The Eclipse of Economics?
Steve Levitt is moving on. Is it an eclipse? Which gets me to …
I have a use for all those used special glasses we Americans just acquired en masse. The ones that allowed us to look at the sun during its eclipse. We can recycle them — there will be more eclipses soon.
Or we could use them to study economics.
Trying to pin down the natural rate of something in economics can be the equivalent of burning your eyes looking at the sun. There’s just too much glare. And economics is just chock full of natural stuff. It has laws upon laws many of which seem to have natural outcomes. Or at least outcomes that are totally and incontrovertibly correct. So say the economists. Just don’t look up to see if they are correct.
Let’s begin at the beginning.
Well done astronomers! You got that one right. I was told that I would witness an eclipse here in Vermont, and I did. Your theories led to predictions and those predictions led to observations. Even by a total ignoramus like me. And the thousands of others who jammed the roads of Vermont to get a sight of the eclipse. It seems that the elegance of the underlying math in physics leads, at least in this instance, to something we can all witness. We don’t need to make big extenuating assumptions or embarrassingly silly explanations in order to see an eclipse take place exactly when it was predicted. It just happens. Wow!
That restores my faith in science
Which is good because economics had totally undermined it.
Physics is highly relevant. It explains real stuff.
Economics is not relevant. It explains only made up stuff.
Which is only useful if you are wearing magical glasses. The kind that blinds the sight of economists.
I am being harsh. I know. There is a ton of clever stuff in the attic of economics. Ideas that have some use and have a certain logic to them. They look great. Just don’t try to watch the economy and wait for the equivalent of an eclipse. You might wait a while.
An equilibrium for instance. Wait for it …
Well you missed it. It was there, I am told, but it evaporated too quickly for you to realize it was there. You should have been wearing those glasses. Only if you wear the economists’s special glasses can you witness the presence of the objects they discuss. The natural rate of this. The natural rate of that. General equilibrium. Special equilibrium. And so on. All these artifacts so well described by economists. They pass us by every day. Honestly.
Just wear those glasses!
This is simply not fair.
We all know that an economy is vastly more complex than the universe. There’s a lot going on. Some people call it life. And life’s difficult to get your arms around. There are people, for instance, and we all know how difficult people can be. They have preferences for things. And just when you’ve modeled what happens when you mix all those preferences together, they go and change them. How inconsiderate! So let’s hold them constant. Let’s make the earth the center of the solar system while we’re at it. That makes life easier to calculate. No?
Even better. What happens to people when we squeeze the life out of them?
Yes! Now we can model them just like astronomers can model the sun and moon. We can predict our versions of an eclipse. Automatons are so much more simple to manage within our math. And we are totally committed to our math. So when we have to choose between people and math, we choose math very time. We so want to match the astronomers!
I know. I know. There’s nothing new here. Nothing at all.
Which is the point.
A couple of days after the vindication of physics, we are left gasping at the problems economics has in trying to make itself relevant to the real world.
Just look at the fuss over inflation and interest rates. What is the “right” level for interest rates? Do the math. And … well it’s sort of this. Or that. It depends.
And, why don’t the “markets”, whatever they are, already know? Don’t they have perfect information? About the future, the past, and the present? Of course not. That’s just a ruse. It’s just a trick to get the math to work. No one believes it. So why would we believe economists? They make stuff up. Just to make their work less difficult.
Okay. Let’s cut to the quick.
Nothing I have said surprises any of you. So, I repeat: why would anyone pay attention to economists?
Apparently this has just hit home to Steve Levitt of all people. He of “Freakonomics” fame. He is leaving Chicago. Good for him. But it’s his reasoning on the way out that is a little eye catching. He gave a long interview to someone who publishes a podcast on contemporary economics.
Here are a couple of snippets from the conversation — it’s a transcript, so forgive the language.
“… I just think about all these ideas that had so much impact. I wonder now, just like with so many researchers, to what degree they’re still low-hanging. I think it just gets harder and harder, I think, at some level, to be able to innovate. And so, the bar just keeps on being higher. But at the same rate, I wonder, too, if the marginal impact of an academic is perhaps declining sort of in the same respect that Bob Gordon and people like that argue that we’re running out of ideas and that we’ve already invented all the great inventions, … “
And
“…I think the profession is very inward-looking. It’s rewarding people who do things that are seen as hard. It’s really blurring the lines between theory and empirics was structural in a way that it is an experiment that I personally don’t think has worked out very well. And so, I think that it’s not that, I mean, the great ideas you’re talking about like black souls are few and far between anyway. But the rewards are not there for people who have practical insights are not rewarded greatly in the profession. The rewards come to people who make innovations, theoretical innovations, right? Who come up with new techniques, who do hard stuff that other people can’t do. So, I think in that sense, economics is going to become, my prediction is that economics is going to become less and less relevant, more and more inwardly focused. And honestly, I wouldn’t be that surprised if economics ends up going the way of anthropology or sociology, which works prominent and thought to be very promising and important disciplines, but have fallen dramatically in their stature because they ended up being more arcane and more focused inwardly. So, I have a really bad feeling about the future of economics, and I don’t see an easy way to change it.”
You can listen to the entire podcast here: https://newbooksnetwork.com/stevendlevitt
As far as I can tell, Levitt is pretty sure economics has become so inwardly focused that it is fast becoming irrelevant. At this pace it will, gasp, join sociology and anthropology on the dust heap of useless academic exercises soon. There are plenty of useless academic exercises, but I think that’s being harsh on sociology and anthropology. At least when they make stuff up they don’t advertise it to the world with the kind of arrogance that economics has displayed for decades.
Despite it’s failures.
The really amusing part of the Levitt story is that he was once criticized by James Heckman of not doing “proper” economics. Whatever that is. “Proper”? Who knows?
It reminds me of the total lack of coherence I have remarked on before. Let me illustrate:
Here’s Thomas Philippon beginning his book “The Great Reversal” by saying:
“The big debates in economics are about growth and inequality. As economists, we seek to understand how and why countries grow and how they divide income among their citizens.
This is not exactly true because in 2004 Robert Lucas said this:
“Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution… The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.”
So, what is “sound” economics? Is it like Heckman’s “proper” economics? Can it predict an eclipse? Accurately? And without the prop of absurd assumptions? Can it?
No it can’t.
I love the pomposity of the Lucas comment. I would have thought that “sound” economics would be the sort that establishes how and why we experience economic growth. That seems to be a big deal for economists to figure out. Kind of like predicting an eclipse.
But, no. Even after decades of trying and after a vast pile of technical mumbo jumbo economists can’t answer that question. They are left with a wide and deep set of ideas. With no clear single theory that allows us to say with clarity what is likely to happen over the next few years let alone decades. Halley’s comet this is not.
They did, however, “discover” something they call Total Factor Productivity. Scratch the surface of that glittery idea though and you learn that it is the part of growth that their models can’t explain. Models based, that is, on their traditional method and classification of economic resources.
Yes. They re-branded something they can’t explain, gave it a fancy name, and announced its “discovery” as progress. Backwards progress. But progress nonetheless. And no eclipse either. Nothing to see after all that work.
They will naturally object to my flippancy. They should. Just as I should remind them of 2007.
Oh that!
Economics was rightly chastised for missing that one. And, before you all get upset, I am fully aware that not everyone missed it. Which is the point. Is economics a science or simply a great big conversation out of which nothing comes? Dare I remind you of sociology and anthropology? Can you imagine a physics that has several competing theories along with various versions of when an eclipse will take place?
Don’t laugh. That’s where economics is.
When you think about it 2007 was as if an eclipse occurred and took astronomers by surprise. My goodness! They might have said. Did you see that? How did that happen? Our models, ever so clever that they are, didn’t predict that! Ah, but we are not in the business of predictions. We are simply trying to explain. That’s where their voices might drift off towards silence … explain what?
Astronomers, though, can both explain and predict.
Economists can’t.
Their voices do drift off almost immediately. Or they get indignant. Don’t you understand, they proclaim, just how complex an economy is? All that astronomy is easy by comparison.
I suppose that’s where I began.
Agreeing with Levitt. Economics is irrelevant. That is if you want to understand actual economies.
“Proper” or not. “Sound” or not. It just seems irrelevant.
Maybe it’s the economists themselves. They’re so steeped in their method that they can no longer change. There’s no way forward. So they dig down. Down and deeper into the intricacies of their method. They disappear into irrelevancy. They are locked in. They are stuck way up a fitness peak. They are so path dependent. See? Complexity is chock full of ideas that might help explain the problem. If only economists would adopt some new ideas. Yes. An economy is complex. So think in terms of complexity and don’t simplify the economy out of existence in order to explain it.
And, yet again I say, I know. There are a few brave souls trying to bring economics within the scope of complexity. Good luck to them.
In the meantime, as Clara Mattei and Aditya Singh have recently claimed maybe it’s time to save economics from economists.
And maybe Levitt that arch practitioner of micro jumbo leaving is a sign or progress.
We can always hope.
Meanwhile put those glasses away. The eclipse has come and gone. Just like the astronomers said it would.
Now there’s a proper science. Maybe Heckman should take notes.
