Putting Economic Models in Their Place

BERKELEY – When policymakers turn to economists for guidance, they expect the advice they receive to be grounded in science, not academic factionalism or political presuppositions. After all, the policies they will be putting in place will have real implications for real people. Unfortunately, however, sound science is not always the driving force behind economic analysis and policy recommendations.

In a recent critique of what he calls the “mathiness” of modern economics, Paul M. Romer of New York University argues that economists should take measures to exclude academic factionalism and politics from the dismal science. Romer grounds his case in an ongoing debate in his field about the role that ideas play in promoting economic growth.

Romer seems to be worried principally about some economists’ tendency to claim that what is true about certain types of theories is true of all theories and thus applicable to the real world. As an example of this tendency, Romer cites the work of the University of Chicago economist Robert Lucas, who, in his 2009 paper “Ideas and Growth,” dismisses the role that books or blueprints can play in driving growth. “Some knowledge can be ‘embodied’ in books, blueprints, machines, and other kinds of physical capital, and we know how to introduce capital into a growth model,” Lucas argued, “but we also know that doing so does not by itself provide an engine of sustained growth.”

The problem is that Lucas’s statement is true only for models of economic growth that are specified in such a way that the return on “embodied” capital drops to zero as capital accumulates. As Romer notes, there are many models for which this is simply not true. What Lucas makes out to be a general truth – that the path to economic growth cannot lie in creating and acquiring the kind of knowledge that is “embodied” in books, blueprints, and machines – rests on a barely examined decision to restrict attention to only a few kinds of models.