I have a long essay on the scientific status of economics in National Affairs. A few excerpts from the conclusion:
In the end, can we really have effective theory in economics? If by effective theory we mean theory that is verifiable and reliable for prediction and control, the answer is likely no. Instead, economics deals in speculative interpretations and must continue to do so.
Young economists who employ pluralistic methods to study problems are admired rather than marginalized, as they were in 1980. But economists who question the wisdom of interventionist economic policies seem headed toward the fringes of the profession.
This is my essay in which I say that academic economics is on the road to sociology.
We might not like the consequences if economists gave up on aspiring to be scientific, though.
Indeed. The Congress, media, and civil service have little use for economists who do not advocate for public policy so why would they pay them?
That’s quite an article. I skimmed it hurriedly but hope to provide some comments in due time.
Good work!
It would seem like most of the economics basics were hammered out hundred+ years ago. Now it’s mostly speculative stuff that is up for a lot of debate.
The contrast between “political consistency” and “analytical consistency” is important and made very clear.
The contrast between South and North Korea makes a good case about institutions, rules, and culture. The same could be said for former East and West Germanies, and pre vs. post-Deng China. Today’s Israel vs. yesterday’s very Socialist Israel is also a good exemplar. But Israel vs. its neighbors is not. Even in the worst of days, I’m guessing GDP per capita (or whatever) has been higher than any of its neighbors for half a century, including during bad Socialist times. Human capital is best treated as partially a resource endowment.
I immediately ordered Leamer’s Macroeconomic Patterns and Stories.
The connection between future insights regarding divergences as the final nail in the coffin in the potential future death of old-school Macro modeling could have been emphasized more. That’s a really important point.
Prediction is more likely, within a range, than control.
Predict that people will try to act rationally in their purchases, and their job searches, while having both imperfect info and very limited time for uncertain search outcomes; plus a good amount of laziness and risk aversion.
Incentives will continue to work, but most control freaks look for a “free lunch” of control without unintended consequences. Nope.
Plus any “economic law” which can be used, reliably like in science, to achieve above average returns will result in a change in behavior of increasing numbers of people. Thus, the law of “house prices always go up, or at least stay the same” — the housing situation from about 1979’s high inflation high interest rates on mortgages thru 2005 — such a “law/ reliable guide” gives the incentive to more people to borrow more to buy more houses. This change in human behavior leads to invalidating the “law”.
Economic truths which can NOT be converted to higher profit, in some way, seem no more valuable than sociology or anthropology. Interesting for understanding, but not relevant to the vast majority of people. Economic truths which can be converted to higher profit, will produce behavior changes which invalidate that truth.
An example of the ability of economists to approach the mumbo-jumbo levels of sociology is Nobel prize-winning economist Joseph Stiglitz’s praise of Chavista Venezuela in 2007. .
A gold standard for assessing performance in public health is Life Expectancy. From 1998, the year Chavez was elected, to 2005, Venezuela’s Life Expectancy increased 1.4 years, compared to an increased of 2.12 years for Latin America. In 1998, Venezuela’s Life Expectancy ranked 9th in Latin America. In 2005, Venezuela’s Life Expectancy ranked 9th in Latin America. Venezuela’s performance in Life Expectancy was not exceptional compared to its neighbors. by 2013, Venezuela’s Life Expectancy had fallen to 12th in Latin America. (Romance Language speaking countries). Chavista claims of awesome health improvements were hot air.
World Bank
Great article! Thanks! Very insightful!
When you wrote, “There is really no avoiding some movement in the direction of understanding economics as an interpretive discipline…” did you have in mind Ludwig Lachman’s “Austrian Economics: a hermeneutic approach”?
Also, concerning “there is reason to believe that in the coming years economists will reluctantly come to recognize the importance of mental-cultural factors as determinants of economic outcomes” I have written a book that does an economic history of the world through the lenses of culture and institutions. I titled it “God is a Capitalist” and have provided a rough draft in pdf on my blog if you’re interested. I would love to have any comments on it.