What Do Economists Know?

I think I annoy many students.

They come to me with questions, generally about policy. And they want definitive answers: is this policy beneficial or not?

They could ask these questions of anyone.

But they ask me because they think I will be able to back up my answer more solidly. After all, I’m a macroeconomist, and I think a lot about policy.

Here’s the annoying part: a lot of my back up leads me to the conclusion that I don’t know the answer, and no one else does either.

That’s not very comforting. It’s also hard to digest, because when we watch or listen or read about policy analysis, we’re confronted by people who are certain they have the right answer. It’s easy to mistake their certainty for a preponderance of solid evidence supporting one side of the policy or the other. Certainty is very common. Convinving evidence that tilts us one way or the other is much rarer.

Economics is not alone in this problem. It crops up in all the social sciences, and a good chunk of the harder sciences as well (e.g., anthropogenic climate change).

One last note before I move on. At the risk of sounding age-ist, the tendency to see the world in black and white diminishes with age. I think this is a good thing, but I’m no longer young. Here’s the thing: there’s pretty much never been a former student who you run into many years later who remarks that economics make less sense than it once did. And most of the time their opinion revolves around to noting that they didn’t realize how few solid conclusions there were about anything, until they’d gotten out in the adult world for many years.

***

I am not alone in my position. And I fancy it to be rather “grown up”.

Russ Roberts has published an essay on this entitled “What Do Economists Know?”. Read it.

John Cochrane has a good follow up on this, urging more humilty amongst economists. Don Boudreaux riffs on that here.

For my part, the intro to Roberts’ piece happens to me with not just journalists, but students and other professors:

A journalist once asked me how many jobs NAFTA had created or destroyed. [substitute most questions about economics there] I told him I had no reliable idea. …

The journalist got annoyed. “You’re a professional economist. You’re ducking my question.” I disgreed. I am answering your question, I told him. You just don’t like the answer.

Yep, that annoys people. Here’s what we hope happens, but sometimes it doesn’t:

What usually happens is that very smart well-trained people on both sides of the issue argue. …Eventually, sometimes a consensus emerges but that consensus can be reversed by further empirical analysis. … This consensus is … like the two sides in a trial — one hopes the process yields truth more often than not.

But there is no way of knowing reliably if the consensus reflects the truth. It may rely instead on the underlying biases of the prosecutors and defendants in the intellectual trial of ideas. Or where they received their PhD degrees. Or the fashionability of certain positions over time as society changes. … there are no clear feedback loops in the world of academic economics. You can say something that is wrong and the price you pay may be zero. In fact you may be rewarded.

So, here’s where I am coming from in your class:

Where does that leave us?

First let me make it clear that facts and evidence matter. I am not saying that measurement is irrelevant.

…

Facts matter but some facts are extremely difficult to measure … Some facts are quite difficult to pin down and prone to extreme misinformation and even deception.

…

Or as Brian Nosek, Jeffrey Spies and Matt Motyl put it:

Published and true are not synonyms.

So where does that leave us?

…

If I am right, economists are mostly dangerous. At least economists as the world perceives them. But most of the people I am talking about are not economists. They are really applied statisticians.

Those are the people that I think are in the Trump White House. And the Obama White House.

And I think they are mostly applied statisticians who aren’t very comfortable with the tools actual statisticians use.

Think people who spend many seconds perusing the box scores after the game and think they know something about why a certain team won. Policy is made that way in capital cities all over the world.

Roberts continues:

Economics is primarily a way of organizing one’s thinking in considering incentives and costs and the interactions between individuals that we call a market but is really emergent behavior with feedback loops. Studying economics sensitizes you to these things and others and helps you appreciate complexity and various outcomes …

Economists understand that many things are more complicated than they seem. …

… These ideas are not rocket science. But they come easily to economists and not so easily to non-economists. Thinking like an economist is very useful.

… [But we] economists should be more humble and honest …

Cochrane sums up with a discussion of 7 things he thinks we learn from economics (the bullet points and organization are my summary of a couple of pages of finer points):

• Economics leads you to great sensitivity to the fact that  correlation is not causation.
• Budget constraints and accounting identities. I think good economists quickly follow the money one more step than most analysts.
• Unintended consequences. Our field is, perhaps, best described as a collection of funny stories about unintended consequences.
• Supply response, (or demand), and competition. … we are not always great at quantifying their relative significance. But "not zero" is usually an eye opener in public policy.
• The fallacy of composition ought to be right up there with correlation is not causation. We can't all negotiate better.
• In sum, I think economics provides an excellent set of bullshit detectors. This is my stock answer about my own professional expertise. I may not know what makes the economy grow, or how monetary policy works. But I now [sic] with great detail exactly why the ten stories in front of us are all wrong, and typically logically incoherent.
• … Let's call it Hayekian humility. This is the hardest one for so many economists to admit, as we all like to play central planner.

Boudreaux’s post takes on a faux debate format between a non-economist and an economist over policy questions. Good stuff too.