Everyone seems to be talking about this article by Barry Eichengreen, whose main point (an optimistic one) is that,
In contrast, the twenty-first century will be the age of inductive economics, when empiricists hold sway and advice is grounded in concrete observation of markets and their inhabitants. Work in economics, including the abstract model building in which theorists engage, will be guided more powerfully by this real-world observation. It is about time.
Mark Thoma does a good job excerpting this piece, if you want to read more (but not too much more).
Dani Rodrik agrees with another point by Eichengreen, that models were picked and chosen by economists based on their favorability.
One is that the problem with economists is not that we did not have the models and the tools needed to understand that the crisis was on its way, but that we focused excessively on the more benign models that we had…
And why did this happen? Part of the reason is that economists are subject to all the same heuristic biases that behaviorists amongst us study in others–over-confidence, willingness to conform, tendency to discount contradictory evidence, and so on. Part of it is that economists did not have the guts to speak out when financiers and policy makers engaged in cherry-picking their results–using those that were favorable to their cause to buttress their case, while disregarding others.
I think Rodrik’s point about cherry-picking reinforces that empirical economics is a positive direction for the discipline. The overemphasis on theoretical models has certainly helped get us into this current crisis. My concern, though, is if empirical economics will be able to fully satisfy the host of questions that economists and policymakers tend to have. The economy is very complex and relies on nearly infinite interactions. It is not the sum of individual decisions (which are not so easily predictable in their own right). This complexity leads to a desire for a simplified model, with idiotic assumptions, that soon become the orthodoxy. Much of the work in the last four decades has involved tweaking one of these assumptions at a time, which certainly leads to different conclusions (see Stiglitz’s work, among others). However, this work is still largely in the theoretical realm.
I think empiricism holds promise (if the discipline moves that way), but I wonder if eventually, unsatisfied economists will revert back to theory to explain things their data can’t capture. Or, perhaps, a new kind of empiricism can emerge, in which an overreliance on “scientific” data goes a way and an openness to ethnographies, etc. is seen.
These ideas, of course, are not my own. I had the pleasure of attending the final professor dinner of my college career last night (or at least the first half of it, before my Chicago Bulls required attention). Our “lecturer,” a Marxian economist, provoked a good deal of discussion about these very issues. One of the interesting threads was about behavioural economics.
One of the students there, who, as judged by the previous professor dinner, was somewhat conservative (in a very liberal audience), said that he held out hope for behavioural economics because it was empirical and rigorous and challenged assumptions. The Marxian responded to this by saying that behaivoural economics still revolved around “max U”, homo economicus, whatever you want to call it. He seemed to argue that without getting away from this (and economists would have a really hard time doing that), the field of vision in economics would still be very limited. I think I agree.
I’ll have another post on the half-dinner I attended last night later today.