Economics is an inexact science

When I wrote about why the BBC should treat a clear consensus in economics the same way as it now treated climate science, I got a number of comments about why economics is not a science. A common theme was that economics couldn’t prove theories ‘beyond doubt’ the same way as the hard sciences could. A more sophisticated version of this complaint is that most economic theories cannot be disproved in the same way that Popper thought scientific theories could be disproved.

All this ignores a key feature of any social science, which is their inexact nature. Instead we have accumulations of evidence that confirm the applicability of some theories and reject the applicability of others. Economists’ views about what models are applicable change as this evidence accumulates.

A good example involves the minimum wage, as Noah Smith suggests. The basic economic model suggested even a modest minimum wage should significantly reduce employment, but economists discovered that the evidence did not show this. As this evidence accumulated, alternative theories and models (monopsony and search) were thought to be more relevant. It is this response to evidence that makes economics a science.

Jo Michell writes “The scientific method of forming a hypothesis and then testing that hypothesis against reality can never be the final arbiter of knowledge, as it can in the physical sciences.” He is right that no single experiment or regression can kill a theory, but wrong that the accumulation of evidence is not the final arbiter, because no other arbiter is available. He links to a post by Noah Smith which talks about the failures of forecasting. But as that post makes clear, this is not about data rejecting models, but the inability of models to predict the future. We would never dream of condemning medics because they cannot predict the exact time of our death, still less suggest that this failure indicates they are not doing science.

Of course economics involves cases where economists appear too reluctant to give up their favoured models. You can find similar stories in the hard sciences. There will be more such stories in economics because the inexact nature of economics makes it easier to discount any single piece of evidence. What I cannot understand is what leads someone like Russ Roberts to argue against the use of evidence, and instead that “economics is primarily a way of organizing one’s thinking”. Astrology is also a way of organising one’s thinking, but it fails because evidence does not back it up.

That comparison is slightly unfair, because while the theory behind astrology is obviously implausible, the basic principles of microeconomics are not. In a class on economic methodology I once drew a huge tree that showed how most of economics could be derived from principles of rational choice. But go beyond the basics, and add in complications involving information and transactions costs (to name but two) and you very quickly derive competing models. There is no single model that comes from thinking like an economist, so for that reason alone we need data to tell us which models are more applicable.

So thinking like an economist does not tell me at what point raising the minimum wage will reduce employment. But why would anyone want to keep their models from being proved relevant or otherwise by data? The only reason I can think of is that some models give answers that are ideologically convenient. Of course allowing data to establish the relevance of some models over others does not make economics ideology proof. For example people can always select the one study that suggests that fiscal policy does not influence output and ignore the hundreds that show otherwise. That is why the accumulation of evidence, which includes its replicability, is so important. If you think economics has problems in that respect, have a look at psychology.

This is why economists views about the long term impact of Brexit should be treated as knowledge rather than just an opinion. Here knowledge is shorthand for the accumulation of evidence consistent with plausible theory. Sometimes the theories are common sense, like making trade more difficult will reduce trade. Estimates of the size of trade reduction based on evidence are uncertain, but they are better than estimates based on wishful thinking. Empirical gravity equations consistently show that geography still matters a lot in determining how much is traded. Finally there is clear evidence that trade is positively associated with productivity growth. To say that all this has no more worth than some politicians opinion is ultimately to degrade evidence and the science which interprets it.

Speak for yourself, or why anti-Keynesian views survive

“The evidence for the Keynesian worldview is very mixed. Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government.”

Statements like this tell us rather a lot about those who make them. As statements about why people hold macroeconomic views they are wide of the mark. Of course there is confirmation bias, and ideological bias, but as the term ‘bias’ suggests, it does not mean that evidence has no impact on the views of the majority of academics.

The big/small government idea makes no theoretical sense. Why would wanting a larger state make someone a Keynesian? Many Keynesians, and most New Keynesians, nowadays acknowledge that monetary policy should be used to manage demand when it can. They also know that any fiscal stimulus only works, or at least works best, if it involves temporary increases in government spending. So being a Keynesian is not a very effective way of getting a larger state.

It is also obviously false empirically. In the UK and US a large majority of economists appear to hold Keynesian views. I think it rather unlikely that a similar majority want a large state, and I can think of some notable Keynesians who clearly do not. Central bank models are typically Keynesian. Does that mean central banks want a larger state? No, it means the evidence suggests Keynesian economics works.

Russ Roberts says more recently:

“The evidence is a mess leaving each of us free to cherry-pick what sustains our worldview be it ideological or philosophical or just consistent with our flavor of economics.”

Ryan Bourne of the Institute of Economic Affairs goes further:

“when the facts change, the Keynesians don’t change their minds.”

To illustrate their belief that Keynesians ignore awkward facts both the authors above use the example of US growth following the 2013 sequester. (In my experience anti-Keynesians tend to shy away from data series, and especially econometrics, and prefer evidence of the ‘they said this, and it didn’t happen’ kind - particularly if ‘they’ happens to be Paul Krugman.) The problem is that this episode actually illustrates the opposite: that anti-Keynesians are so keen to grasp anything that appears to conflict with Keynesian ideas that they fail to do simple analysis and ignore others that do.

In this post I just looked at the data and did some simple arithmetic to show that this episode was quite consistent with Keynesian fiscal policy analysis. I’m sure others have done the same. But such analysis just gets ignored: they have a superficially good story, and that is all that matters. (Read this post to see how Scott Sumner in response to my work dug himself an even deeper hole.)

Why do we have to go over, yet again, that the clear majority of studies show that Obama’s stimulus worked. Why do we have to keep going over why UK growth in 2013 does not prove austerity works? Why do these people never mention the meta studies that confirm basic Keynesian analysis of fiscal policy? Because they want to believe that the “evidence is a mess” so they can carry on holding their anti-Keynesian views.

Parts of the political right have always had a deep ideological problem with Keynesian analysis. As Colander and Landreth describe, the first US Keynesian textbook was banned. New Classical economists, for all the many positive contributions they brought to macro (in the view of most mainstream Keynesians), also tried to overthrow Keynesian analysis and they failed. 

When anti-Keynesians tell you that support or otherwise for Keynesian macroeconomics depends on belief about the size of the state, they are telling something about where their own views come from. When they tell you everyone ignores evidence that conflicts with their views, they are telling you how they treat evidence. And the fact that some on the right take this position tells you why anti-Keynesian views continue to survive despite overwhelming evidence in favour of Keynesian theory.