8 ms·

How Effective Is Economic Theory?

60 points by abhineet97 9y ago

bmh_ca 9y ago
Effective at what? A rather savvy economic-statistician once told me that economic theory is a very effective way to determine who has been able to get their theory published.
- euyyn 9y ago
  Effective at predicting outcomes of interventions. As in: My country's situation is X. If I tweak such and such policies this way, will that lead to situation Y? And then it actually happening.
- rhizome 9y ago
  Not only that, but the current economic climate necessarily tells us where the effectiveness of economic theory lies.
  - TheSpiceIsLife 9y ago
    Not Economic Theory, but Economic Practice as implemented by politicians and bureaucrats. That's not to say that economic theory is all sound, but that even the soundest of theories doesn't stand a chance against the incompetence of government.
    - rhizome 9y ago
      The "incompetent" economic behavior you speak of is also based upon theory.
frgtpsswrdlame 9y ago
This is a great article although the stuff about Austrian economics and how economics will move left should be tossed. Mr. Kling should save those opinions for Cato. Aside from that, I always wonder why we have never had a "Great Economic Project." In WWII we united scientists of all stripes to come together to build the atom bomb and more recently Obama launched the BRAIN initiative. Understanding how our economy works is, I'd say, as important as either one of those. Some project where the government can assemble the best minds in sociology, psychology, business, math, history and then use economists to help glue all of this together. Perhaps our way forward is not in coming across some new beautiful model but in building the ugliest, most glued-together piece of crap that happens to be (relatively) accurate and then simplifying it later.
- ThrustVectoring 9y ago
  A manhattan project for economics would likely cause more human misery than the invention of atomic weaponry. The market is not your friend. The market is highly advanced social technology that bribes and coerces people into sacrificing the things they care about to further the goals of the state. There's a reason why Western-style market capitalism has taken over the world. You aren't anywhere near remotely worried enough about it.
- jerf 9y ago
  'Aside from that, I always wonder why we have never had a "Great Economic Project."' The nature of politics is such that if the government funded such a thing, the only acceptable outcome for it to come to is that the people funding it already had the correct model. The alternative is that the politicians funding it would have spent a lot of political capital to get that funding only to be told that they're wrong, probably wrong about everything. On one level or another, even politicians realize that they might as well just cut out the middleman here and operate on the vigorous and loud assumption that they are already correct about economics and anyone who disagrees is the literal embodiment of evil.
szeptik 9y ago
When it comes to macro, it is pretty useless. See for example the polemic caused by this paper by Paul Romer, chief economist of the World Bank: https://paulromer.net/trouble-with-macroeconomics-update/ https://paulromer.net/trouble-with-macroeconomics-update/
- bachmeier 9y ago
  If that's what you took from his paper, you didn't understand it. He is specifically arguing against DSGE models, a popular methodology for studying business cycles, but one that has been unsuccessful. That is not the same as arguing that all of macro is useless. It's not different from saying that criticism of imperative programming means all of computer programming is useless.
  - marcosdumay 9y ago
    If the community does not take status and funding away from failed models, it ceases doing science. As a group, economists aren't letting DSGE go. There are many economists trying to do the right thing, but overall the area has a deep problem.
    - nostrebored 9y ago
      Do you feel the same way about climate research?
      - marcosdumay 9y ago
        Climate researchers abandon models all the time.
        nostrebored 9y ago
        Necessarily, as none of their models work, which is a natural consequence of how complicated the system is, just like macroecon.
    - 9y ago
acd 9y ago
A flaw with current economics is that they expect the economy to grow exponentially while resources including energy are linear. That for me is a flaw can someone explain how that works?https://dothemath.ucsd.edu/2012/04/economist-meets-physicist/ https://dothemath.ucsd.edu/2012/04/economist-meets-physicist... Then there is central banks which I think is a form of central planning. Most central planned system lack information that why they do not work. I argue production of goods and services are free market but money creation is centralized by banks and central banks. https://en.m.wikipedia.org/wiki/Economic_calculation_problem https://en.m.wikipedia.org/wiki/Economic_calculation_problem Then there is the whole thing of peels bank act where the bank loans your bank account assets to others no matter how risky but still guarantees it to you. Is banks doing a form of double book keeping? https://en.m.wikipedia.org/wiki/Bank_Charter_Act_1844 https://en.m.wikipedia.org/wiki/Bank_Charter_Act_1844
- dragonwriter 9y ago
  > A flaw with current economics is that they expect the economy to grow exponentially while resources including energy are linear. The first half of this is less than clearly true, the second half is not only not true but it's not even coherent. Resources are linear with regard to what independent variable? Certainly not time, the one that is implied in exponential growth.
- JumpCrisscross 9y ago
  > A flaw with current economics is that they expect the economy to grow exponentially while resources including energy are linear The amount of energy the world consumes to produce 1 unit of GDP declined by 32% between 1990 and 2015 [1]. Measuring macroeconomic material intensity is more complicated [2], but the core of your misconception derives from the subjectivity of value. One way to make a car more valuable might be to make it twice as heavy. But another could be to make it a nicer color. Or give it better software. (Better being defined solely by price.) As our world becomes immaterial, the decoupling of material inputs and economic output makes sense. It also lays the ground for theoretically infinite economic growth. As long as peoples' utility is being increased the economy will grow. [1] https://www.eia.gov/todayinenergy/detail.php?id=27032 https://www.eia.gov/todayinenergy/detail.php?id=27032 [2] http://www.sciencedirect.com/science/article/pii/0301420785900455 http://www.sciencedirect.com/science/article/pii/03014207859...
AnimalMuppet 9y ago
"There is a very real possibility that over the next 20 years academic economics will congeal into a discipline, like sociology today, which is definitively shaped by an ideologically driven point of view." That does not bode well for the future of the economy...
- ihaveahadron 9y ago
  There needs to be a new word to distinguish between science and whatever economics sociology etc is. "Soft science" is b's imo it's not science at all. It has its uses I guess but it's not science.
dhfhduk 9y ago
Discussions like this always seem a little strange. Sure, they're important, but taken out of context they're counterproductive and even harmful. This is the problem: what is the alternative? The pet theory of a madman or sociopath? The difficult truth is that everyone has an economic theory, whether they admit it or not. The question is, whose theories do we want to pay attention to? People who spend their lives arguing and thinking about it, and trying to find some evidence in support? But who might be a bit isolated from reality? People who work close to the phenomena being explained, but who don't really rigorously explicate or defend any of their ideas, who haven't had to put them on the table, so to speak? Or have massive, critical financial conflicts of interest? There's also the difficult problem of identifying when any theories have really been tested well. It's not like we can just run randomized controlled designs on whole civilizations--at least, not most of the time for major policies. I guess I really don't see the alternative to encouraging the standard academic approach to economics, opening it up to public criticism and discussion, and maybe trying them out when it's ethical and feasible. Sure, lots about classical economic theory is really ridiculous, and the source of a lot of problems, but then you change those things and then move on. It's not any different from physics theory or chemistry theory in that regard.
- lkrubner 9y ago
  Still, one can argue with fundamental assumptions, and if those are wrong, then whole entire branches of knowledge, including decades of work by many bright individuals, comes into question. Regarding economics, there are some fundamental assumptions that are often criticized. For instance, in the mid 1700s, Charles Townsend asserted the fundamental laws of economics were these: 1,) Man's want, wishes, needs and desires are infinite. 2.) Resources are finite. But numerous anthropologists have criticized these assumptions. Margaret Mead didn't see the tendency towards infinite consumption among the tribes she studied. And see Marshall Sahlins book Stone Age Economics -- he doesn't see any evidence of infinite desires among the tribes he studies. Thus it appears Townsend's assumptions are fit only for a society in the middle of the Industrial Revolution. So his "laws" are not "laws" in the same way that Issac Newton could describe "Laws Of Motion". Rather, Townsend's laws were a convenient assumption for a certain kind of society, but then the question comes up constantly, are we still the same kind of society? Another example, Joseph Schumpeter starts one of his books (I think Das wesen und der hauptinhalt der theoretischen nationalökonomie, 1908) "The social process is one indivisble whole! However, to make useful remarks regarding production and consumption, it is reasonable to pluck from experience those transactions that are altogether economic in nature." There are many people who strongly agree with the first sentence and therefore they can not agree with the second sentence. I could go on, but I don't have the time. If you go looking, you'll find many examples. In physics, no one doubts that matter and energy are real things, but in economics, it is the most fundamental assumptions of the discipline that have always been under attack.
cs702 9y ago
No respectable author would dare ask such a question about the effectiveness of, say, theoretical Physics, Computer Science, or the Theory of Evolution -- to name other bodies of theory familiar to general audiences. The fact that the question is being asked about Economic Theory in a respectable, prominent magazine like National Affairs provides the answer.
- frgtpsswrdlame 9y ago
  >No respectable author would dare ask such a question about the effectiveness of, say, theoretical Physics... https://en.wikipedia.org/wiki/The_Trouble_with_Physics https://en.wikipedia.org/wiki/The_Trouble_with_Physics
- CalChris 9y ago
  Provides what answer? Is National Affairs a respectable, prominent magazine? I'd never heard of it. Founded in 2009, it has a circulation of about 10,000 [1]. At $27.99/yr, it clearly doesn't pay for itself. It looks like a small media outlet, a sinecure for right wing writers and editors, and financially supported by Irving Kristol [2]. [1] https://newrepublic.com/article/112745/yuval-levin-rights-new-irving-kristol https://newrepublic.com/article/112745/yuval-levin-rights-ne... [2] https://en.wikipedia.org/wiki/National_Affairs https://en.wikipedia.org/wiki/National_Affairs
- deleted 9y ago
  [deleted]
- jostmey 9y ago
  I disagree! Many of the fields you mention are tested through experimental observation. Often times, the outcome is a clear binary response. Hell, I've even seen bacteria evolve antibiotic resistance first hand. When it comes to economic theory, scrutiny becomes of paramount importance if you are going to make laws based upon it!
noir-york 9y ago
It is pretty effective as long as you ignore the economic theories espoused by the Cato institute (the institution the author forms part of) and other pseudo think-tanks. Interesting to note that the author tries to discredit Keynesian economics, but makes no mention of the Reinhart / Rogoff debacle that completely undermined their paper which purported to show a link between debt and growth - a paper much referenced by people like the author of the article who are primarily interested in using economics as a fig leaf for their ideology. For the record, I trained in politics and economics.
- partiallypro 9y ago
  I also trained in politics and economics, and worked for a think-tank doing economic impact analysis for a short period. And I will tell you that Cato has a lot of good economists, that are well respected in their field; so do -most- think tanks, and Federal Reserve branches. Every economist has a political view, largely because economic policy is largely political. Krugman is a political hack, but that doesn't mean his papers are trade can be discounted, that would be absurd. The reason economic theory is so hard is because it's very hard to observe and experiment. You can run a test and verify in physics, math, etc, but in economics this is generally impossible. Even the boom in behavioral economics that happened in the mid-2000s has come under question after more and more data has emerged. There are a LOT of things economists agree on, but there's also nuances on how a policy can achieve a result...because there are so many actors in an economy and we can't test our theory until maybe 10 years from now, and that's even if the policy is ever implemented to begin with.
crdoconnor 9y ago
>This notion of effective theory sets a useful standard for considering economics. Economists are not without knowledge. We know that restrictions on trade tend to help narrow interests at the expense of broader prosperity. We know that there aren't any countries which rose to first world status without judicious application of tariffs, subsidies or currency manipulation.
- euyyn 9y ago
  Is that causation, or only correlation?
  - crdoconnor 9y ago
    Causation: https://en.wikipedia.org/wiki/Infant_industry https://en.wikipedia.org/wiki/Infant_industry
jostmey 9y ago
While in graduate school for biology, I gained a limited exposure to the economics department through some of the students. I saw very little actual "tracking on money" and a whole lot of conjecturing and mathematics. It seemed like lots of theory and not very many facts
grenoire 9y ago
People most often overlook two things when it comes to economics. First one is that it is based on drawing conclusions from models that attempt to simplify extremely complex interactions of billions of agents. Second one is that although these models are imperfect (otherwise they would be unsolvable and bring no meaningful intuition), they are getting better over time. Stop dismissing economics because 'it doesn't work.' The subject of the science simply doesn't have any determinism to it whatsoever, and things aren't reasoned through discovery as it is the case with natural sciences.
- sloppycee 9y ago
  How can you be sure the models are getting better (more accurate) over time?
armenarmen 9y ago
Reminds me of a quote by Steven Landsburg: > Most of economics can be summarized in four words: "People respond to incentives." The rest is commentary.
maxxxxx 9y ago
I know the economy is much more complex than let's say physics. But at least I would like economists to backtest things that happened. For example, the large tax cuts that happened during the Reagan, Bush and probably Trump years could be tested and it could be determined if the promised increase in investment and whatever really happened. At least the economists that make it to the media don't seem to have interest in checking whether their theories actually worked out.
- specialist 9y ago
  Their policies worked out exactly as intended. Perhaps we should distinguish Economics and Rhetoric.
- pzone 9y ago
  Backtesting is a poor substitute for experimentation. We can't run back history and check what happens if the Bush tax cuts never happened. We certainly can't create a thousand parallel economies, implement the tax cuts in half the sample and not in the other. Economists use historical data to calibrate models. Of course data from the Reagan years was used to are for the Bush tax cuts. But simple backtesting can never tell you with certainty wherever your theories worked out or not.
tnecniv 9y ago
I'd be interested in hearing someone with knowledge talk about how these models get used in practice. From an engineering perspective it seems like actually applying them would be very hard. For example, how good are parameter estimates and how do we know if they are good? If I was designing a controller for a plane, I can spend a lot of time getting good parameters for the plane model and design a controller that looks good in simulation. However, when I take the plane out, it might not be stable (or doesn't meet some other metric I designed for) because the parameters changed due to a variety of physical factors and/or the model is a model and thus doesn't account for anything. So I go back and forth tweaking the controller design until I get something that works. That process isn't really feasible when it comes to economies, though.
- pzone 9y ago
  Economic models usually aren't used for precise, high-frequency decision-making. When you estimate an economic model, simply getting the right sign on your estimates is often enough to inform your decision. Choosing what to take as exogenous is a matter of judgment. Would building high speed rail from NYC to Chicago be a net positive for consumer welfare? Well we can use estimates of how much people pay for various modes of transportation throughout the country, and how often they're used. We can also come up with an estimate of the cost of building the rail. The analogous effects to your feedback loop are equilibrium effects - for example if people start taking the new high speed rail then plane ticket prices will fall a bit. But it adds more uncertainty to the model, and we know that plenty of flights from NYC to Chicago are connecting flights, so probably the effects are pretty small, and we can just assume those prices stay fixed for the sake of tractability. If you do this kind of calculation and find the rail project is a massive multi billion dollar money pit, you can confidently recommend against it despite the fact you've ignored some of the feedback effects.
quantum_state 9y ago
An interesting article ... but not sure it's that accurate to compare economics to physics ... the closest situation comes to mind would be the phenomenon of turbulence ... which still is more manageable than economics since the controlling principles are known and controlled experiments can be performed ... on the other hand, an economic system involves many many agents of different scales, most of time seemingly rational but certainly emotional, interacting nonlinearly at all scales, without much chance of controlled experiments ...

60 points by abhineet97 9y ago

Effective at what? A rather savvy economic-statistician once told me that economic theory is a very effective way to determine who has been able to get their theory published.

euyyn 9y ago
Effective at predicting outcomes of interventions. As in: My country's situation is X. If I tweak such and such policies this way, will that lead to situation Y? And then it actually happening.
rhizome 9y ago
Not only that, but the current economic climate necessarily tells us where the effectiveness of economic theory lies.
- TheSpiceIsLife 9y ago
  Not Economic Theory, but Economic Practice as implemented by politicians and bureaucrats. That's not to say that economic theory is all sound, but that even the soundest of theories doesn't stand a chance against the incompetence of government.
  - rhizome 9y ago
    The "incompetent" economic behavior you speak of is also based upon theory.

frgtpsswrdlame 9y ago

This is a great article although the stuff about Austrian economics and how economics will move left should be tossed. Mr. Kling should save those opinions for Cato. Aside from that, I always wonder why we have never had a "Great Economic Project." In WWII we united scientists of all stripes to come together to build the atom bomb and more recently Obama launched the BRAIN initiative. Understanding how our economy works is, I'd say, as important as either one of those. Some project where the government can assemble the best minds in sociology, psychology, business, math, history and then use economists to help glue all of this together. Perhaps our way forward is not in coming across some new beautiful model but in building the ugliest, most glued-together piece of crap that happens to be (relatively) accurate and then simplifying it later.

ThrustVectoring 9y ago
A manhattan project for economics would likely cause more human misery than the invention of atomic weaponry. The market is not your friend. The market is highly advanced social technology that bribes and coerces people into sacrificing the things they care about to further the goals of the state. There's a reason why Western-style market capitalism has taken over the world. You aren't anywhere near remotely worried enough about it.
jerf 9y ago
'Aside from that, I always wonder why we have never had a "Great Economic Project."' The nature of politics is such that if the government funded such a thing, the only acceptable outcome for it to come to is that the people funding it already had the correct model. The alternative is that the politicians funding it would have spent a lot of political capital to get that funding only to be told that they're wrong, probably wrong about everything. On one level or another, even politicians realize that they might as well just cut out the middleman here and operate on the vigorous and loud assumption that they are already correct about economics and anyone who disagrees is the literal embodiment of evil.

szeptik 9y ago

When it comes to macro, it is pretty useless. See for example the polemic caused by this paper by Paul Romer, chief economist of the World Bank: https://paulromer.net/trouble-with-macroeconomics-update/ https://paulromer.net/trouble-with-macroeconomics-update/

bachmeier 9y ago
If that's what you took from his paper, you didn't understand it. He is specifically arguing against DSGE models, a popular methodology for studying business cycles, but one that has been unsuccessful. That is not the same as arguing that all of macro is useless. It's not different from saying that criticism of imperative programming means all of computer programming is useless.
- marcosdumay 9y ago
  If the community does not take status and funding away from failed models, it ceases doing science. As a group, economists aren't letting DSGE go. There are many economists trying to do the right thing, but overall the area has a deep problem.
  - nostrebored 9y ago
    Do you feel the same way about climate research?
    - marcosdumay 9y ago
      Climate researchers abandon models all the time.
      - nostrebored 9y ago
        Necessarily, as none of their models work, which is a natural consequence of how complicated the system is, just like macroecon.
  - 9y ago

acd 9y ago

A flaw with current economics is that they expect the economy to grow exponentially while resources including energy are linear. That for me is a flaw can someone explain how that works?https://dothemath.ucsd.edu/2012/04/economist-meets-physicist/ https://dothemath.ucsd.edu/2012/04/economist-meets-physicist... Then there is central banks which I think is a form of central planning. Most central planned system lack information that why they do not work. I argue production of goods and services are free market but money creation is centralized by banks and central banks. https://en.m.wikipedia.org/wiki/Economic_calculation_problem https://en.m.wikipedia.org/wiki/Economic_calculation_problem Then there is the whole thing of peels bank act where the bank loans your bank account assets to others no matter how risky but still guarantees it to you. Is banks doing a form of double book keeping? https://en.m.wikipedia.org/wiki/Bank_Charter_Act_1844 https://en.m.wikipedia.org/wiki/Bank_Charter_Act_1844

dragonwriter 9y ago
> A flaw with current economics is that they expect the economy to grow exponentially while resources including energy are linear. The first half of this is less than clearly true, the second half is not only not true but it's not even coherent. Resources are linear with regard to what independent variable? Certainly not time, the one that is implied in exponential growth.
JumpCrisscross 9y ago
> A flaw with current economics is that they expect the economy to grow exponentially while resources including energy are linear The amount of energy the world consumes to produce 1 unit of GDP declined by 32% between 1990 and 2015 [1]. Measuring macroeconomic material intensity is more complicated [2], but the core of your misconception derives from the subjectivity of value. One way to make a car more valuable might be to make it twice as heavy. But another could be to make it a nicer color. Or give it better software. (Better being defined solely by price.) As our world becomes immaterial, the decoupling of material inputs and economic output makes sense. It also lays the ground for theoretically infinite economic growth. As long as peoples' utility is being increased the economy will grow. [1] https://www.eia.gov/todayinenergy/detail.php?id=27032 https://www.eia.gov/todayinenergy/detail.php?id=27032 [2] http://www.sciencedirect.com/science/article/pii/0301420785900455 http://www.sciencedirect.com/science/article/pii/03014207859...

AnimalMuppet 9y ago

"There is a very real possibility that over the next 20 years academic economics will congeal into a discipline, like sociology today, which is definitively shaped by an ideologically driven point of view." That does not bode well for the future of the economy...

ihaveahadron 9y ago
There needs to be a new word to distinguish between science and whatever economics sociology etc is. "Soft science" is b's imo it's not science at all. It has its uses I guess but it's not science.

dhfhduk 9y ago

Discussions like this always seem a little strange. Sure, they're important, but taken out of context they're counterproductive and even harmful. This is the problem: what is the alternative? The pet theory of a madman or sociopath? The difficult truth is that everyone has an economic theory, whether they admit it or not. The question is, whose theories do we want to pay attention to? People who spend their lives arguing and thinking about it, and trying to find some evidence in support? But who might be a bit isolated from reality? People who work close to the phenomena being explained, but who don't really rigorously explicate or defend any of their ideas, who haven't had to put them on the table, so to speak? Or have massive, critical financial conflicts of interest? There's also the difficult problem of identifying when any theories have really been tested well. It's not like we can just run randomized controlled designs on whole civilizations--at least, not most of the time for major policies. I guess I really don't see the alternative to encouraging the standard academic approach to economics, opening it up to public criticism and discussion, and maybe trying them out when it's ethical and feasible. Sure, lots about classical economic theory is really ridiculous, and the source of a lot of problems, but then you change those things and then move on. It's not any different from physics theory or chemistry theory in that regard.

lkrubner 9y ago
Still, one can argue with fundamental assumptions, and if those are wrong, then whole entire branches of knowledge, including decades of work by many bright individuals, comes into question. Regarding economics, there are some fundamental assumptions that are often criticized. For instance, in the mid 1700s, Charles Townsend asserted the fundamental laws of economics were these: 1,) Man's want, wishes, needs and desires are infinite. 2.) Resources are finite. But numerous anthropologists have criticized these assumptions. Margaret Mead didn't see the tendency towards infinite consumption among the tribes she studied. And see Marshall Sahlins book Stone Age Economics -- he doesn't see any evidence of infinite desires among the tribes he studies. Thus it appears Townsend's assumptions are fit only for a society in the middle of the Industrial Revolution. So his "laws" are not "laws" in the same way that Issac Newton could describe "Laws Of Motion". Rather, Townsend's laws were a convenient assumption for a certain kind of society, but then the question comes up constantly, are we still the same kind of society? Another example, Joseph Schumpeter starts one of his books (I think Das wesen und der hauptinhalt der theoretischen nationalökonomie, 1908) "The social process is one indivisble whole! However, to make useful remarks regarding production and consumption, it is reasonable to pluck from experience those transactions that are altogether economic in nature." There are many people who strongly agree with the first sentence and therefore they can not agree with the second sentence. I could go on, but I don't have the time. If you go looking, you'll find many examples. In physics, no one doubts that matter and energy are real things, but in economics, it is the most fundamental assumptions of the discipline that have always been under attack.

cs702 9y ago

No respectable author would dare ask such a question about the effectiveness of, say, theoretical Physics, Computer Science, or the Theory of Evolution -- to name other bodies of theory familiar to general audiences. The fact that the question is being asked about Economic Theory in a respectable, prominent magazine like National Affairs provides the answer.

frgtpsswrdlame 9y ago
>No respectable author would dare ask such a question about the effectiveness of, say, theoretical Physics... https://en.wikipedia.org/wiki/The_Trouble_with_Physics https://en.wikipedia.org/wiki/The_Trouble_with_Physics
CalChris 9y ago
Provides what answer? Is National Affairs a respectable, prominent magazine? I'd never heard of it. Founded in 2009, it has a circulation of about 10,000 [1]. At $27.99/yr, it clearly doesn't pay for itself. It looks like a small media outlet, a sinecure for right wing writers and editors, and financially supported by Irving Kristol [2]. [1] https://newrepublic.com/article/112745/yuval-levin-rights-new-irving-kristol https://newrepublic.com/article/112745/yuval-levin-rights-ne... [2] https://en.wikipedia.org/wiki/National_Affairs https://en.wikipedia.org/wiki/National_Affairs
deleted 9y ago
[deleted]
jostmey 9y ago
I disagree! Many of the fields you mention are tested through experimental observation. Often times, the outcome is a clear binary response. Hell, I've even seen bacteria evolve antibiotic resistance first hand. When it comes to economic theory, scrutiny becomes of paramount importance if you are going to make laws based upon it!

noir-york 9y ago

It is pretty effective as long as you ignore the economic theories espoused by the Cato institute (the institution the author forms part of) and other pseudo think-tanks. Interesting to note that the author tries to discredit Keynesian economics, but makes no mention of the Reinhart / Rogoff debacle that completely undermined their paper which purported to show a link between debt and growth - a paper much referenced by people like the author of the article who are primarily interested in using economics as a fig leaf for their ideology. For the record, I trained in politics and economics.

partiallypro 9y ago
I also trained in politics and economics, and worked for a think-tank doing economic impact analysis for a short period. And I will tell you that Cato has a lot of good economists, that are well respected in their field; so do -most- think tanks, and Federal Reserve branches. Every economist has a political view, largely because economic policy is largely political. Krugman is a political hack, but that doesn't mean his papers are trade can be discounted, that would be absurd. The reason economic theory is so hard is because it's very hard to observe and experiment. You can run a test and verify in physics, math, etc, but in economics this is generally impossible. Even the boom in behavioral economics that happened in the mid-2000s has come under question after more and more data has emerged. There are a LOT of things economists agree on, but there's also nuances on how a policy can achieve a result...because there are so many actors in an economy and we can't test our theory until maybe 10 years from now, and that's even if the policy is ever implemented to begin with.

crdoconnor 9y ago

>This notion of effective theory sets a useful standard for considering economics. Economists are not without knowledge. We know that restrictions on trade tend to help narrow interests at the expense of broader prosperity. We know that there aren't any countries which rose to first world status without judicious application of tariffs, subsidies or currency manipulation.

euyyn 9y ago
Is that causation, or only correlation?
- crdoconnor 9y ago
  Causation: https://en.wikipedia.org/wiki/Infant_industry https://en.wikipedia.org/wiki/Infant_industry

jostmey 9y ago

While in graduate school for biology, I gained a limited exposure to the economics department through some of the students. I saw very little actual "tracking on money" and a whole lot of conjecturing and mathematics. It seemed like lots of theory and not very many facts

grenoire 9y ago

People most often overlook two things when it comes to economics. First one is that it is based on drawing conclusions from models that attempt to simplify extremely complex interactions of billions of agents. Second one is that although these models are imperfect (otherwise they would be unsolvable and bring no meaningful intuition), they are getting better over time. Stop dismissing economics because 'it doesn't work.' The subject of the science simply doesn't have any determinism to it whatsoever, and things aren't reasoned through discovery as it is the case with natural sciences.

sloppycee 9y ago
How can you be sure the models are getting better (more accurate) over time?

armenarmen 9y ago

Reminds me of a quote by Steven Landsburg: > Most of economics can be summarized in four words: "People respond to incentives." The rest is commentary.

maxxxxx 9y ago

I know the economy is much more complex than let's say physics. But at least I would like economists to backtest things that happened. For example, the large tax cuts that happened during the Reagan, Bush and probably Trump years could be tested and it could be determined if the promised increase in investment and whatever really happened. At least the economists that make it to the media don't seem to have interest in checking whether their theories actually worked out.

specialist 9y ago
Their policies worked out exactly as intended. Perhaps we should distinguish Economics and Rhetoric.
pzone 9y ago
Backtesting is a poor substitute for experimentation. We can't run back history and check what happens if the Bush tax cuts never happened. We certainly can't create a thousand parallel economies, implement the tax cuts in half the sample and not in the other. Economists use historical data to calibrate models. Of course data from the Reagan years was used to are for the Bush tax cuts. But simple backtesting can never tell you with certainty wherever your theories worked out or not.

tnecniv 9y ago

I'd be interested in hearing someone with knowledge talk about how these models get used in practice. From an engineering perspective it seems like actually applying them would be very hard. For example, how good are parameter estimates and how do we know if they are good? If I was designing a controller for a plane, I can spend a lot of time getting good parameters for the plane model and design a controller that looks good in simulation. However, when I take the plane out, it might not be stable (or doesn't meet some other metric I designed for) because the parameters changed due to a variety of physical factors and/or the model is a model and thus doesn't account for anything. So I go back and forth tweaking the controller design until I get something that works. That process isn't really feasible when it comes to economies, though.

pzone 9y ago
Economic models usually aren't used for precise, high-frequency decision-making. When you estimate an economic model, simply getting the right sign on your estimates is often enough to inform your decision. Choosing what to take as exogenous is a matter of judgment. Would building high speed rail from NYC to Chicago be a net positive for consumer welfare? Well we can use estimates of how much people pay for various modes of transportation throughout the country, and how often they're used. We can also come up with an estimate of the cost of building the rail. The analogous effects to your feedback loop are equilibrium effects - for example if people start taking the new high speed rail then plane ticket prices will fall a bit. But it adds more uncertainty to the model, and we know that plenty of flights from NYC to Chicago are connecting flights, so probably the effects are pretty small, and we can just assume those prices stay fixed for the sake of tractability. If you do this kind of calculation and find the rail project is a massive multi billion dollar money pit, you can confidently recommend against it despite the fact you've ignored some of the feedback effects.

quantum_state 9y ago

An interesting article ... but not sure it's that accurate to compare economics to physics ... the closest situation comes to mind would be the phenomenon of turbulence ... which still is more manageable than economics since the controlling principles are known and controlled experiments can be performed ... on the other hand, an economic system involves many many agents of different scales, most of time seemingly rational but certainly emotional, interacting nonlinearly at all scales, without much chance of controlled experiments ...