On leeches and bleeding

Noah Smith, a very bright professor who blogs a lot about economics and who is unusually open to challenges from the economic wilderness, has an article in the Atlantic Monthly asking whether we should trust economists. Comparing them to 14th-century physicians who thought that either leeches or bleeding were the cause of illness, Smith concludes that mainstream economists are difficult to trust because their assumptions are wrong, they haven’t built a proper model of the economy and their data is bad. On top of all this, their models are dodgy because they’re just stories about how the world might work, not genuine explanations of hard data like in the natural sciences.

But we should probably make do with medieval quackery, Smith asserts, because economists are a humble bunch who are aware of their shortcomings. He quotes a couple of famous economists — Greg Mankiw (author of the textbook I used as an undergrad) and US Federal Reserve chairman Ben Bernanke — as saying that they don’t know everything about the future. Moreover, Smith continues, the quacks are better than the loonies outside the mainstream who peddle snake-oil and wizardry.

Smith cites as example of this unpalatable wizardry the Austrian economists,  “who believe that we only need logic to understand how the economy works, and that data and evidence are useless.”

Smith is mostly right about the problems with economists. But as an example of wilful mischaracterisation this last statement is difficult to surpass. As Peter Klein (dismissed by Smith on Twitter as a troll) points out:

Certainly no Austrian economist has ever maintained that one can provide a detailed analysis of actual business cycles, or monetary policy, or any aspect of applied economics without careful, detailed, empirical study. It might surprise Smith to know that Mises wrote detailed empirical studies of prewar business cycles and European monetary policy, that Rothbard produced a 368-page treatise on the Great Depression, and that contemporary Austrians have written about the credit collapse, quantitative easing, and just about anything else in recent economic policy.

It’s not that i’m particularly keen on the Austrian school of economics. I am keen, however, on trying to understand different schools of thought. Dismissing them as “absurd”, as Smith does, is totally unhelpful, and typical of the mainstream of economics, which tends to ignore, misrepresent and drag opposing sets of ideas through the mud rather than accepting the possibility that they might have something to contribute, however small.

Mainstream economists are in fact far from humble. The implicit view of Bernanke and Mankiw is that they’re on the right track and that their brand of economics will, eventually, establish the truth. The 1994 textbook of Mankiw’s that I used says at the beginning: “Macroeconomists are the scientists who try to explain the workings of the economy as a whole… To be sure, macroeconomics is a young and imperfect science… we do know quite a lot about how the economy works.” He seems to think that the type of models used by mainstream economists aren’t quite up to the job yet, but eventually they should yield better answers.

The mainstream approach is so dominant that its practitioners are able to laugh about their own minor shortcomings. Haha, they exclaim. Look at our funny little foibles, but don’t bother taking any of the alternatives seriously.

Macroeconomists act from a position of power. It’s OK for Bernanke to affect modesty by saying that he doesn’t know much about the future. He sets monetary policy for the world. He knows that what he says goes, and that his sort of economics will anyway be force-fed to Americans and the rest of us because he influences how much money the Fed prints and how long it keeps interest rates at zero. For him to joke that economists don’t know much about the future is like a teacher joking to a pupil how boring his lesson is. They’re in charge, regardless.

Mainstream economists are part of a school of thought which posits some very specific things about human behaviour — many of which, in my view are complete rubbish — and which is backed by immense corporate power, as documented in the film Inside Job. Ideas about methodological individualism, rationality and equilibrium support the status quo. Neoclassical economists dominate the universities and in some cases even close down departments which think differently. From the 1980s economic methods infiltrated other social sciences in what came to be known — even by its proponents, led by Gary Becker — as the “imperialism of economics”. Far from being humble, this was a prolonged episode of extreme arrogance in which one individual had the temerity to write a decade ago that “economics is the premier social science.”

It is ludicrous naivety for Smith to suggest that “when you listen to economists, the key is to try to understand why they think what they think”. Most of the public don’t have a clue and never will have any idea about why economists think what they do. Economists, because of their close relation to power and because of the necessarily complex nature of what they do, are in a position of privilege, and it’s up to them to be realistic, to make it quite clear why they think what they think, and to be much more modest about their predictions.

Either that, or we prise their fingers off their privileged perch, one by one. Smith’s, and Mankiw’s and Bernanke’s method of economic science is mistaken. Most economists aren’t honing techniques to be able gradually to achieve better knowledge about the future. They’re never going to get better at predicting the future. The whole notion that we should spend our time building mathematical models using ridiculous assumptions like perfect foresight and rationality is flawed, and we ought to do away with it. One of Smith’s commentators rightly points out that these are “ghost” models, which produce results that are precisely wrong. Better to be somewhat right using intuition than precisely wrong using a formal model. If mainstream economics were any good as a school of thought, how come almost no mainstream economist was anywhere near predicting the 2008 crisis, after more than a century of economic ‘science’?

The leeching and bloodletting analogy is a good one, because it took a revolution in medical science to overcome these practices. When they were proved false, they were mostly consigned to the dustbin of history along with the physicians who practiced them. It was eventually discovered that bloodletting actually helped kill the patient. Leeching is now a rare technique used to reduce swelling on certain wounds during surgery. The 14th-century physicians were using the wrong methods, and would never arrive at the truth. I dislike that bastardised phrase ‘paradigm shift’, but a scientific revolution may be the only way of moving beyond the kind of 14th-century quackery that currently infects economics.