Thursday, November 27, 2014

What Use Are Economists?

CAMBRIDGE – When the stakes are high, it is no surprise that battling political opponents use whatever support they can garner from economists and other researchers. That is what happened when conservative American politicians and European Union officials latched on to the work of two Harvard professors – Carmen Reinhart and Kenneth Rogoff – to justify their support of fiscal austerity.

Reinhart and Rogoff published a paper that appeared to show that public-debt levels above 90% of GDP significantly impede economic growth. Three economists from the University of Massachusetts at Amherst then did what academics are routinely supposed to do – replicate their colleagues’ work and subject it to criticism.

Along with a relatively minor spreadsheet error, they identified some methodological choices in the original Reinhart/Rogoff work that threw the robustness of their results into question. Most important, even though debt levels and growth remained negatively correlated, the evidence for a 90% threshold was revealed to be quite weak. And, as many have argued, the correlation itself could be the result of low growth leading to high indebtedness, rather than the other way around.

Reinhart and Rogoff have strongly contested accusations by many commentators that they were willing, if not willful, participants in a game of political deception. They have defended their empirical methods and insist that they are not the deficit hawks that their critics portray them to be.

The resulting firestorm has clouded a salutary process of scrutiny and refinement of economic research. Reinhart and Rogoff quickly acknowledged the Excel mistake they had made. The dueling analyses clarified the nature of the data, their limitations, and the difference that alternative methods of processing them made to the results. Ultimately, Reinhart and Rogoff were not that far apart from their critics on either what the evidence showed or what the policy implications were.

So the silver lining in this fracas is that it showed that economics can progress by the rules of science. No matter how far apart their political views may have been, the two sides shared a common language about what constitutes evidence and – for the most part – a common approach to resolving differences.

The problem lies elsewhere, in the way that economists and their research are used in public debate. The Reinhart/Rogoff affair was not just an academic quibble. Because the 90% threshold had become political fodder, its subsequent demolition also gained broader political meaning. Despite their protests, Reinhart and Rogoff were accused of providing scholarly cover for a set of policies for which there was, in fact, limited supporting evidence. One clear lesson is that we need better rules of engagement between economic researchers and policymakers.

A solution that will not work is for economists to second-guess how their ideas will be used or misused in public debate and to shade their public statements accordingly. For example, Reinhart and Rogoff might have downplayed their results – such as they were – in order to prevent them from being misused by deficit hawks. But few economists are sufficiently well attuned to have a clear idea of how the politics will play out.

Moreover, when economists adjust their message to fit their audience, the result is the opposite of what is intended: they rapidly lose credibility.

Consider what happens in international trade, where such shading of research is established practice. For fear of empowering the “protectionist barbarians,” trade economists are prone to exaggerate the benefits of trade and downplay its distributional and other costs. In practice, this often leads to their arguments being captured by interest groups on the other side – global corporations that seek to manipulate trade rules to their own advantage. As a result, economists are rarely viewed as honest brokers in the public debate about globalization.

But economists should match honesty about what their research says with honesty about the inherently provisional nature of what passes as evidence in their profession. Economics, unlike the natural sciences, rarely yields cut-and-dried results. For one thing, all economic reasoning is contextual, with as many conclusions as potential real-world circumstances. All economic propositions are “if-then” statements. Accordingly, figuring out which remedy works best in a particular setting is a craft rather than a science.

Second, empirical evidence is rarely reliable enough to settle decisively a controversy characterized by deeply divided opinion. This is particularly true in macroeconomics, of course, where data are few and open to diverse interpretations.

But even in microeconomics, where it is sometimes possible to generate precise empirical estimates using randomization techniques, the results must be extrapolated in order to be applied in other settings. New economic evidence serves at best to nudge the views – a little here, a little there – of those inclined to be open-minded.

In the memorable words of the World Bank’s chief economist, Kaushik Basu, “One thing that experts know, and that non-experts do not, is that they know less than non-experts think they do.” The implications go beyond not over-selling any particular research result. Journalists, politicians, and the general public have a tendency to attribute greater authority and precision to what economists say than economists should really feel comfortable with. Unfortunately, economists are rarely humble, especially in public.

There is one other thing that the public should know about economists: It is cleverness, not wisdom, that advances academic economists’ careers. Professors at the top universities distinguish themselves today not by being right about the real world, but by devising imaginative theoretical twists or developing novel evidence. If these skills also render them perceptive observers of real societies and provide them with sound judgment, it is hardly by design.

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    1. Commentedraul ramos

      10 may 2014 manila, ph

      economy in an intelligent view,

      “. . . . . . . don't worry about a crisis”

      “. . . . . . . doesn't see debt as a big problem”
      with high respect to sir kenneth rogoff. sir thomas d. cabot
      professor of public policy and professor of economics at
      harvard university. chief economist and director of research
      at the international monetary fund. just to put on record.
      it is my pride for you to be a part of all my writings with
      regards to u.s. economy, our economy and the economy of
      the entire countries of the whole world. i already stated in
      all my writings that debt per se is good. debt means growth.
      but today’s debt is exactly and absolutely the opposite of
      growth. again, why? simple, today’s economy is precisely
      moving in the wrong, incorrect directions. accumulating
      debt, compounding by the hour by the minutes is truly
      fatal. i wish and pray you had a brighter, clever, brilliant
      idea. thanks’


      please kindly take good care and God bless . . . . . . . raul

    2. CommentedAyse Tezcan

      Same goes for epidemiologists. Every association that is put out has a risk to be interpreted as causal and used by special interests. I am not sure whether there is remedy for the problem that stems from human nature...

    3. CommentedEdward Ponderer

      In his 1989 NEW REALITIES, among a number of insightful predictions, Peter F. Drucker warns of the implication of a global economy on 4 tiers of nonlinear equations as likely indicating deterministic chaos. The reasons that such was not noticed were that we were still in the relatively early throws of globalization. For one thing, the Internet was still in its infancy. Nonlinear effects moved slowly enough that decently insightful economists like Milton Friedman could still takes measures, recognize drift, and course correct. Also, America still being the dominant economic superpower, those corrections had strong enough teeth. Coordinating with America, the world economy could keep stable. But now globalization has come to full strength and still grows stronger. Evermore links crossing between economic layers -- and evermore coupling strengths to those links, evermore diffusion of economic control, evermore unstable swelling and random gambling by distributed powerful individuals, evermore distrust. And the Internet baby has grown up at warp speed -- giving it all a fully-functional nervous system. In short, we are entering a full-fledged chaos, which like the Internet itself, can no longer be mapped, measured, and predicted -- not in time, or with any power, to implement anything more than almost random noise -- delaying a dam burst at the cost of greater total cost at best, and just making the decay accelerate from the get go at worst (i.e., it might be better to just fold your hands and do nothing). As all systems in nature, there is no longer a simple black box to homeostasis, but rather the full complexity of the system must be taken into account -- and only the system itself can do that. We must assist in the evolution of this via the one thing that we can. This is using educational and media psychology means to create an environment conducive to a sense of mutual responsibility -- the type of "altruism" seem in the members of successful natural systems. We must switch from the top-down view of economics, to this bottom-up behavioral model, if we are to permit the entire system of global Humanity -- and in particular its economics -- to evolve into a healthy, literally biological system. The alternative is to enter a full-scale nonlinearity in which natural entropy can only magnify to chaos ("Murphy's law") and lead to the death of the system before it is born. Please give pause and serious consideration to this -- because this is not some abortion statistic -- we are, altogether 7 billion of us -- the fetus in question.

    4. CommentedStamatis Kavvadias

      It is pretty obvious that economists are more appreciated in politics than can be supported by the immature science supporting their knowledge. It is astonishing that the author does not even go as far as to express an opinion on what the problem is in the evolution of economic science. Contrary to other comments, I tend to believe that the problem is not in the complexity of studying a system that involves human will as a parameter, but rather in trying to fit this behavior in specific simplistic patterns of limited representativeness, usually based on holistic preconceptions of such behavior. In other words, the problem is in expecting a specific behavior, that we could understand or like, instead of modeling a range of behaviors. To me, this is lack of academic motivation, and, in did, I believe the biggest problem for the evolution of economic science lies in schools of thought that are tightly linked to views of society and economy as it "should" be. The deeper an economist gets involved in understanding how economies work, the more he confuses philosophy with economics, possibly under the influence of Adams Smith. In my eyes, for economics to mature, they need to transition from qualitative understanding of the economy to quantitative understanding, exactly as computers have. The object is not human behavior but, behavior of economies, and demonstrably predictive models need to be built. The chase of causality must stop its pursuit of being established to human behavior (which is for psychologists). Meanwhile, the irresponsibility of technocrats is very lightly judged, when they advise politicians, or when they defend institutions (or lack of them) and schools of thought that have no supporting evidence behind them, or base their claims on evidence have not even gone through peer reviewed publication yet! The costs for society are too grave for this to be tolerated any longer!

    5. CommentedZsolt Hermann

      This question in the title presumes economists, or bankers, or politicians, or anybody else operate in isolation, following their own rules, practice.
      But this is impossible.
      We are all existing in the same interconnected network, we keep forgetting humanity is a single species based on the same nature and principles, each and every human being is moved by the same software, and our individual actions are simply the manifestation of the same software through the filters of our individual character.
      Thus if we presume that the world is not functioning well, that we are in a crisis, or we even say humanity is at crossroads, it is completely pointless trying to blame individuals, or professions, cultural and racial groups in isolation.
      We need to change the software that moves all of us.
      Up to this point humanity was driven by our self centered, egoistic imprint, making us think, act, move each and every second towards ourselves, for our own benefit, for our own pleasure.
      And it worked, although through a lot of suffering and pain propelling humanity to the level we achieved so far.
      But the conditions have changed.
      We have evolved, been locked into today's global, fully interconnected and interdependent human network, this human network is fully merged into the natural environment around.
      In this new system, every selfish move, every motion that does not take the whole system, its mutual, common well-being into consideration is doomed to failure, reaching the initial "perpetrator" as a boomerang with multiple force.
      The first step is to fully accept and understand the principles of a globally integral human society and all of its implications.
      Not only finances, economy, the global crisis depend on it, but our survival, we cannot cheat, blackmail or even change the vast natural system we exist in giving us these conditions.
      Only we can change.

    6. CommentedRodrigo Botafogo

      I agree with Anthony when he claims that economics is not a "science" in the legitimate sense and that economists have failed to introduce predictive models. I´m not an economist and I have thus limited knowledge of the field. But it seems to me that while economists insist in starting from unreal premises they´ll never be able to have any predictive models. Can one really believe that economic agents are rational? If so, the whole field of psychology/psychiatry would be useless and Spock would feel at home here on earth. Also, how can we believe that markets are efficient? There are large asymmetries between agents and how they can gather and distribute information.
      Removing those premises will require large changes in economics. Although hard, I don´t see any other way to really produce predictive models and bring economics closer to a legitimate science.

    7. CommentedChris Mante

      Okay. I'll grant economists are not sufficiently worldly to anticipate how their "scientific" results are likely to be used by lobbyists, politicians, special interests and sundry other less principled, lower intellect types. THAT SAID: is it too much to ask that when these inhabitants of academic cloud cuckoo land are widely (if inappropriately) cited as experts who support the self-interested "truths" of lesser men and women that instead of basking in their 15 minutes of recognition, these natural born wonders issue a statement saying "that is not what I meant at all"?

    8. Portrait of Pingfan Hong

      CommentedPingfan Hong

      At least R&R tried to find evidence from historical data, and the error they had can happen in many researches in the field of "hard sciences". In comparison, many other economists, include those who chastised R&R in commentaries, don't even bother to look into evidence when they give policy advice, purely driven by ideology. Ther are even worse cases, when economists calibrate their "models" according to their predefined political objectives and claim the results are "model-based" and "scientific" .

    9. CommentedArvind Gupta

      The fault, dear Brutus, lies not in Reinhart-Rogoff but in that we were easily gullible, swayed by pedigree, susceptible to the halo effect, ......

      In many ways this is a typical "Kuhnian" process of competition amongst competing paradigms; with each protagonist using all means available to assert primacy.

    10. Commentedradek tanski

      My fav quote from von mises about economists.

      "The development of a profession of economists is an offshoot of interventionism. The professional economist is the specialist who is instrumental in designing various measures of government interference with business. He is an expert in the field of economic legislation, which today invariably aims at hindering the operation of the market economy."

    11. CommentedProcyon Mukherjee

      When the purpose of belief is to further the cause of advancement in the academia and if that could be done by selective use of data with a mix of bias, we have the current milieu of Economists mired in controversy.

      Bartley’s immortal book, “The Retreat to Commitment” holds some glaring examples as to the nature of the question of dilemma of ultimate commitment. The biggest impediment to any free thinking is the ‘belief’ embedded in the mind itself, before any hypothesis is even formed through observation or data gathering. On the contrary some of these beliefs tend to influence the very hypothesis and the gathering of instances or data that would later prove the hypothesis itself.

    12. CommentedMarc Laventurier

      As someone concerned with both the logic and utility of knowledge representation in AI, Dani's characterization of 'achievement'in professional economics in his last paragraph rings true, but must be over-generalized. For all the nit-wits in Chicago (Glen Weyl excepted), there is a Jeff Sachs who at least knows about the human terrain beneath the cute map with the late-capitalist legend.

    13. CommentedManfred Dix

      So, Dani, what was *your* clever addition to economics that landed your nice position at the KSG?
      As for Reinhart/Rogoff, most people forget that their paper was and is still a *working* paper, not a published one. But, alas, everybody had to jump all over them, right?

    14. CommentedBrett Blake

      A few years back, peer-reviewed academic journals undertook to publish both data and code used in the research they published, though its application was haphazard and incomplete. It also seems to have fallen by the wayside as researchers refused to release one or both, intending to "dine out" on their proprietary data as much as possible. I understand the impulse. Data is time and labor intensive to build, however, the Reinhart-Rogoff fiasco (as in Edward Pinto's flawed work) points out how important that initiative can be.

      In policy making scenarios, at the very least, the refusal to make data and code public should be noted and pressure put on researchers to make both available.

    15. CommentedRalph Musgrave

      Rogoff’s claim not the be a “deficit hawk” is laughable. Look at this Project Syndicate article from last year, full of emotive, scary language clearly designed to give us bad dreams about the debt.

    16. CommentedAnthony Juan Bautista

      Nice article!

      In my estimation, the primary reason that economics is not "science" in the legitimate sense, is because the field has yet to introduce models with useful predictive power (most likely because whether they know it or not, economists are modeling complex systems).

      Meaning, the models of modern economics have failed to be more powerful (failed to add incremental usefulness) as compared to those econ/philosophical first principals elucidated 100's and sometimes 1000's of years ago.

      The micro and behavioral models are likely more powerful, mostly because they are narrow in scope.

        CommentedAnthony Juan Bautista

        Another way to think about things: if something is "true", it can be modeled with some accuracy. What does this say about "truth" in economics?