Tuesday, April 24, 2018

The economic way of thinking?

Via David Andolfatto, I came across a pretty thorough blog post from Jim Rose (Twitter handle) aiming at not just describing but motivating the "economic way of thinking". Now I don't want to attribute this way of thinking to all economists, but it is common enough that I don't think it's entirely unrepresentative.

The thoroughness is a great way to illustrate how assumptions, perspectives, and worldviews (all plausible at each step) aggregate into a complex structure that I think many people inside and outside of economics think of as the "mainstream economics" they have a problem with. Since his blog post is organized by sections, I'm going to illustrate my point by listing some of the same section titles with my commentary below.

Thinking about thinking

We start with the self-evident truth that you cannot begin to study any problem from "gazing at a mass of unorganized data". However, this is then used to motivate the "selection of an analytical framework", and by implication a particular analytical framework (the "economic way of thinking"). The issue here is that this analytical framework covers the territory from the philosophy of Hume's uniformity of nature to the mathematics of utility maximization. You can easily do science with only the framework where you assume there are empirical regularities without having to either put known facts about social systems into a hierarchy of importance or accepting that these facts are the result of optimization by agents.

As a real world example, there was a lot of physics done before Newton came up with the first analytical framework. People knew things about magnets, materials, and motion as a collection of facts organized only by what would eventually be known as Hume's uniformity of nature. The framework does not need to be that complex, and simple usefulness  may be sufficient.

The facts of the social sciences

At this point, the author basically states the central tenet of methodological individualism. However the author also makes an assumption about the place of economics relative to the social sciences in general. It is true that individual opinions and beliefs are important facts for e.g. sociology and psychology. However, it has not been conclusively demonstrated (via e.g. empirically successful theory) that these opinions and beliefs are critical elements of understanding a lot of economic phenomena. Where I criticize economic methodology, my blog has generally been about how this belief that agents matter is just assumed — to the detriment of empirically accurate descriptions of economic phenomena. My recent paper takes Gary Becker's "irrational agents" to their logical conclusion, showing that some basic macroeconomic facts can be explained without pretending knowledge of human behavior. That approach also suggests that it is the space of possible agent behaviors rather than the behaviors of individual agents that is important — the individual beliefs and opinions are often irrelevant to economic observables except in highly correlated cases (e.g. panic in a financial crisis).

PS A lot of behavioral economics (which purports to get even closer to those beliefs of individuals) doesn't improve the empirical accuracy of economic theories either.

Measurement and theory

While anyone would agree with this premise in general, we again have a blanket statement covering the territory from "counting objects" to "optimizing agents" as the theory required in order to make sense of measurements. The unemployment rate needs very little theory (you can count people). A measurement of NAIRU or the natural rate of interest needs much more theory. Some macro theory even obviates measurements of the unemployment rate by declaring everyone to be "on vacation".

The author then says that the "rich tapestry" of the facts of history can only be isolated by theory. But this creates a problem that I discussed at length in a post about Dani Rodrik expressing this same view. The problem is that you have to have the correct theory to correctly isolate effects, but in order to have the correct theory you must have correctly isolated the effects in order to build a theory. It's a chicken or egg problem.

You first need a way to bootstrap yourself from potentially theory-contingent observations to a theory, and natural sciences was incredibly lucky in this regard. Our intuitions about the natural world (e.g. some effects diminish with distance, so using physical separation — or just the fact that we can't do much of anything about the sky) allowed experiments and observations to be done that correctly isolated the effects. That means a lot of empirical observations were already made correctly within what would become the theoretical framework you might use to isolate the systems. (A really good example is that modern thermodynamics is nearly entirely taught today using theoretically isolated systems that assume exactly the conditions that were used in the experiments to establish thermodynamics.)

Economics was really set up with some rotten luck in this regard. A lot of behavioral studies say that our human intuitions are woefully inadequate for addressing how to theoretically isolate the system. It is also possible the utility maximizing framework of microeconomics requires "macrofoundations": the system must be near a macro equilibrium for the utility maximizing framework to be a good approximation. You might not be able to understand microeconomics without a complete macro theory!

For me, this makes economics fascinating. I also have no idea how to solve this problem. I try to look for empirical regularities using a framework that makes as few assumptions about human behavior as possible. Someone else might have a better idea, but assuming a theoretical framework that isn't motivated by empirical success is just mathematical philosophy.

Thinking about abstractions

I will just say that Feynman tells us that the fundamental issue of science is not fooling yourself —that you don't filter and abstract away from facts that might prove your theory or experiment wrong. Putting emphasis on a human's ability as an apparatus of classification is a well-worn route to self-deception.

The power and self-discipline of parsimonious analysis

While I would agree that some kind of theoretical structure is good to prevent "explaining everything and therefore nothing", the author then makes a decidedly unsupported leap to stating: "Complex human objectives are not assumed in economic analysis because everything could be explained and nothing could be falsified."

Gary Becker's "irrational" agents (Becker 1962) are an explicit counterexample to this statement. The random "irrational" agents are equivalent to algorithmically complex agents, and the results could easily be falsified (and in fact the approach reproduces some basic concepts of economics).

[To be continued?]

This post is getting long. I may return to it to address more of the sections, but I think I've made my point that there are a lot of underlying assumptions about how the world works buried in what seems like an objective view. A lot of it derives from a basic assumption that human decisions are important to understand economic observables. But given the lack of observables that have been successfully described, maybe we should take on this unchallenged assumption. Here's Noah Smith:
But the real reason you have this tradeoff [between macro and micro-economic validity] is because you have big huge unchallenged assumptions in the background governing your entire model-making process. By focusing on norms you ignore production costs, consumption utility, etc. You can tinker with the silly curve-fitting assumptions in the macro model all you like, but it won't do you any good, because you're using the wrong kind of model in the first place. 
So when we see this kind of tradeoff popping up a lot, I think it's a sign that there are some big deep problems with the modeling framework. [Emphasis in original]
Is human agency one of these unchallenged assumptions?



Here is Brad DeLong expressing some similar views to Jim Rose.


Comments are welcome. Please see the Moderation and comment policy.

Also, try to avoid the use of dollar signs as they interfere with my setup of mathjax. I left it set up that way because I think this is funny for an economics blog. You can use € or £ instead.