The Validity of the Science

patriks

Originally Posted by nesf
The general populace has neither understanding nor respect for the profession

Hello all,

I'd like to preface this post by clearly stating that this is a genuine question. This is not intended as an attack on the discipline.

Something posted earlier by nesf implied an important - albeit hackneyed - question: Does economics deserve respect?

A particularly pertinent report must be "How Accurate Are Private Sector Forecasts? Cross-Country Evidence from Consensus Forecasts of Output Growth", by Prakash Loungani, International Monetary Fund (IMF), December 2002.
According to Wikipedia, "a 2002 International Monetary Fund study looked at “consensus forecasts” (the forecasts of large groups of economists) that were made in advance of 60 different national recessions in the ’90s: in 97% of the cases the economists did not predict the contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated their severity."
Some of you will, no doubt, question the source, the validity of the statistics and even the accuracy of this fact, and you're probably right to do so, but it remains, if this statistic is anything to go by, it is a pretty savage indictment of the science.
This is just one area which has been vehemently criticised. I could go on, we've all seen just about everybody attack the Achilles' heel of the discipline: the rational choice theory.
Perhaps economics is progressing? Perhaps it is, as some claim (David Colander, et al.), a complexity science? Or is it, as many others claim, something much worse: a pseudoscience?
In light of this (and other discussions I'm sure you've had), what conclusions have you come to?

It is not my intention to unleash a belligerent and partisan exchange, so, bearing that, I hope the theme will remain objective.

Also, I'm aware that this initial post hasn't been neutral in its presentation. If you'd like to add some content representing the efficacy of the science, please do.

Finally, as I alluded to at the top of this post, this may well be a tired question. If so (and if necessary), then please do delete.

Time Magazine

You're most welcome to debate the topic here and fair play to you for the way you've presented it.

Folks, patriks has been nothing but polite in his post. Snide remarks aren't welcome.

Flamed Diving

When it comes to the field of Macro forecasting, I pretty much agree. I would go as far as suggesting that such a pursuit is futile. Unfortunately the vast majority of people believe that this is where economics begins and ends. This is a shame.

Firstly, I think I said that?

Economics suffers from an expectations gap (def. here), where people expect them to be effectively able to predict the future. To return to the medical analogies, that is like expecting every doctor to be a brain surgeon, when in reality there is only a small subset of the medical profession who are trained and capable to conduct such proceedures. Furthermore, when someone dies from disease, there is not a call by the general populace to burn down the immunology department. Instead there is regard for the level of complexity involved in the procedure, and acknowledgement of the frailty of the surgeon.

The term 'economist' covers a very broad range of specialities such as behavioural economists, labour economists, environmental economists, macroeconomists, economic historians etc. Forecasting is only conducted by a tiny, tiny fraction of the profession.

Regarding forecasting, economist base predictions on current events - they use the current and past states to gather inferences about the future. If they were able to name the exact day and extent of a shock, we would all be millionaires many time over!

People should be concerned with the generalities of predictions (ie a recession is coming soonish) rather then looking for specifics. If economists can get the sign of the prediction right over the medium term, then they are doing a good job.

BESman

I agree with Zaraba. Economics is put forward too often as a predictory science, when in fact it is only a tiny percentage of the overall field. I think the media are partly to blame for this as they only put economists and economics in the spotlight when they are making predictions on future events. I suppose economists can take some flak here too as many take themselves (and their predictions) far too seriously. They have to remember at the end of the day that all models and predictions will have assumptions and limitations.

However, despite my defence of the science (and without the intention to cause an argument) I believe modern macro is a fundamentally flawed area of economics. PLEASE don't go railing off at me for saying so.

SkepticOne

Results are what matters not the methods used to arrive at those results. So, for example, if astrology could be used to predict the direction of the economy to a certain degree of accuracy then astrology would be respected for this ability. Astrologers would have no trouble finding employment in government departments and they would be taken seriously for this reason.

However astrology does not have this predictive power and hence astrologers are not employed or taken seriously.

If economics, like astrology does not have predictive power then this would be a reason why economists are not taken particularly seriously by governments or the public. The other stuff might be very interesting...to economists, but the measure of a science is its predictive power.

silverharp

Macro economics is not on the "physics" side of the scale if comparing it to other sciences. It has elements of biology at a push, however no one would expect endless predictions on the growth or movement of a herd of wilderbeests from a biologist? hopefuly not pushing that anology too far.

However a question could be, where were the full page adverts back in 2002-2005 warning that the economy was dysfunctional? to be fair the IMF did warn about Ireland at the time but then was more complacent in relation to the global economy so I cant say it acted as a useful "early warning system"

Time Magazine

SkepticOne wrote: »

Results are what matters not the methods used to arrive at those results. So, for example, if astrology could be used to predict the direction of the economy to a certain degree of accuracy then astrology would be respected for this ability. Astrologers would have no trouble finding employment in government departments and they would be taken seriously for this reason.

However astrology does not have this predictive power and hence astrologers are not employed or taken seriously.

If economics, like astrology does not have predictive power then this would be a reason why economists are not taken particularly seriously by governments or the public. The other stuff might be very interesting...to economists, but the measure of a science is its predictive power.

Depends on your definition of science. Is the mathematical study of randomness not scientific? Evaluation of the efficacy of a trial drug not scientific?

SkepticOne

Time Magazine wrote: »

Depends on your definition of science. Is the mathematical study of randomness not scientific? Evaluation of the efficacy of a trial drug not scientific?

Mathematics is a special case but I guess yes it is scientific in the broad sense. It is certainly a tool used in the sciences. The drug example is, of course, scientific but it is also part of a predictive process, i.e. predicting how a drug is going to work under different conditions when prescribed.

silverharp

Here is an interesting examples of where the models give less then useless information. According to this there is "nothing to see" between 2002 and 2006. where is the housing bubble?

gerry87

patriks wrote: »

According to Wikipedia, "a 2002 International Monetary Fund study looked at “consensus forecasts” (the forecasts of large groups of economists) that were made in advance of 60 different national recessions in the ’90s: in 97% of the cases the economists did not predict the contraction a year in advance.

1) I'll bet you wouldn't find such uniformity in a random sample, so there must be some science to it... which would mean the 3% that got it right were wrong

2) There's an inherent problem with macroeconomics aside from the hocus pocus argument, i haven't looked at that report specifically but in general look who the economists giving predictions are, they're generally chief economist for davy's, goodbodys, AIB and so on. They aren't towing the economists line, they're towing they're employers line - like they're supposed to. For the employers there's more money to be had if nobody sees a recession coming. "It is difficult to get a man to understand something, when his salary depends upon his not understanding it."

3) Economics is different to other sciences in it's meta-interactions. Physics has laws and rules, if you can identify, measure and model everything that influences something then you can model it perfectly. Economics is different, the simple existence of a working model affects how well it works. Imagine a perfect model that says with 100% confidence that there will be a recession next year, all economists use it and so report on the recession - people stop spending in anticipation and so it happens this year. Because the model was right, it turned out to be wrong. You need a sort of recursive model that accounts for the existence of itself.

(I'm no expert on physics so i stand to be corrected on the connection, but the point's the same - doesn't quantum physics have something about observing something changing it's outcome... anyway)

These are the challenges in economics and what makes it so complex and justifies it being considered a science, but just understand it's in it's infancy. It completely goes against the nature of a science to belittle it for not knowing things - that's the point!

Brad

De Long discusses this today (http://delong.typepad.com/sdj/2010/03/macro-wars.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BradDelongsSemi-dailyJournal+%28Brad+DeLong%27s+Semi-Daily+Journal%29) maybe he read Boards?

Brad wrote:

Macro Wars...

Karl Smith:

Macro Wars: Solow vs. Lucas: Re: Adam:

I don’t think that Solow, in particular, has ever tried to come to grips with any of these issues except by making jokes

~Bob Lucas

Though, these exchanges are funny I think they reveal something deep and its why I tend to side with Mankiw-Solow camp. Lucas is essentially saying that Keynesian doesn’t make any sense. Solow is responding that Frictionless Markets don’t match reality. My take is that at its heart this is exchange is about whether economics is philosophy or science. For philosophy logical consistency is paramount. But, in science, empirical observation wins. I side with science. If the world doesn’t act like its described by Freshwater Models then all the elegance in the world can’t save you. If the only explanation anyone can think of that fits the data is that a Giant Purple Elephant did it. Then Giant Purple Elephants it is. That doesn’t mean we have to be satisfied with GPE model, but unless you got something better...

Adam Ozimek:

The Quotable Bob Solow: Rereading Greg Mankiw’s “The Macroeconomist as Scientist and Engineer” I came across this Bob Solow quote on why he doesn’t bother to seriously engage neoclassical economists:

Suppose someone sits down where you are sitting right now and announces to me that he is Napoleon Bonaparte. The last thing I want to do with him is to get involved in a technical discussion of cavalry tactics at the Battle of Austerlitz. If I do that, I’m getting tacitly drawn into the game that he is Napoleon Bonaparte.

Greg Mankiw:

http://qed.econ.queensu.ca/pub/faculty/lloyd-ellis/econ815/papers/mankiw1.pdf: Neither scientists nor engineers have a claim to greater virtue. The story is also not one of deep thinkers and simple-minded plumbers. Science professors are typically no better at solving engineering problems than engineering professors are at solving scientific problems.... As a result of the three waves of new classical economics, the field of macroeconomics became increasingly rigorous and increasingly tied to the tools of microeconomics. The real business cycle models were specific, dynamic examples of Arrow-Debreu general equilibrium theory. Indeed, this was one of their main selling points.... [T]hese three waves of new Keynesian research added up to a coherent microeconomic theory for the failure of the invisible hand to work for short-run macroeconomic phenomena. We understand how markets interact when there are price rigidities, the role that expectations can play, and the incentives that price setters face as they choose whether or not to change prices. As a matter of science, there was much success in this research.... Was this work also successful as a matter of engineering? Did it help policymakers devise better policies to cope with the business cycle? The judgment here must be less positive.... Lucas seems to be complaining that Solow does not appreciate the greater analytic rigor that new classical macroeconomics can offer. Solow seems to be complaining the Lucas does not appreciate the patent lack of reality of his market-clearing assumptions. They each have a point. From the standpoint of science, the greater rigor that the new classicals offered has much appeal. But from the standpoint of engineering, the cost of this added rigor seems too much to bear...

Somehow, I think Greg misses the mark with his definition of "science" here...

Narayana Kocherlakota:

Why do we have business cycles? Why do asset prices move around so much? At this stage, macroeconomics has little to offer by way of answer to these questions. The difficulty in macroeconomics is that virtually every variable is endogenous – but the macro-economy has to be hit by some kind of exogenously specified shocks if the endogenous variables are to move. The sources of disturbances in macroeconomic models are (to my taste) patently unrealistic. Perhaps most famously, most models in macroeconomics rely on some form of large quarterly movements in the technological frontier. Some have collective shocks to the marginal utility of leisure. Other models have large quarterly shocks to the depreciation rate in the capital stock (in order to generate high asset price volatilities). None of these disturbances seem compelling, to put it mildly. Macroeconomists use them only as convenient short-cuts to generate the requisite levels of volatility in endogenous variables.... It is not true that all macroeconomic models assume complete financial markets--quite the contrary.... However, few macroeconomic models capture an intermediate messy reality in which markets are incomplete but there are nonetheless many assets and/or asset trade is conducted through intermediaries. As a consequence, we don’t understand the sources (or costs/benefits) of large-scale daily (or even quarterly) financial asset re-allocation. In part, this omission reflects a belief among macroeconomists that this level of institutional detail was not essential for questions of interest. In part, it reflects the extreme difficulty in handling mathematical formalizations of these features of reality.... Again, recent events may well lead to a re-ordering of priorities...

And Robert Lucas again:

In order to get an output [and employment] effect... the exchange of money for goods takes place in some manner other than in a centralized Walrasian market.... [A] given price increase can [then] signal a supplier that the [unanticipated] money transfer x is large, in which case he wants to... not respond, or it can mean... a real shift in his favor [to which he should] respond by producing more [and hiring more]. The best the individual can do... is to hedge.... Equilibrium prices... move in proportion to [the anticipated monetary shock] m which is known to all traders, but increase less than proportionally with the [unanticipated monetary] transfer x.... Anticipated monetary expansions... [do not create misperceptions of real prices and] are not associated with the kind of stimulus to employment and production that Hume described. Unanticipated monetary expansions... [do create misperceptions of real prices and] stimulate production... unanticipated contractions... induce depression. The importance of this distinction between anticipated and unanticipated monetary changes is an implication of every one of the many different models, all using rational expectations... developed during the 1970s.... The discovery of the central role of the distinction between anticipated and unanticipated money shocks resulted from the attempts, on the part of many researchers, to formulate mathematically explicit models that were capable of addressing the issues raised by Hume.

But... none of the specific models... [is a] satisfactory theory of business cycles...

Earlier in his Nobel Prize Lecture Lucas explained why:

In the models... real effects of monetary policy need to work through movements in prices. The [favorable econometric] tests described in the last paragraph do not use data on prices and so do not test this prediction. Other econometric work that did require money shocks to be transmitted through price movements was much less favorable. Estimates in Sargent (1976) and in Leiderman (1979) indicated that only small fractions of output variability can be accounted for by unexpected price movements. Though the evidence seems to show that monetary surprises have real effects, they do not seem to be transmitted through price surprises...

And then he picks up the thread again:

Perhaps in part as a response to the difficulties with the monetary-based business cycle models of the 1970s, much recent research has followed the lead of Kydland and Prescott (1982) and emphasized the effects of purely real forces on employment and production. This research has shown how general equilibrium reasoning can add discipline to the study of an economy’s distributed lag response to shocks, as well as to the study of the nature of the shocks themselves. More recently, many have tried to re-introduce monetary features into these models, and I expect much future work in this direction. But who can say how the macroeconomic theory of the future will develop, any more than anyone in 1960 could have foreseen the developments I have described in this lecture? All one can be sure of is that progress will result from the continued effort to formulate explicit theories that fit the facts, and that the best and most practical macroeconomics will make use of developments in basic economic theory.

I will just remark that "discovery" is used in an unusual way here: Lucas "discovers" that anticipated monetary shocks don't and unanticipated monetary shocks do have real effects because anticipated monetary shocks don't and unanticipated monetary shocks do move relative prices in a way that is correlated with movements in employment and production. But they don't. This to me to be very different than Galileo's discovery of the moons of Jupiter, or Rutherford's discovery of the atomic nucleus, or Crick, Russell, and Watson's discovery of the structure of DNA.

Joe1919

'The errors which arise from the absence of facts are far more numerous and more durable than those which result from unsound reasoning respecting true data.'
Charles Babbage (& quoted by Charles Jones in his intro to Economic Growth).

DaSilva

I'm not a Scientist for what it's worth so my understanding of what Science is may be incorrect.

What I understand science to be, is the process of forming theories based on two main criteria.
1) Strong, tested, consistent and observable evidence supporting the theory.
2) The theory is falsifiable. (that some new evidence is able to disprove it, Gods existence is not provable/disprovable so it isn't able to be a scientific theory)

Which leads me to Economics. Are Economic theories falsifiable? Yes. Which to me is really the only criteria I ever see satisfied. Do Economic theories have strong, tested, consistent evidence in support of the theories? No. In fact they are regularly observed to be incorrect.

Do any Economic models/theories satisfy these criteria? I don't know, my knowledge of the area is insufficient to say.

Take Supply and Demand model, please correct me if I over simplify or am just incorrect. In short it states, if price increases then demand falls. Does this fundamental model satisfy both criteria? No. This theory can be observabled as false in the real world, for example a monopoly. Economists will argue that this theory requires a Competitive Market, or explained another way, it only applies in a perfectly controlled simulation of the world, not in the real world. Therefore its accuracy and use is dubious at best.

I hope we wouldn't allow Engineers to design aircraft based on extremely restricted simulations where air pressure, velocity and such don't exist.

Flamed Diving

DaSilva wrote: »

I'm not a Scientist for what it's worth so my understanding of what Science is may be incorrect.

What I understand science to be, is the process of forming theories based on two main criteria.
1) Strong, tested, consistent and observable evidence supporting the theory.
2) The theory is falsifiable. (that some new evidence is able to disprove it, Gods existence is not provable/disprovable so it isn't able to be a scientific theory)

Which leads me to Economics. Are Economic theories falsifiable? Yes. Which to me is really the only criteria I ever see satisfied. Do Economic theories have strong, tested, consistent evidence in support of the theories? No. In fact they are regularly observed to be incorrect.

Do any Economic models/theories satisfy these criteria? I don't know, my knowledge of the area is insufficient to say.

Take Supply and Demand model, please correct me if I over simplify or am just incorrect. In short it states, if price increases then demand falls. Does this fundamental model satisfy both criteria? No. This theory can be observabled as false in the real world, for example a monopoly. Economists will argue that this theory requires a Competitive Market, or explained another way, it only applies in a perfectly controlled simulation of the world, not in the real world. Therefore its accuracy and use is dubious at best.

I hope we wouldn't allow Engineers to design aircraft based on extremely restricted simulations where air pressure, velocity and such don't exist.

You are talking about models from the 1920s.

DaSilva

Flamed Diving wrote: »

You are talking about models from the 1920s.

http://en.wikipedia.org/wiki/Mainstream_economics#Assumptions

Wikipedia wrote:

A number of assumptions underpin mainstream economics, while being rejected by some heterodox schools. These include the neoclassical assumptions of rational choice theory, a representative agent, and, often, rational expectations. The methodology employed by mainstream economics is the deductive methodology, which starts with axioms (that do not have to be proven, as they are classified as 'known to be true'), such as the rationality of individuals and their sole aim of maximising their own personal benefit (utility maximisation). To these axioms, assumptions are added, such as perfect and symmetric information, complete markets, perfect competition and zero transaction costs. Based on such axioms and assumptions, basic concepts, such as market equilibrium, are postulated, which are only relevant, when all or most assumptions hold.

I'm learning this as I read, so I could be misunderstanding things. Apparently "mainstream economics" is being criticized heavily since the 07 meltdown though by other schools(?) of Economics.


Edit:

As I understand it, the main school criticizing mainstream economics is the Austrian school? And they are criticized for the following.

http://en.wikipedia.org/wiki/Austrian_School#Methodology

Wikipedia wrote:

Critics of the Austrian school contend that by rejecting mathematics and econometrics, it has failed to contribute significantly to modern economics. Additionally, they contend that its methods currently consist of post-hoc analysis and do not generate testable implications; therefore, they fail the test of falsifiability.[5] Austrian economists contend that testability in economics is virtually impossible since it relies on human actors who cannot be placed in a lab setting without altering their would-be actions.

Flamed Diving

Microeconomics isn't really my area, so I'm not going to pretend to know what the modern literature says, what I do know is of the pre-war sort of Micro, which was the mathematical foundations of market behaviour. As you may know, when you begin to analyse something mathematically, you begin with a simple model first (perfect world) and then you work from there. So that accounts for the over-simplification of fundamental Marshallian supply & demand models. These are the kind of models that are taught to undergrads (and to a lesser extent at MA level) and hence many people leave with their BA thinking that the story ends there (around 1930s), with perfect competition/knowledge abound in economics.

But like I said, I don't know much about the modern literature (though I am quite sure this began to change in the 1970s at least, see Stiglitz/Spence/Stigler), as my fields of interest are in Macroeconomics, Econometrics, Historical Economics and to a lesser extent, Economic Development. If you want to know anything about these topics, let me know.

Économiste Monétaire

"Rational choice" in the sense of complete, reflexive, transitive and continuous preferences that allow economists to analyse choices through utility functions. Bounded rationality and models of incomplete information have been around since the 1960s. Try reading something beyond Wikipedia.

Économiste Monétaire

DaSilva wrote: »

Take Supply and Demand model, please correct me if I over simplify or am just incorrect. In short it states, if price increases then demand falls. Does this fundamental model satisfy both criteria? No. This theory can be observabled as false in the real world, for example a monopoly.

You're talking about demand elasticities, not the intersection of supply and demand 'curves' in a competitive market setting.