Economists Do It With Models

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On Adam Smith Versus Physicists And Monkeys With Dart Boards…

January 11th, 2013 · 22 Comments
Economic History · Just For Fun · Uncategorizable

Sometimes I feel like the comics I come across are written just for me…

…especially since this came out as I was putting together my lecture slides for the first day of Econ 101. I really want to point out how this comic is inaccurate, but the only counterargument I have is that Adam Smith is generally regarded as the father of modern economics because of his work The Wealth of Nations, but that work doesn’t really have any math in it. So really I only have a counterargument on a technicality. (In related news, if you’ve ever wanted to read the Wealth of Nations but worried that it was too difficult or dry, you should check out P.J. O’Rourke’s On The Wealth of Nations: Books That Changed the World.)

My principled objection to the joke in the comic (I know, I ruin everything), is that one could easily replace economics with physics without any loss of validity, so why do people pick on the mathematization of economics so much? Yes, the models that economists use are obviously simplified views of reality, but it’s not like you hear physicists say “gravity causes items to fall at an acceleration of 9.8 meters per second per second in a vacuum” and then get repeated responses of “yeah, but we have air resistance in the real world, so your field is crap.” (Though I am curious as to how physicists would respond to that.)

Obviously, a big part of the difference is that physicists and other “real” scientists can conduct carefully controlled experiments in order to verify or disprove their theories. In contrast, economists often can’t do this, either because it’s not socially palatable or because it’s difficult bordering on impossible. Nick Rowe gives some good insight:

Let’s suppose you wanted to design an experiment to test the effects of monetary and fiscal policy. And suppose you had the power to do whatever you wanted, and couldn’t care less about getting clearance from the Research Ethics Board. What experiment would you design?

Probably something like: get 100 countries, then for each country toss two dice, one for monetary policy, the other for fiscal policy, then watch what happens for a couple of decades. That should settle the question.

Now, just for a laugh, imagine you wanted the worst possible experiment design. An experiment design so bad that no researcher would ever be able to figure out the effects of monetary and fiscal policy by looking at the data. What would you do?

Probably something like: make monetary policy negatively correlated with fiscal policy, and negatively correlated with any other shocks you observed hitting the economy. So it would be impossible for the researcher to disentangle the effects of monetary policy, fiscal policy, and any other observed shocks. If you were feeling really mean, you would do your best to try to set monetary policy and/or fiscal policy so that nothing ever did happen to the economy. So all the researcher would ever observe would be a few small fluctuations in the economy due to shocks you didn’t observe (and he probably can’t observe either), plus a few small fluctuations because you over-compensated or under-compensated for the shocks you did observe, and even here the researcher won’t be able to figure out even the sign of the effect of monetary policy because he won’t know whether tight money caused inflation or whether you just didn’t tighten monetary policy enough in response to an inflationary shock.

That’s the world we live in. We live in something very close to the worst possible experiment design for testing macroeconomics. We live in a house controlled by Milton Friedman’s Thermostat. It’s sometimes a wonky thermostat, that under- or over-compensates for the shocks it can see, but it’s still a thermostat. For all its faults, it does not play dice with the amount of oil going into the furnace. Even if it did play dice, you could never be sure that it was playing dice, or just responding as best it could to some shock it sees that you don’t see.

You want us macroeconomists to figure stuff out better? Sure. No problem. Just lend us 100 countries for a couple of decades, and let us play dice with monetary and fiscal policy.

I suppose a corollary to this would be “look, most (macro)economists are doing their best with what they have, and sometimes they are asked to give advice on matters that the field doesn’t have definitive answers to.” I’m at least pretty confident in saying that such advice wouldn’t be systematically wrong…

…but apparently the world doesn’t share my perception, as evidenced by Ryan Avent’s summary of two key findings from work by Paola Sapienza and Luigi Zingales. First, people, even people with similar demographics to economists, don’t agree with economists:

Second, knowing what economists think on these matters doesn’t get people to agree with economists and can sometimes even cause them to disagree more:

Economists might conclude from this that they just need to shout their views more loudly. But communication is only part of the problem. Ms Sapienza and Mr Zingales note that when Americans are told what economists believe before answering a question, their view scarcely budges. Told that economists favoured a carbon tax, the share of the public supporting the tax rose only marginally, from 23% to 26%. The public actually grew more confident in its ability to pick stocks successfully after learning that economists think it is close to impossible. Americans seem to believe that economists operate in a fact-free environment, a bit like Buddhists, commented Robert Hall of Stanford University.

In other words, economists know that they’re no better than monkeys with dart boards when it comes to picking stocks (see the first survey question), and the general public thinks that they are either in line with or worse than the monkeys with regard to everything else. I guess at least that part of the comic is spot on. =P

Tags: Economic History · Just For Fun · Uncategorizable

22 responses so far ↓

  • 1 Bo Zimmerman // Jan 11, 2013 at 8:15 pm

    Great article Miss Beggs. Bryan Caplan has a funny story he tells along these lines. The gist of it is: ”Why is it that, after a physics class, no student goes up to the professor and says “So you believe in that gravity stuff huh, well, what about BALOONS, huh?”, and yet every year at least one student will come up to me and say “So you believe in trade, huh? Well, what about outsourcing? Huh?”.”

    Also, I’m sure you’ve heard this one before, but ah well: “How can you tell economists have a sense of humor? They use decimal points.”

  • 2 Danny // Jan 11, 2013 at 8:50 pm

    I agree with Bo, this is really great stuff. It should be mandatory reading before applying to grad school so that people know what they’re getting into. I think about this in the context of climate change. There is so much consensus within economics about some (clearly not all) issues that you would think the general public would be convinced. Scientists studying climate change probably feel the same way.

  • 3 Economist // Jan 11, 2013 at 10:30 pm

    I think Bo seriously knocks the sentiment out of the park.

    Economics is something whose prescriptions are most often correct. They are just disputed by political apes who have preconceived biases against sense and reason.

  • 4 Economist // Jan 11, 2013 at 10:34 pm

    Danny, there was an article by a fairly famous economist which basically analyzed and modeled why it is that people, SPECIFICALLY on the issues of Climate Change and “Free Trade” are so utterly ignorant and stubborn to the best recommendations of experts.

    The basic results were that there are way too many different and in most cases nonmonetary costs to differentiating true experts from people like Krugman who are retired, have their wives write most of their material, and are not actually current experts in any sense of the word. Most people do not want to bear the costs of telling who is an actual expert from who is just the guy in a funny lab coat calling himself “Dr. Medicine.”

  • 5 Anthony G // Jan 13, 2013 at 10:24 am

    On the subject of physics and gravity :

    If I remember physics class correctly, they took care of the air resistance problem when they introduced the use of vectors in their calculations.

    I googled it and got this that seems to back me up :

    I dont wanna discredit your post in any way.

  • 6 econgirl // Jan 13, 2013 at 1:47 pm

    You’re not, and that’s kind of my point…as you get further advanced into physics, you learn more detailed models that more closely approximate reality, and the same is true in economics in a lot of cases. But the more detailed physics models don’t mean that people stop believing that objects accelerate as they fall, whereas people seem really intent on wanting to throw out the basic economic models.

  • 7 Daniel // Jan 13, 2013 at 5:54 pm

    We are using computers, flying airplanes and driving cars, all of which has been accomplished due to our advances in physics and other natural sciences. Meanwhile, what good has economics ever done to the world?

  • 8 Steve O // Jan 15, 2013 at 10:01 am

    I think everyone believes they know “as much” as economists because the issues they talk about are more in the public consciousness than physics or biology. I definitely have no problem with laypeople having strong opinions (especially informed ones!), but many do tend to dismiss economists quickly without trying to understand their views.

    Daniel, I’m no macro expert, but it isn’t hard to find a list of successful policies that have been informed/implemented by economists. As for micro, every business that uses data uses economic tools in order to make money, reduce waste, and otherwise improve outcomes.

  • 9 Brian Donohue // Jan 15, 2013 at 2:02 pm

    Good article. Ultimately, economics proposes to study something that is more complex than physics, and so the methods of science have a much more limited ability to bear fruit, and more math may not always be the road to more understanding.

    Too many economists, IMO, significantly overstate what we CAN learn from studying economics.

    Answers may not be forthcoming, but the questions continue to press, so I suspect there will be work for economists as far as the eye can see regardless.

  • 10 Andy Hall // Jan 19, 2013 at 12:13 pm

    I think part of what gives the field such a bad name lies in how it’s taught: generally we don’t relax the neo-classical assumptions until more advanced courses, giving non-economists a distorted view.

    I’m not sure how common it is for econ courses to be available for liberal arts majors in the US, but in the UK this really isn’t helped with the PPE (philosophy, politics, economics) degrees, where people will graduate having spent less than half of their time at university studying econ, often to wind up in influential government and political positions.

  • 11 Weekend viewing: January 29 | EC 101 // Jan 22, 2013 at 4:44 pm

    […] this class (and throughout economics) we use models to better understand the world around us. Consider a paper airplane as a model for a real airplane. […]

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