Economics in the face of imperfection.

Edward Glaeser writes his last post at the New York Times Economix blog, which I suspect is in no short measure due to the fact that he has a book to publicize. While I can’t speak to The Triumph of the City, Glaeser has some interesting remarks about the economics discipline today on the blog.

He in part rehashes the distinction between positive and normative economics:

Positive economics, as usually practiced today, combines formal, mathematical models and lots of quantitative, statistical work. That’s not what economists did before World War II; Keynes’s General Theory is short on both formal models and statistics. But formal theory and statistics have triumphed, and that’s a good thing.

In the wake of the recent crash and recession, it has become fashionable to deride the quants, whether on Wall Street or in the academy. After all, few of them saw it coming. The critics may be right to criticize excessive overconfidence, but they are wrong to suggest that the fault lies in either formal models or statistical work.

Hubris has been part of the human condition, with or without math, long before the Black-Scholes asset-pricing formula. Mathematical models create discipline. They ensure that we specify our assumption and that our conclusions then follow from our assumptions. Statistics then provide us with indispensable tests of our theories.

But we need to always remember that data and statistical tests never prove a theory. Typically, many different theories can explain almost any observed phenomenon. Data  allows us only to reject a theory. The theories that survive are those that haven’t been rejected yet, and that’s a good reason for humility.

Good reason for humility indeed. As a libertarian (although the sentiment isn’t exclusive to any one ideology) I feel every day the discomfort of friction when my values rub up against empirical evidence. I can always rationalize the empirical evidence away as preliminary, or based on flawed assumptions — but it’s telling that I (and I assume many people) easily capitalize on the inherent humility in scientific inquiry while sanctifying the normative assumptions we hold dear. In an ideal world free from cognitive bias, nothing should be free from skepticism.

Some economists, like Glaeser, seem to balance their data driven conclusions with their open-mindedness to empirical revision. It makes them less interesting because they shun taking strong and polarizing stances, but it makes them more credible. It’s the tragedy of Paul Krugman that he allowed himself to devolve from a serious economist into a pontificating partisan. It’s one thing to be a straight shooter, but when you shoot down the middle you’re probably taking better aim.

Glaeser ends on another point worth dwelling on:

Economics marries a predilection for personal freedom with a longstanding tendency to view the interests of the government as being distinct from the welfare of the people. Adam Smith’s “Wealth of Nations,” modern economics’ founding document, emphasized that point.

In the 18th century, it seemed clear that what was good for King George III was not necessarily good for Britain and certainly was not necessarily good for his American subjects.

Democratic revolutions muddied the waters and made it possible for some to think that the government was a faultless servant of the people’s will, but a healthy skepticism about the benevolence (and competence) of the state continued within economics.

Both markets and governments are quite imperfect, and it is important to weigh their failures against each other.

The world isn’t and shouldn’t be run by economists — many perspectives need to be at the table. But economists have plenty to add: formal models, statistical evidence, a focus on freedom and a sophisticated centuries-old approach to public policy.

It’s a concise summation of the unique benefits of the economic perspective. It is the discipline most conducive to liberty, most given to outlining the dynamism of human institutions and the difficulty to containing or controlling them.

Yet because it is the most quantitative of the social sciences, it also encourages conceit and certitude by its practitioners. When humility is called for, economists often instead see their discipline as a technocratic credential. Glaeser’s romantic ending glosses over this, but it’s why there was such a rift between Hayek and Keynes. It is a testament to the power of human cognition that two camps can look at the same body of evidence and conclude respectively that complexity should be bowed to and should be contained and controlled.

We may never extricate the philosophical implications of economics from the data, and thus the unique tension will always remain. Economists are neither philosophers or physicists, but damn if they don’t try to be both.


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