If you can find the time (it is relatively short and wonderfully written) try reading D. McClosky’s The Secret Sins of Economics by Dierdre McCloskey.

You might also enjoy The Market as God by Harvey Cox who is a professor of Divinity at Harvard.

While there is some (posibly a lot even) of thruth in your post, dont you think on could make a similar one for, say, mathemathics? Only you would agree with the math one, Id gather? The book “Innumeracy: Mathematical Illiteracy and Its Consequences”, by John Allen Paulos is fairly prechy too, and to some level a non-parody example of what youre getting at.

posted by econgeek on December 8, 2005 #

The problem with comparing markets to God is that markets are not a single omnipotent entity - they are a spontaneous order created by the interactions of thousands, millions, or billions of people. A more accurate analogy to God would be government itself - people put their trust in government to be able to fix markets. In order for a government to “fix” a market, however, it has to be omniscient and omnipotent - it has to understand the “correct” price for the good whose prices it controls in order to not cause a shortage and encourage future investment in a needed area.

In reality, this is not how government tends to work. When government caps, say, gas prices - voila, shortages result, just as economists predict. Government is not God, it is simply a creation (and design) of man. Markets, likewise, are not God - but at least they are not created by human design. They simply arise out of the mass of voluntary human interaction.

Here are some related articles by economist Don Boudreaux:

http://cafehayek.typepad.com/hayek/2004/12/creationism_liv.html http://cafehayek.typepad.com/hayek/2004/12/more_on_bluesta.html http://cafehayek.typepad.com/hayek/2005/08/social_creation.html

posted by Daniel on December 8, 2005 #

@econgeek: Ok, on the hand we have “markets”, which are very heavily influenced by what people believe. And on the other hand we have mathematics which are an extension of logic - and where the results are not going to change based on what you believe.

Gee, I wonder which one is more like religion…

Besides, Daniel and econgeek, I think you’re missing the fact, that Aaron was not comparing economics to religion, but he talking about “economese” (as he called it), which is how some people in “the newspaper, the television, the school system, the bookstore” talk in their own special language. Interestingly enough the reactions were like that of true zealots, finding their believes attacked, and having to defend them.

Oh, and Aaron, why do you hate America?

posted by Sencer on December 8, 2005 #

That’s right Daniel, see also:

Faith in the Godvernment http://www.livejournal.com/users/fare/88486.html

posted by on December 9, 2005 #

And here:

http://cafehayek.typepad.com/hayek/2005/11/are_humans_gene.html

posted by on December 9, 2005 #

Oops, that should be:

Are Humans Genetically Disposed to Pray to the State?

posted by on December 9, 2005 #

surely governance is a founding principal which we see displayed in pretty much every major civilisation in history, whatever the style maybe people need to be governed and involved in governance. once you privatise things (as we see in england - transport) things dont improve if anything they get worse, the train companies have a monopoly on their section of rail so prices are going up along with their profits but service isnt changing.

there are somethings which are so fundemental to the needs of society which need to be run by a body which at least claims to represent the people, not-for-profit. when the government opened our schools to market forces, now we have schools in inner cities struggling and others doing brilliantly with no money, decreasing social mobility and widening the wealth divide

posted by jana on December 9, 2005 #

Economics certainly sounds dogmatic when you constrain a discussion of it to only the type of explanation that can offered for religion.

posted by Christian G. Warden on December 9, 2005 #

Aaron, I totally understand your objection against economics. A lot of my friends at college are biology majors, and they’re always trying to persuade me that evolution is true. They keep on quoting scientific papers and the like, but how can biology be valid if it disagrees with creationism? I mean, if it contradicts my current beliefs, then it must be wrong. The whole field seems to be the most blatant form of left-wing propaganda, brainwashing young Americans into embracing atheism.

My friends are trying to get me to take biology next semester, but I don’t see any point. You know, I read this book here, Case for a Creator, and the author made some pretty strong arguments against the field of biology. Unfortunately, since I don’t actually know anything about biology, I was persuaded by a lot of arguments that are completely incorrect. But, since I’ve read this book, and some articles online, I feel that I can safely say that the whole field of biology is just plain wrong, without having actually studied the subject with an open mind.

So I guess I understand your position of being able to reject an entire field of study without actually knowing or understanding the evidence and reasoning behind it. Its good to see we have something in common. Just remember Aaron, IGNORANCE IS STRENGTH.

posted by Justin on December 9, 2005 #

If you said you didn’t believe in evolution, there are tons and tons of evidence I could point you to. Where’s the evidence that economics is true or even close?

P.S. I’ve actually studied economics quite a bit and I’m hoping to write a whole book chapter about it as soon as I get back to school.

posted by Aaron Swartz on December 10, 2005 #

Where’s the evidence that economics is true or even close?

Well, you could compare different societies (across space or time), to see how differences in their economic policies play out in the real world.

This can be complex, and maybe not realistically quantifiable, but I think there’s enough evidence in history to give us general principles for how economics works.

For example, the Irish economy has recently been liberalizing, and as a result, basically two things have happened: 1)the economy has grown, more jobs, more wealth, and 2) Poverty, where it occurs, is sometimes more serious.

So, we could observe, with this case taken alongside others, that liberalizing an economy makes the median case better off, and increases the variance in income distribution. Just because people don’t talk about it this way in the newspaper doesn’t mean something magical is happening.

As for your comparison, just because both arguments aren’t backed up by fact, doesn’t speak to the underlying subject matter. The religious argument, just by nature of being a bunch of baseless assertions, isn’t an argument against god or the policies therein. So maybe your real problem isn’t economists in the media, it’s that there isn’t any real analysis in the media…

posted by Ben W. on December 10, 2005 #

Yes, you could test economic theories. But as far as I can tell, economists don’t.

Don’t just take my word for it, here’s University of Chicago economist Deirdre McCloskey:

Economics in its most prestigious and academically published versions engages in two activities, qualitative theorems and statistical significance, which look like theorizing and observing, and have (apparently) the same tough math and tough statistics that actual theorizing and actual observing would have. But neither of them is what it claims to be. Qualitative theorems are not theorizing in a sense that would have to do with a double-virtued inquiry into the world. In the same sense, statistical significance is not observing. […]

The progress of economic science has been seriously damaged. You can’t believe anything that comes out of [it]. Not a word. It is all nonsense, which future generations of economists are going to have to do all over again. Most of what appears in the best journals of economics is unscientific rubbish. I find this unspeakably sad. All my friends, my dear, dear friends in economics, have been wasting their time. […] They are vigorous, difficult, demanding activities, like hard chess problems. But they are worthless as science.

The physicist Richard Feynman called such activities Cargo Cult Science. […] By “cargo cult” he meant that they looked like science, had all that hard math and statistics, plenty of long words; but actual science, actual inquiry into the world, was not going on. I am afraid that my science of economics has come to the same point.

(Deirdre McCloskey, The Secret Sins of Economics, 41, 55f)

posted by on December 10, 2005 #

Amusing post. I’m a fan of neither capitalism nor religion, and yet I love the idea of America — go figure. I think it’s pretty obvious that capitalism and organized religion go hand-in-hand, and the party lines between the pro and anti segments would be logically split down the middle. I would like to believe that pointing out the fundamental flaws of each system (which could be done once and then cut-and-pasted between the two, as done above) would be enough to catalyze a whole new form of thinking amongst the masses, but then again, we do live in a country where people are excited when a Wal-Mart opens in their suburb.

Given the general education of the average American, I often wonder what the people will be rising up in favor of when they do, eventually, rise up.

posted by Justin Kownacki on December 11, 2005 #

Jana wrote: “once you privatise things (as we see in england - transport) things dont improve if anything they get worse, the train companies have a monopoly on their section of rail so prices are going up along with their profits but service isnt changing.”

That’s just not true, Jana. The service has changed dramatically: avoiding unnecessary and costly safety procedures has resulted in years of derailments and dozens of deaths.

Your statement is probably more relevant to the privatization of water. For a country surrounded by water, where it rains all the time, and where the bottom half of the country regularly floods due to the effects of global warming, we now have some of the most expensive water in the world! Hurray for us! (We would have privatized even more, but we ran out of money.)

posted by Lord Amok on December 12, 2005 #

Heh. Actually, of course, what the nattering nabobs of ‘nomics skip over is that “efficiency” is not something we want from government (or markets, but that’s another matter). Efficiency is defined as maximalizing one metric in terms of another metric. One has to wonder: what happens if we choose the wrong metrics? Hampered, as it happens, by the fact that the market paradigm only allows a very limited set of possible metrics?

As for those efficient markets themselves…who amongst us dreams of driving the most efficient car? Aren’t there other values?

posted by david stewart zink on December 13, 2005 #

Actually, efficiency in economics basically tries the capture the idea of lack of wastefulness. (See for example the Wikipedia article on Pareto efficiency). If a given allocation is not economically efficient, then you could make someone better off without making anyone else worse off. Economists tend to think that’s not a desirable situation; if someone can be made better off without worsening anyone else’s situation, why not let them be better off?

posted by on December 14, 2005 #

It sounds quite nice when you put it that way, but that’s not how things work in practice. In reality, economic efficiency is calculated to maximize very specific respects.

Your favorite computer company tries to increase “efficiency” by firing half its tech support staff. Now you get to spend hours on hold before your problem gets fixed. Do you feel better off?

Your local government increases “efficiency” by privatizing the bus system, which promptly increases “efficiency” by hiking the prices on working people and schoolchildren. Do they better off?

The UN is told they really should increase “efficiency” by letting US industry pollute as much as they want, causing the Earth to overheat and the environment to be destroyed for future generations. Think they’re going to feel better off?

The problem in all three cases is that the definitions of “efficiency” are weighted not by people, but by money. You’re just one of millions of computer purchasers, working people are low down on the economic scale, and our grandchildren don’t participate in the market at all. So economics says “screw ‘em”.

posted by Aaron Swartz on December 14, 2005 #

Well, I do think we are talking about different things. For example, if you go to the Wikipedia page for “efficiency,” there are many different meanings of the term. I do acknowledge that it is also used as a euphemism for things that people don’t usually like, in business speak. I thought we were talking about economics as it is studied academically, though.

I would like to speak to a couple of your points in the other paragraphs. Regarding the computer company that lowers tech support staff, I would say that if a company does that and it is against the interests of the market they primarily serve, it could very well end up being a mistake which costs them. Sure, it might make them some money in the short run, but if their consumers really value that aspect of the product, in the long run they will change to competitors who provide what they want better. Then again, maybe people so like their cheap computers from Dell that they are willing to accept the low-probability event that they’ll have a harder time with tech support.

Regarding the case of the bus system, people are paying for the bus system either way. When the government runs it, it is paid for out of tax dollars, and when it is privatized, it is paid for by the people who use it. Privatizing the system does shift the burden towards the people who use it and away from people who don’t, and you might think that it’s good to subsidize poor people so they can live their lives (I agree). Economists tend to favor a policy like a negative income tax or the earned income tax credit for that, however. (The reason has to do with the distortionary effects of taxes and subsidies, which hide the true cost of what is being purchased). There is also the issue that government agencies tend to require a lot of bureaucracy and oversight that private companies do not, which means that it might actually be more efficiently run (fewer wasted resources) as a private company. Economists frequently find in empirical studies that the welfare benefits from government-run services like housing projects and so forth frequently do not outweigh the costs, meaning that everyone would be better off if the government just gave people the money they would spend on the project and bought private housing or whatever.

Pollution is a case where there might be externalities, which is a case where welfare theorems break down. In those cases, it might be welfare-increasing to set up a system like a pollution permit market.

So yes, the language and terms of economics are often misused in order to further people’s personal agendas. I suggest that rather than denying the validity of economics itself because shysters can use its terminology to sell whatever they want, we encourage better education in economics so that people are better able to think about these issues for themselves. In fact, I would say there are few people other than economists who passionately, lucidly and analytically advocate in the interests of the poor and powerless.

posted by on December 14, 2005 #

How is this use of efficiency a business-speak problem? The first result on Google for “economic efficiency” explains “In a market economy, the goals of the rich are given more weight than the goals of the poor” when calculating efficiency, just as I said.

The rest of Anonymous’s comment clearly demonstrates the problems with economics I discuss in this article — we can see them by applying the same transformation:

“if a company [lowers tech support staff] and it is against the will of God … [it could] cost[] them.”

EITC was supported as a way to prevent an increase in the minimum wage, not welfare. The reason for this is that the EITC taxes the public to subsidize business, while the minimum wage essentially taxes business to provide money for low-wage workers.

The idea that government agencies are less efficiently run that corporations is another fiction of privatization, which I hinted at in my last post. The way privatized services are typically more “efficient” is not through less bureaucracy, but through scamming the poor. Take health care for example: in the US overhead is 13%, in Canada’s government-run system it’s just 1%.† (And of course everyone gets health care in Canada.)

Finally, I’ll let Anonymous’s closing comment refute itself: “religion is often misused in order to further people’s personal agendas. I suggest that rather than denying the existance of God Himself because shysters can use it[] … we encourage better education in religion … In fact, I would say there are few people other than clergy who passionately … advocate in the interests of the poor and powerless.”

Few would be convinced that the solution to poverty is more religious indoctrination. So why would economic indoctrination be any better?

posted by Aaron Swartz on December 14, 2005 #

If you believe that replacing key words in what people say to make it sound superficially like something you don’t like is a logically valid form of argumentation, then I really don’t know how to counter that. As a concerned humanist (and devout atheist), I study economics because I think understanding it can make many people’s lives better, and not understanding it can make people’s lives worse, even if solutions to problems are proposed with good intentions. I’d rather we had a substantive discussion about specific ideas and why they might be wrong or right based on logic and evidence, not “what it can be made to sound like if I replace words.”

All I said was that businesses and political spin-doctors have successfully used the language of economics to suit their purposes, and that unfortunate fact does not itself invalidate the analysis. Just because an economic result runs against your intuition, it does not mean that there is a conspiracy by all those billionaire academics and development economists to keep poor people poor. The suggestion that the development economists and labor economists and public finance economists of the world (and it’s not that lucrative a profession) are all concerned with keeping people down is kind of humorous.

Yes, economic efficiency does count the rich more than the poor in some sense (I would say more accurately that it does not say anything about the distribution of wealth). The definition of Pareto optimality does not rule out a situation where a single person has everything and everyone else has nothing; that is “efficient” in the Pareto sense. However, that is obviously not sufficient to capture everything that we think is important in distribution issues, and so as the article you link to mentions, that’s not typically the only criteria economists use in applied welfare analysis. Given that there are usually an infinitude of Pareto optimal allocations, focus on efficiency is more like a necessary but not sufficient condition for a desirable outcome; a policy had better be efficient, but efficiency alone does not necessarily recommend a policy.

Regarding the EITC and the minimum wage, this is a complex issue. A minimum wage increase can be like a tax increase on labor purchases. This can cause an decrease in the purchase of low-wage labor, or it might cause a price increase in the finished product the firm is selling (see section 6.1 of the textbook at introecon.com, for a more detailed discussion of all the issues). In either case, the public pretty much pays for it, whether through taxes or through the slightly increased price of almost everything they buy. If the EITC can make poor people better off with lower distortion on the employment and purchase decisions of workers and employers, why not do it through that?

posted by on December 15, 2005 #

Thinking economists are wrong makes me a conspiracy theorist? (I didn’t even say anything about development economists!) So I guess McCloskey (quoted above) is also such a crazy person. As is economics journalist Doug Henwood, who says in his book Wall Street:

[Among economists, o]bservation and experience are distrusted, and theory instead is the lodestar. Given the bias of most theorists and theories, then, this style of economics can generally be trusted to produce results proving unfettered markets to be the finest principle of social organization.

There’s one sterling example of that dependable bias, the minimum wage, almost universally regarded by economists to be a job-killer. Their reasoning is pure Econ 101 — raise the price of something (and a wage is the price of labor), and you depress demand for it. Therefore, boosting the minimum wage has to result in an employment decline for low-end workers. But in surveys of employers taken just before and after changes in the minimum wage, David Card and Alan Krueger (1995) showed that this just isn’t true. They paused for a few pages in the middle of their book, Myth and Measurement, to review some reasons why the academic literature has almost unanimously found the minimum wage guilty as charged. They surmised that earlier studies showing that higher wages reduced employment were the result of “publication bias” among journal editors. They also surmised, very diplomatically, that economists have been aware of this bias, and played those notorious scholarly games, “specification searching and data mining” — bending the numbers to obtain the desired result. They also noted that some of the early studies were based on seriously flawed data, but since the results were desirable from both the political and professional points of view, they went undiscovered for several years. †

This also defuses the first half of your claim (that increasing the minimum wage will decrease the purchase of low-wage labor), leaving the second possibility: an increase in the price of goods. But I suspect this theory-based claim is similarly wrong — in practice I suspect the cost will simply come out of profit.

posted by Aaron Swartz on December 15, 2005 #

No, thinking economists are wrong does not make you a conspiracy theorist, but you paint with such a broad brush. We seem to agree on our dislike of the spin-doctoring of economics, but to consider MBAs and economists (with PhDs) as being involved in the same endeavors would leave me wondering why a bunch of (in my experience, passionately well-meaning) academics are so interesting in screwing people over.

I don’t think McCloskey is crazy, but I don’t think her opinion is as extreme as you think it is either. I read the Secret Sins a while back, and many kind words are spoken about economists before two specific methodological issues are addressed. There is some truth to what she says about qualitative theorems, but I’m not willing to say that they’re useless. Economics is especially hard because it is plagued with confounding difficulties, so one way of trying to gain insight is simplifying the theoretical model you work with. Theoretical economics does get pretty abstract, but even though the data required for much of the theory will never be available, analysis can often be done with simplifications, and the insights can trickle into empirical work. As I think McCloskey says in that file, applied economics is typically uglier and more approximate, but closer to reality. I really don’t think McCloskey considers herself to be involved in a totally useless pursuit in which every result that everyone else in the field believes to be correct is wrong.

I don’t know about Doug Henwood, and have never heard of him. To turn the question around a bit, are the faculties of the economics departments at MIT, Harvard, Chicago, and other top schools all crazy? Also, regarding the Card and Kreuger study, I don’t believe that was the end of the story, and there is still controversy about their results. The Wikipedia article on the minimum wage provides more details about the various issues regarding their study and others. (Personally, I am not too gung-ho about the issue, and labor economics is definitely not my specialty, I just don’t think that it would be so horrible if poor people were assisted through the EITC instead of a minimum wage increase).

Whether the cost comes out of profit or the consumer’s pocket due to a price increase depends on the price elasticity of demand. For some goods, it would come out of profit. For others, it is almost certain to be passed on to the consumer. For most, it is probably split between the two in some proportion. (The textbook at Introecon.com discusses this). A lot of empirical work analyzes who pays for a given tax or regulation.

posted by on December 15, 2005 #

If you want to know why economists propose things that hurt people, don’t look at the individual economists (who are reasonable and decent people, doing what they’ve been trained to do, thinking it’s for a noble end) but instead at the system that trains, selects, and hires them. This is sociology 101 stuff.

You may not believe McCloskey, but that is undoubtedly what she says: “The progress of economic science has been seriously damaged. You can’t believe anything that comes out of [it]. Not a word. It is all nonsense, which future generations of economists are going to have to do all over again. Most of what appears in the best journals of economics is unscientific rubbish. I find this unspeakably sad.”

Maybe you should ask her whether the department at U of C is all crazy. They’re pretty clearly off-base.

posted by Aaron Swartz on December 15, 2005 #

I’m not a sociologist, so I’m afraid I don’t understand. How is it that we are so sure objectively that “people are hurt” by their proposals? How is it that all these economists, spending their lives reading and writing insane amounts of research and philosophy on the subject matter can miss what is so obvious to an outsider, and only hurting when they think they are helping?

Is there some specific problem you have with U of C or a specific economist there? There’s a wide range of specializations in that department, and many of their economists openly disagree with each other on fundamental issues. Furthermore, Chicago’s “price theory” style of economics is a more applied approach than the sort that is criticized by McCloskey. (McCloskey actually defends Becker’s work on fertility decisions in that file, for example).

posted by on December 15, 2005 #

How is it that all these economists, spending their lives reading and writing insane amounts of research and philosophy on the subject matter can miss what is so obvious to an outsider, and only hurting when they think they are helping?

So, the argument is, they’re trying really hard, so how can they be wrong? That’s silly. If their field is based on false premises, or if their techniques are scientifically bankrupt, then they’ll be wrong no matter how hard they try.

posted by mark on December 16, 2005 #

a) I was defending their intentions as much as their conclusions, both of which have been under attack here.

b) It’s still a valid point. Their job is to study and understand it, and you think they’re not aware of some issue you bring up? You think they don’t spend any time making sure their methods are as scientifically valid as possible? I guess you can think that, but it’s kind of a silly thought. For example, I don’t know jack about climate science (and it does share certain similarities with economics, such as the difficulties of measurement, and lack of controlled experiments), but I’m not going to assume that scientists who tell us the world is getting warmer are simply failing to take something obvious into account and that any insights they give us are wrong. Plenty of people do make such assumptions, and I think you’d find them silly as well.

posted by on December 17, 2005 #

You think they don’t spend any time making sure their methods are as scientifically valid as possible? I guess you can think that, but it’s kind of a silly thought.

<

p>So, being silly, it is prevented from being true? Now, that is not being rigorous. Anyway, I think you do not understand too well what science is and how it works.

<

p>Did you actually read the article by Deirdre McCloskey cited and linked above? It explains what is happening quite clearly, and also some of the fundamental nature of much of what is wrong in modern day economics.

<

p>If you are to lazy to read it, perhaps I can hit you hard enough on the head with some little bit of related knowledge. I have a little challenge for you: find one scientifically valid argument that refutes the claim that beheadings successfuly eliminate headaches.

posted by foobar on December 17, 2005 #

I believe I’ve said on this thread that I’d read McCloskey’s piece, every word of it. Again, that said, I don’t agree with her views. Your argument is “But there’s this one economist who says it’s all bilge.” OK, fine. I guess if that’s the standard, without appeasing that one economist, victory is impossible for me.

It is true, it could be possible that all of economics, despite the brilliant people who work on it, is all wrong due to some simple oversight that a novice can walk up and point out. To believe that is the case takes a severe disrespect for the intellect of economists of the past several hundred years or a very high level of self-esteem. I don’t think it’s likely, but there’s no mathematically provable reason that that’s not the case, so feel free to think that.

And yeah, I’m having a hard time arguing against vague, nonspecific claims against the field as a whole. I’m having a hard time believing this entire conversation is about whether or not economists should use a test of statistical significance as evidence for or against a given result…

posted by on December 18, 2005 #

You claim you’ve read McCloskey and disagree, but you don’t really respond to her argument.

McCloskey’s first sin is that economists “don’t really do either theorizing or observing”, just things that “look like” it (emphasis in original). She goes on to explain why what economists think is theorizing and observing actually isn’t. Economic theories, she says, depend on premises that simply aren’t true (“everyone is motivated by P-Only considerations”, “information is symmetric”, “people are rational…”).

Disproving this should be easy: just show us the great works of economics that don’t make such assumptions or show us that these assumptions are actually true. If economics is worth anything at all, this shouldn’t be very hard. I await your reply.

posted by Aaron Swartz on December 18, 2005 #

OK, I guess I’m so fully “indoctrinated” that I didn’t recognize the first argument as being the “the assumptions aren’t true” argument (I admit I skimmed some parts on rereading the other day). I have several responses to this.

The first one would be to just copy the entire essay called “The Methodology of Positive Economics,” by Milton Friedman into this little box (It’s available on Google Print if you search for page numbers, and a large excerpt appears if you do a regular Google search). He addresses the “the assumptions are wrong” argument in depth in that essay, and I believe his defense is reasonable. In many things, economics does very well, in other things, economists are still struggling to understand certain phenomena (and the good ones will freely admit this).

The second response would be that economists have whittled down the number of assumptions they make about human behavior to a very small number. If you read the microeconomic theory textbook by Mas-Colell, Whinston and Green, they derive most of economic theory from 6 fairly reasonable assumptions about people’s behavior, and note when those assumptions might not be true (ie, why we might observe intransitive preferences, etc). In higher-level works, the number of assumptions can be whittled down to I believe about 4. Furthermore, many fundamental results, such as the fact that demand curves are downward sloping, can be derived without any assumptions on human behavior, and can in fact follow simply from the scarcity of resources (Gary Becker has proved many of these fundemental results along these lines).

The third response is that, as I mentioned regarding the Mas-Colell text, the assumptions are sometimes good starting points, sometimes not. The hot fields in economics right now are beginning to try to understand where those assumptions go wrong. Behavioral economics is a relatively new field that proceeds without classical economic assumptions (rationality, etc), and calibrates its assumptions to results from psychology. Experimental economics, another fast-growing field, is an attempt to perform controlled experiments on human behavior in economic and strategic situations. I am no expert on behavioral economics or experimental economics, but in my understanding, the big results coming from those fields don’t overturn past economic results, but they can give us more detailed insights. Much of this work is still very controversial, especially from the old guard, but I’ve yet to see any result come out of this field that has fundamentally overturned what the old-guard has found.

Finally, the assumptions that seem unbelievable at first can in fact be true in many situations. For example, in finance, it isn’t unreasonable to assume that the main players on a market have all the same information, or that they are very rational. The fact that financial economics seems to work so well suggests that perhaps the breakdown in results in other settings is in fact due to the breakdown of these assumptions, and this is what behavioral economists try to investigate.

posted by on December 18, 2005 #

So I see you’ve tried tactic a (insisting that the assumptions are true). So can you give us some good examples of the predictive power of these theories then?

posted by Aaron Swartz on December 18, 2005 #

I’m not sure what would satisfy you here. If an economist points to something that economic theory would suggest, and then finds support for it empirically in data, then you would probably not consider that to be a prediction in the grandiose sense that we would hope for, yet that is a common form for empirical research in economics to take. Unfortunately, economists are constrained in how much they can observe. Very few countries would agree to experimental macroeconomics, for example. When economists are called on to consider various policies and make a recommendation about the best one (and when their advice is taken) they can’t observe what would have happened otherwise.

Can economists predict what is going on in the macroeconomy? Not at all; macroeconomics models most macro variables (GDP, productivity, etc) as random variables. I don’t know that there’s any hope for that sort of thing. Now, given that things like output and productivity are considered exogenous, macro can say some things about fiscal policy and monetary policy, the length or severity of a recession, the work/labor decision in business cycles, and other related things. For example, modern insights about monetary theory seem to have made inflation-fighting a tractable problem. If you look at Fed policy before and after Paul Volker (who implemented many of Milton Friedman’s monetary policy suggestions) became chairman, the difference is striking in terms of how much inflation we’ve had; the period from 1980 onward is the longest period of low inflation and low volatility ever. Jeffrey Sachs has also had some success in advising countries like Bolivia during economic crises (He’s currently proposing strategies for lifting Africa out of poverty, but we’ll see to what extent anything he proposes gets implemented).

Aside from the standard, uncontroversial results that economics predicts (rent control bad, deadweight loss of taxation, etc), specialized empirical economists who work in consulting firms or trade associations or hedge funds or government agencies do seem to have some success in making useful, if rough, estimates about demand analysis, and the near term effects of say, a new product introduction in a market about which they have a lot of useful data. Stuff like that. That sort of thing is rarely published in an academic journal, however. (I have had some experience working on this sort of thing in a marketing/industrial organization setting). Markets tend to move faster than government policies, companies are more likely to listen to an economic consultant than governments, and data is easier to collect in a timely manner for a small market or a company; perhaps all this helps explain why things seem to work better empirically on a smaller scale. Perhaps this is also why financial economists and industrial organization specialists seem to be in such high demand compared to other more theoretical-minded economists.

Personally, I don’t think of prediction as mainly what economics does, and I’m not sure how important it is to the validity of the field. If economics is mostly restricted to looking back and approaching welfare analysis like an accountant, I don’t see why that can’t be helpful and valid. Hopefully we could all agree that how resources are distributed and best utilized is a worthy thing to study, but we’re not handed a perfect world with wonderful data and the ability to experiment freely for everything we’d like to study. Many fields worthy of study (in my opinion) find themselves in this position as well, such as climate science, sociology, and astronomy (especially string theory). What can you do? You do the best you can and look for what evidence you can, and I think that economists do a good job testing their theories empirically given those difficulties. If this prevents economics from rising to the level of a pristine science like physics or chemistry, so be it. They’re lucky that the subject matter they study seems to be controlled by simpler laws than unpredictable human intelligence. I don’t think everything that can’t meet that standard is rightly called pseudoscience nonsense, only as good as the dogmatic circular logic of a religious evangelist. What is important is how people approach the subject; if the best tools possible are brought to bear, and the available evidence is carefully weighed and considered, the insights can be valid and helpful even if they don’t have the precision of the standard model of particle physics.

posted by on December 18, 2005 #

<

p>It is funny you mention Bolivia. This one is a wonderfull example of economics gone wrong. Privatize water. Liberalize this and that. Privatize schooling. Etc. The theory predicts things will improve. It went nowhere, not because these things cannot actually improve things under certain circumstances, but because they were done ignoring that very last bit, just as in the Potato famine example that I think you missed.

<

p>

It is true, it could be possible that all of economics, despite the brilliant people who work on it, is all wrong due to some simple oversight that a novice can walk up and point out. To believe that is the case takes a severe disrespect for the intellect of economists of the past several hundred years or a very high level of self-esteem.

First of all, it is not all of economics that is under attack (there was some talk about post autistic economics at some point, if you missed that, and McCloskey’s point is way more subtle and carefull than you make it sound). And second - what has self-esteem and respect to do with this? If it is rubbish it is rubbish.

<

p>The criticism isn’t just “the assumptions are wrong”, although that is certainly one of them. The criticism is that, even when the assumptions are right, it has very often a strong disconection from what is relevant in the field of application (thus the beheadings example). Also, another of the criticisms of McCloskey is that if you add another assumption (even a correct one) you tend to get an entirely different theory, without any reasonable way to predict or measure how close it is to reality. (Although, granted, this is due to the perhaps essentially untractable nature of parts of the subject - which isn’t really a valid excuse).

posted by foobar on December 18, 2005 #

Yeah, I wasn’t familiar with the water privatization case in Bolivia. I was talking specifically about Jeffrey Sachs’s “shock therapy” program which pulled Bolivia out of hyperinflation in the 80s. My instinct would be that if you take something essential, like water, and go from the government providing it at a loss to giving some company monopoly rights over it, it’s going to get more expensive, which seems to be what happened. I’m not really sure what the rationale was in those cases for doing it without introducing competition, or what they were trying to accomplish by doing it that way, so that is kind of weird to me.

I don’t know much about “post-autistic economics,” and I can’t seem to find any substantive academic articles from that movement. I’ll look out for their results.

posted by on December 19, 2005 #

Perhaps if you substitute capitalism for economics. I’m willing to bet that there are at least a couple economists studying the dynamics of a socialist economy.

As far as ‘economics as religion’ goes, you can make the same argument regarding pretty much anything. “Food is nourishment.” “Food is god’s will. “I can convert calories into work.” “God puts his will in me with food.”

They question as to why capitalist markets dominate the world economy is probably best answered by pointing out that the major advantage capitalism has over other economic systems is that it is cynical regarding individuals. In capitalism, individuals are self-centered liar’s who don’t give a shit about anyone else. ME ME ME. Unfortunately, this matches up pretty well with my experience when it comes to strangers(i.e., people are nice if they know you a bit or can foresee dealing with you more in the future).

posted by Max on January 7, 2006 #

The idea that introducing competition when privatising a previously-subsidised water supply will counterbalance any negative consequences is pretty daft. It’s this kind of free-market-fundamentalism that leads many of us to despise what in other respects is a not-unreasonable intellectual position.

Market economics can generate useful models, but that’s no reason to grant the discipline any moral or utilitarian authority; no more than we should take the explanatory power of Darwinian evolution as consituting an ethical argument for mercilessly slaughtering anyone or anything not perfectly fitting their ecological niche.

There are ways in which the world works, and ways in which we can represent those to at least partly understand them; and there are the things we value and the things we do. Do not make the mistake of confusing these domains.

In practical terms, an economic understanding of the way people behave, of resource flow and consumption and scarcity, is a valuable input into sociopolitical analysis and (where such is possible) action. But it’s no Bible. (Neither, for that matter, is The Bible — but that’s a whole other flamewar.)

A proposition like “people behave selfishly” can give useful insight. It in no way implies that people should behave selfishly, or even that we, either individually or collectively, should relate to (cater for, gear public policy towards) people on that basis.

posted by matt on March 23, 2006 #

The thing about “liberalising” economies (such as in Ireland and Australia, since the float of the $AU and continuing through the so-called boom times to today) is that this sometimes creates only a perception of wealth and growth. Australia is actually more indebted to overseas investors than ever before. Just today it has been reported that the national (private) debt has hit a record $493 Billion, representing more that 51% of GDP. This means that the Australian people are now a minority shareholder in the country.

What liberalisation has done, especially in the banking sector, is create easy access to cash which has unfortunately been spent on recurrent consumption rather than capital expansion (the federal government has injected billions in revenue into tax cuts and increased family payments, which is generally being spent on consumables, refinancing mortgages etc).

The nation’s indebtedness is frigtening and personal debt levels are at a record, with exposure to credit card debt one of things that could drive many to the wall once inflation kicks in and interest rates rise.

Certainly, growth is occuring, unemployment is lover than it has been for a while, “contracting” and “sub-contracting” is seen everywhere as former employees become small-business men. However, the growth has been largely financed by foreign capital and has not as yet resulted in the required levels of productivity to tip the balance of trade in Australia’s favour and therefore, the national debt does not look like it might improve for a long time. It appears that many people are more affluent than before, but what happens when the creditors come callin’?

posted by Dean on June 7, 2006 #

Dear Aaron, I have read your article. It is indeed very interesting and I was impressed by it,it’s unbelievable, but it is a right comparison, religion and economics are the principal things today. Still, I think they can not be compared in such a close way. They do not cross, they are parallel to each other, that is why a person can not choose among them. It is understood that everybody tries to make his life better, to earn more money,so people can not live out of market and religion has the same significance in today’s life.

posted by Steve Osborne on October 2, 2006 #

There’s one sterling example of that dependable bias, the minimum wage, almost universally regarded by economists to be a job-killer.

I am no economist, but I think that this counter-example is flawed.

Firstly, the notion of supply and demand is very commonsensical. You raise the price of something to very high levels, you would obviously want to buy less of it.

But then why does minimum wage help workers instead of harming them as the theory might suggest? One reason might be related to the actual market conditions under the influence of which a demand-supply equilibrium is supposed to be reached. For example, large employers might have a monopoly-buyer status locally and might be able to dictate lower wages. They are also specialists in reducing costs, which means they can afford to fund other strategies to find labor (e.g., transport people en mass from elsewhere). There could be several barriers preventing workers from migrating to locations where wages are higher. E.g.,

1. Lack of information - how do the workers know where the new jobs are?

2. Reasons related to personal preferences. You may not want to move to a strange climate and society.

3. You may have personal property that need to be transported or otherwise disposed.

Lets say that the cost associated with finding a new job is O (for overhead). The monopoly buyer will be able to get away with paying you Wequilibrium - O.

Minimum wages protect the employees against employers who will ruthlessly exploit their monopoly status and expertise in cost reduction to maximize their profits.

posted by Arun RV on November 20, 2006 #

Firstly, the notion of supply and demand is very commonsensical. You raise the price of something to very high levels, you would obviously want to buy less of it.

Just because it’s common sense doesn’t mean it’s right. Sell a luxury watch for $100 instead of $5 and people will buy more of them because it’s a better status symbol.

posted by Aaron Swartz on November 28, 2006 #

Sell a luxury watch for $100 instead of $5 and people will buy more of them because it’s a better status symbol.

I’d argue that the person is paying for the status symbol-ness of the watch, which does have an economic value. The same watch at $5 can be bought by anyone and doesn’t have this property.

posted by Arun RV on November 29, 2006 #

Thanks for the post above and the discussion to follow. I found many of the comments rather insightful. I’m a big fan of D. McCloskey and I believe she is on to something in her writings. As a former PhD student, IMHO economics has become somewhat self absorbed and forgotten its roots as a social science. Its errors stem from largely believing ever more math can answer the questions posed rather than recognising that might not always be the case or even particularly useful. Moreover, while many economists are sloopy and allow certain interest groups within society to misuse the insights provided by the field for social or political reasons and sometimes actively pontificate on these issues themselves thereby confusing everyone, economics as a field of study is very limited in what it can tell us about “the right way” to organise society which is often the ultimate question people want answered. In otherwords, economics is good at telling us what will - in theory - allow us to have more “stuff”. But it is not so good about telling us whether we should indeed take those steps. Again, thank you for the discussion.

posted by boaltie2004 on December 4, 2006 #

Hi Aaron. I’m enjoying this discussion, as a former developer with a terminal master’s in economics (who is extraordinarily cynical about what he learned there), who happens to be a big fan of Deirdre McCloskey. (in fact, select quotes from ‘Secret Sins’ are ON MY WALL as we speak.)

I think you are off-base if you are attempting to portray McCloskey’s writing as a blanket condemnation of all economics (as it is taught in school). It is very far from that, and frankly she would react with scorn if she saw the crude anti-economics hatchet job you started this entry with.

Just one money quote “I beseech you to think it possible that the libertarianism of economics is a virtue”.

Here’s another “… the insiders cannot believe that methods which they have been elaborately trained … are simply unscientific nonsense, having literally nthing to do with whatever actual scientific contribution (and I repeat, it is considerable) that economics makes to the understanding of society.”

posted by Darren X on December 10, 2006 #

Aaron: “Just because it’s common sense doesn’t mean it’s right. Sell a luxury watch for $100 instead of $5 and people will buy more of them because it’s a better status symbol.”

Aaron, you are unfortuantely demonstrating the aptness of the expression “a little knowledge is a dangerous thing”. Economists have, in fact, noticed the high price of status goods and have come up with a theory (signalling in the presense of imperfect information) to account for it. Most of the time, the simple supply/demand story is pretty good at coming up with a simple framework to explain price movements. (and BTW the Card study is very interesting but is hardly the last word in labour economics).

I must say, I always thought I was economics’ number one critic, and I never thought I’d be in a position of defending economics.

posted by Darren X on December 10, 2006 #

I can only say that today’s economics is like mathematics without concept of zero!

If you are surpised, mathematics did exist without concept of zero for centuries, before concept of zero orginiated from India.

posted by Anon on December 14, 2006 #

Wow, it’s quite amazing to see views so clearly tinted by pre-existing biases and a lack of exposure to the world outside their little involvement.

For example: “I think it’s pretty obvious that capitalism and organized religion go hand-in-hand”. Although quite tempting to take as fact given the current association of religion and capitalism to the right and more independent thought and socialism to the left in America, isn’t it quite shallow to infer that this is a causal relationship? Wouldn’t even a very preliminary search outside of one’s immediate environment bring up the inaccuracy of this statement? Take a look at Morocco — those pushing capitalism are more forward-thinking and educated, and are much more for independent thought, while those against it are fiercely religious.

Moreso, Aaron, it’s a huge cop-out to pander to the biases of your readers to produce pseudo-intellectual thought. Why do you so obviously reveal your hate for organized religion by comparing it to economics, and assuming this to be an extremely negative inference? My personal opinions on organized religion likely fall very close to yours, but I find it somewhat appalling that you show your biases so clearly. For an article trying to label economics as rubbish, you’d think the author wouldn’t delve into the same polemics he was criticizing.

posted by Anonymous on December 18, 2006 #

@ Sencer: “@econgeek: Ok, on the hand we have “markets”, which are very heavily influenced by what people believe. And on the other hand we have mathematics which are an extension of logic - and where the results are not going to change based on what you believe.”

Ever heard of the axiom of choice? You think the results of mathemathics dont change based on wether you believe it or not? Do you have any idea how much we can only prove if we asume it? Do you really think the reason the controversy over it died down is anything other thna the fact that we really need it (not wether logic says much about wether it is true or false).

http://www.math.vanderbilt.edu/~schectex/ccc/choice.html

cheers, econgeek

posted by econgeek on December 21, 2006 #

Thats libertarian religion and NOT economics , most people who present themselves as economists get paid to help their patron rip off others . Minimum wage studies show its a super plus except for business owners who want more profits , human costs be dammned . They also benefit from schools so bad most folks feel they must attempt genocide on encountering someone who uses the shortest verbs of english properly vs the usual info theory disaster , goot run

posted by bruce coston on December 23, 2006 #

Why is it that only left-wingers criticize economics? I wonder if they would be so gloomy about it if economists suddenly said the market is all wrong, the end of work is near, and that Cuba is a paradise for workers. Maybe you can help me figure out why people prefer to have no job at $7.25/hr rather than having a job at $5.15/hr, or why some individuals prefer to have a cheap, state-owned phone that doesn´t work rather than a costly, privately provided phone that actually does?

posted by on January 3, 2007 #

Interesting food for thought. I think its perfectly normal that people who view the world a particular way through one discipline (such as economics) would have a similar perspective which they apply to others (like religion).

In fact, much scholarship is being done to see the impact of certain schools of literary thought and historical analysis to a person’s conception of God, religion, etc. Much of the way English is taught in America right now bears a striking resemblemce to evangelical strains of Christianity. For example, when analyzing a poem in high school, you may have a class discussion to figure out how all the various lines in the poem come together to form on coherent whole. If one line does not make sense, you may “re-asemble” the pieces so that it all makes sense and adjust the meaning of the poem accordingly.

The underlying assumption here is that all lines must make sense together to form an organized, coherent whole, and that the author of the poem must have put it there for a reason. Well, truth be told, the author could have simply said something stupid, or maybe that stray line is a reference to something we don’t (or can’t) understand because of something we don’t know. Maybe there is more than one way to interpret a text.

So what happens if you walk through life thinking that every piece of written word must make total sense as a whole and that all lines much be reconciled with the meaning of the entire piece? When someone puts a Bible in your hands, a lot of people find that the evangelical or fundamentalist viewpoint is the easiest one to understand. We are taught to be fundamentalists in school because our culture is seeped in this one form of literary criticism and the assumptions that come with it.

This is just one example of the way the perspective we form in one area carries over to another.

posted by Frank on March 26, 2007 #

I’ve seen people from both sides and certainly they tend to float to one or the other, but there are always times when both religion and straight economics mix in some way or shape. Taking this a step further, during these coming presidential elections in 2008, it had better be in the candidate’s best interest to swing with the religious people since they have such a major force in the voting booths. Surely the more religious Barack Obama is at the head of it compared to someone who appears more of a strict business woman such a Hillary Clinton. Politics and Religion are intertwined more than the politicians would ever admit.

posted by on May 22, 2007 #

Again Aaron, you say you’ve studied Economics. Where at? Economists aren’t right about everything and they don’t know how to implement things all the time but they are usually quite smart and economics is about more than money, it’s the most scientific social science there is. A lot of modern economics is applied statistics. I’m glad in your infinite wisdom of your entire 20 years of existence you’ve determined that economics is wrong.

Let me remind you that economists are the reason that China has brought hundreds of millions of people out of poverty in the last 20 years. Let me remind you that economists are the reason Chile is the most prosperous South American country.

Economics cannot be compared to religion. You’re such a hypocrite. Religion is about dogma. Economics is about data. You don’t like dogma and you don’t like data. What do you like? Your own stupidity?

posted by City Dweller on May 23, 2007 #

when I read your two perspectives of the same expression above, I started to smile… a sociology scientist, Steven Pinker (http://pinker.wjh.harvard.edu/) developed a table of phrases/words, that can be combined by chance (using a dice f.e.), and finally, one is able to say extremely important seeming sentences without any sence ;-) Some years before, a german philosopher made a “translation” of psychological and sociological phrases (in german “phrase” means semantically empty or all the time repeated sentences, that fit to everything). I think, it was Carl Popper (see wikipedia, I?m not sure) who pointed to the extraordinary “scintific jargons”, whee vry often pretty simple circumstances are expressed in a woven and complicated way, that nobody at the end understands, what thy are about, but everybody agrees (better to agree than to convince, not to understand a word ;-) Modern Marketing psychology develops this to create new names (in german we say “old wine in new tubes”) for new products to give them a “new” impression, a self-developing new ambiance, and positive interpretation form customer?s side. Creating a “Uniqe Selling Propoal” today is often an attempt, to distinguish oneself from aanother product, which is pretty similiar… “mee to” - in times of internet, no idea stays exclusiv, so such USP search and reduction on verbal expressions is ssential for marketing economics and their financial (economical success) Hans Stiner DIPL.Psych.Univ Munich/Germany

posted by Hans on June 28, 2007 #

Wow, it’s quite amazing to see views so clearly tinted by pre-existing biases and a lack of exposure to the world outside their little involvement.

For example: “I think it’s pretty obvious that capitalism and organized religion go hand-in-hand”. Although quite tempting to take as fact given the current association of religion and capitalism to the right and more independent thought and socialism to the left in America, isn’t it quite shallow to infer that this is a causal relationship? Wouldn’t even a very preliminary search outside of one’s immediate environment bring up the inaccuracy of this statement? Take a look at Morocco — those pushing capitalism are more forward-thinking and educated, and are much more for independent thought, while those against it are fiercely religious. Thats libertarian religion and NOT economics , most people who present themselves as economists get paid to help their patron rip off others . Minimum wage studies show its a super plus except for business owners who want more profits , human costs be dammned . They also benefit from schools so bad most folks feel they must attempt genocide on encountering someone who uses the shortest verbs of english properly vs the usual info theory disaster , goot run

posted by David on November 20, 2007 #

A thorough Russian translation (I tried): http://obnal.biz/2008/01/ponimanie-ekonomicheskogo-zhargona/

posted by Andriy V. Makukha on January 7, 2008 #

I can only conclude that the purpose of economics is to keep people confused about economics. Economics is what is in the economics books not what happens in reality.

In reality cars purchased by consumers wear out and therefore depreciate. But economists have defined depreciation as applying to CAPITAL GOODS. So cars purchased by consumers don’t depreciate BY DEFINITION. But when cars wear out in REAL LIFE real people have to go to work to make the money to buy new ones.

There are more than 200,000,000 cars in the US. If each car depreciated by $1,500 per year how much would that be? But economists have been ignoring this since 1945 though of course there weren’t as many cars back then. But the total depreciation of 60 years should be a fair amount. Like 10 TRILLION DOLLARS.

It is curious that double entry accounting is 700 years old but economists don’t suggest everyone know how to do it with the computers we have now.

psik

posted by psikeyhackr on January 29, 2008 #