Question: Have economists been over-confident regarding their ability to predict things?

My unequivocal answer here would be yes – but I’m not asking me, I’m asking you.

Do you guys think that economists have been over-confident about their ability to predict things?

We have repeatedly said on this blog that economic science “frames issues” – but predictions only stem from virtually untestable value judgments (although we can inform these, and narrow the band of judgments, by using data).

However, it appears that many economists have tried to sell their ability to predict – something that has caused issues.

This blog post really sums up how I think people think about economists right now (ht Market Movers).  I think the issue is that economists have sold this story to the public about their ability to predict – an ability that doesn’t exist.  The risk from this is that the value that economists can add (framing issues, even describing what has happened) may get ignored as a result of this perceived failure.

Arnold Kling: Economics>Macro

Arnold Kling is right that Macroeconomics is only a subset of economics – and as a result a failure in macroeconomics does not damn the whole economic method.

However, I think he might be giving macroeconomists a bit of a free ride here.  Think of it this way – microeconomics has evolved to generalise hypotheses and make them testable.  Microeconomists have also been careful to posit counter-factuals to their cases and discover necessary and sufficient conditions for their results.  The strength of microeconomics has lead to a burgeoning industry in “Freakonomics” style books.

Macroeconomic theory has followed micro, attempting to solve general economic situations from “individual rationality” and even applying some game theory.  However, as soon as the business hit the fan – they dumped their attempts at a framework and rushed back to arbitrary debates on the size of the “multiplier”.

Recent debates have illustrated that macroeconomists are really just “play economists” – stating that they believe in scarcity, and want to study the allocation of resources, but don’t want to put in the hard yards that microeconomists have.  Where is the general equilibrium theory?  Where is the study of multiple, heterogeneous, agents interacting in a dynamic system with poor information and imperfect institutional arrangements.  Do macroeconomists actually have a general framework (based on methodological individualism) that they agree on – like microeconomists do.

Some people posit that the separation between micro and macro is like the difference between general relativity and quantum physics – these people would have us believe that there is only one step left between reconciling these divergent disciplines and having a “general theory”.  However, doesn’t that give macro a little more credit than it deserves?

Note:  This post is supposed to be contentious – I would like to hear how macroeconomists would go about answering the claims I’ve made in this post 🙂

Remember history when thinking of Keynesian economics

Over at Think Markets Mario Rizzo follows the advice of Paul Krugman and discusses what Keynes has actually said about infrastructure spending (ht Greg Mankiw):

Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle

So infrastructural investment is good when we are in some sort of reinforcing hole where effective demand is deficient and “will not” go back to our primary equilibrium. However, Keynes appears to be deriding infrastructural investment as a way to smooth the “economic cycle”.

I see this quote as justification for the idea that, if we have multiple pareto ranked equilibrium and a large shock government can help – but if we have a temporary shock to demand infrastructural investment is not the way (furthermore it says nothing about structural shocks, which is part of the current story). I don’t actually think this conclusion leads to an ability to dismiss either the view of Krugman, or the views of Mankiw – given that they ultimately have different beliefs on what is the proper description of the current events we are facing …

The morality play of the “non-morality play”

In an interesting piece over at Economist’s View the case is made from moving away from “morality arguments” and just looking at how we can pull ourselves out of the depression now.

Although the piece provides a clean argument, and involves discussions by economists as intelligent and convincing as Martin Wolf and Paul Krugman I have to admit I nearly completely disagree with it.

Fundamentally, I believe that these economists are making an implicit moral judgment when they state that we need to “improve current outcomes” through employment and consumption. I am not saying that they are wrong, however trying to make their conclusions sound value free is incredibly misleading.

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The upcoming war of succession and the future of Macroeconomics!

It appears that economics is on the verge of war … ok maybe I’m being melodramatic – but the change in tone of economists recently (well, actually mainly macroeconomists) has been startling!

During the credit crisis, more and more economists have moved towards a panicked position.  However, the first true indication that this might be different than a few little methodological spats came to me from these posts (Econlog and VoxEU).

These posts indicated that the very structure of economics was preventing research into valuable fields – we had failed to achieve knowledge by focusing on “equilibrium”, “mean reversion”, and/or the constant obsession by ignoring the depression when we analyse data.

There are two primary areas where I think the main set of criticism will fall – and the size and scope of this criticism will determine whether it is war, or merely an evolution of ideas.  These areas are 1) aggregation and stability conditions (so macroeconomics and its current foundations) and 2) behavioural assumptions (a more widely shared issue).  Tyler Cowen links on both issues to some degree 1,2.

Hopefully there is a realisation that economic methods and models are useful – even if the value judgments economists make aren’t always up to scratch.  My concern is that disputes about value judgments will lead to a situation where the entire framework is thrown to the side.  However, if this occurs it will be partially the result of some economists inability and unwillingness to describe their assumptions openly – something we should all keep in mind.

How do we compare Keynesian and modern economics?

Over at policy.net, Chris Trotter states (ht Rates Blog):

Keynesian economics was never more than the rational response of decent and compassionate men to the human cost of economic management when reposed in the hands of the avaricious and the uncaring

This is an incredible mis-representation of “Keynesian economics” – however, it is also an incredibly common mis-representation.

Among many on the left and right of the political spectrum there is a belief that Keynesianism is left-wing macro-economics and modern economics (which people attribute to Friedman – even though in general terms his ideas only apply to monetary policy, not the whole shabang). However, as CPW once said to me, the correct comparison is not one of political ideology, but one of science – Keynes was like Newton, while Lucas/Friedman/the crew are like Einstein.

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