific as anything can be. Both don’t exist and were central to subsequently disproven theories, but that’s not the same thing as “pseudoscience”. Phrenology is a better candidate as the poster child for pseudoscience.

As a student of the history and philosophy of science, one of my biggest annoyances is this cultural tendency, in both scientific and popular culture, to by default accord contemporary scientific theories rigor and rationality and all past, disproven theories slipshod irrationality. When you study historical science and natural philosophy closely—not as a narrative gloss, but the actual intellectual and empirical work—pretty much all these ideas which seem to us now as outlandish and even absurd were perfectly reasonable in context, given what was known at the time. It’s only a relatively few dominant theories/assertions, such as some of Aristotle’s errors in anatomy (and subsequently repeated in Galen), which are egregious even within their proper context. People typically ridicule Ptolemaic astronomy on the basis that heliocentricism is a self-evidently more elegant and explanatory theory—most don’t realize that many geocentricists up to and including Ptolemy were well aware of this but quite reasonably couldn’t accept the unthinkably vast size of the cosmos indicated by the lack of observable parallax in the “fixed stars”.

I agree that economics as a scientific discipline has a great many problems, some of them systemic; but this trend of all and sundry smugly declaring it a “pseudoscience” is irritating because the vast majority couldn’t reliably differentiate a science from a pseudoscience if their lives depended upon it.

All the social sciences have problems, and they’re basically the same problems. The subject matter is almost impenetrably complex. These sciences are young. Because of both these things, these sciences are easily dominated by politically ideologically-driven ideas. They tend to have so-called “physics envy” and embrace a well-intended but simplistic need to formalize with mathematics and highly abstracted theory.

Economics has these illnesses far more severely than most (or all) and it certainly needs a renewed emphasis on empiricism. But it’s not wrong to have mathematically formalized and to have searched for powerful abstract theory. It’s just gone too far, too soon with this. And it needs to find a way to insulate itself from political trends—but that’s true of all the social sciences and is particularly difficult in the case of economics.

21

ogmb 09.18.09 at 12:01 pm

Some of the most demonized figures at Chicago, such as Cochrane and Fama, are in the business school rather than the econ department.

sclimatus beat me to it. Not to let the Chicago econ department off scotch-free, but Cochrane is the AQR Capital Management Professor of Finance at the University of Chicago Booth [formerly Graduate] School of Business. Which incidentally also makes his whining that Krugman ‘accuses us literally of adopting ideas for pay, selling out for “sabbaticals at the Hoover institution” and fat “Wall street paychecks”’ a bit malnourished in the introspection department, coming from someone who holds a chair sponsored by a quantitative trading firm at a school sponsored by the founder of an EMH investment firm. (Nevermind that Krugman never, literally or otherwise, accused Cochrane and his peers of selling out to Wall Street…)

22

Hidari 09.18.09 at 12:44 pm

‘All the social sciences have problems, and they’re basically the same problems. The subject matter is almost impenetrably complex. These sciences are young. Because of both these things, these sciences are easily dominated by politically ideologically-driven ideas. They tend to have so-called “physics envy” and embrace a well-intended but simplistic need to formalize with mathematics and highly abstracted theory.’

This is true, but it is false that the problems can be derived from the fact that these sciences are ‘young’. Philosophy, as is well known, goes back to the Ancient Greeks, who also discussed psychology and political science. Neuroscience goes back to the Edwin Smith Papyrus . Sociology began with Ibn Khaldun (or, arguably, with Plato). Medicine of course has its roots in Ancient Babylon (actually, almost all cultures have some form of medicine). Economics goes back to Ancient Egypt. Experimental psychology goes back to the Islamic Golden Age. .

While it is true that these early predecessors of today’s social sciences were ‘primitive’ by our standards precisely the same can be said about the state of the ‘hard’ sciences at the time. Indeed, I would argue that the state of political science and philosophy in the 14th century was considerably more advanced than that of, say, astrophysics.

So what happened?

I think the answer to the question what went wrong with the social sciences is precisely the same answer to the question, what went right with the hard sciences? In both cases the answer is the same: the ‘Scientific Revolution’. Here I think the definitive statement of the problem is by Alan Costall:

‘Descartes set up, almost single-handedly, a whole range of dualisms that continue to trouble the human sciences: the physical vs. mental, body vs. mind, animal vs. human, self vs. other, mechanical vs. rational, passive vs. active, natural vs. normative-to mention just a few. Certainly, Descartes had been impressed by the scope of the new scheme of physical science and its remarkable extension to the distant heavens, on the one hand, and to the intimacy of our own bodies on the other. (He had been particularly struck by William Harvey’s account of the circulatory system.) As Descartes saw it, the new physics was nothing less than a comprehensive science of nature. Consequently, anything failing to figure within that science must exist beyond the realm of the natural (Wilson, 1980, pp. 41-42).

But, of course, Descartes was not acting alone. Galileo and Kepler, among many others, also seem to have engaged in a similar “ontological fix” to save the universal claims for the new physics (Burtt, 1967; Whitehead, 1926; Young, 1966; cf. Chapman, 1966): the new science explains everything-and everything it fails to explain is not really real.5

Within this scheme, psychology’s own subject-the “subject”- became radically subjectivized as that which eludes science. As Alexandre Koyr put it:

[Modern science] broke down the barriers that separated the heavens and the earth. . .[But] it did this by substituting for our world of quality and sense perception, the world in which we live, and love, and die, another world-the world of quantity, of reified geometry, a world in which, though there is a place for everything, there is no place for man. (1965, p. 24)

This is not just a matter of rather distant history. One can still find physicists who insist that their task is “to build a world which is foreign to consciousness and in which consciousness is obliterated” (G. Bergman, cited in Rosen, 2000, p. 82), but we need to think through the implications of this exclusion of us. First, it is not clear how there could ever be any kind of science because, after all, scientists are people, and science is a human enterprise. If scientists, at least, do not belong to the natural order of things, how is science getting done!

The dualistic scheme of traditional science also “set up” psychology to be a rather strange kind of enterprise, the science of the “unscientific”-the science of that which eludes science. When physical science had promoted its methodology (of atomism, mechanism, and quantification) to an exclusive ontology, psychology (so conceived) was a pretty obvious mistake just waiting to happen- an essentially derivative science modeled on physics, yet having as its subject the very realm that physics rendered utterly obscure.’

One might substitute ‘economics’, ‘sociology’ or any of the other ‘human sciences’ for ‘psychology’. The problem is, therefore, that the way the sciences are set up in the ‘West’ a scientific psychology, or sociology, or economics, is simply a contradiction in terms: a scientific study of that which can’t be studied scientifically. To make the social sciences genuinely scientific will mean not only destroying ‘scientism’ and ‘physics envy’ but also undoing the negative effects of the Scientific Revolution, which will have an impact on the practice of physics and chemistry too.

http://www.redorbit.com/news/science/91657/from_darwin_to_watson_and_cognitivism_and_back_again_the/

23

Cranky Observer 09.18.09 at 1:46 pm

> The problem is, therefore, that the way the sciences are set up in
> the ‘West’ a scientific psychology, or sociology, or economics,
> is simply a contradiction in terms: a scientific study of that which
> can’t be studied scientifically.

I am not sure what you mean by this. Certainly since 1980 (and probably long before) both economists have set up and run various scientifically-controlled laboratory experiments designed to test basic hypotheses, and generated results that would be considered Keplerian facts by all by the most hard-physics-centric. Yet those experiments consistently run into two problems (1) given time and multiple exposures human beings can figure out almost any simple game being played on them, and then figure out a way to manipulate that game for profit, fun, or just sheer malice. Behavior changes, sometimes radically, over time and in response to the experiment itself – and this is true of even those behaviors which should be atomic for economic analysis. (2) When the results of the experiments contradict the requirements of the powerful in society (e.g. experiments which show that human preferences are not necessarily transitive, calling into direct question standard micro and its free-market bias) the results are either rejected outright or explained away with new theories that assuage the powerful.

Which takes us back to a comment made earlier: human beings live, work, fight, and play in groups. Those groups have power structures which shift over time. But always and everywhere it is to the advantage of the strongest power structure that there be no real discussion or analysis of itself, so anything leading to that end is scorched with flame.

Cranky

24

Cranky Observer 09.18.09 at 1:47 pm

“… both economists have set up and run …”

should be

“… both economists and psychologists have set up and run… “

25

belle le triste 09.18.09 at 1:55 pm

(phrenology has a poetic name too! plz to make yr poster-children the ones with prosaic names! economics and analytic philosophy are of course the places to start looking for this, which is NO ACCIDENT/emerson)

26

Charlie 09.18.09 at 3:10 pm

I think it’s worth noting that Barro concludes his 1974 paper with this construction:

This paper has focused on the question of whether an increase in government debt constitutes an increase in perceived household wealth. The effect of finite lives was examined within the context of an overlapping generations model of the economy. It was shown that households would act as though they were infinitely lived, and, hence, that there would be no marginal net-wealth effect of government bonds, so long as there existed an operative chain of intergenerational transfers which connected current to future generations.

Surely it would have been more circumspect either to say:

It was shown that households in an overlapping generations model would act as though …

or:

An observation of real households acting as though they were infinitely long lived would be consistent with the overlapping generations model presented here …

It’s possible that I missed something crucial in my brief (and not very well informed) reading (I’m fairly confident, though, that the ‘utility functions’ which appear on p. 1100 and following are not derived from any observation of the author). It’s also possible that Barro’s intended audience would (a) never confuse a description of a model with an empirical claim, and (b) possess perfect immunity from any normative effect of his conclusion. Personally, I can’t help thinking that this sort of product seems well suited for the shelves of your typical ‘family office’.

27

Rabbi 09.18.09 at 6:22 pm

Neel@16: your claim is too weak. Actually, for any set of data, that of physical as well as social science, there is an infinite class of theories which will be consistent with that data. The choice among them must be made on other grounds. As Chris@18 notes, the set of data available, and hence the class of theories consistent with it, changes over time.

Chris@18: I agree with you about Public Choice theory. I was trying to call it window dressing; sorry for any confusion.

28

Chris Dornan 09.18.09 at 7:07 pm

I agree with Raven that this is an ethical issue and I am surprised that nobody has connected Krugman’s demand that the saline economists repent with Rowan Williams’s alarm that there is no sign that anyone has learnt anything from the crash, least of all Keynes’s emphasis on uncertainty. Some humility and more ethics might be essential to stop an immediately repeat of the dismal cycle (I say more about this here).

29

Billikin 09.18.09 at 10:00 pm

The Raven: “I take this as an ethical issue: that in the final reading, the freshwater economists ignored two core ethical practices of science: that theoretical argument must give way to experiment, and that, and that scientific consensus on theory is to be built on the evaluation of experimental work.”

Neel Krishnaswami: “This critique doesn’t merely cast doubt on freshwater economics; it rules out the very possibility of any form of social science, as a scientific enterprise. The reason is the world is too complicated, and there is not ever enough data to identify a model.”

As Rabbi pointed out, the same is true for all science. That does not stop the scientific enterprise, however.

“Let’s pick an example less controversial than economics—in particular, basketball. So, suppose we want a theory of basketball, which we want to use to predict the outcome of NBA games. . . . Suddenly you have hugely more variables in your model than the number of players, and the amount of data you need to identify a model with good statistical confidence blows up—you will need more data than any player will ever generate in his whole career.

“So we have no choice but to make use of qualitative insight to prune the space of models, in order to make it small enough that statistics can tell you anything useful. You cannot commit to building only on experimental data because there can never possibly be enough.”

Again, this is true of all science. It is why parsimony is invoked. One thing that I have noticed on economics blogs is how economists do not seem to invoke parsimony. Instead, this is the kind of thing I hear.

“So they can design models to take advantage of qualitative insights (e.g., there was no mass outbreak of laziness in 1929), but there’s no way to falsify their general approach, because you can always add another tweak.”

Does economics suffer from tweakism?

30

Neel Krishnaswami 09.19.09 at 12:17 am

Again, this is true of all science. It is why parsimony is invoked. One thing that I have noticed on economics blogs is how economists do not seem to invoke parsimony. Instead, this is the kind of thing I hear.

That’s because they know what they are talking about. If you listen to sociologists, you will hear the same thing, only more loudly and larded with rude comments about the folly of economists who are too quick to ignore important effects.

Parsimony is not a magic wand. It is a claim about the structure of the causal relationships within a system, which can be either true or false, and must be justified with evidence and argument. It happens that many (but by no means all) physical systems have the property that you can rule out most possible causes, and be left with a model with few enough parameters that you can actually identify a model with a reasonable amount of data.

However, the principle of parsimony does not get rid of enough causes in most social systems. Returning to the example of basketball, we can justifiably appeal to parsimony to rule out considering hemlines or football scores as relevant variables in a theory of basketball. However, we cannot appeal to it to rule out considering the effects of a player’s teammates on the quality of his or her play. Even if you limit yourself to considering one-on-one interactions, the number of interactions grows quadratically, and you quickly end up with too many parameters for the available data to identify a model.

Basically, theory in social science is under-determined by the data, and there is no prospect of that fact ever changing. This means that social scientists need lots and lots of yellow books to make even modest claims — you need fancy math to wring conclusions out of weak assumptions.

31

Mitchell Freedman 09.19.09 at 1:09 am

A corporate financial officer once told me that most economists are just people too stupid to become accountants. Doesn’t that just about size up Cochrane? His most arching issue is that somehow, the private sector is less inefficient and somehow “better” than government. Yet, his post does not even try to prove that point.

And I really had to laugh when he quoted Hayek. I was waiting for him to start blabbering about John Galt. What Cochrane doesn’t get is his metrics will end up being garbage unless he gets beyond a FoxNews level of economic assumptions. Most economists are in serious need of some sociology courses. …

32

Neel Krishnaswami 09.19.09 at 1:54 am

Most economists are in serious need of some sociology courses. …

You are perhaps too optimistic on this point. The hottest area in sociology these days is social network analysis, and random graph models of social networks make the rational choice framework look realistic and psychologically insightful.

(I don’t want to rag on either economics or sociology, actually. In both of these cases, facts were thrown out to get something mathematically tractable, and that’s actually a good thing. Math lets you tell a story with the confidence that the story doesn’t have any plot holes in it. But: it remains a narrative.)

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John Quiggin 09.19.09 at 1:47 pm

Math lets you tell a story with the confidence that the story doesn’t have any plot holes in it. But: it remains a narrative

A nice line which I might pinch

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Billikin 09.19.09 at 9:01 pm

Moi: “Again, this is true of all science. It is why parsimony is invoked. One thing that I have noticed on economics blogs is how economists do not seem to invoke parsimony. Instead, this is the kind of thing I hear.

Neel Krishnaswaim: “So they can design models to take advantage of qualitative insights (e.g., there was no mass outbreak of laziness in 1929), but there’s no way to falsify their general approach, because you can always add another tweak.”

—-

Neel Krishnaswami: “That’s because they know what they are talking about. If you listen to sociologists, you will hear the same thing, only more loudly and larded with rude comments about the folly of economists who are too quick to ignore important effects.”

Do you mean that they know that everybody is tweaking their models? Or that they know that, without appeal to general criteria such as parsimony, virtually any model can be tweaked ad infinitum, and therefore not falsified? The general tenor of what I read is along these lines: You can always tweak the models, so no model can be falsified, so what can we do? I do not read this: You can always tweak the models, so no model can be falsified, so let’s get some discipline.

Neel Krishnaswami: “Parsimony is not a magic wand. It is a claim about the structure of the causal relationships within a system, which can be either true or false, and must be justified with evidence and argument.”

Parsimony is not a claim, it’s a criterion. There is more than one kind of parsimony. Occam’s razor minimizes entities, which I suppose will also cover variables. Minimal algorithmic complexity and minimum description length are modern forms of parsimony. Axioms and postulates can also be minimized.

Now, why parsimony is a criterion is not so easy to say. Is it simply esthetic? More parsimonious explanations are more beautiful. Is it explanatory power? More parsimonious explanations explain more with less. Is it probability? More parsimonious explanations are more probable, a priori.

Something that is related to parsimony is, I think, the sense that tweaking is like cheating. It is as though you are debating with someone and you raise objections to their claims, and they modify or take back or redefine something they said to meet each objection that you raise. You can never pin them down. If falsifiability means anything, it means making clear and definite claims that pin you down. There is an austere discipline to science that I miss in these discussions of tweaking.

Like astronomy, macroeconomics is not a laboratory science. One recent lament that I have seen is that, well, once competing models have been tweaked to cover our current situation, we will have to wait X years to test them. (When, of course, they will be tweaked again. ;)) There is an important anti-tweaking lesson from the field of machine learning: Never tweak your model so that it predicts everything, because you need to avoid overfitting the model to the data, and you need to have a good measure of the error of the model. Tweak the competing models on most of the data and test them against the rest.

Neel Krisnaswami: “Basically, theory in social science is under-determined by the data, and there is no prospect of that fact ever changing. This means that social scientists need lots and lots of yellow books to make even modest claims—you need fancy math to wring conclusions out of weak assumptions.”

That is another problem. Math lets you build magnificent edifices, but to what avail if they rest upon sand?

All scientific theory is underdetermined by the data. Does economics suffer from tweakism?

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noen 09.20.09 at 8:57 pm

I liked what Hidari had to say and I think it was not fully appreciated. What I understand her (if I remember correctly) calling for is a new scientific paradigm. This reminds me of John Searle’s criticism of cognitive researchers in their attempt to reduce the mind to a program. Because a lot of Cartesian assumptions are still in play what you end up with is zombie social sciences. Rational actor economics is Zombie Economics. This makes sense because what you get when you accept Descartes assumptions but reject human subjectivity what you are left with is a zombie universe.

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Anand 09.20.09 at 11:18 pm

Billikin : “Parsimony is not a claim, it’s a criterion.”

I would argue that, proceeding from the sort of data you have access to in the social sciences to the sort of hypotheses you end up forming, parsimony is implicitly a claim (and I may be mistaken, but this may also be what Neel is arguing). But why proceed from the data to these parsimonious hypotheses?

In the natural sciences, the answer seems clear : falsifiability. Scientific theories are falsifiable. When contradictions to a scientific theory are seen, the theory is dropped (examples are many – luminous ether, phlogiston, et cetera. Yes, phrenology is a better strawman candidate (in some respects) because the rejection of the theory has not proceeded from falsification, as I argue below). Here, I distinguish the natural sciences from the social sciences as well as the formal sciences (mathematics, logic, some areas of computer science).

In the social sciences, the answer is less clear. This is Milton Friedman’s argument in The Methodology of Positive Economics : if you are going to start dropping social science theories because their assumptions have been falsified, pretty soon you are going to have no theories left at all. (By quoting Friedman, I don’t nescessarily agree with everything that Friedman has said in the paper). So Friedman argues that assumptions in the social sciences cannot be questioned. IIRC, he uses the example of a ball falling through a vacuum to illustrate the impossibility of ever obtaining the conditions nescessary to verify a theory (which was a bad example, in my opinion). To me, this is a key difference in methodology between the social sciences and the basic sciences. Assumptions in the social sciences can be unverifiable and even blatantly false.

I am less sure than Neel is that mathematics is a narrative (and so, I suppose, I disagree with John Quiggin as well. Take problems in engineering or operations management, for example.) Mathematical and computational solutions to problems are “correct solutions” in that they are the best possible solution for the initial conditions in the models and/or the values of the parameters specified. Further, mathematics is the only tool available to keep track of simultaneous and multifacted relationships among entities. Argumentation (and formal logic) cannot be used to describe these relationships completely nor can they be used to solve the problem at hand. This is why engineering models are also “correct solutions” in many respects. They are the correct solution to the problem at hand given initial conditions in the model and/or the values of the parameters specified. Just because there are some problems that cannot be solved using mathematics does not mean that there are no problems that can be solved using mathematics.

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Salient 09.21.09 at 12:16 am

I am less sure than Neel is that mathematics is a narrative… They are the correct solution to the problem at hand given initial conditions in the model and/or the values of the parameters specified.

Seems to me you’re disagreeing over terminology, not concept. Those initial conditions, and boundary values of the parameters specified, constitute the “narrative” of which they spoke.

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Anand 09.21.09 at 2:19 am

Seems to me you’re disagreeing over terminology, not concept. Those initial conditions, and boundary values of the parameters specified, constitute the “narrative” of which they spoke.

I think so too. I would phrase it as mathematics being part of a narrative since it is the narrative that supplies the initial conditions and boundary values for parameters. I think the process of theoretical economics research goes something like this : you specify a model (e.g. for a particular situation), show that you make as few assumptions as possible, and then show that it is helpful in explaining something (say. that situation). This is not that different from the process in the natural sciences, except that there tend to be a few more assumptions in social science theories. Questioning the assumptions could lead to a better understanding of the limitations of the theories, but in the end, there is still the question of whether this is simply the best thing we have that works. Or in other words, we don’t know which of those assumptions we should drop. Rationality in favor of predictable irrationality? Consistency of preferences in favor of possible racial biases in people?

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Chris 09.21.09 at 9:05 pm

This makes sense because what you get when you accept Descartes assumptions but reject human subjectivity what you are left with is a zombie universe.

We are all p-zombies now.

Something that is related to parsimony is, I think, the sense that tweaking is like cheating.

Specifically, tweaking is a form of goalpost-moving. (Well, ok, *that* theory is falsified, but how about *this* one?) But it’s also a major method of scientific advancement — in some sense, fitting more and more data is what theory is about. ISTM that in science, there’s nothing wrong with being wrong, only with being stubborn about it.

But to come full circle for a moment, there are some economists that are quite well-paid to be stubborn about provably wrong theories. And economics as an intellectual field doesn’t seem to have the will, or perhaps the capability, to cast them out or to draw a line with the same rigor that it is drawn between, say, biology and creationism.

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sam 09.22.09 at 12:08 pm

@Keith Ellis

“As a student of the history and philosophy of science, one of my biggest annoyances is this cultural tendency, in both scientific and popular culture, to by default accord contemporary scientific theories rigor and rationality and all past, disproven theories slipshod irrationality.”

I would have thought that Kuhn drove a stake through the heart of this tendency.

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