How to Restore Faith in Economics
Should you trust economists? For many people nowadays, the answer is “no.” Economists failed to predict the Great Recession. Their prescriptions -- quantitative easing, for example -- didn’t seem to help speed the recovery much. During the past three decades, a lot of their big policy ideas -- financial deregulation, tax cuts, privatization and the free movement of capital across borders -- don’t seem to have worked out so well for the economy. And their seeming tone-deafness on inequality and the problems of workers displaced by trade and new technologies often makes them seem like clueless elitists.
In the years since the crisis, a popular narrative has sprung up about why economists have been getting so many big things wrong. It goes something like this: Economists are obsessed with theory. Entranced by the beauty of elegant constructs, they’re disconnected from the way the world really works.
That story has more than a little basis in fact. In the early 1980s, the majority of papers published in top econ journals were theory papers. In 1986, Edward Prescott, whose macroeconomic theories would go on to win him a Nobel Prize, confidently declared that theory was “ahead” of measurement -- in effect, that a combination of intuition and math could tell us more about the business cycle than statistics and evidence. Prescott’s website declared that economists should “progress, not regress” -- a pun on the statistical technique of regression, which he disdained.
But that was 30 years ago, and times have changed. As my Bloomberg View colleague Justin Fox has reported, most economics papers are now empirical work instead of theory:
And within the world of empirical economics, more and more is being done without the aid of complicated theories. Instead of trying to derive a general theory of how people find and lose jobs, for example, many modern economists look directly at how a minimum-wage increase affects employment and wages. Almost all the young economists I meet are less interested in cooking up new theories than in discovering facts about the world around them.
So economists in general are moving away from being what empirical pioneer David Card calls “mathematical philosophers.” Nowadays, your average economist is more like a detective -- using a mix of direct evidence, theory and combinations of the two to understand the real world. In other words, they’re very rapidly looking more like scientists.
At the same time, different kinds of economics are coming to the fore in public debates. As the Great Recession fades into history, macroeconomics -- the study of business cycles and long-term growth -- is taking a back seat to questions about trade, automation, business competition, labor market participation, taxes and the environment. Those are issues where the evidence is a lot more solid than in macro, where it’s usually impossible to find good natural experiments.
So the standard narrative about why economists are useless is out of date. It still, of course, makes sense to have a healthy amount of skepticism of macroeconomic theory. But most of econ is now on much firmer footing.
But a new critique is emerging. Some skeptics are telling us to discount the empirical evidence now pouring out of the economics profession. Russ Roberts, host of the podcast "EconTalk," and John Cochrane, of the Hoover Institution, are two such skeptics. Roberts and Cochrane note that many empirical studies disagree with each other and others are later proven wrong. Therefore, they recommend that economists rely less on empirical studies and more on intuition about how the economy works.
The diagnosis here is correct, but the solution is not. It’s true that empirical economics studies should always be taken with a grain of salt. This is actually true of science findings in general, whether they’re about the minimum wage, or the Big Bang, or the health benefits of red wine. Scientific results turn out to be wrong all the time. And there’s a big incentive for both researchers and reporters to tout studies that haven’t stood the test of time and replication. For reporters, the way to avoid overhype is to explain why results might be wrong, to look around for contradictory results and to rely on meta-analyses. For readers, the key is to keep in mind that empirical studies aren’t useless, but they aren’t the final word either.
To discard empirical economics in favor of intuition and wisdom would be a mistake. That approach makes economists into gurus, instead of scientists. Saying “Trust me, I can think like an economist” is just about the weakest pitch there is -- it reinforces every stereotype of economists as out-of-touch, arrogant dreamers.
Empirical economists may get things wrong, but at least they come with evidence in hand. Science is a messy process of cross-checking, re-examining and fact-gathering. Intuition and received wisdom seem clean and pure, but that veneer conceals a lack of substance -- and, very often, a degree of political ideology.
So be skeptical of new economic findings that you read about in the news. But be far more skeptical of evidence-free pronouncements from people who claim to have access to a special mode of thinking. Evidence is imperfect, but it’s a big step up from conjecture and ideology. The empirical revolution should make you trust economists more, not less.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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