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How Effective Is Economic Theory?

nationalaffairs.com

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Re: How Effective Is Economic Theory?

#31

Post by pdonis »

dhfhduk wrote: post #10

Discussions like this always seem a little strange. Sure, they're important, but taken out of context they're counterproductive and even harmful. This is the problem: what is the alternative? The pet theory of a madman or sociopath? The difficult truth is that everyone has an economic theory, whether they admit it or not. The question is, whose theories do we want to pay attention to? People who spend their lives arg…

> what is the alternative?

To not commit an entire society to a single economic theory. Which means getting rid of a lot of the centralized control mechanisms that currently require just such a commitment.

> whose theories do we want to pay attention to?

Since no one has a theory that is good enough to make useful predictions, as far as public policy is concerned, the answer is "none of them".

> There's also the difficult problem of identifying when any theories have really been tested well.

This isn't a difficult problem. You test theories by comparing their predictions to what actually happens. (Note that a "theory" that makes no testable predictions fails this test.) As the article notes, economics does not do well on this test. But that's not a "difficult problem" of how to test economics; it's just that economists, and politicians who want to use economics to justify their pet policies, don't want to admit that the result of the test is that economics doesn't make good predictions.

> It's not any different from physics theory or chemistry theory in that regard.

Yes, it is, because, as you note, you can run controlled experiments in physics and chemistry, but you can't in economics.

Re: How Effective Is Economic Theory?

#32

Post by GlennS »

dhfhduk wrote: post #10

Discussions like this always seem a little strange. Sure, they're important, but taken out of context they're counterproductive and even harmful. This is the problem: what is the alternative? The pet theory of a madman or sociopath? The difficult truth is that everyone has an economic theory, whether they admit it or not. The question is, whose theories do we want to pay attention to? People who spend their lives arg…

I sort of see where you're coming from here, but the way you phrase it, you could say exactly the same thing about theology.

Re: How Effective Is Economic Theory?

#33

Post by paulpauper »

paganel wrote: post #23
dhfhduk wrote: post #10

Discussions like this always seem a little strange. Sure, they're important, but taken out of context they're counterproductive and even harmful. This is the problem: what is the alternative? The pet theory of a madman or sociopath? The difficult truth is that everyone has an economic theory, whether they admit it or not. The question is, whose theories do we want to pay attention to? People who spend their lives arg…

> Sure, lots about classical economic theory is really ridiculous, and the source of a lot of problems, but then you change those things and then move on. That's the thing, it has proven really, really hard to "change those things". I'm looking at the latest (still current?) economic/financial crisis. Lots of "economic theory tells us this should never happen"-things did in fact happen, and consistently so (there was…

I think you're overestimating the power of economists and putting too much blame on them. The 2008 crisis was not cased by economists; rather, it was caused by MBAs who approved mortgages that should have never been approved in the first place. This generated short-term gains for these financial institutions that paid the price years later.

Re: How Effective Is Economic Theory?

#34

Post by GhostVII »

pdonis wrote: post #31
dhfhduk wrote: post #10

Discussions like this always seem a little strange. Sure, they're important, but taken out of context they're counterproductive and even harmful. This is the problem: what is the alternative? The pet theory of a madman or sociopath? The difficult truth is that everyone has an economic theory, whether they admit it or not. The question is, whose theories do we want to pay attention to? People who spend their lives arg…

> what is the alternative? To not commit an entire society to a single economic theory. Which means getting rid of a lot of the centralized control mechanisms that currently require just such a commitment. > whose theories do we want to pay attention to? Since no one has a theory that is good enough to make useful predictions, as far as public policy is concerned, the answer is "none of them". > There's also the diff…

> To not commit an entire society to a single economic theory. Which means getting rid of a lot of the centralized control mechanisms that currently require just such a commitment.

Isn't that just another economic theory?

Re: How Effective Is Economic Theory?

#35

Post by rhizome »

TheSpiceIsLife wrote: post #7
rhizome wrote: post #3

Earlier quoted context omitted.

Not only that, but the current economic climate necessarily tells us where the effectiveness of economic theory lies.

Not Economic Theory, but Economic Practice as implemented by politicians and bureaucrats. That's not to say that economic theory is all sound, but that even the soundest of theories doesn't stand a chance against the incompetence of government.

The "incompetent" economic behavior you speak of is also based upon theory.

Re: How Effective Is Economic Theory?

#36

Post by tedsanders »

paulpauper wrote: post #33
paganel wrote: post #23

Earlier quoted context omitted.

> Sure, lots about classical economic theory is really ridiculous, and the source of a lot of problems, but then you change those things and then move on. That's the thing, it has proven really, really hard to "change those things". I'm looking at the latest (still current?) economic/financial crisis. Lots of "economic theory tells us this should never happen"-things did in fact happen, and consistently so (there was…

I think you're overestimating the power of economists and putting too much blame on them. The 2008 crisis was not cased by economists; rather, it was caused by MBAs who approved mortgages that should have never been approved in the first place. This generated short-term gains for these financial institutions that paid the price years later.

It's not even known whether the subprime crisis even caused the great recession. Causality is very hard to prove when we only have one reality. Some think the crisis was caused most by cautiousness by the Fed; in this case, the 2008 crisis may indeed have been caused by economists.

http://econlog.econlib.org/archives/2015/09/how_the_subprim....

Re: How Effective Is Economic Theory?

#37

Post by marcosdumay »

bachmeier wrote: post #12
szeptik wrote: post #5

When it comes to macro, it is pretty useless. See for example the polemic caused by this paper by Paul Romer, chief economist of the World Bank: https://paulromer.net/trouble-with-macroeconomics-update/

If that's what you took from his paper, you didn't understand it. He is specifically arguing against DSGE models, a popular methodology for studying business cycles, but one that has been unsuccessful. That is not the same as arguing that all of macro is useless. It's not different from saying that criticism of imperative programming means all of computer programming is useless.

If the community does not take status and funding away from failed models, it ceases doing science. As a group, economists aren't letting DSGE go.

There are many economists trying to do the right thing, but overall the area has a deep problem.

Re: How Effective Is Economic Theory?

#38

Post by sloppycee »

grenoire wrote: post #26

People most often overlook two things when it comes to economics. First one is that it is based on drawing conclusions from models that attempt to simplify extremely complex interactions of billions of agents. Second one is that although these models are imperfect (otherwise they would be unsolvable and bring no meaningful intuition), they are getting better over time. Stop dismissing economics because 'it doesn't wo…

How can you be sure the models are getting better (more accurate) over time?

Re: How Effective Is Economic Theory?

#39

Post by partiallypro »

noir-york wrote: post #17

It is pretty effective as long as you ignore the economic theories espoused by the Cato institute (the institution the author forms part of) and other pseudo think-tanks. Interesting to note that the author tries to discredit Keynesian economics, but makes no mention of the Reinhart / Rogoff debacle that completely undermined their paper which purported to show a link between debt and growth - a paper much referenced…

I also trained in politics and economics, and worked for a think-tank doing economic impact analysis for a short period. And I will tell you that Cato has a lot of good economists, that are well respected in their field; so do -most- think tanks, and Federal Reserve branches. Every economist has a political view, largely because economic policy is largely political. Krugman is a political hack, but that doesn't mean his papers are trade can be discounted, that would be absurd.

The reason economic theory is so hard is because it's very hard to observe and experiment. You can run a test and verify in physics, math, etc, but in economics this is generally impossible. Even the boom in behavioral economics that happened in the mid-2000s has come under question after more and more data has emerged. There are a LOT of things economists agree on, but there's also nuances on how a policy can achieve a result...because there are so many actors in an economy and we can't test our theory until maybe 10 years from now, and that's even if the policy is ever implemented to begin with.

Re: How Effective Is Economic Theory?

#40

Post by nostrebored »

marcosdumay wrote: post #37
bachmeier wrote: post #12

Earlier quoted context omitted.

If that's what you took from his paper, you didn't understand it. He is specifically arguing against DSGE models, a popular methodology for studying business cycles, but one that has been unsuccessful. That is not the same as arguing that all of macro is useless. It's not different from saying that criticism of imperative programming means all of computer programming is useless.

If the community does not take status and funding away from failed models, it ceases doing science. As a group, economists aren't letting DSGE go. There are many economists trying to do the right thing, but overall the area has a deep problem.

Do you feel the same way about climate research?
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