Economists Need to Admit When They’re Wrong
In the popular imagination, scientists do their job by testing theories against the facts and deciding what’s right. In reality, what matters most is figuring out what’s wrong -- an endeavor in which the economics profession has been failing spectacularly.
As the physicist Richard Feynman put it, “We’re trying to prove ourselves wrong as quickly as we can.” Only in this way can scientists replace dominant ideas with better ones. The best theories take risks by making specific predictions -- they “stick their necks out,” to use another Feynman phrase. Unscientific ideas, by contrast, have a bloblike ability to conform to any set of facts. They are difficult to prove wrong, and so don’t teach us much.
Several years ago, most people took the financial catastrophe of 2008 as definitive proof of profound errors in economic thinking. Some academic economists even lamented the discipline’s failure. After three decades of exuberant celebration of the wonderful efficiency and inherent stability of modern markets, all supposedly supported by volumes of sophisticated mathematics, it seemed that researchers could finally jettison some deeply flawed ideas and search for new ones.
Not so. The dominant paradigm in macroeconomics recovered remarkably quickly, leading one to wonder if any conceivable turn of events could falsify the prevailing faith. Much of academia went into complete denial, while some people suggested that a few minor tweaks may be necessary to put things back on track.
In one notable recent case, an economic research team announced that after several years of determined effort, they had found a way that standard theory could explain the aftermath of the crisis after all. They managed, with enough tinkering in the workshop, to hammer one of the profession’s beloved mathematical models -- known as a dynamic stochastic general equilibrium model -- into a form that could produce something crudely like the 2008 financial meltdown and ensuing recession.
What drives such desperate efforts at rationalization? In a new book, “Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown,” the economic historian Philip Mirowski points to a self-reinforcing confluence of factors.
Most important, Mirowski argues that significant change would threaten the standing of the economics profession. Much of economists’ authority stems from their claims to insight on which policies will make people better off. Those claims arise from core theorems of mathematical economics -- known as welfare theorems -- which in turn depend on some wildly implausible assumptions, such as the idea that people are perfectly rational and make decisions with full awareness of all possible futures.
If economists used more realistic assumptions, the theorems wouldn’t work and claims to any insight about public welfare would immediately fall apart. Take a few tiny steps from mathematical fantasy into reality, and you quickly have no theory at all, no reason to think the market is superior to alternatives. The authority of the profession goes up in a puff of smoke.
Clinging to happy visions of market-based perfection, Mirowski writes, serves an array of interests in business and finance for whom the “markets always work best” mantra paves the way to profit. They care more about short-term gain than about better science or better policy or social welfare. Hence, the profession’s claim that nothing is seriously wrong with economic thinking has found ready allies, especially in conservative and libertarian-leaning think tanks and foundations.
It’s a long way from the ideal we might hope for, where economists would be trying as hard as possible to prove themselves wrong. If they have no incentive to do so, eventually a bigger crisis -- and the social response it engenders -- will do it for them.
(Mark Buchanan, a theoretical physicist and the author of “Forecast: What Physics, Meteorology and the Natural Sciences Can Teach Us About Economics,” is a Bloomberg View columnist.)
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author of this story:
Mark Buchanan at email@example.com
To contact the editor responsible for this story:
Mark Whitehouse at firstname.lastname@example.org