Matt Nolan

Attacks from the left and the right on economics

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One thing I have noticed in my time is that people on the political left and right both attack “mainstream economics” with abandon.  This is good, as a discipline has to be able to explain itself widely and be willing to face criticism.

However, it is one of the elements of these attacks that interests me here.  Namely, how each side of the political spectrum attacks the “focus” of economics, or the framing – specifically in terms of the market and government.  Here is my oversimplified understanding of this element:

  • Left:  Economists are focused on markets.  They start from a place where markets are perfect, and markets provide the best outcomes and work from there – therefore they have a pro-market bias.
  • Right:  Economists focus on markets and resource allocation.  The focus on markets makes them dwell on policies that solve “market failures” rather than paying attention to the possibility of government failures!  As a result they have a bias to push policies that are anti-market.  Furthermore, by discussing the allocation of resources they drive the feeling that the economy can be controlled – which also leads to a bias towards government involvement.

I find both of these attacks suffer from the same problem, they avoid trying to understand why economists use the counter-factual they do, and the way economic analysis stems from it.

In itself, economics is not about giving policy prescriptions, it is about “trying” to “objectively” describe and explain an economic situation.  We find the elements of a market (which is the voluntary trade relevant to the issue at hand), and try to model them.  When then describe a “perfect counterfactual” and look at how these elements cause outcomes to differ.  We then do nothing.

In this case, the purpose of our counterfactual is to give some idea about how a more “realistic” outcome compares to an “ideal” outcome.  We do not say that the ideal outcome is possible, we do not say that any policies could move us towards the ideal outcome, and as strict economists we do not place hefty welfare judgments on the relative outcomes.  The counterfactual is solely there to allow us to describe, in some sense, how the elements in the model impact on the outcome – it helps us to describe.

The next stage is more “subjective” (I am putting commas around objective and subjective as even the “objective” analysis involves a number of subjective assumptions – but I digress), and it is not in the realm of economics per see.  Economists often move on to the policy analysis stage, but it is an additional element, that requires different skills than those that are central to economics.

The biases the left and right discuss tend from their view of the value judgments made by analysts at this stage of analysis – they are not relevant in a discussion about economists.  As a result, although the left and right often like to tarnish all economists with the same brush this is just not the case – economics is not the issues they disagree with here, but the value judgments made in the application of economic models.  The critique is of analysts they do not agree with, not the discipline as a whole.

Of course, I do not expect individuals with a political mind to ever properly accept or represent this significant difference – as there is too much satisfaction and political capital associated with attacking all economists 😀

Matt Nolan

Data and prediction

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Via Scott Sumner we saw the following article that mentions economic data and economic predictions.  The statements that stood out to me were:

(Economic) predictions are, of course, the bread and butter of economic institutions. But can we believe them?

In recent years, some economists have begun to express doubts over predictions made from huge volumes of data, but they are in the minority. Most embrace the idea that more measurements mean better predictive abilities.

Hold up.

For one, as we have mentioned prediction is not the central element of what economists do – and even when they do predict the goal of such prediction is to give some view regarding risks and movements, not direct figures (it is more ordinal than cardinal in some sense).

Secondly, ever since the Lucas critique economists have been very nervous about predictions from large amounts of data without theory – I would say that the majority of economists doubt the usefulness of econometric models relying solely on huge amounts of data.

Economists would like data with less measurement error, that is closer to representing the true economic variables we discuss in theory – we aren’t looking for an infinite number of measures we can stick together to find a result.  An economist that doesn’t use theory to inform their discussions of the economic outlook, but uses lots of data, isn’t an economist – that is all.

Matt Nolan

Mankiw is right again – this time on prediction

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This time on how Economics as an academic discipline will not have to have the wholesale changes some peoples are suggesting.

He is right when he says the focus of economists and economic teaching is not on prediction.  However, I would also say that economists HAVE sold the idea that they can predict when talking to people, even if they personally realised this isn’t the primary role.

In some sense this comes back to Friedman.  During the positivist revolution in economics he stated that it didn’t matter so much what we assumed – as long as it was predicatively accurate.  Furthermore, our “value” for policy analysts and the such has often been tied to predictive accuracy.  Here we never agreed with this.

There are two ways to understand current economists methinks:

  1. Economists want to explain and understand – and that is where the value is:  This fits the academic economist view, but often ends up with no predictions.
  2. The Tarot card view:  This fits what economists do when they have to make predictions.  They use archetypes (models of aggregate behaviour), historical knowledge (data), and intuition to get a feeling of where the economy will head and the risks around it.  Even the more technical models (think DSGE models) have elements of this.

Both these services have value – by building knowledge and understanding.  But economics as a discipline should be based on its ability to adequately explain and provide understanding – not its ability to predict (especially given the issues with data).

Economists add value by describing, explaining, and painting risks – but they do not have magic time traveling powers.

This all reminds me of:

http://www.ritholtz.com/blog/wp-content/uploads/2009/09/economics03.jpg

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