It has been difficult to resist writing about Dani Rodrik’s new book, [amazon_link id=”0393246418″ target=”_blank” ]Economics Rules: The Rights and Wrongs of the Dismal Science[/amazon_link], before the embargo date, but at last I’m free to say how terrific it is. Rodrik is of course one of the most eminent public intellectual economists, engaged with policy and the ‘real world’, and a natural communicator. I’m completely in sympathy with his dual aim of aiming the correct criticisms at economics while defending it others: “I have long been critical of my fellow economists for being narrow minded, taking their models too literally and paying inadequate attention to social processes. But I felt that many of the criticisms coming from outside the field missed the point.” This might sound defensive but it matters to get the criticisms right: some of the old chestnuts (too mathematical, all about selfishness etc) give economists a free pass because they allow them to ignore the more troubling issues.
[amazon_image id=”0393246418″ link=”true” target=”_blank” size=”medium” ]Economics Rules: The Rights and Wrongs of the Dismal Science[/amazon_image]
What are these? Rodrik supports the mathematical nature of economics as bringing clarity of meaning, and argues that the subject is far more applied and empirical than its detractors realise. But he criticises large-scale macro models and time series regressions. “I cannot think of an important economic insight that has come out of such models,” he writes. He also flags up the lack of testability of many economic models: they purport to be deductions from theoretical principles, but as they are ‘deduced’ to explain a particular phenomenon (credit rationing, say), then that phenomenon cannot be used to test the model. “Very few of the models that economists work with have ever been rejected so decisively that the profession discarded them as clearly false.”
Another consequences is that there are huge waves of fashion in economic models. Almost the opposite problem is the use of models that *are* built up from 1st principles and have no relationship with reality – prime culprits being macro DSGE models.
Finally, Rodrik writes, “The profession values smarts over judgment, being interesting over being right – so its fads and fashions do not self-correct.” I would suggest (Rodrik does not note this) that this helps account for the male dominance of economics (like philosophy); young women are very strongly socialised out of this kind of showy intellectual display.
So what, then, does the book argue is good about economics? Rodrik portrays the version of the discipline done well as highly empirical, using inductive and deductive methods, sensitive to context – historical, social, conjunctural – and eclectic in its selection of models. It’s horses for courses. We should think of models as a kind of library of diagnostic texts.
Towards the end of the book, he addresses the kind of challenge exemplified by Michael Sandel’s [amazon_link id=”0241954487″ target=”_blank” ]What Money Can’t Buy: The Moral Limits of Markets[/amazon_link]. Sandel writes: “Putting a price on the good things in life can corrupt them. That’s because markets don’t only allocate goods, they express and promote certain attitudes toward the goods being exchanged.” Rodrik acknowledges that economists could do with a “richer paradigm” of human behaviour but defends the economic efficiency lens, the analysis of the efficient allocation of resources. Efficiency is a good thing, an important consideration. If carbon trading will reduce emissions, and you believe that to be vital, why would you reject the market approach as immoral? This section ends: “The early philosophers encouraged the spread of markets not for reasons of efficiency or for the expansion of material resources, but because they thought it would produce a more ethical, more harmonious society. It is ironic that, three centuries later, markets have come to be associated in the eyes of many with moral corruption. Just as today’s advocates of markets overlook the limits of efficiency, perhaps the critics neglect some of the ways in which markets contribute to a spirit of co-operation.”
The main message I hope non-economist and economist readers alike will take away from this book is the importance of specific contexts for economic analysis and policy. The book ends with Jean Tirole explaining how frustrating it was for many people, when he won his Nobel Prize, that it was impossible to summarize his work in a brief statement. “It is industry-specific,” Tirole said. “The way you regulate payment cards has nothing to do with the way your regulate intellectual property or railroads.”
The final couple of pages have Rodrik’s Ten Commandments for Economists. Numbers one and two are: Economics is a collection of models; It’s a model, not the model. And also Ten Commandments for Non-Economists, which include: maths is useful; economists are not all alike; economists typically do understand how markets work.
I’m not sure how much traction any book trying to bridge the gap between the best of economics and the subject’s critics can gain (having tried myself in a different way by explaining some areas of economics on the research frontier in [amazon_link id=”B012HTWE7S” target=”_blank” ]The Soulful Science[/amazon_link].) The fact that there are plenty of economists doing the version Rodrik criticises in the book doesn’t help our cause; just turn on the TV or read social media and you find oodles of economists making strong, universal claims about macroeconomic policy or trade policy. But I hope open-minded critics of economics will read [amazon_link id=”0393246418″ target=”_blank” ]Economics Rules[/amazon_link] to learn how the best of economists approach the subject, and how important their work is.
By the way, Dani Rodrik is speaking at the LSE on 7 October.
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How to be a good scientist
Comment on ‘How to be a good economist’
Towards the end of his book, Rodrik gives a summary for non-economists: “math is useful; economists are not all alike; economists typically do understand how markets work.” (See intro)
While the triviality of the first two items is unsurpassable, the third assertion is simply false. Economics is a failed science and the representative economist can until this very day not tell the difference between profit and income. Because they do not understand what profit is, economists do not understand how the market system works (2015). Most of them have not yet realized that supply-demand-equilibrium is a ridiculous construct.
It is of utmost importance to distinguish between political and theoretical economics.
(i) The goal of political economics is to push an agenda, the goal of theoretical economics is to explain how the actual economy works and nothing else.
(ii) In political economics anything goes; in theoretical economics scientific standards are observed.
Theoretical economics has to be judged according to the criteria true/false. The history of political economics, on the other hand, can be summarized as good/bad-moralizing and the perpetual violation of well-defined scientific standards.
The fact of the matter is that theoretical economics has since Adam Smith been dominated by the agenda pushers of political economics which can be characterized by three common traits.
(i) They are mainly occupied with sociology, psychology, anthropology, political science, history, etcetera. By dabbling in the so-called social sciences they miss the core of the subject matter, that is, the objective properties of the economic system.
(ii) They use theoretical economics as a means/support for their agenda. By this, they abuse science.
(iii) As far as they have tried to underpin their agenda theoretically it can be rigorously demonstrated in each case that their approaches lack formal and material consistency.
Political economists are incompetent scientists and, by the same token, bad economists.
“In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion. (Stigum, 1991, p. 30)
Economists lack the true theory. Eclecticism is not a merit in science. Just the contrary: a heap of loosely connected and contradicting models is the very proof of failure. Rodrik defends the indefensible. A good scientist would not do this.
Egmont Kakarot-Handtke
References
Kakarot-Handtke, E. (2015). Major Defects of the Market Economy. SSRN Working Paper Series, 2624350: 1–40. URL http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624350.
Stigum, B. P. (1991). Toward a Formal Science of Economics: The Axiomatic
Method in Economics and Econometrics. Cambridge, MA: MIT Press.
He referenced himself so it must be true!
🙂
We all do that sometimes.
Diane: ‘Finally, Rodrik writes, “The profession values smarts over judgment, being interesting over being right – so its fads and fashions do not self-correct.” I would suggest (Rodrik does not note this) that this helps account for the male dominance of economics (like philosophy); young women are very strongly socialised out of this kind of showy intellectual display’
I couldn’t agree more! The behaviour at many economics seminars certainly reflects this.
I’m a huge Dani Rodrik fan, so looking forward to reading this and expecting to spend a lot of time agreeing.
One issue I’d raise is that the study of complex systems suggests that the criteria “effectiveness” and “robustness” need to sit alongside “efficiency.” And indeed, it has often been the role of politics (or visionary business leaders) to value those (and preserve them) in the face of economists too keen to over-optimise around a single variable. (Efficiency.)
Rodrik says this implicitly when he talks about the need for judgement, but I wonder if it is in the book more explicitly? It’s similar to Sandel’s point, but less about ethics and more about success.
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“He also flags up the lack of testability of many economic models: they purport to be deductions from theoretical principles, but as they are ‘deduced’ to explain a particular phenomenon (credit rationing, say), then that phenomenon cannot be used to test the model. ”
Please could you explain this point to me in a more detail? I’m afraid I don’t quite get it, although I do have an inkling.
It’s pointing out a circularity of reasoning you sometimes see. A very simple example would be you observe that consumption vetoes with income. You model from micro foundations a consumption function that has income on the RHS. You can’t take a positive coefficient in the regression as roof of your theoretical model.
Great post Diane. I have read some of Rodick’s blogposts, my only comment is that really saying we need fewer one-sized-fits all approaches in economics is not enough; there are some things which should not be modelled at all and there are times in all investigations when the models have to be put aside altogether.
But it’s a start.
I agree with absolutely about the role of women in the discipline. Economics definitely needs some gendering. I started in economics after getting in PHD, and moved over to political science. I am now more of an historian, I look at macro economic history as an area specialist, but I do not call my self an economic historian because I believe I believe there is so much outside economics you need to know to properly understand what is actually going on in macro. (Keynes new this – and really he said it is irrational behaviour you need to understand, not rational – and you need to know some psychology and philosophy.) In fact economic theory is probably the least interesting thing about what you need to know to understand the issues I deal with. I had to quickly get over what a lot of other socialist scientists do, and it was liberating, but it made me realise how narrow the methodological approach of economics is and how dangerous that is. Feminists played a big role in some of the other social scientists in revolutionising them and preventing them taking the road economics did. Perhaps they finally do the same in economics.
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Time to make economics a science
‘Key member of Swedish Academy of Sciences calls for immediate suspension of the “Nobel Prize for Economics”’
• Science does not explain everything, but non-science explains nothing.
• Neither orthodox nor heterodox economics satisfies the scientific criteria of material and formal consistency.
• Economists cannot explain how the economy works. The profit theory is false since Adam Smith. There is much opinion and little knowledge.
• Opinion is the realm of political economics, knowledge is the realm of theoretical economics.
• Political economics is scientifically worthless.
• Theoretical economics is built upon clearly stated premises, i.e., upon a set of axioms.
• Orthodoxy got the axiomatic foundations wrong and Heterodoxy has none at all.
• Economics is a failed science.*
Egmont Kakarot-Handtke
* For a new start see cross-references Paradigm shift
http://axecorg.blogspot.de/2015/02/essentials-cross-references.html
Well that’s all a matter of opinion….. you’re welcome to yours but I disagree 🙂
Knowledge only — no opinion
Comment on Diane Coyle on ‘How to be a good economist’
You answer in the post of 12 October: “Well that’s all a matter of opinion.” It is pretty obvious that you never got the salient point of science, which is to get out of the anything-goes-opinion-wish-wash.
“There are always many different opinions and conventions concerning any one problem or subject-matter …. This shows that they are not all true. For if they conflict, then at best only one of them can be true. Thus it appears that Parmenides … was the first to distinguish clearly between truth or reality on the one hand, and convention or conventional opinion (hearsay, plausible myth) on the other …” (Popper, 1994, pp. 39-40)
Since more than 2000 years it is known that science is about knowledge and that politics is about opinion/belief/second guessing/filibustering. In sum: the bad economist cranks out opinions, the good economist contributes to knowledge.
Egmont Kakarot-Handtke
References
Popper, K. R. (1994). The Myth of the Framework. In Defence of Science and
Rationality. London, New York, NY: Routledge.