Looking at the study of economics in comparison to some of
the more “hard” sciences it is easy to find points of difference. As economics
has moved from a more narrative description of both normative and positive aspect
of the political economy to a more math-heavy, quantative discipline, there has
been talk of an economist’s physics envy. The problem here is that no matter
how much data you have and how strong your model is, the experiments you will
be able to run will be limited. And even then they are small scale and
depending on your subject group, you might not be able to generalize the
results to a whole population. The behavioral revolution led to some
interesting insights such as how people are risk averse or have non-transitive
preferences, but how does that scale to theories about the macro economy? I’m
not aware of a widely used macro model that has a behavioral microfoundation.
And that’s the other piece – we’re still debating about what macro model to
use. Dynamic, static, multiple equilibria: what are we pulling off the shelf
and why? And then even if you design an experiment, you can’t re-run the economy.
Time’s arrow is a harsh mistress to the scientist of the economy. There’s much
less debate on this in the physics book.
But we also have to think about the physics book we’re opening
up. For a couple hundred years, what we knew of physics was purely Newtonian.
But as technology advanced in the late 1800s physicist were able to start
looking at what the world looked like at micro scales through different kinds
of experimentation. This lead to quantum dynamics and then unleashing the power
of the atom for good and bad. On the vast scales, Einstein was able to break
some Newtonian assumptions and make equations that better described the
universe at the vast scale of stars and galaxies.
What the physics book will do is have that basic Newtonian
physics as a model of how everything acts, and for most purposes it will work.
You want to figure out how much gunpowder you need and what angle to aim your
gun to hit the enemy in the camp three miles away you don’t need to take into
the account the quantum effects of the iron atoms in your shell nor the
relativistic effects of the moon’s gravity well. It works. And even in a more
basic textbook you’ll have simpler models that will hand-wave things like
friction to make the math easier and it will mostly work. I think what is
missed in criticism of economics is how useful a lot of the models we use can
be especially in this small scale Newtonians of the economy – You get something
like Al Roth’s market design and it works because it is smaller scale and
testable.
I think learning the history of a science is important
because it doesn’t just come across as received wisdom and instead shows that
the science was a point of contention. I used to be a chemistry teacher, and
the elementary text books show the progression of thought about what the world
looked like at an atomic scale. At first it was seen as a small mass of
undifferentiated matter, then experiments were run and we found that there were
places of greater density creating the “plum pudding” model. Next Rutherford
ran the gold foil experiment and saw that the atom as we know it was mostly
empty space. He literally aimed a particle beam at gold foil and most of the
particles ended up right on the other side of the gold foil. These experiments were led by theory, of
course. At the same time of these scientists others were ordering the existing
known elements into groups based on their properties. Carbon acted like silicon
so they go together and so on. This led to the development of the periodic
table and to me the most impressive thing – they were able to postulate that
elements were missing and their properties which lined up once they were discovered.
From there you get to the Bohr model of the solar system atom that we’re most
familiar with and then the quantum hybridized orbitals which show electrons not
as points but as probabilistic clouds. I like this because it also helps
reinforce the scientific method – you go to hypothesize and test theories to
discover all you can know.
But what wasn’t appealing for me was the sense that
Chemistry was at its end point. To go further you had to get into particle
physics and even there the standard model is almost complete. The theories
about the further constituents of the physical world get into the place where
it borders on philosophy borrowing from math. Sure, you can imagine the quarks
as made up of nine or eleven dimensional strings and all change from the
universe comes from these strings vibrating, but it was at the point where
those theories are as of now untestable. That’s why economics is appealing to
me. There has been centuries of discovery and description and research roughly paralleling
the growth of the other sciences since the enlightenment – but especially at a
macro level things are still in contention. One of the things that sticks with
me is Greenspan in testimony after the financial crisis hit where he said he
had an operating model of the economy that worked pretty well for him for fifty
years but he was wrong. If your maestro is wrong, who can be right?
Ultimately though, I do hold out hope that the economy can
be better described and the economic problem can be largely solved. I know
there’s been a lot of reflection in the discipline in the last decade because
the voices who were calling for care in the run up to the bubble were
marginalized and not listened to but given derisive nicknames like “Doctor Doom”.
Will we get to the point where IT won’t happen again, or will the discipline
remain in contention with regards to the dominate models based on fads and
influence?
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