If the Economy Improves Will We Know Why?

Cafe Hayek

where orders emerge

by Russ Roberts on January 4, 2011

in Curious Task,State of Macro,Stimulus

Suppose the economy does well this year–growth is robust and unemployment falls. What is the reason for the improvement? Will it be because of the natural rebound of an economy after a downturn that has lasted longer than people thought? The impact of the stimulus finally kicking in? The psychological or real impact of extending the Bush tax cuts? The psychological or real impact of the November election results? The steady hand of Obama at the tiller? All of the above? Can any model of the economy pass the test and answer these questions?

The reason macroeconomics is not a science and not even scientific is that the question I pose above is not answerable. If the economy improves, there will be much talk about the reason. Data and evidence will be trotted out in support of the speaker’s viewpoint. But that is not science. We don’t have a way of distinguishing between those different theories or of giving them weights to measure their independent contribution.

I’m with Arnold Kling. This is a time for humility. It should be at the heart of our discipline. The people who yell the loudest and with the most certainty are the least trustworthy. And the reason for that goes back to Hayek. We can’t measure many of the things we would have to measure to have any reasonable amount of certainty about the chains of connection and causation.

That is not to say that economics has nothing to contribute to the debate or to our understanding. It has something to say. It can rule out some explanations, perhaps. It can help us organize our thinking about the scope of different causes. It might help us understand whether some policies are likely to push us toward recovery or further trouble. It can tell us who wins and who loses from various policies. But if our models of the complex organism called an economy are insufficient to predict ex ante the effect of this policy or that, then we cannot expect those models to explain what did in fact happen.

“The curious task of economics is to explain to men how little they really know about what they imagine they can design.” F.A. Hayek.

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Anonymous

I’m still unclear on what you think “science” is.

Do you think biology is a “science”, Russ? You’ve mentioned physics repeatedly in the last couple days, and all you seem to have demonstrated is that economics is not physics. I could not seem to get you to weigh in on my point about biology, but if you’re making the claim that macroeconomics isn’t a science it seems like that’s a point worth speaking to. Certainly some biologists experiment (some economists do too) – but are the ones that don’t “unscientific”?

Anonymous

Russ asks “Suppose the economy does well this year"“growth is robust and unemployment falls. What is the reason for the improvement?”

The answer will, according to Pelosi and Biden and other Keynesiacs, obviously be that unemployment benefits have been extended and those benefits have been spend and multiplied themselves many times into an economic recovery.

Josh S

Dear Mr. Roberts,

In your post, you say, “The reason macroeconomics is not a science and not even scientific is that the question I pose above is not answerable.”

Your conclusion may be correct, but your reasons are not. I would re-write the end of your sentence as, “…the question I pose above is not answerable at this time.” That’s an important distinction. The same could be said about much of particle physics and quantum descriptions until the mid 20th century. This does not imply that this realm is unscientific.

Science is not defined by its ability or inability to answer questions. Rather, science is defined by its ability to disprove a statement or proposition (or hypothesis). If something is a scientific proposition, it is able to be disproved. That is, a scientist ought to be constantly saying, “I believe X. If Y occurs at any point through experimentation or observation, I will need to believe something other than X, or strongly revise my understanding of X.”

This is the missing component of macroeconomics. No matter the evidence provided, people of mutually exclusive viewpoints may conclude that they have not been (and never will be) disproven. There is no Y that can occur to make a Keynesian believe that Smith was right, and vice-versa. And this is why macroeconomics is not a science.

Thank you, Josh S

Anonymous

If you keep doing the rain dance, eventually it’ll rain.

http://greatguys.blogspot.com Bret

There’s not much one can say in any scientific endeavor from just one data point. In this case, the one data point is whatever the economy is about to do.

But, if many data points are collected, perhaps over thousands or even millions of years, then there may be enough data relative to the degrees of freedom to answer such questions.

S_birkey

Between this post and the one on NAFTA, you are making a great case for why the average two year MA/S program for Econ costs much less than a two year MBA program.

What’s the marginal utlity of Econ grad school?

Thomas Bayes

“Science is the belief in the ignorance of experts.”

Richard Feynman

http://twitter.com/hudley Alan Mead

“We can't measure many of the things we would have to measure to have any reasonable amount of certainty about the chains of connection and causation.” We not only can’t measure it, we don’t really even know what to measure.

It seems like there’s the “is macroeconomics science?” question and then there’s the “does macroeconomics offer useful predictive information?” question.

I’m with Russ. There’s still vigorous argument about what brought us out of the Great Depression. What can we measure 70+ years later that will definitively answer that question?

Youngsanger

We know some things. If we grew then we have created more long term opportunities and smoothed out deliveries in the short term. So I am looking for growth by looking for the first things that make smoother deliveries down a channel. Which consumer goods make it down the tree with smoother variations. It might just be the tax stream, so look at variations in taxes across the whole government channel, compare it with, say, the Ceridian Index. See which preceded in structural change.

Krishnan

To me Biology IS a science – theories are falsifiable – and there are economic “theories” that are falsifiable – the problem could be that getting the data together to agree or disagree about a theory in economics may be much harder and given the verbosity in some cases, impossible to figure out what the theory says and the kinds of predictions it can make – and far too often people in economics walk away from their “theories” when the conclusions do not fit the data – not change the theories mind you, but keep arguing their theories even as the data seems to contradict the theoretical predictions

Today, there is no “Climate Science” (since so many of the practioners have decided that “consensus” has been achieved and there is nothing yet to discover and those that question conventional wisdom are deniers and so on)

Anonymous

I think you are confusing epistemology with methodology. Falsification is nice when we can get it, but it’s not the definition of science. Approximations to strict falsification are very good too.

We can’t strictly falsify theories about the evolution of the human species, but we can rule things out over time, corroborate, bolster with evidence, etc. And no evolutionary biologist that I’m aware of spends much of their time predicting the future trajectory of human evolution.

Krishnan

If you allow for the possibility that you can be wrong and that an alternate theory can better “predict” the data, then it is science – if not, no. We can falsify theories about evolution by making testable predictions about events not studied or data not acquired (no, I am not talking about “investigating the origin, nature, methods, and limits of human knowledge” but about testing of theories and accepting the possibility that such theories could be wrong

Anonymous

Well right. Allowing for the possibility that you are wrong is simply a pre-requisite for being a reasonable participant in any sort of intellectual endeavor – scientific or not!

Krishnan

Increasing taxes lead to increasing revenues (Theory I) Decreasing taxes lead to increasing revenues (Theory II)

(yes, subject to lots of assumptions ofcourse)

To me, I am convinced that in the 1980′s as the Kemp Roth tax cuts were put in place, Federal Revenues went up even as the tax rates went down (yes, I have seen the data) The counter argument is “No, it did not – Look at the deficits” – Ofcourse this ignores the fact that deficits are revenues minus expenditure and if expenditures go up more than revenue, the difference is bound to become more negative (simple math). So, people who dislike Kemp Roth look at the arithmetic sum while ignoring the impact of revenues and expenditure (since to them, expenditures that they want are “investments” and so on)

Obama’s response to Charlie Gibson about increased revenues from lowering capital gains tax is illustrative of this – Obama did not care that revenues went up, he was concerned about “fairness”

So, yes, I do believe that economists can make predictions – state (best as they can) as to what the assumptions may be – and let the data speak – Why should they make predictions/create theories? Because, I believe, it helps make policy

If in fact that we can prove that reducing taxes DOES increase revenue (yea, under some conditions/assumptions) then it would behoove policy makers NOT to increase taxes unless all they want is to punish those that have money

I do believe there are many economic “theories” and the good economist adjusts theories or modifies them as and when the data indicates the necessity to do so – the fact that it IS difficult to formulate theories about the behavior of markets/people in the markets does not mean that we should not – but, yes as many have noted, be humble about the ability to do so

http://www.econoblast.blogspot.com David L. Kendall

Yes, but was it the dance that caused it? Perhaps it would have rained sooner without the dance. That’s pretty much Russ’s point, I think

http://www.freedomofink.com Ray

An economy is 300 million people trying to do better today than they did yesterday. An economy then is an organic entity comprised of the individuals in the population. Macro as a “science” is attempting to forecast the individual wants and ever changing needs of these hundreds of millions of people who are of course, not universally rational.

So macro is not a science, cannot be a science then because it cannot possess any precise, forward looking predictability such as physics or chemistry. This is what causes the dissonance with those who by dint of their own personal outlook favor a central planning and/or paternalistic world view. Their nature is to engineer an outcome, “nudge” the serfs into proper behavior, etc. But reality doesn’t allow such tinkering.

Blinded by their own good intentions, this is also why they fail to see their actions as arrogant, but Russ is correct, now is a time for humility but they just don’t see it that clearly.

JohnK

That counts you out.

blog comments powered by Disqus /* I’m still unclear on what you think “science” is.

Do you think biology is a “science”, Russ? You’ve mentioned physics repeatedly in the last couple days, and all you seem to have demonstrated is that economics is not physics. I could not seem to get you to weigh in on my point about biology, but if you’re making the claim that macroeconomics isn’t a science it seems like that’s a point worth speaking to. Certainly some biologists experiment (some economists do too) – but are the ones that don’t “unscientific”?

Russ asks “Suppose the economy does well this year"“growth is robust and unemployment falls. What is the reason for the improvement?”

The answer will, according to Pelosi and Biden and other Keynesiacs, obviously be that unemployment benefits have been extended and those benefits have been spend and multiplied themselves many times into an economic recovery.

Dear Mr. Roberts,

In your post, you say, “The reason macroeconomics is not a science and not even scientific is that the question I pose above is not answerable.”

Your conclusion may be correct, but your reasons are not. I would re-write the end of your sentence as, “…the question I pose above is not answerable at this time.” That’s an important distinction. The same could be said about much of particle physics and quantum descriptions until the mid 20th century. This does not imply that this realm is unscientific.

Science is not defined by its ability or inability to answer questions. Rather, science is defined by its ability to disprove a statement or proposition (or hypothesis). If something is a scientific proposition, it is able to be disproved. That is, a scientist ought to be constantly saying, “I believe X. If Y occurs at any point through experimentation or observation, I will need to believe something other than X, or strongly revise my understanding of X.”

This is the missing component of macroeconomics. No matter the evidence provided, people of mutually exclusive viewpoints may conclude that they have not been (and never will be) disproven. There is no Y that can occur to make a Keynesian believe that Smith was right, and vice-versa. And this is why macroeconomics is not a science.

Thank you, Josh S

If you keep doing the rain dance, eventually it’ll rain.

There’s not much one can say in any scientific endeavor from just one data point. In this case, the one data point is whatever the economy is about to do.

But, if many data points are collected, perhaps over thousands or even millions of years, then there may be enough data relative to the degrees of freedom to answer such questions.

Between this post and the one on NAFTA, you are making a great case for why the average two year MA/S program for Econ costs much less than a two year MBA program.

What’s the marginal utlity of Econ grad school?

“Science is the belief in the ignorance of experts.”

Richard Feynman

“We can't measure many of the things we would have to measure to have any reasonable amount of certainty about the chains of connection and causation.” We not only can’t measure it, we don’t really even know what to measure.

It seems like there’s the “is macroeconomics science?” question and then there’s the “does macroeconomics offer useful predictive information?” question.

I’m with Russ. There’s still vigorous argument about what brought us out of the Great Depression. What can we measure 70+ years later that will definitively answer that question?

We know some things. If we grew then we have created more long term opportunities and smoothed out deliveries in the short term. So I am looking for growth by looking for the first things that make smoother deliveries down a channel. Which consumer goods make it down the tree with smoother variations. It might just be the tax stream, so look at variations in taxes across the whole government channel, compare it with, say, the Ceridian Index. See which preceded in structural change.

To me Biology IS a science – theories are falsifiable – and there are economic “theories” that are falsifiable – the problem could be that getting the data together to agree or disagree about a theory in economics may be much harder and given the verbosity in some cases, impossible to figure out what the theory says and the kinds of predictions it can make – and far too often people in economics walk away from their “theories” when the conclusions do not fit the data – not change the theories mind you, but keep arguing their theories even as the data seems to contradict the theoretical predictions

Today, there is no “Climate Science” (since so many of the practioners have decided that “consensus” has been achieved and there is nothing yet to discover and those that question conventional wisdom are deniers and so on)

I think you are confusing epistemology with methodology. Falsification is nice when we can get it, but it’s not the definition of science. Approximations to strict falsification are very good too.

We can’t strictly falsify theories about the evolution of the human species, but we can rule things out over time, corroborate, bolster with evidence, etc. And no evolutionary biologist that I’m aware of spends much of their time predicting the future trajectory of human evolution.

If you allow for the possibility that you can be wrong and that an alternate theory can better “predict” the data, then it is science – if not, no. We can falsify theories about evolution by making testable predictions about events not studied or data not acquired (no, I am not talking about “investigating the origin, nature, methods, and limits of human knowledge” but about testing of theories and accepting the possibility that such theories could be wrong

Well right. Allowing for the possibility that you are wrong is simply a pre-requisite for being a reasonable participant in any sort of intellectual endeavor – scientific or not!

Increasing taxes lead to increasing revenues (Theory I) Decreasing taxes lead to increasing revenues (Theory II)

(yes, subject to lots of assumptions ofcourse)

To me, I am convinced that in the 1980′s as the Kemp Roth tax cuts were put in place, Federal Revenues went up even as the tax rates went down (yes, I have seen the data) The counter argument is “No, it did not – Look at the deficits” – Ofcourse this ignores the fact that deficits are revenues minus expenditure and if expenditures go up more than revenue, the difference is bound to become more negative (simple math). So, people who dislike Kemp Roth look at the arithmetic sum while ignoring the impact of revenues and expenditure (since to them, expenditures that they want are “investments” and so on)

Obama’s response to Charlie Gibson about increased revenues from lowering capital gains tax is illustrative of this – Obama did not care that revenues went up, he was concerned about “fairness”

So, yes, I do believe that economists can make predictions – state (best as they can) as to what the assumptions may be – and let the data speak – Why should they make predictions/create theories? Because, I believe, it helps make policy

If in fact that we can prove that reducing taxes DOES increase revenue (yea, under some conditions/assumptions) then it would behoove policy makers NOT to increase taxes unless all they want is to punish those that have money

I do believe there are many economic “theories” and the good economist adjusts theories or modifies them as and when the data indicates the necessity to do so – the fact that it IS difficult to formulate theories about the behavior of markets/people in the markets does not mean that we should not – but, yes as many have noted, be humble about the ability to do so

Yes, but was it the dance that caused it? Perhaps it would have rained sooner without the dance. That’s pretty much Russ’s point, I think

An economy is 300 million people trying to do better today than they did yesterday. An economy then is an organic entity comprised of the individuals in the population. Macro as a “science” is attempting to forecast the individual wants and ever changing needs of these hundreds of millions of people who are of course, not universally rational.

So macro is not a science, cannot be a science then because it cannot possess any precise, forward looking predictability such as physics or chemistry. This is what causes the dissonance with those who by dint of their own personal outlook favor a central planning and/or paternalistic world view. Their nature is to engineer an outcome, “nudge” the serfs into proper behavior, etc. But reality doesn’t allow such tinkering.

Blinded by their own good intentions, this is also why they fail to see their actions as arrogant, but Russ is correct, now is a time for humility but they just don’t see it that clearly.

That counts you out.

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